The Road Less Traveled – Compensation Impacts of COVID-19

No map or plan could have prepared organizations for the compensation impacts of COVID-19. The bumpy path likely involves more hairpin turns and steep slopes before arriving at the destination – the new normal. Designing, implementing and analyzing compensation strategies as a part of an employer’s total rewards strategy requires agility and stamina. Most importantly, organizations must utilize strong data to back a thorough understanding of what it takes today and will take in the future to balance business needs with the ability to attract, retain and reward employees using every total rewards tool, including compensation.

Businesses with Unique Compensation Impacts

Developing and implementing the best compensation plan is not a one-size-fits-all exercise. COVID-19 shifted the growth trajectories of businesses and strategies within various sectors of the economy. With those changes come reformulations in the numbers, make up, and needs of employee populations. Each variation requires compensation strategies that were, most likely, not part of this year’s original total rewards plans. Developing the right compensation plan is not universal and differing approaches reflect the unique needs across the economy.

For businesses that suffered downturns, employee furloughs, layoffs and reductions in staff likely came with compensation price tags in the forms of severance, benefits transitions and salary reductions. These businesses need to reevaluate their overall business strategy and realign their total rewards package to meet current needs.

Businesses that have thrived during this pandemic may see increased compensation costs through recruitment, hiring and retention costs. It has been difficult for many organizations to attract workers to essential services jobs and many have reached deep to offer higher wages, bonus payments, and ongoing incentives to be an employer of choice in a difficult hiring market.

Regardless of which side a business falls on, the pandemic has impacted compensation. In April 2020, salary.com surveyed more than 1,000 companies, 65%, indicated no change to base pay in 2020, 10% saw a reduction in base pay during 2020 and 17% froze salaries at pre-COVID-19 levels.

Compensation Impacts of COVID-19

Common Considerations

Even as business sector needs vary, reviewing compensation structures within organizations involves careful analysis of several components within the framework of short and long-term planning. As one of the largest expenses to every company, managing financial viability of compensation is critical. Businesses need to recognize and react to immediate needs and adjust their total rewards strategy to address compensation, as the veil of the COVID-19 pandemic slowly lifts. Considerations to weigh include:

Base pay structures – Examining the data used to develop a base pay structure involves reviewing the original assumptions and data sources. It is safe to assume that five-year-old data will not accurately represent today’s conditions. It may be time to utilize more current data to update the underlying structure of base pay plans to more accurately reflect the current and future financial impacts of the pandemic. 

Incentive compensation – Businesses assessing incentive compensation plans on an annual basis may still require additional analysis in the short term to ensure incentive compensation is financially practical for an organization that may be struggling. Companies experiencing growth and profitability are likely to continue or increase incentive pay to reward and motivate performance. In every case, incentive compensation should align with current business conditions and the company’s strategic plan. 

Premium pay – Businesses with essential workers and organizations experiencing growth are using premium payments as a way to attract and retain employees. According to a recent World at Work pulse survey, incentives and spot payments are more popular now than prior to the onset of the global pandemic. Of the 26% of organizations offering hazard pay, 9% offer a flat cash amount, 8% tie incentives to hours and shifts worked and 9% offer hazard pay based on other performance criteria.

Executive compensation – It may be likely for many employers that the pre-pandemic budgets set for short-term incentive (STI) and long-term incentive (LTI) targets no longer apply. Employers will need to consider addressing the compensation targets in the future and the availability and role of discretion with variable pay.

Taking action to address the needed compensation shifts may culminate in a stronger compensation plan that meets the needs of the organization and its employees.

Data-Driven Decisions

Compensation evaluation requires market data as one source of information used to align practices with markets and create a fair play environment within organizations. Compensation studies and surveys are typically published one year after completion. Historically, the data lag has not been significant enough to be of major concern to compensation professionals but during these unprecedented times, market compensation information is severely impacted by data lags. Current surveys won’t reflect COVID-19 related shifts in base pay, Payroll Protection Program impacts or cash incentive payments made during pandemic business operations. These factors must be taken into account when using data produced in 2020.

Therefore, additional information sources are useful. Some sources are aggregated more frequently, and the savviest compensation plan designers augment traditional data points with other sources of information including pulse surveys from reputable sources and industry publications.

The Road Ahead

Even as businesses reopen and employees get back to work, early indicators tell us that the COVID-19 pandemic will impact employers and employees for longer than originally anticipated. Understanding the overall financial impact on businesses will continue to be the primary step in designing and implementing an effective compensation strategy.

In all cases, compensation can be an emotional factor in the employee value proposition. The same level of analysis and thought that lays the foundation for compensation planning must be used to develop compensation communication. Addressing issues requires careful and clear communication around compensation as a component of total rewards. In all cases, compensation is more than a wage package. Leveraging a total rewards approach allows employers to offer traditional and non-traditional benefits to recognize and reward employees.

Depending on your company’s financial health, companies are finding new ways to leverage compensation to attract and retain employees. For example:

  • Microsoft announced that it pays all hourly service providers during the COVID-19 pandemic regardless of whether or not their services are needed.   
  • Starbucks will pay employees for up to 14 days if they have been diagnosed with, exposed to or in close contact with someone with the coronavirus. 
  • Amazon and other retail giants are paying hourly employees $2 more per hour than pre-pandemic rates.

Conclusion

Compensation continues to be the largest expense for employers. Managing the complexities and leveraging the power of pay programs to attract, retain and engage employees has grown more difficult in recent months due to the swiftness and intensity of COVID-19. We expect this to continue throughout this year and into 2021. It is more important than ever for organizations to examine their compensation strategy and ensure it is viable for the near future. To learn more about navigating the compensation impacts of COVID-19, contact Jen Givens in the form below:

Published September 3, 2020

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Copyright © 2020 by Findley, Inc. All rights reserved.

Compensation and Retention Strategies for Healthcare Executives

To thrive today, healthcare organizations must provide competitive compensation and implement strategies to recruit and retain talented executives. Short- and long-term incentive plans – along with retention arrangements – are increasingly being tied to successfully vying for healthcare’s top talent.

Healthcare organizations compete for the best leadership talent by offering a unique and compelling value proposition that includes a balance of mission served, performance challenges, engagement of diverse stakeholders, and competitive compensation.

It’s essential that these organizations use total rewards strategies to successfully guide the design, administration and governance of their pay and benefit programs. The strategy should be developed and designed to support the organization’s strategy (i.e. incent growth and performance, utilize the financial resources of the organization, etc.) and culture. Top-performing health systems have written strategy statements that are board-approved and shared with existing and potential employees.

Compensation and Retention Strategies for Healthcare Executives

The value of benefits and perquisites make up a smaller percentage of executive total rewards. There are fewer executive benefits (i.e. executive medical insurance, supplemental disability plan, etc.) and many organizations are offering executives the same benefits offered to other employees. Limited executive perquisites are the new norm and any enhanced benefits and/or perks must be justified as having a legitimate business purpose.

Establish a Compensation Strategy for Executive Talent

Compensation is a key element of the total rewards strategy to attract and retain the best leadership, and healthcare systems should develop a compensation framework that includes:

  • Base salary
  • Short-term incentives
  • Long-term incentives
  • Retention incentives

Base Salary

Base salary is fixed compensation that typically does not vary according to performance or organizational results. It pays for experience, knowledge and individual performance. It is common practice to establish and maintain a salary administration program with two objectives: providing base compensation that is competitive with the market, and controlling fixed costs. In addition, the program should ensure that pay is internally equitable when compared to similar positions within the organization.

The majority of organizations target base salaries at the market median, which is the 50th percentile. Likewise, recent surveys and Findley’s industry experience indicates 65% of healthcare organizations target leadership base salaries at the market median. The next most popular target, used by 15% of organizations, is to set the range at the 60th or 65th percentile of market.

In practice, not all salaries will be equal to the target and there are a number of valid reasons why salaries may vary from the target. The salary administration program has pay ranges that allow management and the board flexibility to determine salaries by evaluating factors that include individual experience, market rates, length of service and business needs.

Short-Term Incentives

Top-performing organizations design short-term incentive plans, (also know as annual incentive plans), to award incentives using an objective and disciplined approach. The plan should reinforce the philosophy that executives are connected to organizational results; it should motivate and drive appropriate behaviors and deliver rewards that are in alignment with organizational success and growth.

“Recent research and Findley’s industry experience, indicate formal short-term incentive plans are used in more than 75% of healthcare organizations.”

Compensation and Retention Strategies for Healthcare Executives Guide

Long-Term Incentives

Long-term incentive plans are emerging as important components in compensation strategies for healthcare systems as the plans prove valuable in retaining and recruiting top talent. Based on market studies and Findley’s experience, offering long-term incentive plans varies by the size of the organization, with more than 40% of organizations with net revenue greater than $2 billion featuring long-term incentive plans in their compensation programs.

As organizations look for long-term performance-based compensation solutions, there are a variety of options to consider. One solution that is growing in popularity is a performance-based long-term incentive plan that awards cash at the end of a multi-year performance period based on the achievement of predetermined goals.

“Boards of directors in this pay-for-performance era are seeking alternatives to deliver long-term performance-based compensation.”

Compensation and Retention Strategies for Healthcare Executives Guide

Another approach that is becoming more common is the “performance-based” SERP. This combines the planning and techniques used for defined contribution SERPs, along with the performance measurements of an annual incentive pay plan. This option offers competitive long-term compensation, assuming adequate levels of sustained annual performance.

Long-term incentive plan options vary, too, between for-profit and non-profit healthcare organizations. For-profit healthcare systems are able to include some type of “equity” award in the total compensation package for executives. Executives in the non-profit, tax-exempt healthcare environment lack the opportunity of real “ownership.” Measuring long-term value is even more important with a tax-exempt organization because the “shareholders” are taxpayers and members of the community.

Historically, long-term plans have been merely an accumulation of short-term metrics over a multi-year period. The trend has shifted and long-term or value-focused metrics force a more strategic or visionary view of future guideposts for success. While financial results remain important, organizations are including more measures that focus on growth, market share, community impact, and employer brand.

Retention Incentives

One component that has seen significant growth over the last several years is the implementation of retention compensation. The healthcare industry in particular has been on the forefront due to the recent and expected future consolidation of hospitals and healthcare systems.

Often, retention incentives occur in instances of an anticipated transaction which requires continuity in order to execute transition plans and maintain the ongoing value of the enterprise. It can be essential to ensure that key talent is retained, operating functions are held intact, and relationships are maintained during a significant transition (i.e. pending sale, reorganization or new leadership).

The structure of retention arrangements varies as some organizations may choose to incorporate retention benefits within individual employment agreements, while others create standard agreements or policies for groups of executives.

Learn more about our findings and the solutions to implementing effective and creative strategies to recruit and retain talented executives in the healthcare industry in this guide below:

Compensation and Retention Strategies for Healthcare Executives Guide

Design and Implement an Effective Compensation Strategy

The healthcare industry is going through significant transformation and it is imperative for organizations to have well-designed executive compensation programs with retention strategies to recruit and retain top talent. Designing and implementing effective plans requires:

  • Taking a total rewards and total compensation planning perspective;
  • Aligning the compensation plan design with the mission and strategies of the organization;
  • Creating and maintaining conditions that are favorable to delivering competitive compensation and;
  • Designing retention strategies that align the interests of the executives with the stakeholders.

Questions or need advice on implementing an effective compensation strategy or successful incentive programs at your organization. Please contact Jen Givens or Tom Hurley by filling out the contact form below.

Published May 15, 2020

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Copyright © 2020 by Findley, Inc. All rights reserved.

Four Keys to Recalibrating Human Capital Strategy

The impact of the COVID-19 pandemic continues to unfold, changing our approach to personal and work life now and likely for the remainder of 2020. The unexpected economic challenges brought on by the coronavirus pandemic have prompted companies to assess their financial forecasts and adjust as best they can. Beyond making appropriate financial adjustments, every organization should rethink their human capital strategy. And, they should do it now. Below are the four most critical areas of focus during these uncertain economic times.

Human Capital Strategic Planning

More than ever, every company needs to assess their short-term and long-term plans for retaining key employees and maintaining the necessary talent base to weather the crisis. This human capital assessment should be a formal structured activity that is consistently monitored and reported on until the business climate returns to a level of normalcy. Absent a strong human capital plan, companies will emerge from the crisis weaker than their competitors.

Four keys to recalibrating Human Capital Strategy

Leading From a Distance

During uncertain economic climates, like this Coronavirus Economy, leadership and management skills differentiate the winners and losers in businesses of all sizes and in all industries. At the heart of this challenge is how adept managers are at maintaining relationships with their employees. Do they know how to rigorously maintain communications, focus their employees, build trust and hope with a team that they may not physically interface with?  For many leaders, this is a new test of management skills. Driving employee engagement is now more demanding than ever before.

Compensation and Total Rewards

In the past decade, base compensation grew very modestly in most industries while incentive compensation became a significant portion of total target compensation. In addition, there has been an emphasis on total rewards beyond compensation, especially for the millennial workforce. Given the likelihood that most organizations will not be able to pay bonuses, it is critical that companies establish a new approach for rewarding workers and staying competitive in the marketplace. On top of that, health and welfare costs remain a central point of discussion at most organizations. At the onset, the pandemic’s economic impact shows new strategies for compensation and total rewards need to be addressed and implemented.

Employer Communications and Branding

Human capital decisions made during the COVID-19 pandemic will influence the employer’s brand in the future. Employees will remain loyal and support the organization as much as possible if the company is doing its utmost to take care of them. How the company communicates at all levels – from executives to salaried and hourly employees – is at the heart of employer branding. Everyone needs a transparent and consistent message, even if the news is not positive. Employees must be a top concern.

So, while these four human capital areas may seem elementary, a company’s key success will be how it tackles the unique strategic needs during this Coronavirus Economy. It is certain that new human capital strategies will need to be established in order to prevail through the current storm.

While this article is a call to action, in the upcoming weeks, Findley’s experts will offer best practices within these four core human capital areas during this time of economic uncertainty.

How has the economic downturn impacted compensation? Find out what additional strategies you can adopt, and your current options are for compensation and total rewards in the article below.

Article: Adapting Compensation Strategy in an Economic Crisis

For more information about recalibrating your human capital strategy, contact Dan Simovic at dan.simovic@findley.com or 216.875.1917, or Sandy Turba at Sandy.Turba@findley.com or 216.875.1937

Published April 30, 2020

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Minimum Pay Levels—Can Organizations Afford an Increase?

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One issue that continues to be debated is the increase of the minimum wage to $15. The argument focuses on fairness vs. affordability. However, it is important to note that there are a number of states and municipalities that have taken steps to increase the minimum level to $15 and higher through ballot and legislated changes.

In addition to the state and local statutory changes, there continues to be voluntary moves toward a “living wage” which has been adopted by a number of employers throughout the country. There is a location-specific quantification of living wage which is defined as the minimum income necessary for a worker to meet his/her basic needs for shelter, clothing and nutrition. For example, in Cleveland, Ohio, the living wage for a single adult is $10.77 per hour and for one adult with one child, it is $22.68.

Why has this voluntary move occurred?

It is typically a combination of the recognition of the need to provide a morally and socially just minimum pay level along with a desire to enhance the attraction and retention of good employees. We have seen moves by employers of all sizes. Employers are beginning to see a decrease in turnover rates which has helped to offset the cost of the increased wages.

Without quantifiable savings, an increase to compensation expense decreases operating margin unless it is offset by higher revenues.

Other results included a significant increase in the quantity and quality of the applicant pool for entry level positions. This is an important desired outcome for employers increasing their minimum starting rates. Without quantifiable savings, an increase to compensation expense decreases operating margin unless it is offset by higher revenues. This is the biggest argument of those in the food and beverage industry—the inability to pass on the increased costs to the customer.

Minimum Pay Levels—Can Organizations Afford an Increase?

The move to a living wage involves a number of factors that must be considered. First, what is the appropriate pay level? As stated earlier, that level varies depending upon each person’s circumstance. Obviously we cannot implement a pay system that varies based upon each person’s number of dependents and working status of other adults in the household.

The most common approach is to take a “typical” profile and land on that as the starting point. That might range from $10 to $15 per hour. Another issue is the potential loss of welfare benefits such as Medicaid and food assistance programs as a result of the pay increase. Is it possible for someone’s net earnings to decrease as a result of the increase? The answer is yes, however, while employers need to be cognizant of this, our experience is that structuring a pay system to maximize welfare benefits is never in the long-term best interests of either the employer or the employee.

Another issue that is important to recognize is the wage compression that occurs with an increase of the minimum starting pay levels. In other words, a significant increase in the lowest level positions can result in the next levels having the same or slightly higher pay levels. The compression adjustments cannot totally match the minimum increase, however, some adjustments need to be made to recognize experience and higher levels of responsibility.

We expect that moves to what might be considered a just or living wage, will continue on a voluntary basis. The need for high quality staff at all levels will continue to push employers to make efforts to enhance their employment experience. The assessment of starting pay levels will be an important part of that effort.

Questions? Contact the Findley consultant with whom you normally work or Rob Rogers at Rob.Rogers@findley.com or 216.875.1926.

The information provided is a summary and should not be relied upon in lieu of the full text of a particular law, regulation, notice, opinion, legislative proposal or other pertinent information, and the advice of your legal counsel. Findley does not practice law or accounting, and this publication is not legal or tax advice. Legal issues concerning your employee benefit plans should be discussed with your legal counsel. This publication is intended for informational purposes only and is in no way intended to offer investment advice or investment recommendations.

Published on September 24, 2019

© Copyright 2019 • Findley • All rights reserved.

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Long-term Compensation Choices: Real Equity or Phantom Stock?

Shareholders, business owners, and Boards have two primary options when considering key employee long-term compensation linked to shareholder value. Long-term compensation is typically structured to:

  • Motivate, reward and retain key employees
  • Promote long term thinking
  • Grow the business
  • Build shareholder value

At the same time, talented and entrepreneurial employees are looking for opportunities to become owners, to share in the success and create wealth for themselves and their families. So what’s the right way to deliver the long-term compensation aligned with shareholder value? Sharing real equity or using phantom stock?

Like many other business decisions, the choice of real or phantom equity can be a challenging one. The answer depends on your philosophy, corporate governance and culture, objectives, corporate structure, and the desires of your key employees. 

I believe that if using real equity is practicable, it serves as the best way to deliver long-term compensation. Key employees become shareholders and enjoy the same benefits as other shareholders. This may include voting rights, dividend rights and the opportunity for capital gains once the shares are earned and vested. This is the case for virtually all public companies which use their shares as the “currency” to deliver at least part, if not all, of the long-term compensation.

Real equity works for certain privately held businesses which hold a philosophy of key employee ownership and can manage the issues of having minority shareholders. Real equity is also used as part of a shareholder succession plan – replacing one generation of owners with the next.

However, in many cases, particularly with closely held businesses and not-for-profit organizations, the use of real equity is not possible or practicable. Examples include a family business that desires to keep stock ownership in the family or with a single business owner who doesn’t want to deal with minority shareholders.

Real equity or phantom stock comparison for long-term compensation elements

Issues with Having Minority Shareholders

Many corporate attorneys will advise their clients against having minority owners because of the issues it presents. These issues include:

  • Governance issues including minority shareholder rights to dissent against mergers and other significant corporate transactions.
  • Minority shareholders of private companies may have unrealistic expectations regarding their role in corporate decision-making.
  • Minority shareholders may have voting rights (if common shares carry voting privileges).
  • Minority shareholders owning enough stock individually or collectively may create obstacles to corporate action and have the right to petition a court for the involuntary dissolution of the corporation. During times of great opportunity or immense hardship, minority shareholders can cause trouble.
  • Minority shareholders may exercise inspection rights and force privately owned businesses to produce their accounting records.
  • It may be difficult to terminate the employment of a minority shareholder.
  • Minority shareholders may make claims of excessive compensation of majority owners or question expense reimbursements.

Phantom Stock

This is a form of compensation where a company promises to pay cash at some future date, in an amount equal to the market or formula value of a number of shares of its stock. Thus, the payout will increase if the stock price rises, and decrease if the stock falls, but without the recipient actually receiving any stock. Like other forms of stock-based compensation plans, phantom stock broadly serves to encourage employee retention, and to align the interests of recipients and shareholders. Recipients are typically employees, but may also be directors, third-party vendors, or others.

In general terms, phantom stock is a compensation plan that confers the right to receive cash at a future point in time, typically tied to a valuation formula. Design of a phantom stock plan can replicate the value of real stock. The value of the company’s stock or the appreciation in the value of the stock after the date of the phantom stock award determines the amount of compensation. 

The award is usually contingent upon the phantom stockholder’s continued employment with the company, i.e. retention of key management.

When a business is sold, the phantom stockholder might receive an amount equal to the cash the recipient would receive if he or she owned the same percentage of the corporation’s stock (or the appreciation in value of an equivalent amount of stock). Some plans also include participation in dividends paid to shareholders.

Designed and administered properly, phantom stock should be non-taxable until the cash is paid, generating ordinary income for the employee and a deduction for the company.

Plans that are limited to only key employees should be free from the burdens of ERISA rules governing participation, vesting, funding and fiduciary responsibilities.

Implementing a phantom stock plan should cost less in legal and accounting fees than a formal stock program with buy-sell agreements.

Phantom stock provides a way to share a stake in a business while avoiding the need for the new “owner” to invest cash or suffer taxable income. Most importantly, phantom stock avoids the risks inherent in having additional shareholders.

Questions? Contact the Findley consultant you normally work with, or contact Marc Stockwell at marc.stockwell@findley.com, 419.327.4122.

Published August 14, 2019

© 2019 Findley. All Rights Reserved.

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Using Compensation Management as a Tool to Recruit and Retain Top Talent

The U.S. had experienced a dramatic power shift in the workplace. It was a long, slow recovery, but the job market has turned a corner, presenting job seekers with multiple employment options. The month of February saw 7.1 million job openings across a range of industries, and the U.S. unemployment rate is 4.5% according to the U.S. Department of Labor Bureau of Labor Statistics. It’s clear that employees are taking advantage of their options.

A strong job market is great news for employees and job seekers, but it isn’t so good for employers that must compete for new talent as they struggle to retain top performers. In a PayScale 2019 Compensation Best Practices study, 66 percent of all organizations agree or strongly agree that retention is a growing concern (up from 59 percent last year).

In today’s economy, employers that fail to attract and retain talent will ultimately lose, and employers with poor retention rates will find themselves spending more time and money recruiting and training new employees than focusing on growing their business. Finding a solution (or solutions) is critical to long-term success.

Successful companies know that one way to compete for talent is to become a preferred employer, where employees are so engaged in their jobs that they aren’t interested in pursuing other opportunities. An essential element in achieving preferred employer status is a well-thought out compensation strategy. This is crucial, as compensation is one of the top three drivers of attrition.

A compensation strategy is a compass to guide disciplined pay design, administration, and governance. It will also:

  • Provide a philosophical framework for the development and management of compensation systems and policies,
  • Provide key messages to communicate with employees, and
  • Recruit top talent to meet growth and profit objectives.

When it comes to what type of compensation strategy to implement, a best practice to consider is a pay for performance philosophy. Pay for performance plans base employee pay on productivity, as opposed to hours spent on the job or at a set salary. While this can result in employees feeling less financial security, there are several advantages for both the employee and employer. If done correctly, a pay for performance structure will:

  • Promote teamwork and avoid promoting behaviors that benefit individuals to the detriment of the company or other employees,
  • Deliver compensation under a disciplined and objective structure that rewards employees,
  • Link pay levels to the performance of the individuals and the organization,
  • Use survey data and technology to analyze and understand the changing dynamics of pay for specific jobs, and
  • Design executive compensation plans that motivate and retain top talent and drive performance that creates shareholder value.

A culture without a pay for performance philosophy does not reward high performance and sets the company up for high turnover. A company that continues to reward low, average, and high performers with the same salary increase or bonus ultimately encourages high performers to look elsewhere. There is simply too much competition for talent to avoid properly rewarding high performers.

Questions? Please contact the Findley consultant you normally work with, or contact Jennifer Givens at jen.givens@findley.com, 216.875.1944.

Published on May 6, 2019

© 2019 Findley. All Rights Reserved.

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Incentives for the Sales Force Commission Verses Bonus

Compensating the sales force operates from a basic principle: money drives behavior. Although this principle is pretty simple, incenting a sales team to sell and paying them fairly at an affordable cost can be quite the balancing act. Both commission and bonus plans play a role in attracting, motivating, and retaining sales employees, but how does a company determine which to use?

Commission Plans and the Individual

A commission plan pays the sales employee on a percentage of sales or profits that he/she brings directly to the company. The compensation pay mix for sales employees is heavily weighted through variable pay. Base salaries, if any, are often set low and commission payments account for the majority of total cash compensation. This works for the company because it limits the fixed costs; but, it only works for the individual sales team member if he/she is a successful seller.

This strategy attracts result-oriented salespeople and keeps them motivated as they are paid for each individual sale. Their commission rate is typically multiplied by sales or gross profits to determine their payout. A well-designed commission structure pays employees well without threatening company profits.

This model encourages poor performers to leave the company. However, it could also drive unwanted attrition of top performers, if a competitor is willing to pay a higher commission rate.

Bonus Plans and Team Players

Bonus plans have a role in the sales force world, too. Depending on influencing factors, such as a stable market, client base or slow growth, bonus plans can assist in retaining and motivating the sales team to sell while managing the company budget. These plans structure the pay mix with a higher fixed portion of total compensation. Typically, the base salary will encompass the majority of the employee’s total pay and is often targeted to competitive market levels. The variable portion, or bonus, is only paid out if certain company and individual targets are met.

These plans attract salespeople who want to stay with the company, build a career, and have additional duties outside of selling. With a bonus plan, incentive payments are tied to achieving specific targets at the individual and company level. The company may also build into the bonus plan metrics outside of sales, which may include achievement of strategic plans or taking part in long-term projects. This strategy promotes more of a team based approach and allows salespeople to earn a decent living if established goals aren’t achieved at target.

Commission Verses Bonus Plan Attributes Chart

Commission Verses Bonus Plan Attributes Listing

In Perspective

As you can see from the illustrations, there is not a “one size fits all” sales plan that works for every company. Linking company strategy with internal and external factors will help shape a plan that drives bottom-line success. An effective sales compensation plan can provide balance between financial needs and desires. Effective compensation plans are thought through and structured, with the appropriate pay mix of salary, commission, bonus, and other incentives. They should also be designed so that they are easily understood, implemented, and managed. Most of all, sales compensation plans need to create and promote a “win-win” for both the company and the sales force.

Questions? Contact the Findley consultant you normally work with, or Jen Givens at Jen.Givens@findley.com or 216.875.1944.

Posted December 12, 2018

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Hot Topics in Total Rewards

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From conference presentation topics to client interactions, here’s a look at four Total Rewards current hot topics:

Employee Recognition Program Vendors

The number of vendors administering employee recognition programs has increased. Some manage offerings that provide employees with goods (i.e., a golf club), while others offer experiences (i.e., scuba diving lessons) to deserving employees. These programs are designed to reward top performers, increase employee engagement, and provide a good or experience that may help in retaining the employee.

The Best Rewards?

It is hotly debated, what would employees prefer as rewards? Would they prefer to receive a spot bonus or incentive payment, rather than a good or experience? Often vendors are restricted on the goods or experiences they can offer; do these match what the employees actually want? Also, companies are paying for the administration of the program. Depending upon the company, it may make more sense to direct funds spent on the administration of such a program to the employees the company is looking to reward.

Gender Pay Inequities

The gender pay gap is an accepted fact these days, but a viable, workable solution has been elusive. There are several ways to examine gender pay inequities, which may not be sufficient (especially in a pay for performance environment) including:

  1. Average or median pay of a male vs female for the whole company. Note the United Kingdom has adopted this for all companies of a certain size.
  2. Average or median pay of a male vs female by position.
  3. Average or median pay of a male vs female based on years in the position.

The Solution?

Some combination of (b) and (c) above is likely the best answer. However, a study would really need to be done on a case by case basis and the pay philosophy of each company would need to be considered. Item (a) above is an incomplete measure, but may indicate if the company is providing opportunities for advancement to both genders.

The Role of Compensation Committees

Most companies that have a Board have a smaller group of Board members which make up a Compensation Committee. The Committee has historically been more centered on executive compensation decisions and CEO secession planning. However, they are getting more involved in talent management and compensation decisions both at the executive level and lower levels.

The Impact?

Committees are starting to focus on retention and grooming of future top talent. Also, they are shifting some of their focus to ensuring the company’s compensation strategy is being followed at all levels. With increased scrutiny around gender pay and executive pay, as well as the labor crisis, this is likely to continue.

Performance Management

There are many challenges involved with establishing a well-designed performance management system. Linking pay to performance is the best way to impact performance. The keys in implementing a well-designed performance management system include:

  1. Having a grasp of the positions value in the market and to the company.
  2. Ensuring the plan is designed in a financially responsible manner.
  3. Creating individual performance plans that are measurable and align with company goals.

The Impact?

Performance management has many benefits including spending less time micro-managing employees and less misunderstanding between employee/employer on expected work. This topic will continue to be a hot trend for years to come.

In Perspective

These four hot topics shouldn’t surprise you. Some of these are issues that companies have wrestled with for years. Finding the right recognition vendor, solving the pay gap, working with compensation committees, and finding the right performance management are all challenging puzzles but solving them will reap great rewards for the company.

Questions? Contact the Findley consultant you normally work with or Brad Smith at Brad.Smith@findley.com, 419.327.4414.

Posted November 13, 2018

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Using Lean Six Sigma to Optimize Short-Term Incentive Plan Administration

Challenge

A global manufacturing company with 15,000 employees operating from 30 countries wanted to optimize its Short-Term Incentive Plan (STIP) process, which required an estimated 120 hours per year to complete at the corporate level. The Lean Six Sigma DMAIC approach and various Lean tools were used to greatly improve quality and decrease administration and reporting time.

The global compensation team was responsible for:

  • Setting plan metrics and targets for 80 complex STIPs across multiple countries
  • Coordinating with 20 local controllers worldwide who are responsible for calculating and inputting the quarterly metric results
  • Reviewing quarterly results with the local controllers
  • Creating PowerPoint reports 3 times a year to review with the C-suite

The company was looking for a way to preserve quality and reduce administration time so they could focus more on the business results and implications.

Identifying the Root Cause(s) to be Addressed

We used the Lean Six Sigma Ishikawa (Fishbone) Diagram to identify the root cause of the extensive process timeline.  We looked at the following:

  • Commitment – There was no issue with the commitment of controllers, plant managers and supervisors to uphold their end of the process.
  • Knowledge –In general, controllers, plant managers and supervisors understood the key criteria in the short-term incentive plans.
  • Timing – While timing was tight, it was tied to the release of financial information, which was on a strict schedule.
  • Process – We identified several manual steps in the process that could be automated and made error-proof.

Solution

Working with the company’s global compensation team, Findley developed an automated tool to:

  • Set and input plan metrics and targets in a single platform
  • Automatically generate reports to review plan design and results
  • Have the ability to readily add or remove plans
  • Accommodate multiple plan design features (multipliers, add-ons, circuit breakers, etc.)

Results

The time requirement to administer the STIPs was reduced from 120 hours to 8 hours annually, and we used an abbreviated FMEA process to produce greater consistency and reduce errors in data entry.

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