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5 Trends That Are Changing How We Think About Compensation

Several members of the compensation caf Ann Bares, Jim Brennan and myself teamed up yesterday for a TLNT webinar to examine where compensation practice is headed in 2012 and beyond. We also looked at 5 trends that are starting to impact how we think about compensation. Trend 1: The Evolving Role of Salary Surveys - Useful as they are for competitive benchmarking, salary surveys have several known limitations, including:

Non-US Information Its difficult to get reliable non-US salary information, let alone from a single source. As a result, companies end up patch working their US salary survey information with various non-US sources. New or Hybrid Jobs Salary surveys can't keep up with changing jobs. In addition to the dramatic increase of contingent workers and hybrid jobs over the last several years, new jobs exist that didn't exist until recently, i.e., 'social media expert.' Salary surveys alone may not get you to the appropriate salary for these types of jobs. Total Rewards -In this day and age of cost cutting it's critical to take a good look at your total rewards offering and use this more holistic view to help determine the right salary level.

What this means: Salary surveys offer a useful starting point for compensation design but there's more work to do on the compensation planning and analysis side in order to avoid over- or under-paying. Trend 2: A New Kind of Workforce - The modern workforce is global, multi-generational and 20% contingent (expected to double over the next 10 years). Moreover, modern technology has allowed the rise of more flexible work arrangements so quite a few people work away from the office. What this means: You may have a highly heterogeneous workforce with different locations, priorities and work styles that must somehow fit under one rewards umbrella. Can your HR systems keep up? Trend 3: Flexible Compensation If you have a highly dynamic, diverse workforce a static once-a-year compensation and performance review may not be the most appropriate tool to assess workers and allocate rewards. What this means: Evaluate whether your company's compensation and performance processes are in alignment with your workforce development strategy. To make the most of limited rewards, consider targeting rewards to different workforce populations. Trend 4: New Business Priorities - Some of our most dearly held assumptions about

compensation planning were made when the business had different workforce priorities. Now's a good time to take a critical look at priorities and rewards, for example:

If developing people is important, does your company reward managers and mentors for developing people? If teamwork is important, does your company reward teams for great teamwork? If our company values are important, does your company reward individuals for adhering to the core values of the business?

What this means: Give your rewards philosophy a good shake down. 5. Growing Demand for Transparency - Good communication can make the difference in someone's mind between resentment and gratitude. Take credit for the things your company does well and be honest about what you don't offer. What this means: Every company should offer a total rewards statement to showcase total investment in people, including salary, allowances, bonus, benefits, professional development and even technology.

In todays day and age, compensation packages have evolved to include perks and benefits that were unheard of a generation ago. Gone are the days of meeting with employees once a year to give them a pat on the back and the standard four percent merit increase. With the world progressing and peoples wants and needs shifting, in order to stay competitive, an organizations compensation program must continually change. Merely updating the way a company pays employees may not be enough to keep pace. Because the current marketplace is so competitive, in order to attract, retain and motivate the kind of people

who are committed to the success of an organization, it may necessitate a complete compensation system overhaul. There are a number of catalysts present that have strongly influenced the direction and philosophy behind employee compensation packages. Things like the changing business environment including new technology like the Internet, downsizing due to sluggish economic growth, and the transition to flexible or contingency work forces have caused companies to rethink their approach to compensation. As well, the old business model of authority dictating from the top down has been replaced in many organizations with horizontal cross-functional work teams which require a different system to reward performance. And finally, companies today want their compensation programs to help increase productivity and reduce costs. But traditional programs dont reward employees for cutting costs or increasing profits. This creates significant conflict between organizational and employee wants and needs. In my personal experience, when employees see no personal gain for working hard or harder, they have no motivation to embrace continuous improvement. A new approach to compensation includes new and enticing ways to attract and motivate employees with a wide range of perks designed to enhance individual effort and, in some cases, promote team building and chemistry. While large companies have long touted major corporate perks, including tuition payments and daycare on site, many smaller businesses are now providing plenty of attractive cost-effective perks that are having some very positive results. The following information will attempt to outline the direction employee compensation packages seem to be going, as well as explain some of the reasons these types of modes of compensation are gaining in popularity. To start with, a consideration for most companies is consistency and fairness in base pay structures. In this era of rather small incremental pay increases, employees feel that if they cant be paid more, then they should at least be paid fairly. Therefore, internal pay equity in organizations and pay for performance are becoming even higher priorities. Things like automatic incremental raises, simple cost of living increases, and lump-sum merit payments are quickly falling out of favour. Conversely, growth has been observed in management incentives, key staff incentives, and multi-year cash-incentive plans focused on the achievement of long-term corporate goals. Another trend in employee compensation approaches has been to focus on work/life balance initiatives. This has become important to many employees, particularly due to the rise in two wage-earner families. Employees are willing to forego large pay increases for advances in the area of work/life balance. For example, rather than the strictly structured eight hour work day schedule Monday through Friday, offering flexible work schedules are more attractive to employees as a way to achieve more of a balanced lifestyle. Some employers embrace alternate work arrangements like ten hour work days scheduled four days a week, job sharing between employees and allowing employees to work from home to offer employees added flexibility. Working from home is very attractive to some staff to avoid the daily commute and to complete their work around their own schedule to allow additional time with family. And as previously mentioned, large corporations can offer things like on-site daycare which is a huge benefit to employees with children in light of the rising costs of childcare.

Many organizations have also added indirect compensation elements focused on employee wellness initiatives. Things like having health clubs on-site with free memberships for employees, offering yoga classes or massage therapy during the work day, offering complementary breakfasts, arranging social outings like sporting events and concerts and by offering free wellness seminars for staff. It is in every companys best interest to concentrate on reducing stress at work and in their employees personal lives. Wellness initiatives in the workplace can result in less employee absenteeism due to illness and workplace injuries. And when it comes to the direction actual financial compensation packages are heading, there have been a number of changes in this regard. There has been a shift from pay for job and status to pay for individual employee skills and contributions. As well, discretionary bonuses have been replaced by incentive awards for achieving defined goals and objectives. Innovative compensation programs also include: * Broad-banding or reducing the number of pay grades in an organization while expanding the actual salary ranges. The benefit here is being able to expand the actual pay for performance and competency component. * Competency-based programs involves identifying the skills employees need to possess in order to meet expectations in a given position. The key benefit here is that the employee continually upgrades their skills and the emphasis is on paying the individual and not the job. * Incentive compensation this is pay that is directly connected to the performance of the individual or the team and has been found to increase employee performance in the right environment. The right environment means employees are actually motivated by money, the employees efforts and results are measurable and the potential rewards are significant. The final trend in compensation to discuss is stock options, the leading means of compensation for executives and managers in the 1990s. With stock options, the employee owns the option to buy stock in their company at a price that is fixed beforehand and is exercised by a specific date. The goal here would be to motivate the employee to work hard to create the greatest possible value for their company. So when the time came for the employee to buy the stock, they would hopefully earn the expected additional value of the stock by purchasing at the lower price. Some companies are getting away from stock options because of their inherent volatility and are moving towards a more controllable and predictable system that involves providing variable compensation that is tied to medium and long-term strategic goals. Still, stock options remain a component for high-level positions in many organizations. Some feel they are a good avenue for executive staff to share in a companys success and to create value for those professionals who are committed to the company for long-term goals. All of the various approaches to employee compensation that have been covered are not appropriate for every type of organization. To implement programs that promote wellness initiatives or competency and performance based compensation for example, requires a significant investment of time and resources. While the planning and implementation required is no small task, it can pay large dividends for the organization in the areas of employee development and satisfaction, as well as achieving corporate goals and objectives. In summary, the best compensation system for any organization is one that ties

the interests of the employees with that of the company and creates real commitment among staff to work together to strengthen the corporation. The best method is to conduct a complete and thorough analysis of the company to determine what motivates the particular staff members at each level of the organization. Based on this information, the appropriate vehicles for compensation as discussed previously can be implemented. This should create a workforce that is motivated and engaged, which should facilitate the achievement of corporate goals and objectives.

Compensation experts are predicting modest but steady wage growth over the next few years as employers shake off the salary freezes, layoffs and low profits brought on by the recession. The average pay raise will be modest this yeararound 3%, according to a handful of employer surveys. By contrast, raises averaged about 4% from 2005 to 2008 . Still, a recent Forbes story says 2012 could be The Year of the Employee Backlash, as workers look for greener pastures after years of corporate slash and burn. Translation:Nows the time to review your pay structure from a retention perspective. Twelve pay trends to keep in mind: 1. An increasing focus on pay for performance. Employees who get the best results will reap the highest annual raises. As a result, the gap between high-performing employees

and those in the lower-performing categories is widening significantly, says a new Mercer report (see chart below). 2. Alignment of compensation with business goals. The math can be brutally simple in tight times. How much value does each employee add to the organizations workand bottom line? 3. Raises send a message. High performers wont just get raises, theyll get way better raises than others do. HR consultants are advising clients to show their appreciation for MVPs with raises as high as 10%. If that drives off disappointed low performerswho might score a 1% bumpso be it. The consultants rationale: That frees up jobs for more productive new hires. 4. Smaller merit-pay, larger variable-pay budgets. Hewitt Associates researchers project that the average annual merit budget 10 years from now (in 2022) will be 2%. However, variable-pay budgets will run close to 16%. 5. Creative budgeting breakouts. Mark Szypko of Kenexa says some companies are splitting pay budgets into two categories: managerial and line employees. Its not to set up a double standard. The division prevents the top brass from dipping into employee pay budgets to line their own pockets. Other splits might serve other purposes: Some firms divide their average 3% pay raises into two pots2% for the whole employee pool, with an additional 1% on top for high performers. 6. Broader compensation benchmarking. More organizations will base pay systems on local and industrywide compensation surveys rather than on internal traditions. Business factorssuch as recruiting and retention patternswill be more decisive than how much a position has been worth historically. 7. More nonmonetary rewards. Work/life benefits, job flexibility, training and recognition increasingly will fill in for stingier raises. After all, research shows that qualitative benefits motivate many employees just as well as money. 8. Recalculation of replacement costs. Conventional wisdom says it costs between 50% and 300% of annual salary to replace an employee. Post-recession, that cost has jumped as high as five times salary, says Lena Bottos, a VP at Kenexa. Reason: To reduce turmoil in tough times, hiring managers and HR want to be absolutely sure a new hire will stick. 9. A hyper-focus on retention. Because it costs so much to replace valued talent, employers are going all out to keep their current stars. Tip: Consider re-recruiting your most valuable employees by offering bonuses and career advancementjust as you would when wooing an attractive external candidate. 10. Restrictions on extra pay. While some companies have stopped layoffs and furloughs, many continue to limit overtime. Its approved only if calculations say it will reap a return on the investment. 11. Better communication with employees. After three years of pay doldrums, you may have fallen out of practice when it comes to addressing compensation. Warm up for better

times to come by meeting with employees to review how your compensation system works. Even if theres nothing new to report, it could improve employee attitudes. 12. Updated compensation policies. Left stagnant, compensation policies quickly go outof-date. That could render your organization less competitiveespecially if merit raises still dominate. Dust off your stale pay structure and job descriptions as part of your renewed focus on recruiting and retention of top talent. Pay increases in 2012 based on employee performance Percentage of workforce Highest rated Next highest-rated Middle rated Low rated Lowest rated 8% 30% 54% 6% 2% Average pay increase 4.4% 3.6% 2.8% 1.2% 0.4

Source: Mercer U.S. Compensation Planning Survey