My colleagues at Executive Benefits Network, R. David Fritz and Patrick Margot, and I collaborated on a white paper: Designing the Right Compensation Package. The white paper discusses the key components of providing a robust package for employees. In particular, EBN explores types of Nonqualified Deferred Compensation Plans that companies are using to attract, retain and motivate top talent.
https://www.lappley.com/wp-content/uploads/2023/03/Screenshot-2023-02-28-184427.png487771Tracy Champagnehttps://www.lappley.com/wp-content/uploads/2016/07/Lappley.Logo_.F-300x68-300x68.pngTracy Champagne2023-03-01 00:57:482023-03-01 00:57:49Designing the Right Compensation Package
The past few years have certainly been eventful, from both a talent and rewards perspective. The intersection of a global pandemic, world political and supply chain disruptions, shortage of talent, and raging inflation present difficult terrain to manage for both employers and employees.
In 2023, employers will continue to face significant pay challenges: a competitive talent landscape, an exhaustive workforce, and pressure to control costs amid a potential economic downturn. How employers respond could determine whether they are an employer of choice.
So, what should employers be thinking about to address these complexities? Lappley & Associates research and consulting experience point to four themes that will impact compensation for 2023 and beyond.
Determining and implementing compensation strategy short term.
Embedding pay equity principles in rewards programs.
Being transparent in pay management.
Making rewards communications more effective.
These four trends are explored below in this month’s newsletter.
Update: 2023 Compensation Budgets
Faced with uncertainty over inflation and a possible recession, most companies plan to raise salaries, but not enough to keep up with the cost of living according to a recent Korn Ferry pulse survey focusing on compensation and rewards strategy. Survey participants reported that companies are planning 2023 wage increases of between 4% and 4.5%. This is consistent with our November newsletter that summarized several surveys reporting on 2023 anticipated compensation increases.
And while wage increases are going up, they still trail the inflation rate. It seems that a number of companies are taking a wait-and-see approach so that they don’t lock in costs that lead to layoff recession hits. While hiring has softened a bit in the past couple of months, there are nearly two times as many jobs available as there are people to fill them. In addition, recent communications by the International Monetary Fund (IMF) suggest that, forsaking major international events, the U.S. economy will, at worst, face a mild recession. It’s still a workers’ labor market.
While companies balance the costs and returns for increasing salaries, including differentiating increases between excellent and long-term employees, funding equity increases, and addressing competitive practice for high-demand positions and high-potential employees, they often continue to utilize hiring and retention bonuses.
While many organizations conduct pay equity audits to ensure that pay outcomes don’t appreciably vary between gender and race groups, a great deal don’t go beyond these initial efforts. Inclusive organizations are insisting that their rewards programs are inclusive, as well. This expands a narrow focus on statistical analysis to include the following.
Inclusive contributions incorporate a belief that rewards are an investment and not simply a cost. This approach incorporates leaders including underrepresented talent, along with other stakeholders, to be part of design thinking. This fosters alignment and a feeling of ownership across the organization.
Expand statistical assessments to include overall pay gaps across all employee groups.
Establish metrics and processes to measure accountability.
Setting up rewards processes that support pay equity, including hiring, promotions, and development.
Optimizing the balance between freedom and framework, ensuring that management discretion has appropriate guiderails to minimize pay-equity risk.
Education for all employees including managers who are at the forefront of inclusion administration.
A new pay equity focus is being enforced by regulatory progression. Several U.S. jurisdictions (e.g., California, Colorado, Connecticut, Washington, and New York City) have recently passed laws requiring organizations to disclose salary ranges for job postings. That follows many jurisdictions that don’t allow asking recruits for their salary history. Passage of these laws will likely drive disclosing pay ranges nationally.
Disclosure of pay ranges aims primarily to reduce pay inequalities for underrepresented groups. However, recently newly hired employees have often leapfrogged incumbent employees into higher paying jobs creating equity issues and concerns about employee engagement, loyalty, and disillusionment leading, of course, to their leaving the organization.
Organizations facing this new legislation need to reexamine the design of their compensation programs. This process starts with a review of the purpose of the organization’s rewards strategy, followed by ensuring that logical rewards processes and structures are in place, and that the rewards programs are aligned with the business.
Following reexamination of rewards design, it must be communicated to all employees. Rewards should not be seen as a black box. Communication elements include strategy intent and alignment with organization purpose, determination of job grades and titles, competitive benchmarking, and how individual performance is rewarded.
Robust rewards program design enables companies to have a good story to tell which they need to share effectively and transparently.
Rewards convey a very loud message to employees about the organization’s values, culture, and character. It may be the loudest day-to-day message an employee receives. Employees have become more discerning and demanding than ever with high expectations of their employer which have increased during the ongoing talent shortage. It has become more complex with expanded employee expectations such as linkage of employee and employer purpose, fairness, and the ESG agenda.
Therefore, it is imperative to deliver a highly regarded reward to employees with effective communications. Marketing plays a pivotal part. To the extent possible, communications need to be personalized, or at least segmented, based on employee needs. If achieved successfully, it is a competitive advantage.
The key to communicating compensation centers on managers. A majority of employees say their manager is their direct link to their organization. But people managers are struggling to balance their employee expectations of purpose, flexibility, and career opportunities with performance pressures from senior management. In 2023, managers need to provide support and education to bridge the widening skills gap, while clarifying the linkage between company goals and employee compensation.
Contact Neil Lappley at (847) 921-2812 or firstname.lastname@example.org to discuss 2023 compensation challenges and trends.
As budgeting for 2023 quickly approaches, compensation and human resource professionals must narrow in on their salary increase strategies for the coming year. Labor market conditions this year, including historic high inflation and unprecedented turnover, have had a dizzying impact on the cost of labor. Looking ahead to 2023, the threat of recession now looms. Projecting salary increase budgets for next year may seem like a daunting task, but an approach that rests on systematically analyzing what you know can help inform your talent strategies at a juncture point in the market.
Determining Your Salary Increase Budget
We believe that a process such as the following will aid your decision making. First, review compensation strategy competitive targets, based on geography, industry, business unit, function, and employees thought as in high demand and high potential positions. Second, assess current level of competitiveness for each group, including recently published spot surveys. Third, take the temperature of employees regarding pay, including competitiveness, internal equity, and their priorities.
Next, consult with business leaders and finance sharing information gathered so far and gain their assessment of current and anticipated business conditions, sketching out salary increase alternatives. Finally, develop a salary increase plan, including incentive and bonus alternatives that don’t increase longer-term fixed costs while maintaining total competitiveness, and low-cost employee-paid benefits that are attractive to employees.
One final thought. Keep in mind that employers have historically lagged salary increases during high inflation times, catching up over one to three years. It happened in the 1980s and after the financial crisis earlier this century. Lastly, each organization is likely to form its own unique solution with alternative plans should company circumstances change.
2023 Salary Increase Survey Projections
Following are salary increase projection results provided by participants for several recently published compensation surveys. We suggest a note of caution, however, in interpreting results. Often it is necessary to dig into the reported projections to better understand the content of the numbers.
For instance, all projections include general/COLA and merit increases. Some survey participants, though, may also include promotion increases and sign-on, retention, and referral bonuses in their
submissions, while others don’t.
The WorldatWork Salary Budget Survey 2022-2023 reported 2023 mean salary increase budgets of 4.1%, including general/COLA of 2.3%, merit 3.6%, and other 1.2%. Both nonexempt hourly nonunion and salaried are projected at 4.1%, while exempt salaried at 4.2%, and officer/executive was 4.1%. Salary structures are expected to increase 2.7%.
The percentage of participants using variable pay is to stay constant at 85%, while budgeting for 2023 is down from 2022 actual. Mean budgeting as percentage of payroll for nonexempt hourly nonunion is projected at 5.6% versus 6.4% paid in 2022, 6.5% for nonexempt salaried versus 7.3%, 13.3% for exempt salaried versus 14.3%, and 38.3% for executive/officer versus 42.7%.
Salary.com’s 2022-2023 Salary Increase Survey reported that 2023 salaries will increase 4.0% across all employee categories. Forty-eight percent of survey participants are planning year-over-year salary increases.
Respondents to Payscale’s 2022-2023 Salary Increase Survey report an average national planned base salary increase of 3.8% in 2023 up from 3.6% in 2022. Exactly half expect to increase their budgets for 2023 in response to competition for talent. Note planned increases in the Payscale survey include general/COLA, merit, and other increases.
Base salary increases in manufacturing, retail, energy & utilities are expected to be 3.8% to slightly higher, while technology (includes software), finance & insurance, and nonprofit will be in the 4.0% to 4.2% range. Engineering & science are reported the highest at 4.6%. Companies with less than 100 employees report anticipated increases of 3.6% while organizations with between 100 and 5,000 employees report planned increases of 3.9% to 4.1%. Further, Midwest states of Illinois, Indiana, Iowa, Minnesota, Ohio, and Wisconsin report slightly higher anticipated increases of 3.8% to 3.9%.
Twenty-five percent of participants report they budget separately for promotions. Of those, promotion increases are budgeted at 1.8% of payroll for 2023, up from 1.7% in 2022.
Willis Towers Watson reports 2023 overall salary increase budgets of 4.1% versus 4.0% actual in 2022. Sixty-four percent of recent survey participants are planning higher budgets for 2023.
The Economic Research Institute (ERI) recently updated its National Compensation Forecast for 2023. ERI projects salary increase budgets of 3.78%. Based on its analysis of economic trends, it believes its projections will continue to increase as 2023 comes closer. It further projects salary structure movement to be 2.98%.
Carlson Dettmann, a Cottingham & Butler Company, recently released the results of its Annual Wage Increase 2022/2023 Survey. In the survey, largely of upper Midwest organizations, participants of private companies projected 2023 budget increases of 4.0% for salaried employees and 3.8% for nonexempt. Additionally, respondents of public organizations projected increases of 3.5% for both salaried and nonexempt employees.
Determining 2023 compensation expenditures is a trade-off between employee expectations feeling the effects of inflation and their employer’s success over the past several years and companies’ reluctance to remain competitive in uncertain times and to add to fixed costs. Each organization is likely to form its own unique solution. Feel free to contact Neil Lappley at email@example.com or (847) 921-2812 to discuss your company’s approach.
In this issue of the Salesforce Alert newsletter, my colleague, Tim Weizer, presents some key questions that need to be answered in reviewing a salesforce incentive plan.
The Sales compensation review and planning season is upon us. 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 some questions to ask. Focusing on these areas can help determine whether you have areas of concern.
#1. IS THE BIG PICTURE CORRECT?
In today’s fast paced 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. It needs to be closely aligned with the company’s business and marketing strategies and goals. Also, the plan must address both internal and external forces impacting the sales job and selling process.
#2. ARE THE PLANS PROPERLY CALIBRATED TO THE VARIOUS SALES ROLES?
Setting the same percentage of base salary as the incentive for target performance for all sales positions is often evidenced in plans. This may be a serious mistake.
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 role in your company
#3. DOES THE CFO HAVE CONCERNS?
When the design allows too many sales reps to max out on incentive earnings, the CFO may be anxious 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 salesforce 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. IS THE PLAN UNBALANCED WITH TOO MANY MEASURES?
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 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. A good idea would be to review the actual percentage of your salesforce that achieved 100 percent or more of quota per measure.
#5. ARE THE PLANS TOO RISKY?
To quickly increase sales, a company may decide to provide a higher leverage of incentive to total cash or an uncapped incentive opportunity versus 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.
#6. WILL ASC 606 IMPACT THE PLANS?
New Revenue Recognition Standard requirements go into effect on December 15, 2017 for public companies and the end of 2018 for private companies. Companies in industries such as Aerospace and Defense, Automotive, and Engineering and Construction are likely to be impacted given their use of long-term contracts. Take a moment now to ask your CFO if ASC 606 impacts your sales compensation plans. If so, find out what data the CFO needs from you to address this topic. Also, investigate if the timing of incentive payments may need to be adjusted.
To learn more or discuss your sales compensation concerns, please contact Tim Weizer at firstname.lastname@example.org or Neil Lappley at email@example.com.
https://www.lappley.com/wp-content/uploads/2016/07/Lappley.Logo_.F-300x68-300x68.png00Neil Lappleyhttps://www.lappley.com/wp-content/uploads/2016/07/Lappley.Logo_.F-300x68-300x68.pngNeil Lappley2017-09-09 15:54:222017-09-09 15:57:39[Salesforce Compensation] September 2017 It’s Review and Planning Time