Building a Compensation Program Strategic Objectives: Cost

Building a Compensation Program

Strategic Objectives: Cost Controls & Real Life

Solutions

Michael F. Maciekowich

National Director

Astron Solutions, LLC

[email protected]

917-714-0317

mailto:[email protected]

Understanding and Developing a Comprehensive

Compensation Strategy

• Compensation Strategy is one of the most important strategies in

the HRM Function as it influences the costs of the organization and

potential bad decisions can lead to very serious damages to the

organization.

• A compensation strategy is derived from, and therefore has to be

fully aligned with, the overall HRM Strategy.

• When the HRM Strategy sets the main objectives for the HRM

Function, the compensation strategy must follow.

Understanding and Developing a Comprehensive

Compensation Strategy

• The compensation and benefits strategy sets the position of the

organization in the job market and defines the items in the total

cash in the organization and their role.

• The role of different compensation components is very important as

the role of these compensation components can differ.

• For example, the role of bonuses can be primarily in ‘performance

reward’ or ‘retention’ and the organization has to decide.

• The compensation strategy has to reflect the reality in the industry

and the surrounding job market.

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Total Rewards “Tools”External Position

EquityInternal Position

EquityEmployee Pay and Recognition Equity

Total “Non-Cash” Compensation –

Benefits/ Retirement

Ability to Fund all Aspects of the

Program

• Competitiveness in terms of Geography.

• Competitiveness in terms of industry.

• Level of competitiveness by organization and position.

•Recruitment and Retention Trends.

• Determine organizational value of positions regardless of market value.

•Determine value of positions not matched to the market.

•Determine the differences among “families” of jobs.

• Determine internal pay levels of employees based on seniority, performance, or other methods.

• Determine appropriate methods to recognize employee performance and contributions.

• Understanding the impact of “Generations” in compensation decisions.

• Addressing the rising cost of insurance in plan design.

• The need to have more employee cost sharing.

•Understanding pressures from organized labor.

•The need for flexibility in addressing “generational” differences in both benefit and pension design.

•Impact of fluctuating stock market on pension design strategies.

•Funding all aspects of the program understanding the impact of current industry trends.

•Determining the “ROI” of all programs to demonstrate the impact on effective recruitment and retention of staff required for the organization to succeed.

•Proactively developing strategies that reduce cost impacts while remaining effective.

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Total Rewards Philosophy and Strategy

•Compensation Philosophy is a statement of the organization's

Human Resource strategy as it relates to pay and provides a

blueprint to follow in the design and implementation of the

program.

•Successful compensation programs have a formal statement of

compensation philosophy or beliefs.

•These beliefs ensure an alignment between the compensation

program and the success strategy of the organization.

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Defining a Total Rewards Strategy

• The purpose of various organization compensation programs

and benefit plans

• A statement of how compensation and benefit programs are intended to support human resources and overall business objectives

• Provision that establishes a parameter of costs of compensation and benefit programs

• A statement on whether compensation and benefit programs can be tailored to meet the needs of individual business units

• Guidelines for communicating compensation and benefit program objectives

• Requirement for annual review to meet change business and external market needs

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Total Rewards Strategy Design Team

• Strategic Planning Professionals

• Tap the expertise of planners so that appropriate performance goals and measures are included in pay plans.

• Financial Planners and Administrators

• The overall cost of total compensation programs should be determined through joint efforts of financial and compensation experts.

• Legal Expertise

• Legal staff can add considerable value to compensation strategy design by reviewing the tax and legal implications of various elements of the total compensation program.

• Human Resource Professionals

• Labor relations, management development and HRIS staff should be involved to determine the short and long term impact of total compensation decisions on the overall Human Resource strategic plan.

• Line Management

• Little hope for success if line management is not consulted. They must be comfortable with all aspects of the program to communicate to staff.

Key Components of Total Rewards and Strategic Decisions Required

• Base Cash Compensation

• Determining Job Value– Internal Focus– External Focus

• Determining Employee Value

– Seniority– Performance– Skill/Competency

•Variable Cash Compensation

• Short Term Incentives– Linkage to Organization

Success– Linkage to Business Unit

Success– Linkage to Individual

Success

• Long Term Incentives

– “Golden Handcuffs”– Need to “Re-Qualify” for

Incentive

•Non-Cash Rewards

• Recognition Programs

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Key Components of Total Compensation and

Strategic Decisions Required

• Benefits

• Reasons Benefit Programs are Provided

– Legal» Social Security, Medicare, Family and Medical Leave» State Workers’ Compensation

• Labor Organizations

– Mandatory subject for bargaining• Competition

– Be at a disadvantage competitively in the current marketplace

• Tax Advantages

– Benefits enjoy tax exempt or tax deferred status.• Employee Desire

– Employees count on benefits• Support Employer Strategies

– May be more effective than pay in recruiting or retaining staff

Discussion on Total

Rewards Strategy Design

Using Compensation

Strategies to Control

Organization Costs

Linking Strategy and

Compensation

The Balanced Scorecard

Approach

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Translating Strategy Into Action

Financial

To succeed financially, how should we appear to our stakeholders?

Customer

To achieve our vision and carry out our mission, how should we appear to our customers/community?

Quality

To satisfy our stakeholders and customers, in what services must we excel?

Growth

To achieve our vision, how do we sustain our ability to change, grow, and improve?

Organization Success

Human Resources

To achieve employee satisfaction, what human resource programs do we need to provide/excel?

• Objectives

• Measures

• Targets

• Initiatives

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Setting Targets/Measuring Performance

Financial

• Operating margins

• Capital budget

Customer

•Satisfaction surveys

Quality

•Process improvement

•Outcome measures

Growth

• Sales/volume

• New product/service development

• Expanded regions/markets


Human Resources

•Employee feedback/surveys

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The Balanced Scorecard Job Content Evaluation

Model (For Both Traditional Job Analysis or New “One Job per Person” Model)

Financial Accountability

• Direct or Indirect

• Revenue or Expense

Customer Accountability


• Internal or External

Quality Accountability


• Process or Outcome

Growth


• Internal or External

• Process or Outcome


Human Resources Accountability


• Individual or Team

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The Balanced Scorecard Competency Based

Performance Management Model

Financial Performance

•Utilization of Resources

•Core Competencies Required

Customer Performance

•Customer Interactions


Quality Performance

•Process


Growth Performance

• Process Improvement

• Core Competencies Required


Human Resources Performance

•Teamwork/Interaction


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Individual Incentive Model

Financial Performance

•Utilization of Resources

• Outcome or Result

• $ Value

Customer Performance

•Customer Interactions


• $ Value

Quality Performance

•Process


• $ Value

Growth Performance

• Process Improvement

• Innovation


• $ Value


Human Resources Performance

•Teamwork/Interaction


• $ Value

Key Compensation Strategies and Their Impact on

Overall Cost Control

• With a prolonged economic downturn looming, it is important for companies to carefully manage their compensation expenses.

• Companies that freeze or cut salaries or pay below market rates will risk losing valuable employees and will struggle to attract the best new talent.

• On the other hand, companies that pay too much will risk damaging their financial health and ability to hire the employees they need to thrive in difficult market conditions.

• Key compensation strategies and their impact on overall cost control include:

– Base Salaries

– Short Term Incentives

– Sales Compensation

– Long Term Incentives

– Hiring Pay Strategies

Base Salaries

Current Strategies

• General Increases

– Breathing Pay

• Traditional Merit Systems

– Performance Level = % Increase

• Skill-Based Pay

– Increased Skill = Additional Salary

• Freeze Current Pay Levels

– Retention Issues

• Reduce Pay Levels

– Retention Issues

– Productivity issues

Future Strategies

• Link Performance Pay to Range Position

– Reward high performers below the market

• Individual Performance Incentives

– Flat $ Bonus for top 20% Performers Only

• Pay for Competency

– Link Pay Adjustments to Combination of Increased Competency and Job Complexity

• Decentralize Pay Decisions

– Develop Different Strategies for Strategic Positions

Short Term Incentives

Current Strategies

• Gainsharing

– Incentive Funded by a Share of Gains Between Company and Employee

• Discretionary Bonus

– End of Fiscal Year Decision

• Formal Executive/Management/ Staff Formula Based Programs

– Usually % of Base Pay

Future Strategies

• Goal Sharing

– Incentive Pre-Budgeted Based on Reality Usually Tied to the Strategic Objectives

• Single Target Annual Incentive

– An Incentive Tied to a Single Objective That All Have an Impact On

• Simplified Formula Based Incentive Plans

– Limited to 3 - 5 Strategic objectives

– 3 Levels of Accomplishments:

• Threshold

• Target

• Optimum

Sales Compensation

Current Strategies

• Traditional Base/Quota/Commission

– Base Pay Set on Market

– Quota Based on "Cost of Sales"

– Commission After Quota Based on % of Total Sales

Future Strategies

• Total Compensation as % of Total Sales Model

1. Determine the Appropriate % of Total Compensation as Related to Total Sales

2. Determine the Base to Variable Pay Mix

3. Set the Base Pay Equally Among Sales Levels

4. Move From Commission Focus to Incentive Focus

5. Establish 3 Incentive Levels:

• Incentives For Minimum Sales Levels

• Incentives for Required Growth Sales

• Incentives For Extraordinary Growth Sales

Long Term Incentives

Current Strategies

• Stock/Equity Driven– Stock Options

– Restricted Stock

• Long Term Cash Based Incentives– Focus on Retention Issues

– Tied to a Vesting Schedule Rather Than Performance

Future Strategies

• Cash-Based Phantom Stock Program

– Stock Grant Equivalent to 50% of Collective Base Pay of Those Included

– Stock Price Set Based on a "Per 1000" Shares Ratio

• Collective Base Pay of Those eligible = $500,000

• Stock Price = $500 per Share ($500,000/1000)

– Stock Price Tied to Primary Company Growth Measure (Margin/Cash Flow)

• Non Profits Can Use a Primary Non Financial Measure

– Formula Established: For Every % Increase in Growth-Stock Price is Adjusted

– Stock Usually Held For 5 Years

Hiring Pay Strategies

Current Strategies

• Link Years of Service to Pay Range position

• Determine Start Rate Based on Internal Equity Review

• Supply & Demand or Market Pressures

• Usually 1 Year Until next Adjustment

Future Strategies

• Competency Assessment Conduct on Potential New Hire

• Results Determine Hire Rate

• Establish Separate Market-Based Pay Ranges for Market Sensitive/Strategic Positions

• Conduct 3-6-9-12 Month Competency Assessments with Adjustments As Appropriate

Discussion on Alternative

Strategies

General

Questions/Discussion

Thank You!

Bonus Information

2011 Compensation Planning

Information - WorldatWork

United States Overall

Actual 2009 Projected 2010 Actual 2010 Projected 2011

Mean Median Mean Median Mean Median Mean Median

General Increase/COLA

1.2% 0.0% 1.6% 2.0% 1.4% 1.0% 1.8% 2.0%

Merit Increase

1.9% 2.5% 2.7% 3.0% 2.7% 3.0% 2.8% 3.0%

Other Increase

0.9% 0.5% 0.9% 0.5% 0.9% 0.5% 1.0% 0.5%

Total Increase

2.2% 2.5% 2.8% 3.0% 3.0% 2.5% 2.9% 3.0%

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Welcome to the World of

Astron Solutions, LLC


National Director

(212) 792-8886

(917) 714-0317 Cell

[email protected]

www.astronsolutions.com

505 8th Ave Suite 2200

New York, New York 10018

mailto:[email protected]

http://www.astronsolutions.com/

Overview of Astron Solutions

Astron Solutions

Total Rewards

Base Pay-Incentive

Compensation

Performance Management

Retention Strategies

Exit Analysis

Employee Opinion

Surveys-360 Surveys

First Impression

Surveys

Flare™ Web Based

SolutionsE-Learning

FLSA

Performance Management

Job Description Writing


Michael Maciekowich is a National Director for Astron Solutions. His areas of expertise include the development, design, and implementation of executive, physician, and employee total cash compensation and performance management systems in all industries. His primary focus is the integration of compensation and human resource strategies with organization-specific missions, visions, values, and strategic operating plans. Michael has twenty-five years of consulting and industry compensation experience.

Prior to Astron, Michael was the National Director of Healthcare Rewards Consulting and the Metro NY Operations Manager for Rewards Consulting for the Hay Group. He was a compensation consultant with a number of consulting firms, including Towers Perrin, Hartstein Associates, Adams, Nash & Haskell, The Omni Group, and Modern Management. He has assisted over four hundred organizations in his twenty-one year consulting career. Prior to his consulting career, Mike was responsible for compensation services at the American Hospital Association, Honeywell International, and Zenith Electronics.

Michael is an active member of WorldatWork (former American Compensation Association), American Society of Healthcare Human Resource Administration, Society for Human Resource Management, and SHRM’s Consultants Forum. He is also a member of various local and state human resource associations in Massachusetts, Connecticut, Upstate New York, Greater New York City, and Louisiana.

Michael is a member of the International Who’s Who of Professionals. He received a lifetime achievement award from WorldatWork. In May 2003, Michael was interviewed by SHRM's HR Magazine regarding the successful design and implementation of an innovative, self-funded incentive plan in a non-profit healthcare organization. In 2004 Astron Solutions was recognized by the American Association of Healthcare Human Resource Administration with a “Best Practices Award" based on Michael's work in developing innovative career-path programs for healthcare workers. Michael received a bachelor’s degree in political science / philosophy and a master’s degree in industrial relations from the Loyola University of Chicago.

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Building a Compensation Program Strategic Objectives: Cost