human resource management unit IV powerpoint
When Talking Pay The time you spend developing fair policies isn't worth a thing if
employees believe that they're being undercompensated.
By Stephen Miller, CEBS
“Most conversations employees have with one another ... are about how incredibly
unhappy everyone is and how tired they are of being underpaid and unappreciated.” T hat’s a comment posted by an anonymous
employee on Glassdoor, the employer rating website. Though the remark was about the com-
menter’s own workplace, it’s a common senti ment across organizations. In 2015, Mercer found that salary is the reward element most
highly valued by workers but that only 55 per cent are satisfied with what they earn. >
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W hile H R com pensation m anagers can devote m any hours to fine-tuning job descriptions, pay bands an d career ladders, none of th a t m atters if employees believe th a t they are being paid less th an they deserve. W hen th a t happens, many w orkers will sim ply leave, triggering a p otentially costly and lengthy process to find replacements.
A nd if these w orkers stay, even w orse problem s can result, including “a loss in engagement, a drop in satisfaction an d toxic conversations th a t disrupt other people in the organization,” says Rusty Lindquist, vice president for strategic H R insights at soft w are provider B am booH R in Centerville, U tah.
Both scenarios can be disastrous and costly. “Payroll is by far a com p an y ’s biggest expense, so the cost of getting it w ro n g is trem endous,” Lindquist says.
T h a t’s why creating structures th a t fairly rew ard talent and perform ance is crucial. But just as im p o rtan t, if no t m ore so, is com m unicating effectively w ith employees w ho are being paid in accordance w ith a w ell-thought-out com pensation philosophy but w ho believe they’re getting shortchanged. They may perceive the inequality to be in relation to their industry peers, colleagues o r m anagers— n o t to m ention the moneybags in the C-suite who are rak in g it in.
A Conversation Catalyst In A ugust 2015, the U.S. Securities an d Exchange Com mission issued a rule requiring U.S.-based publicly traded com panies to disclose how m edian employee pay com pares w ith CEO co m pensation— com m only know n as the CEO pay ratio. Employers will have to reveal this d ata for their first fiscal year beginning on or after Jan. 1,2017. A fter th a t, they m ust identify the m edian w orker wage once every three years— o r m ore frequently if there is a significant change in their w orkforce or pay arrangem ents.
T h a t’s likely to spur resentm ent. “T he CEO pay ratio is going to be a huge u n d ertak in g for com panies” in term s of compiling the d ata and then justifying it, b o th to employees and sharehold ers, says Steve Seelig, executive com pensation counsel a t H R con sultancy W illis Towers W atson in A rlington, Va.
Indeed, CEO com pensation is already a sensitive issue w ith w orkers, given headlines in recent years p o in tin g ou t the w id ening gap between executive pay an d th a t of the ra n k and file. A ccording to the E conom ic Policy In stitu te, the C E O s of top A m erican firm s now earn m ore th a n 3 00 tim es the salary of a typical worker. CEOs at the largest U.S. com panies each made, on average, $16.4 m illion in 2014. A nd w hile w age g ro w th rem ains sta g n an t overall—rising only 10.9 percent from 1978 to 2014 for a typical w orker— com pensation for these fortunate few at the top rose 997 percent over the same tim e period.
“Disclosing CEO pay is n o t a new topic; publicly traded com panies already have to m ake the inform a tion available in their proxy statem ents for the top five corporate positions,” explains Eileen Adler, chief H R officer at People- Fluent, a business softw are provider based near Boston. “People have become nervous ab o u t this because, for the first tim e, the CEO pay ratio makes it personal.”
T h a t m ig h t force some com panies to rethink how they com pensate their w ork force. A nd the pay ratio disclosure, a t least
at public com panies, could be a g ood sta rtin g p o in t for larger conversations. “ Com panies have some w ork to do. They need to m ake the case to their employees th a t they’re paid fairly,” Seelig says. People will be far m ore engaged and less likely to w an t to leave if they believe th a t pay at their organization— for them and executives— is based on the value they create, a 2015 Towers W atson survey revealed.
Appropriate Pay Because salary increase budgets have been very m odest over the p ast few years— aro u n d 3 percent— setting base salary ranges appropriately and adjusting them as needed can be vital to ensur ing th a t people view their com pensation as fair.
“Pervasive feelings of dissatisfaction w ith pay may be trace able to a num ber of ro o t causes, but failing to attrib u te the right
E ileen A d le r
Widespread Dissatisfaction with Pay Percentage of workers who agreed w ith the following statements:
I am paid fairly, given my performance and contributions to my organization.
Source: 2015 Inside Employees' M inds survey, Mercer.
My organization does an adequate job of matching pay to performance.
43% Promotions are generally given
to the most qualified employees.
43%
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*We should be listening to our employees, responding to their concerns and helping them see how their pay
fits into the overall compensation structure/ —Jeff Lindeman, San Diego International Airport
m arket values to jobs and to correctly p o rtra y their place in the o rganizational hierarchy is a t the to p of the list,” says M ichael O ’M alley, senior vice president an d h u m an capital co n su ltan t for Sibson Consulting in N ew York City.
T h at said, using m ark et pricing to define salary ranges is sub ject to error, just like any other m ethod of setting pay. “T he m a r ket does n o t necessarily align w ith the internal value of jobs to the organization,” O ’M alley says. T h at m eans an employee’s relative im portance to a business m ight n o t be properly reflected in the individual’s salary. “T he p o in t is not th a t m arket pricing is a bad approach, but th a t it is no t a p an acea.”
A nd w h at about raises ? “T he goal of the annual m erit increase is to keep people w ithin m arket range on their base pay,” Adler says. In oth er w ords, yearly adjustm ents aren ’t necessar ily intended to be a m eth o d of rew ard in g people for th e ir perfo rm an ce. “ If a com pany is still in th e m indset
th a t they’re using annual merit increases to rew ard and engage employees, then they’re already behind the eight ball, because how m uch can you differentiate w ith just a 2 .5 to 3 p ercen t pay increase budget? It just doesn’t w ork; th ere’s n o t enough.”
Instead, organizations should focus on w h at they can do to counter w orkers’ per-
J e ff Lindem an ceptions of being underpaid. “We may no t be able to ensure th a t all employees, 100 percent of the tim e, will feel com pensated
for th eir value. But we can w ork h ard ... to m ake sure th a t o ur pay structure rem ains competitive and com m unicate th a t aggres sively w ith in th e o rg an iz atio n ,” says Jeff L indem an, S H R M - SCP, senior d irector for talent and engagem ent at the San Diego International A irport, an independently m anaged public agency.
Each year, the a irp o rt’s H R dep artm en t reviews the com pen sation of one-third of its positions relative to national an d local m arkets. Its b o ard has au th o rized m anagem ent to benchm ark pay to the 5 0 th percentile of the broad m arket, and “we bench m ark against the m idpoint o f o u r salary bands, w hich enables us to a ttra c t a wide array of talent, as a band m ight span well above and below the m ark et rate,” Lindeman says. H R then conveys the
results of the an n u al m arket reviews to all departm ents. “T h at transparency helps m anagers to answ er the question of ‘Are we competitive?’ A nd th at, in tu rn , helps to resolve employee percep tions th a t setting pay levels is kind of like the ‘W heel of F ortune,’ w here, behind closed doors, people are spinning a wheel an d I either get good money o r I do n ’t get good money.”
W ithout good inform ation, “people will m ake up w h at they believe to be tru e ,” L indem an says. “We should be listening to our employees, responding to their concerns an d helping them see how their pay fits into the overall com pensation stru ctu re .”
T he a ir p o r t’s H R te am , in ta n d em w ith d ep a rtm en t m a n agers, even tak es salary reviews a step fu rth er. T he team and m anagers look “individually a t p eo p le’s jobs an d if th e w o rk they do, based on their proficiency an d skill level, is at a higher level [than their designated pay grade], w e’re w illing to consider re-evaluating th a t position and moving it to a higher pay b an d .”
T he result of these efforts? L indem an says his organization has “a highly stable, highly engaged w orkforce,” w ith employee engagement levels th a t hover aro u n d 80 percent. But he em pha sizes the im p o rtan ce of “ being w illing to listen w hen someone says, ‘Hey, the w ork th a t I’m doing is much bigger th a n the job description I got hired for.’ ”
Performance-Based Rewards Aside from salaries, variable pay— short-term incentives such as annual (or even quarterly) bonuses, for example, and long-term
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incentives including restricted stock grants at public com pa nies—are often part of H R ’s rewards arsenal. But those types of rewards can be mystifying to workers.
“If you’re going to reward performance with an annual bonus, it needs to be directly tied to the organization’s success and what individuals and teams have contributed to accomplish the orga nization’s priorities,” Adler says. “It’s not just about activity— as in ‘Wow, you worked really hard.’ It’s got to be focused on w hat the company has achieved and how workers contributed to that effort.”
The San Diego airp o rt implemented a gainsharing plan to “help start sh arin g the collective sue cess of our organization,” a c c o rd in g to L inde- m an. “ I t’s called our Business Perform ance Incentive, and we take 10 percent of any gain over and above our fiscal year net income plan and distribute it to employees, and all employees get the same dol lar amount. It’s created a collective con sciousness around how we work and how we get rewarded,” he says.
As a public agency with highly transparent compensation inform ation, the organization finds th a t a flat-dollar, equal-bonus-for-all strategy works best, but many private busi nesses increasingly differentiate variable pay based on individual performance. “Today’s new pay reality for employees is one where guaranteed pay growth is out, but compa nies remain quite willing to pay for performance— even more so if those individuals can drive business innovation,” explains Tom McMullen, vice president in Hay Group’s reward solutions consulting practice in Chicago. “Whereas many organizations in the past had short- and long-term incentive programs that were team-based, creating a rising-tide-lifts-all-boats situation, many of these programs are now being adjusted to include individual performance modifiers to better reflect each employee’s direct contributions.”
But the ideal of performance-based bonuses is often unful filled in practice. In 2015, Towers Watson found th at 30 per cent of U.S. companies planned to give bonuses to workers who failed to meet performance expectations. That matters because companies are likely to have difficulty holding onto high-per formers who see too little of a distinction between the incentive they received and what was given to their poorer-performing col leagues. As a result, many organizations face the challenge of dif ferentiating variable pay enough to motivate and recognize top
performers while ensuring that everyone knows w hat they need to achieve in
order to reap equivalent rewards. Yet, when creating perfor mance metrics related to com
pensation, at many organi zations the formulas for meeting target goals can get overly complex. “If
you have an incentive p ro gram th at is so complicated that
people can’t understand it, then you’re not going to motivate them,” Adler says.
Her company, PeopleFluent, sets its priori ties at the beginning of the year so everyone clearly understands the direction the orga nization is taking. “Those priorities proba bly won’t change during the year, but what an employee needs to do is going to be changing constantly,” she says.
To th at end, the company believes in making “real-time” personal goals. Adler defines th a t as “setting and
resetting goals every 30, 60 or 90 days and constantly evaluating where you are with them. Instead of just a midyear check-in and an end-of-year check-in, it’s fluid and happening all the time.”
The San Diego airport takes a similar approach. “Philosophi cally, we’re moving away from a rearview mirror perspective on performance to a prospective outlook,” Lindeman says. “Our quarterly conversations to talk about progress toward goals now are more about what’s upcoming and what can we do to really excel in delivering in the upcoming quarter, as opposed to at the
‘If you have an incentive program that is so complicated that people can’t understand it,
then you’re not going to motivate them.’ —Eileen Adler, PeopleFluent
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end of a quarter sitting down and looking backward and saying, ‘Well, here’s what I see you did during the last quarter’ and then checking a box.”
The Value Proposition It might help to encourage people to view their rewards as being in different buckets. “There’s base pay, which is what most peo ple spend their time thinking about and negotiating. But the real dollars can be in special incentives, bonuses, career development and promotions. And th a t’s what HR should get people to focus on,” Adler says.
T h is m eans th a t conversations around career advancement and p ro fessional development are essential, as employees want to know what oppor tunities exist—and how they can earn more money.
“Employers are finding ways to deliver pay increases th rough other means like promotions, which reflects the gro w in g tren d of focusing on careers and sustained performance, not a one-year snapshot and reward,” says M ary Ann Sardone, an Atlanta-based partner in Mercer’s talent practice.
In 2015, a prom otion brought an average rise in remuneration of about 8 percent, Mercer found. In addition, 41 percent of U.S. organizations last year budgeted promotional increases sepa rately from merit increases, up from 36 percent the previous year. That reflects the growing focus on getting promoted in order to get a substantial boost in pay.
Providing a career framework—a personal development map that shows workers how they can progress upward within the organization—helps at review time when people ask about a raise. “This allows managers to respond, ‘Great, I under stand that you w ant to move forward in this organization and earn more money; here’s what you need to do,’ and then sketch out a career path that will motivate the employee,” says Mykkah Herner, head of professional services at Seattle-based PayScale, a compensation consultancy.
Get Managers On Board To be sure, managers have a key role to play. “Give managers enough inform ation to not be dangerous, but to be informed and helpful—and also give them the tools and resources they
need to carry out your intentions with regard to communicating about compensation,” Herner says. There’s an added benefit to this approach, he notes: “Training managers in the what, when, how and why of compensation is an opportunity for H R to step into a trusted advisor role and gain authority.”
W hat Herner calls the “worst scenario” is when managers pass the buck, telling direct reports “I can’t give you a bigger increase; H R w on’t let me.” W hen th at happens—and it fre quently does—it undercuts all of H R ’s efforts to build confi
dence in the fairness of the pay system. A far more effective approach is to
show employees how they are paid at market rates (if that’s the organization’s philosophy), how their value is deter mined internally and how the company rewards performance (bonuses tied to achieving goals, for instance). M an agers should be trained to give those answers—or encouraged to bring HR in to provide them.
Lend an Ear The clarity of the message is crucial. Workers need to know w hat’s expected of them, how well they’re doing—and where they need to do better—and how that relates to performance-based pay and bonuses. “It comes down to open, transparent, honest communication,” Adler says.
“Sometimes, simply having a seri ous discussion [about pay] can make the difference between an employee feeling valued or n o t,” Lindquist of BambooHR adds. “Compensation is the communication of how much we value th a t employee. So if they feel u n dercom pensated, th ey ’re feeling undervalued. This is deeply emotional.
If you take it seriously, then you’re telling them that you are seri ous about their value and you care about how they perceive that value.”
HR professionals “need to know th at these conversations can happen at any time, they need to be prepared for them and they need not to be offended when they do happen,” Lindeman says. “Generally speaking, the more you are willing to explain your actions rather than just requiring employees to be satis fied or leave, the more you begin to build a culture of trust and respect.” GO
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Beyond Base Pay To help employees better under stand their compensation packages, encourage them to look beyond base pay and consider the following:
■ Does the company have a bonus structure or profit-sharing plan, and, if so, how large a compo nent of total compensation does it represent?
■ What, if anything, is the match on 401 (k) or other retirement savings plan contributions?
■ What about contributions to health savings accounts?
■ Are there other pieces of the rewards package that are mon etary in nature?
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