Balancing Salaries and Incentive Pay

“Balancing Salaries and Incentive Pay”

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Balancing Guaranteed vs. Variable Pay

What is the right mix of pay between salaries and incentives?

It can be a juggling act Too much focus on

salaries carries a high company cost with no promise of performance

Too much focus on incentives may be perceived as too risky for employees

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Balancing Guaranteed vs. Variable Pay

Incentive plans too commonly fail How should incentives be aligned to your

employee demographics to generate a higher return on investment?

How do you maximize your rewards philosophy?

Salary

Per-for-

mance Incen-tives

Sales Incen-tives

Growth IncentivesCore Health & Wel-

fare Plans

Executive Benefit Plans

Qualified Re-tirement Plans

Nonqualified Re-tirement Plans

SalariesCompetitive with market standards?Tied to strong performance management process (merit)?Managed within a flexible but effective structure?

Performance IncentivesTied to productivity gains?Clear, achievable and meaningful?Self-financing?

Sales IncentivesChallenging yet achievable?Reinforcing the right behaviors?Differentiating your offering?

Growth IncentivesLinked to a compelling future?Supporting an ownership mentality?Securing premier talent?Core BenefitsResponsive to today’s employee marketplace?Allocating resources where most needed?Evaluated to eliminate unnecessary expense?

Executive BenefitsFlexible enough to address varying circumstances?Communicating a unique relationship?Reducing employee tax expense?

Qualified Retirement PlansGiving employees an opportunity to optimize retirement values?Operated with comprehensive fiduciary accountability?Avoiding conflicts and minimizing expenses?

Nonqualified Retirement PlansOptimizing tax-deferral opportunities?Aligning long-term interests of employees with shareholders?Structured to receive best possible P&L impact?

An Aligned Compensation

Strategy

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What is Your Pay Mix? Most companies aim to pay “at market”

What is “at market” pay? If everyone paid the exact same way would that

give you a competitive advantage in hiring and retaining talent?

What is it about your pay programs that make you unique?

What might be right for you may not be right for others

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Lets assume an Accountant should be paid between $45,000 and $47,500

How much of that should be salary and how much should be variable should be decided internally

Are either of these company less “competitive” than any other?

Professional Accountant

Base Salary Incentives

Total Cash

Comp

Option A 44,000 1,000 45,000

Option B 42,500 4,000 46,500

Option C 40,000 7,500 47,500

Sample Pay Mix

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Sample Pay Mix

Option A - Conservative Has an advantage around base

salary Has higher fixed costs

Option B - Moderate Middle ground for both salaries

and incentives

Option C - Variable Has a competitive advantage

around incentives and Total Cash Comp

Risk when no incentives paid



Total Cash

Comp

Option A 44,000 1,000 45,000



Total Cash

Comp

Option B 42,500 4,000 46,500



Total Cash

Comp

Option C 40,000 7,500 47,500

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Conservative Pay Profile

Profile Base PayShort-Term Incentives

Long-Term Incentives

Core Benefits Profile

Conservative High Moderate Low Moderate Moderate

Provides a high degree of employee security at the expense of variable pay

High base salaries and Moderate incentivesGenerally offers moderate level of core benefits

Cash friendly stable organizationGenerally attractive to a younger employee population

Can inhibit the hiring of “high performers” Rewards performance through merit/promotion

May have difficulty recruiting executive or key employees

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Moderate Pay Profile



Core Benefits Retirement

Moderate Moderate Moderate Moderate Moderate Moderate

Provides a middle of the road approach to payBase salaries at middle of marketSome upside incentive potential

Performance rewarded moderatelyAttracts a diverse employee population

Rewards performance through multiple facetsTries to provide a balanced approach without any distinguishing

element of pay

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Variable Pay Profile




Variable Low High High Moderate Moderate

Provides a high degree of upside earning potential with higher level of risk

Base salaries at low end of the marketRewards tied directly to business performance

Entrepreneurial mindset – less cash friendlyAttracts high performers, frightens risk averseRewards performance through incentive pay

Promotes high level of value sharingAttracts entrepreneurial leadership through long-term awards

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Pay Mix Considerations

Demographics Younger/Nonexempt employees value predictable

pay Prefer higher salaries and lower total cash

compensation Entrepreneurial/Mature employees want upside

pay potential Will accept lower salaries with higher total cash

opportunity Usually seek both short and long-term

incentives Diverse employee populations may require

different focus on pay at different levels Usually accommodated within compensation

structure/salary ranges

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Owner/Shareholder attitudes on pay Public vs. Privately held companies tend to have

different pay mixes Privately held companies tend to place more pay

in variable programs Public companies have the capital to pay higher

salaries Public companies may offer equity to offset salary

or incentive pay Public companies can be limited to additional

shareholder/fiduciary concerns around pay Nonexempt organizations also share restrictions

around pay mix


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Capital High salaries provide ease in hiring talent but

carry heavy fixed costs During poor performance years, high salaries

can be a heavy burden High incentives offers a way of self-funding

compensation based on company performance When performance objectives are not hit and no

incentives are paid, this philosophy carries a big turnover risk

Ultimately, your pay mix needs to correspond to your business plan

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How is Your Investment Allocated?

What does your total pay mix look like? Does it link employees to your business plan?

Why is your compensation budget allocated the way it is today?

Is your total compensation allocation producing unintended consequences (spiraling compensation expenses, turnover, inability to attract talent, etc.)?

Is there a more cost efficient way to manage your compensation dollars while aligning more tightly with your business objectives?

The mix of incentives is usually the easiest place to start correcting your mix

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Create a Compensation Philosophy

Best practice is to frame up your philosophy into a written statement

All elements of rewards should be identified (Salaries, incentives,

State where pay is targetedWe pay salaries __________

a) At the top of marketb) At the middle of the marketc) Within market, however we do not lead the market

Our incentives are ________d) At the top of markete) At the middle of the marketf) Within market, however we do not lead the market

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Why a written statement?

1. Becomes a common narrative2. Can be shared with existing employees as

well as new recruits3. Gets managers on the same page4. Identifies your competitive advantage5. Creates a consistent framework for rewards6. Your philosophy statement becomes your

Constitutional Rewards Charter

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Align Pay to the Philosophy

Salary ranges and incentive targets are commonly set and maintained using market data: ERI PayScale Towers Watson Mercer Industry surveys

Ensure you have access to some market data

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Using Market Data

Market data can help create salary ranges

Market data should be interpreted via your philosophy Conservative, Moderate, Variable

25th 50th 75thMercer - Accountant Sr 49,837 57,498 63,141

Market Data

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Market Data + Philosophy

Conservative – High Salary

Moderate – Mid Salary

Variable – Low Salary


Market Data


Market Data


Market Data

2020

Create a Total Compensation Structure

Min Mid Max1 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000 2 151,167 201,556 251,945 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500 3 122,065 162,753 203,442 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000 4 104,864 139,818 174,773 20.0% 25% 100% 0% 5% $6,127 25 5 5,0005 80,952 101,190 121,428 15.0% 5% $6,127 25 5 5,0006 67,842 84,803 101,763 15.0% 5% $6,127 15 5 7 58,564 73,205 87,846 10.0% 5% $6,127 15 5 8 46,027 57,533 69,040 10.0% 5% $6,127 15 5 9 41,835 49,217 56,600 5.0% 5% $6,127 15 5

10 35,494 41,757 48,021 5.0% 5% $6,127 10 5 11 31,507 37,067 42,627 5.0% 5% $6,127 10 5 12 24,145 28,406 32,667 5.0% 5% $6,127 10 5 13 19,529 22,975 26,421 0.0% 5% $6,127 10 5 14 17,354 20,417 23,479 0.0% 5% $6,127 10 5

Annual Car Allow

Grade/Band Sick Days

Salary RangeBonus Target

% Phantom Stock AO

Supplemental Life Insurance

Deferred Comp Eligible

Deferred Comp Max

Match

401k Match Max %

Vacation Days

% Phantom Stock FV

% Phantom Stock AO

Health, Dental,

Life

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Who Are You Hiring?

Baby Boomers – Born between 1946 -1964 Generation X – Born between 1965 - 1979 Millennials – Born in the 1980’s and 1990’s

Demographic identities are extremely influenced by the world they grew up in

Disclaimer: I will be intentionally painting employee demographics with one overly-broad brush. These statements will not hold true for all individuals in these three general classifications. This overgeneralization is intended to provide directional guidance on pay for these subgroups.

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Baby Boomers

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Baby Boomers

Raised by World War II Survivors Parents worked in manufacturing,

agriculture, or retail jobs Encouraged to attend Universities

(premium) Focused on having fewer/longer term roles

within organizations Dominate senior leadership roles Understand the increased cost of health

care Typically eyeing retirement

Many retired early and have rejoined the job force

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Generation X

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Generation X

MTV generation/Latchkey generation Two parents in the workforce

First to have access to home computers College/university was strongly encouraged Incorrectly labeled as “slackers” by

preceding generations Strong entrepreneurship mindset More likely to be 1099 than other gens

Married Later/Fewer kids Took a few jobs to get comfortable Professional and Mid-Manager jobs

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Generation Y

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Millennials Grew up with technology in the house

(home computers, internet, cell phones) Values teamwork, ingenuity, and creativity Was told that college/university was a

necessity Many struggled to get jobs after graduation Many prevailing myths

Not all living in Mom’s basement Starting to have families More likely to stay in the same job as

previously assumed Values individuality and being recognition

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Pay Strategy




Conservative

Millennial High Moderate Low Moderate Moderate




ModerateGen X Moderate Moderate Moderate Moderate Moderate




VariableBoomer Low High High Moderate Moderate

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Theoretical Solution Structure your rewards

around your Compensation Philosophy

Example: “My business is a regional call

center hiring predominately college students and recent college grads.” (Millennials)

“We are a professional investment management firm hiring mostly experienced licensed financial planners.” (Gen X)

“I’m looking to hire extremely experienced legal professionals.” (Boomers)

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In reality… Rarely, is your

workplace demographic so pure

Your senior leadership team is probably in a different demographic than your staff accountant

As a result, their financial goals are probably very different

Maintaining one Compensation Philosophy can be challenging

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In reality…

Philosophy Min Mid Max1 Variable 203,531 271,375 339,219 50.0% 100% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 15,000 20,000 2 Variable 151,167 201,556 251,945 35.0% 75% 50% 50% 5% Yes 5% $11,141 Unlimited Unlimited 10,000 12,500 3 Variable 122,065 162,753 203,442 25.0% 50% 100% 0% 5% Yes 5% $11,141 25 5 5,000 8,000 4 Moderate 104,864 139,818 174,773 20.0% 25% 100% 0% 5% $6,127 25 5 5,0005 Moderate 80,952 101,190 121,428 15.0% 5% $6,127 25 5 5,0006 Moderate 67,842 84,803 101,763 15.0% 5% $6,127 15 5 7 Moderate 58,564 73,205 87,846 10.0% 5% $6,127 15 5 8 Conservative 46,027 57,533 69,040 10.0% 5% $6,127 15 5 9 Conservative 41,835 49,217 56,600 5.0% 5% $6,127 15 5

10 Conservative 35,494 41,757 48,021 5.0% 5% $6,127 10 5 11 Conservative 31,507 37,067 42,627 5.0% 5% $6,127 10 5 12 Conservative 24,145 28,406 32,667 5.0% 5% $6,127 10 5 13 Conservative 19,529 22,975 26,421 0.0% 5% $6,127 10 5 14 Conservative 17,354 20,417 23,479 0.0% 5% $6,127 10 5

Annual Car Allow

Grade/Band Sick Days

Salary RangeBonus Target

% Phantom Stock AO

Supplemental Life Insurance

Deferred Comp Eligible

Deferred Comp Max

Match

401k Match Max %

Vacation Days

% Phantom Stock FV

% Phantom Stock AO

Health, Dental,

Life

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Common Trend




Conservative

Millennial High Moderate Low Moderate Moderate




ModerateGen X Moderate Moderate Moderate Moderate Moderate




VariableBoomer Low High High Moderate Moderate

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Why Incentives?

All demographics appreciate incentives Millennials – Partnership Gen X – Entrepreneurial minded Boomers – Hoarding cash for retirement

Most incentive plans do not deliver on a level that all demographics can appreciate and relate to

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Market CompensationTrends

Incentive programs are more common than ever

2014 World at Work study showed that 99% of publicly traded companies have incentive plans

Between 2011 and 2013 private companies with incentives plans have grown from 95% to 97% prevalence

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Incentives Are A Good Bet Good for organization to put emphasis on

incentive pay Performance Requirements Not Guaranteed

Provides alignment with big picture objectives When properly structured incentives create a

partnership mentality

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Why Do Incentive Plans Fail?

Traditional Incentive plans They seek to change/set behaviors They rob employees of their creative input They reward for completion of small tasks

instead of achieving big picture results They aren’t tied to overall company results/lack

line of sight They are either too discretionary or too

quantitativeBOTTOM LINE:

Traditional Incentive plans are philosophically broken.

They are not perceived as empowering a partnership mentality

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Merriam-Webster Definitions

Bonus – An extra amount of money that is given to an employee

Commission – An amount of money paid to an employee for selling something

Incentive –Something that incites to determination or action

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Traditional View of Incentives

“If I put a carrot in front of you, you will do what I want you to do”

At its heart, when structured inappropriately, incentive plans are perceived as manipulative

Employees agree to be manipulated for money

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A Better Approach

“We are part of a team. If we all work together we will generate greater success. That success will be shared with everyone in our incentive plan.”

When structured appropriately, incentive programs should be perceived a partnership.

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Partnership

Millennials do not value the traditional “employee” and “employer” relationship

Perceived as a subservience model “Do what I say and I will pay you”

All demographics prefer a sense of “Partnership,” working together towards a common goal

Partners rewarded differently than employees

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Simplified Plan Design Simplifying incentive plan

design Incentive plans have

historically been very metric driven

Potentially creates conflict of interest Should I do what’s in the

Company’s best interest or should I just worry about performing

my goals? Should I be paid because the

company succeeded or because I accomplished a list or tasks?

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Basic Structure

Plan funds at different levels based on achievement of company goals

The incentive pool is then disproportionately shared with employees Higher level employees

receive a higher portion of the incentive pool

Employee performance can “modify” the payout

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Advantages Easy to understand All employees are tasked with achieving

high level goals No micromanaging No conflict of interest Simple to administer

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Silent Communications What does your salary

philosophy communicate? Employee Value

What do incentives communicate? Performance

Don’t assume your employees understand this

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Employee Awareness How much do your employees know

about pay? How much do you want them to know

about pay? For a long time, employers benefited

from keeping pay practices behind closed doors

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Automobile AwarenessHow much do you know about your

car?How much should you know about

cars?For a long time, mechanics benefited

from keeping automobile maintenance behind closed doors

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Do You Trust Your Mechanic?

Why do people not trust their mechanics? Because until recently you have had to take

their word Why should your employees trust you

around pay? Compensation is just as important to your

employees as transmission fluid How do you instill trust in your

compensation practices: Transparency

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Communications

Communicate your rewards philosophy (Compensation Philosophy Statement)

Communicate your incentive plan goals/metrics regularly

Communicate actual rewards (Total Compensation Statement)

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Perception is Key

2015 PayScale Study• The main predictor of both “satisfaction” and

“intent to leave is whether employees feel they are paid fairly.

• Even when people’s compensation was in line with their value in the job market, two-thirds believed they were underpaid. Of that huge group, about 60% reported low job satisfaction, and said they plan to look for a new job within six months.

• By contrast, the researchers found that, even at companies that pay below-market wages, if employees know why they’re paid less than they could probably earn elsewhere, 82% say they’re “satisfied” with their jobs and plan to stick around.

- Fortune Magazine, October 10, 2015, “How Pay Transparency Can Keep People from Quitting”

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Return on Investment

Pay is not a cost Pay is an investment Every good investment should have an

equal or greater return Proper alignment of salary and incentive

programs ensures that you have a desired return

1) Create a Philosophy2) Align to Market3) Communicate

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Balancing Salaries and Incentives

Salaries and incentives are the cornerstone of your pay programs

Not an exact science Identifying your key

compensation philosophy, aligning pay accordingly, and communicating effectively is only way to win this balancing act.

Balancing Salaries and Incentive Pay

Leadership & Management

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