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.
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
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.
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.
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.
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.
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.
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.
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.
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.
Trump’s child-care plan also includes six weeks of paid leave for new mothers. Note his proposal is silent pertaining to fathers.
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.
If you would like to discuss these changes further, please contact me at firstname.lastname@example.org or (847) 864-8979. And feel free to forward this email to anyone else who may be interested.
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.
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 quarterly
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.
|•Combination of awards (organization/unit and individual):||70%|
|•Individual incentive awards:||23%|
|•Unit/strategic business awards:||17%|
|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 of 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.
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 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 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.
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.
Please contact me at (847) 864-8979 or at email@example.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
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.
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.
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 May
- 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.