Many organizations profess to have a pay for performance compensation plan in place. What does that mean exactly? Does it recognize and reward the right employees? 

What the definition should be is that the right employee is whoever has performed well above the majority of other employees during the performance cycle. Those employees that the organization can rightly call high achievers. And those employees whose resignation would cause their manager to lose sleep at night. Everyone else should be treated differently.

So What’s the Problem?
Well, that’s not how things work in many organizations. There are a number of other considerations besides performance alone. The result is that perhaps the right employee does not get rewarded. Or what they are given is not much more than what is also given to the average employee.

Why does this happen? Several potential culprits follow:

  • Not much money to go around: This is a common argument when merit budgets are tight. That is to say that when a manager cannot make much of a distinction when granting increases, the manger cannot make much of a distinction with rewards either. Proponents often say, “Let’s just push the easy button and give everyone the same raise.”
  • Everyone deserves something: Advocates of this strategy suggest that if an employee has not been fired then they should get something for sitting around for 12 months. They proclaim, “Hasn’t inflation increased for everyone?”
  • Someone might quit: An employee quitting is often a manager’s worst fear and in this case, may lead to an interest in providing pay increases that would retain staff. Surely they suggest, “If an employee quits it’s more work for the manager and the potential for criticism from their boss.
  • I want to be liked: “I want to be liked” is an attitude often prevalent among new managers, who want to build a collaborative team. They can be reluctant to make performance assessments and pay increases for their team. Many would blame human resources for not providing enough funds.
  • They avoid career-impacting decisions: Some managers would prefer someone else play judge and jury with an employees’ career.

Making the Hard Decisions

Rewarding the right employee becomes essentially about the manager being willing and able to make discretionary decisions about an employee’s job performance and effectiveness as an employee of the organization.
Because the budget for pay increases is always going to be tight, there will never be enough money for everyone. So an effective manager has to choose how to spend available reward dollars in a way that generates the best return for the organization.In some cases, this means that an average employee may not receive a merit increase this year, even if performance has been ok / satisfactory / meets expectations.

Making these decisions is not easy. Nor is it supposed to be.
My colleague, Rich Sperling, and I have spoken and written extensively on the topic of taking care of top performers and high-potential employees.  Contact me and we will be pleased to share our thoughts with you.
Contact Us
Please contact me at (847) 864-8979 or at nlappley@lappley.com to discuss discriminating pay among employees based on performance.  And forward this email to anyone who may also be interested in this topic.

By Tim Weizer | May 2016

In May 1992, the Wall Street Journal bluntly stated, “Nothing positive happens in the absence of revenue.” This statement is equally true today. An organization’s salesforce, and its effectiveness to generate revenue, can be significantly enhanced by the role of the HR function.

Of the many diverse drivers of salesforce effectiveness, 2 topics are worth a brief discussion. Under the topic of People are the success profile, hiring and training/coaching of the salespeople. Under the topic of Activity Enablers are the incentive plan and performance management program.

People

When it comes to salespeople, the chief human resource officer (CHRO) and key HR staff are seen as having a special skill in judging people and recognizing a person’s hidden talents. Whether judging a sales representative’s skills as a “hunter” or “farmer,” or judging the skills of a regional sales manager for higher management positions, human resources needs to not only consider today’s business and competitive environment, but also the future needs of the organization relative to its growth goals. In this regard, the CHRO is seen as having a special knack similar to the CFO’s skill in making inferences from the company’s numbers.

In addition, the CHRO and HR staff are key in two other areas. The first is diagnosing personnel problems that may arise when the sales function is not performing well. Is it because of the mix of talent, the reporting relationships or the absence of strong, cross-functional working relationships? These are all questions to be answered.

The second area is prescribing actions that will add value to the organization. For example, keeping tabs on the senior sales executives of competitors can lead to making meaningful predictions not only on how the competitors may be changing their overall sales strategy, but also on whether competitors may be looking to steal away your sales stars that fit their new sales strategy. One option for retaining sales stars is built on the long-standing premise that sales stars see pay as a personal scorecard. Some companies increase the impact of individual performance through an individual multiplier to incentive earnings.

Activity Enablers

The CHRO‘s role in this area may often be viewed as limited to understanding the duties and responsibilities of individual sales positions and matching their compensation with the relevant marketplace. A growing trend, however, is for the HR function to go beyond that point and look at a broader picture. Namely: What is the importance of the sales position? What value does an individual salesperson contribute to the company? And, what should be the relevant base salary and incentive opportunity given the answers to those 2 earlier questions?

In this regard, the CHRO is seen as the team leader in joint discussions with sales management, the CEO and CFO.

Why This Perspective Is Barely Evident

A lot has been written about the HR function and its lack of strategic focus. Everything from its transactional nature to the many new legal aspects of the function, to a lack of budget, to not enough headcount. A recent Google search on the topic of “Strategic HR” yielded more than 250 million listings. So, there is a lot of ongoing discussion.

In my opinion, there is an important reason why this perspective is not more prevalent today. The senior leadership team may view the CHRO as too HR academic and not analytical. One way to combat this notion is for the HR team to conduct some sales incentive plan analytics that depict the performance level of the current plan. For example, comparing the actual distribution of performance across the salesforce with the expected performance and then determining if these results correlate with the organization’s financial performance.

Likewise, the HR function could begin to develop an analytical or behavioral-competency-based success profile of the company’s superior salespeople in order to improve sales effectiveness and efficiency.

Broader Actions

To begin the process of becoming a strategic partner to the CEO and CFO, the CHRO may also want to consider these broader actions:

  • Ask to attend meetings where the CEO and CFO discuss not only quarterly results, but also talk about the company’s strategic plan and objectives. Take note of areas where the salesforce will be important for success (e.g., a new product introduction in a B2B marketplace).
  • Collect data about the results of recent key activities that involve the sales function and use analyses to improve the working relationship between sales and other functions. For example, collect and analyze data on successful new product introductions and the interaction of the salesforce with marketing, engineering and other important functions seeking to improve the existing structure and/or processes.

Contents © 2016. Reprinted with permission from WorldatWork. Content is licensed for use by requestor only. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.

road-sign-showing-changes-ahead

Last week businessman, Donald J. Trump was elected the 45th president of the United States. To many, the election’s result was unprecedented and unpredictable. This month’s Compensation Alert will summarize current writings on total rewards changes that may occur under the new administration.

Trump’s issues on total rewards include a mix of pro-business positions and some novel approaches to policy changes.


Minimum Wage

Trump has said that the federal minimum wage should be raised to $10 per hour, but that “states should really call the shots.” Changes to minimum wage laws appeared on the ballot in several states during this election, including approved increases in Arizona, Colorado, Maine and Washington state. It is conceivable that Trump could take action at the federal level as he has toyed with the idea.  Quite likely liberal-leaning states, such as California, will continue to push for a minimum wage increase, while states such as Georgia, Texas and Virginia will keep it at the federal minimum.
 FLSA Overtime Rules
Trump supports rolling back the new U.S. Department of Labor overtime regulations scheduled to take effect on December 1st.  At this point, most HR observers believe President Obama administration’s overtime rules will proceed as planned. Although the president-elect has previously opposed the changes, he may not take immediate action to revert them. On the other hand, Congress may very well step in and propose its own changes.
 Federal Child-Care Support
Trump’s plan to enhance child-care would allow working parents to deduct dependent care expenses on their income taxes at rates higher than the current deduction. His plan also would allow dependent care savings accounts and would incent employers to provide child care in the workplace.
Federal-Paid Leave Changes
Trump’s child-care plan also includes six weeks of paid leave for new mothers. Note his proposal is silent pertaining to fathers.
The Affordable Care Act
Trump has called for substantial changes to the Affordable Care Act (ACA), and has openly campaigned to “repeal and replace Obamacare.”  A recent survey of HR participants reported that this is the top policy concern to contributors. However, Trump has recently said that he is in favor of current provisions retaining children until age 26 and covering preexisting conditions. Congressional Republicans at the same time appear to favor repeal of the Cadillac tax, the expansion of HSAs, and a repeal of individual and employer mandates.
Contact Us
If you would like to discuss these changes further, please contact me at nlappley@lapppley.com or (847) 864-8979. And feel free to forward this email to anyone else who may be interested.
New Web Site 
We are pleased to announce the launch of a new web site. We encourage you to take a look at www.lappley.com.  Please provide feedback and pass it on to anyone you feel may be interested.

In September, Rich Sperling and I made two presentations at the Illinois SHRM Conference. A total of approximately 65 conference attendees participated in the two seminars.

At the end of each session, we asked the participants two questions: “What is the most significant compensation issue(s) that you are facing in your company?” and “Why is this important to senior management?” In this month’s Compensation Alert, we will provide you with a report on the results of our quick survey of compensation trends from conference participants in 2015 and 2016.

What is the most significant compensation issue(s) 
that you are facing  in your company?
Survey Year
Topic                                                 2015      2016
Not at market/low pay/high pay    25%         33%
Pay for performance                         25%           0%
Approach to pay lacks structure     18%        42%
Communicating pay                            9%        17%
Other                                                    23%         8%
Not paying at their targeted market competitiveness level emerges as the top issue reported facing organizations. Competitiveness generally represents at least three issues: (1) the ability to attract capable employees; (2) the ability to retain top performers and high-potential employees; and (3) the need to treat employees fairly which touches on gender equality, minimum wage, and compression. Addressing competitiveness involves having a well-articulated compensation strategy, including competitiveness targets, understanding how competitive the organization is currently paying, and developing a plan to move to targeted levels.
Pay for performance, not surprisingly, is equally reported as an issue as several of our SHRM presentations centered on taking care of top performers. Approaches to differentiating performance are well established. Although salary increase budgets recently have been modest, addressing this issue is not about budget, but the will to differentiate rewards.
 
Those reporting a lack of structure either believe they need a more formal approach to salary grade structure and salary ranges, or want to move from a bonus program to a more formal performance incentive plan.
Communicating pay is an issue that is neglected at most companies. Organizations spend significant efforts communicating benefit programs, but exhibit modest efforts explaining their salary and incentive programs.
Why is this important to senior management?
Survey Year
Topic                                                2015   2016
Retention/turnover                         57%       10%
Competitiveness                              32%       70%
Communicating compensation      0%       20%
Other                                                   11%       0%
 
Responses in 2016 report a shift of senior management towards competitiveness which, as discussed above, includes retention. The issue of competitiveness represents a heightened focus as the result of lower unemployment and a steadily increasing economy, coupled with low inflation and conservative salary increase budgets. One result is an increased interest of organizations to implementing incentive programs to aid in taking care of top performers and high-potential employees.
The two topics we presented at this year’s Illinois SHRM Conference were titled: “Compensation Strategy – Develop, Communicate and Use” and “Use ROI to Get Compensation Programs Approved”. We will be glad to discuss either of the presentations with you.
Contact Us
Please contact me at nlappley@lapppley.com or (847) 864-8979 to discuss any questions you may have from this eNewsletter. Feel free to forward this email to anyone else who may be interested.

As we communicated in last month’s eNewsletter, salary increase budgets are expected to remain at 3 percent for 2017. Employers are turning to variable pay to reward employee performance.

The percentage of companies using variable pay vehicles, such as annual or quarterlypay-scale
incentives based on individual, team and organizational achievement, rose to 84 percent in 2016, reports WorldatWork in their most recent survey of its members. This number has been hovering around 80 for many years.

A combination of awards based on individual, business unit, and organizational performance continues to be the most prevalent type of variable pay program.
Types of Variable Pay Programs 
The percentage of participants who indicated that their organization uses all three, or just one or two, of these programs is shown below. Some employers offer multiple variable pay programs covering different employee groups.
•Combination of awards (organization/unit and individual): 70%
•Organization-wide awards: 28%
•Individual incentive awards: 23%
•Unit/strategic business awards: 17%
In deciding whether to offer a combination of variable pay programs or to provide awards only for business unit or individual performance, it is important to answer this question: What do we want to accomplish with our variable pay programs? In some organizations, different employee groups are motivated by different rewards strategies. In other cases, a company may have an overriding culture of winning or losing together, in which case a common incentive program for all employees will support that.
Also, employers should keep an eye on the practices of companies with which they compete for talent.
Variable Pay Program Budgets 
Most organizations that have a formalized incentive program budget, as it often includes sizeable cash expenses. Survey respondents differentiated their current and planned variable pay awards representing a percentage of base pay, by employee classification.
Nonexempt Nonexempt Exempt Officer/
Year Hourly (nonunion) Salaried Salaried Executive
2016 Projected
Percent Paid
5.00% 5.00% 11.80% 34.50%
2017 Projected
Percent Paid
 5.00%
5.00% 12.00%
35.00%
Companies striving to be known as an employer of choice often offer incentives at lower levels to attract better talent or to attract high performers at above market pay rates, which aids in retention. But always check with the objectives that you want to accomplish.
Contact Us
Please contact me at (847) 864-8979 or at nlappley@lappley.com to discuss variable pay programs.  And forward this email to anyone who may also be interested in these projections.
Projected 2017 Salary Increases [Survey Results]
According to recent surveys conducted by WorldatWork and the Hay Group division of Korn-Ferry, U.S. employees can expect to see a moderate 3 percent salary increase budget in 2017. This figure is consistent with actual pay increases ofsalary-increase 3 percent reported by surveyed companies in 2016. These projected and actual salary increases have remained nearly constant over the past several years. Likely this trend (or lack thereof) reflects employers’ consistent conservative increases in salary’s fixed costs.

There is also consistency across most employee groups in regard to salary increases. All employee groups – from clerical to executive – are indicating about a 3 percent median increase.

A 3 percent average salary increase does not mean all employees should expect to receive that number. Organizations at the 90th percentile report planning on a 3.5 percent average increase, while the 10th percentile is planning a 2 percent increase. Also, survey participants see top performers receiving between 1.5 times and 2 times the median salary increase. As a result, top performers could receive salary increase of 6 to 8 percent.

Economic Outlook

There has been upward pressure on wages, due to the lowest unemployment in seven years that many economists are calling near full employment. In addition, changes to FLSA regulations and minimum wage increases will likely add to pay increase pressures. Yet many organizations appear uncertain of their economic outlook. This coupled with relatively low inflation is causing many organizations to keep growth in fixed costs, such as salaries, in check.

Our recruiting and search friends are finding it increasingly hard to find and attract good talent. Companies should continue to be aware of compensation market trends as competitive situation can change quickly.

Industry Data

Industry specific salary increase budgeting has continued to grow and contract. Of particular note is a large fall in mining, quarrying, and oil and gas extraction to 1.3 percent in 2016, after leading all industries around a 4 percent level a few years ago. Reportedly, they will return to approximately 2.4 percent in 2017

Percentage of Employees Receiving Increases

Base salary increases are being awarded to 89 percent of employees in 2016 on average. Thus, most employees are receiving salary increases.

Promotional Increases

Promotional increases were awarded to 8 percent of employees in 2015, a small .1 percent increase from 2014. The size of the average 2015 promotional increase was 8.4 percent. In addition, the planned amount that organizations spend on promotional increases in 2016 is 1.5 percent of total base salaries.

 

Variable Pay

Organizations seem more willing to provide additional compensation through short- and long-term incentive programs. The percentage of organizations using variable pay rose to 84 percent in 2016. A combination of organization/unit success and individual performance continues to be the most prevalent type of variable pay program. In addition, employers are increasingly dependent on referral, sign-on, spot and retention bonuses as ways to reward employees.

Contact Us

Please contact me at (847) 864-8979 or at nlappley@lappley.com to discuss planned compensation actions for 2017 and forward this email to anyone who may also be interested in these projections.

The focus on sales compensation is understandable as selling is, by far, the most expensive part of strategy implementation for most companies.  Five times the expenditures on all media advertising; 20 times larger than the money spent on all online marketing and advertising in 2013.

Here are five areas to test your plan.  Focusing on these areas can help you determine whether you have problems.

#1.  READY…FIRE…AIM APPROACH marketing-strategy

In todays hurry-up world, quality often is not given enough emphasis over a quick answer.  A holistic approach is needed to ensure that proper time and thought are given to plan design and any potential unintended consequences. As one CEO remarked that the company took its time to ensure “…we didn’t have sales compensation becoming disconnected from the overall financial result of the business”. The CEO wanted to ensure that the company was paying for the right strategic results.

The basic premise is that a sales compensation plan does not exist in a vacuum…as illustrated in the graphic above.

#2. “ALL THE SAME” PERCENTAGE
sales-job-analysisSetting the same percentage of base salary as the incentive for target performance for all sales positions is often evidenced in plans.  Careful sales job analysis should be undertaken to properly reflect each position’s impact and influence on a sale.  This analysis then becomes an important part of determining the right pay mix per sales position.

#3.  TOO MANY MAX OUT
In this case, the design allows too many sales reps to max out on incentive earnings. This result can cause the CFO to worry about the inherent risk in the plan’s design or to “pushing” fourth quarter sales into the first quarter of next year.   While 60 percent of the sales force should achieve quota or above, a recent survey stated that only 4 percent, on average, maxed out.  If your result is significantly higher, then multiple analyses should be conducted to determine the reasons (e.g., Quota and territory design analyses).

#4.  TOO MANY MEASURES OR OBJECTIVES
While communicating management’s goals to the field, too many measures or objectives result in the measures receiving little or no attention.  Four should be the maximum number of incentive measures.  This statement is backed up by a recent Hay Group survey of 700 companies that reported 85 percent of respondents had 4 or fewer incentive measures. Also, any single incentive measure or objective accounting for less than 15 percent of the targeted incentive opportunity is simply wasted.

#5.  UNDUE OR EXCESSIVE RISK 
To quickly increase sales, a company may decide to provide a higher leverage of incentive to total cash or an uncapped incentive opportunity vs. the past design.  This action may produce significant risks in terms of cost control, uneven production scheduling, or even upset key customers due to delivery issues.

Contact Us
To learn more or discuss your sales compensation concerns, please contact Tim Weizer at timsalescne.com (phone 312.479.6411) or Neil Lappley at nlappley@lappley.com

When you think about traditional performance reviews, it was based on an employer-employee relationship that has radically changed. Years ago, most employees would wait anxiously for their annual meeting with their manager to find out how they were doing and if they mattered. This was the official validation that employees wanted and craved.

Up until that point, you were never really sure how those above you viewed your performance. It was a dynamic that created a dependent, subordinate relationship that clearly put the organization in control of your destiny.  Back in those days, you felt emotionally connected to your organization for long-term employment, security and stability.

Fast forward to the present, and we are in an era where employees are less concerned about a long-term relationship with their employer. Employees are more concerned about their own careers and doing work that helps them achieve what they hope to become. Today, there is no longer the emotional connection that puts the organization in control.
This is a significant change from 20 or 30 years ago, and in many ways healthier. What we have now is a dynamic that requires an open and honest exchange of expectations and feedback on a regular basis to ensure mutual success. There is a level of acknowledgement that more than ever, employees and organizations need each other to succeed. There needs to be an equal exchange of value and a defined upside for everyone. That requires a partnering relationship and not a dependent or subordinate relationship.
So what does that have to do with the annual performance review conversation between an employee and his or her manager? The fact is everything. The annual review is totally out of sync with what most employees expect in terms of feedback. It is also out of sync with how quickly everything is changing and what is required to remain competitive.
This means that performance management needs to be more rapid and real time.  Anything that happens once a year is DOA. Performance management needs to be much more frequent and an ongoing process. The focus needs to be on learning, coaching and, of course, being accountable.
Managers and employees need to operate as full partners to ensure everyone is successful. It’s not about ratings or rankings. The days of an organization doing the annual performance appraisal are numbered. We should all be grateful.
Contact Us
Performance evaluations are still a key component of your overall compensation program, now may be a good time to evaluate your plan and processes. Contact me at nlappley@lappley.com or call (847) 864-8979 and we can discuss your best options. Feel free to pass this along to other interested parties.

The United States Fair Labor Standards Act of 1938 requires that employees be provided overtime pay unless they qualify under one of the FLSA exemptions.  On Mayflsa-regs-graphic

  • Increase the minimum weekly salary to $913 ($47,476 annually) to be considered exempt.  The current limit was $455 per week or $23,660 annually.
  • Increase the highly compensated employee exemption total compensation to $134,004. The current threshold is  $100,000.
  • Establish a mechanism for an automatic update of salary limits and thresholds every three years.
  • Amend the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard level.

The effective date of this final rule is December 1, 2016.  Employers need to consider the many issues, decide on a course of action, and then have all programs and documented policies in place by this December date. Failure to be in compliance with the new requirements can result in significant employer liability. The changes outlined in the final rules will likely impact financial results, human resources, and information systems.

Consider the following questions:
1.Which employees will be affected?  Gather lists of employees that are currently classified as exempt and have annual salaries below $47,476.
2.What will your strategy be for those impacted?  Develop alternative strategies for those employees that are impacted.  The DOL website offers a general guide to various strategies.  Evaluate the various strategies and the impact changes will have (i.e. increase pay to the minimum, change status to non-exempt, budgets required to deliver pay increases, etc.)
3.How will these changes affect your employees?  Not all employees will view the changes as positive.  Many companies will need to decide whether supervisors who are changed to non-exempt will maintain managerial responsibilities.  Engaging with your employees to understand their issues and answering questions they may have will be appreciated and beneficial.
4.How will these changes impact your compensation and incentive planning and administration?  Take a look at your current salary structure and job slotting.  Increasing wages for employees in certain salary grades may create compression problems between grades.  Also, look closely at your nondiscretionary incentive and bonus payments to see if the amended salary basis test helps you satisfy the standard salary test.
Given the deadline of December 1 to have your company’s new programs, systems, and policies in place and communicated, consideration should be given to conduct a few mid-year reviews of programs that usually wait until year-end.  Getting a sense in mid-summer of what is working and what is not working can avoid a last-minute rush to renew a program that has early warning signs. Among these programs are:
– Executive annual bonus plans
– Middle management annual bonus plans
– Salesforce incentive plans
Contact Us
Simply reply “Let’s Discuss” to this email if you would like to discuss your FLSA compensation issues or wish assistance with a mid-year review.  Please feel free to contact Tim Weizer at (312) 479-6411 or tim@salescne.com or Neil Lappley at (847) 864-8979 or nlappley@lappley.com.  Please also forward this email to anyone you feel will be interested.

When we have the opportunity to talk with executives and managers about their compensation programs, it can be surprising how many don’t understand the complete picture. While they are usually well-versed in the plan mechanics, such as metrics and targets, they are often in the dark when it comes to the broader rationale behind the […]