HR Compensation Strategy

8/8/2019 HR Compensation Strategy

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Compensation Strategies

Compensation is just one aspect of an integrated HR strategy. We alsobelieve that a well-designed compensation strategy can be a strongsource of competitive advantage to an organization. A poorly designed

rewards program can cause dissatisfied employees, excessiveemployee turnover, and the inability to attract quality candidates.

In a few words, ICR defines compensation strategy as how you chooseto reward your employees relative to your competitors, insupport of your business culture and objectives. Companiesneed to determine the purpose of each component of thecompensation package (base salary, short-term incentives, long-termincentives, benefits, perks, and recognition programs) to position themin the market.

ICRs approach to compensation strategy development generallyincludes the following steps:

Establish which companies, industries, andgeographical areas constitute your competitivemarket.

Conduct a full market analysis using company ownedor ICR surveys, to determine actual position in themarket.

Meet with executive management and HR to discussthe integration of compensation programs with thecompany business and HR strategies.

Review and discuss results of market analysis todetermine how actual position varies from desiredposition by each aspect of the compensationpackage, and on a total compensation basis.

Determine if employee relations and recruitmentactivity support indicated findings.

Develop comprehensive plans for addressing areas ofconcern - such as functional spend programs,incentive plan design, program structure, or stockoption awards.

Variable Compensation, Gain sharing and Team Bonuses

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Pay-for-Knowledge and Competency-Based Pay Performance-Driven Base Pay Designs Removal of Outdated Pay Programs

CHRS holds a unique position in both the original research and

design of gain sharing plans and other forms of variablecompensation. Based upon grants provided by the NationalScience Foundation, the US Department of Labor, and the GEFoundation, Dr. Schuster's original trend-setting work has servedas a base for continued research today. We have installed and/orevaluated several hundred gain sharing plans. These designsfrequently include the following elements

Assessment and readiness evaluation Financial analysis Plan structure and measurement Design Implementation training Audit of existing plans Redesign of plans for future effectiveness Bonus programs to support fast-cycle completion of major

projects, including new product creation

Pay-for-knowledge, skill-based pay, and competency-based payprograms reward employees for increasing the depth andbreadth of knowledge and skill and the utilization of those skills.Pay-for-knowledge is often an extension of work redesign efforts.

Assessment and readiness Task analysis Design of knowledge and skill blocks Development of technical, administrative and team training to

support plans Audit of existing plans Redesign of plans for future effectiveness Development of training and certification procedures

CHRS senior consultants have extensive experience establishing andrevising base pay structures to make them more flexible, to increase

their impact in driving critical business objectives, and to make themmore cost effective.

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POWERFUL COMPENSATION STRATEGIESThe greatest benefit is the one last remembered.

One of the biggest questions employers ask themselves today is whatcompensation strategy will have the greatest impact on their bottom

line. Do we use pay for performance strategies? Team incentives?Individual incentives? Non-monetary compensation? That fact is, thereis no pat answer. Your companys compensation strategy, as with anyother system, has to relate to the specific needs of your employeesand other stakeholders.

What follows are some factors you should consider whendesigning your compensation strategies. Our advice is to not rely on acanned approach. Rely on strategies that work best for you, youremployees and your stakeholders. Focus on strategies that willincrease productivity while maintaining stable, long-term relationships.

New Compensation System Generate Trust orMistrust

On numerous occasions, the Dilbert cartoon strip has poked fun atperformance-based compensation systems. This is because employees(not just in the cartoon, but in the real world) do not trust the companymotives attached to such programs. Trust is the single most powerfulfactor in the workplace. Ask yourself whether your system will foster ordiminish trust. It can raise the level of trust if you get employee input,feedback and commitment.

Whatever Your Program Is, You Must Be Willing toCommit to It

We have been involved in numerous lawsuits over the design orimplementation of a compensation plan. Many times, compensationplan issues arise after employee termination. When designing anycompensation plan, you must keep in mind compliance with laws,including wage and hour obligations, commission payment obligations,ERISA (Employee Retirement Income Security Act) fiduciary duties,equal pay laws, etc.

It Must Be Tied Into Open-Book Management

If we want to create learning organizations, we must share thefinancials. This means that anyones compensation plan is open bookfor the rest of the company. If an employee or manager cant justifytheir value, then he or she shouldnt be getting the big bucks. To havean effective open-book management program, financial education is a

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must. We suggest you read Jack Stacks Great Game of Business, theultimate guide on open-book management.

Reward Team Play

Its been said that the word team can stand for together eachachieves more. To foster teams, you must foster trust, and vice versa.When we survey organizations, those having a low level of trust have ahigh desire for

Individual incentives

You must design team-based compensation programs

Statistically, one-third of all teams fail because of poor compensationdesign. Superstar performers, focused on individual performance in

place of team performance, will never create sustainable growth.

Do Not Create a Compensation System That CreatesMore Losers Than It Does Winners

This often happens in the sales area. The salesman of the year gets atrip to anywhere. What do you think the chances are that salespersonwill share the information that has made him or her so successful? Doyou really think he or she will risk sacrificing next years trip to Hawaii?The fact is, you should design a compensation plan, which encourages

the sharing of powerful informationnot one that stymies it by design.

Watch How You Establish Quotas and Benchmarks

It is a statistical fact that the last two weeks of most quarters bring inunprofitable sales. This is because the compensation program iswrapped around gross numbers, not those tied into profitability. Thisgoes for anyones compensation plan. If youre going to haveperformance-based compensation, make sure the performancestandards have a clearly defined purpose. Are you tying compensationinto information that is relevant? Is the benchmark directly related to

the companys vision, mission and goals? Does it directly impact thebottom line?

Dont Cut Off Your Nose to Spite Your Face

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Sometimes, compensation plans seem to work too well. A topsalesperson will end up earning a six-figure income that is greater thanthe salary of the managers. The natural tendency is to reduce thecommission structure or territory. What a fatal mistake! People with

this type of talent should be rewarded, not constrained. Give them adown-line sales force they can educate and provide them withcommission overrides. Reward excellence, do not restrict it! When itcomes to commissions, its not how much you have to pay its howmuch you get to keep.

Incorporate Learning and Innovation Incentives. You want to rewardwhat you want to reinforce and have repeated. In todays informationage, you must reward continuous self-improvement. You must provideincentives for learning and innovation. Self-study bonus programs andcorporate suggestion programs should reward handsomely.

Dont Forget About E.Q.

There has been a great deal of literature written in the past few yearsthat emphasizes the value of ones emotional quotient. People withhigh E.Q.s, not people with high I.Q.s, tend to be the most valuablepeople in an organization. You must reward the soft stuff. Asattorneys, we have met many million dollar executives who earnedtheir nickname not by virtue of the size of their salaries, but rather bythe amount of damage they did to an organization. When you designcompensation plans, you have to reward people who are good at

establishing internal and external relationships. They often providebottom line benefits that are invisible to most benchmarks.

A compensation system that does not allow people to take at leastthree to four weeks of vacation every year does not address the wholeperson. A compensation system that does not acknowledge a personshighest and greatest needs will not keep them from skipping to yourcompetitor at a moments notice.

Let us explain further. According to a nationwide poll of CEOs, thebiggest issue is attracting and retaining quality employees. Most

competitors have similar compensation packages and benefitprograms. For most of them, the only issue is whether they haveemployee ownership or not. Some of them are smart enough to realizeit is very seldom the compensation package that allows them to attractor retain great employees. Its generally the corporate culture thatdoes that.Look at Southwest Airlines. Their salaries are below those of theircompetitors, yet they have less than one-quarter of the employee

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turnover of the industry, have the highest quality of services in theindustry and the greatest profitability in the industry. The last time welooked, their planes looked like everybody elses planes, and theirpeople had two arms and two legs. People work at Southwest Airlinesbecause they enjoy working there! Herb Kelleher appeals to the whole

person. If you get that, youll be light years ahead of your competition.

You Must Create a Flexible Compensation Plan. Things are changing sofast you cannot create a compensation plan which restricts yourcompanys flexibility. If you do, youll be tempted to break it, or evenworse, not conduct business the way you should. Companies that donot commit to their compensation plans get sued. So dont lockyourself in to what may be a losing proposition.

Check Out the Competition

Check out the Non-Competition and Go beyond Geographical Borders.While its important to know what your successful competitors aredoing, also look for successful stories in non-competing industries. Theexamination of compensation practices cannot be restricted togeographical borders. Success stories are based on sound principlesand strategiesno matter what industry or what location.

Think Systemically

If youre building a learning organization dependent on humanintellectual capital, then you must think how your compensationstrategies will affect the entirety of your product or service deliverysystem. How will stakeholders, such as shareholders, customers,vendors and distributors, be affected? How can one department affectanother department based on compensation systems? Will yourcompensation system generate internal competitiveness orinformation sharing? How would Deming, Drucker, Peters or Sengeview your compensation system?

Be Careful About How You Define Core Competencies. Many companiesare still in the job-based view of the workplace as opposed to acompetency-based model. Todays focus should be on paying for theacquisition, demonstration and improvement of core competencies. Inaddressing

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Theres a growing gap between executive compensation and rank andfile compensation. In good times, companies may be able to get awaywith this. However, as soon as the economy slowsand eventually itwillthe compensation gap will be viewed as another form of

exploitation. A worker who feels exploited will not have the loyalty,motivation and sharing skills necessary for your company to thrive intodays economy.

Remember, Compensation Is Only One Way to RewardEmployees

As author Bob Nelson says, there are a 1001 Ways to RewardEmployees. The most important one is the one that rewards employeestoday. Dont be limited in your approach to compensation. Thank younotes, surprise gifts and time off can go a long way to motivating

employees.

In todays whirlwind of mergers and acquisitions (M&As), everyday HRissues such as employee compensation may get blown aside ascountless financial and legal priorities take center stage. However,recent research suggests that HR could play a greater role insuccessful M&As, and, the earlier HR gets involved, the better.

Depending on the circumstances of the deal -- and the compensationpolicies of the merging companies -- HR may be called on to splice

disparate payment plans into a program that fits the new organization,or HR may have to discard the original plans and then create aprogram from scratch that complements the merged entities. Eitherway, old and new employees will be concerned about what ishappening with their pay, so HR also must develop an effectivecommunications plan to inform and reassure them.

More organizations and HR professionals are likely to face thischallenge as the economy improves. A handful of industry-changingnewsmakers drove the market last year, but M & As among mid-sizecompanies also saw increased activity in 2003, according to Fact Set

Mergerstat LLC, a global mergers and acquisitions research firm inSanta Monica, Calif. The companys data predicts M&A volume willcontinue to rise this year.

Behind the headlines that such corporate marriages generate arerough tactical and strategic waters that HR and compensationprofessionals must navigate. The journey is by no means simple, butthe destination is worthy: the union of two sets of employees and pay


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structures that can ultimately influence the success of the merger andits return on investment (ROI).

The more capable an HR department is, the greater the chances ofM&A success, studies show. Yet too many employers involve their HR

professionals too little or too late in the M&A process.

The most common responsibility given to HR during M&As is to providead hoc advice to senior managers, rather than carrying out astructured and formal role, according to a 2003 survey of 132 seniorexecutives worldwide by professional services firm Towers Perrin ofStamford, Conn., called The Role of Human Capital in M&A, 2003.

And a 2001 survey of more than 440 HR professionals conducted jointly by Towers Perrin and the Society for Human ResourceManagement (SHRM) Foundation found that HR involvement in the

critical early stages of M & As is uneven. This study, How theHuman Resource Function Adds Value during Mergers & Acquisitions,formed the basis of a book, Making Mergers Work: the Strategic Role ofPeople (SHRM Foundation, 2002).

In addition, HRs involvement often comes too late in the mergerprocess. Of the four stages in the life of M&A deals -- pre-deal, duediligence, integration and implementation -- HR tends to have a bigrole only in the later stages. However, research suggests that bygetting more involved during the pre-deal and due diligence processes,HR can better carry out the vital functions it performs, such as:

Reviewing the target companys compensation policies to compareorganizational philosophy and cultural fit.

Educating financial and operating executives about possible risksand costs.

Mapping job descriptions at the target company.

Merging Old Plans

The importance of giving HR an early role in mergers was borne out

when Church & Dwight Co. Inc., a Princeton, N.J.-based manufacturerof household and personal care products, acquired in 2001 theconsumer-goods business of Carter-Wallace, a Cranbury, N.J.,manufacturer of consumer and pharmaceutical products.

Church & Dwights acquisition of Carter-Wallace added significantproduct lines and manufacturing capability. The $739 million purchase,in partnership with a New York-based private equity group, Kelso &


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Co., also doubled Church & Dwights employee population. As a result,HR had to migrate the new employees into Church & Dwights originalcompensation plan.

The target companys employees brought knowledge and experience

in areas where Church & Dwight was lacking, says Jim Levine, directorof HR and compensation at Church & Dwight. However, combining thestaffs raised some difficult employee compensation issues: Carter-Wallace paid high base salaries and bonuses with few long-termincentives, whereas Church & Dwights compensation packages placedmuch more of an emphasis on long-term incentives.

Employees who were not on a bonus plan had few transition issues: Ingeneral, these positions also were not eligible for bonuses at Church &Dwight, Levine says. On average these people tended to be paid morethan their counterparts at Church & Dwight, but not significantly so,

and issues could be addressed through the normal merit reviewprocess.

There were, however, significant concerns for highly paid employees,as Carter-Wallace relied on base salary and short-term incentives,while Church & Dwight uses those programs as well as stock options.

Eventually, Church & Dwight made the decision to maintain our paysystem and transition Carter-Wallace employees to it, Levine says.We are firmly committed to the philosophy of tying employeesrewards to the same yardstick that our shareholders have. The process

that we used was to develop a number of possible transition scenarios,review employees compensation on an individual basis, and then usethe appropriate transition plan based upon each employees uniquecircumstances current base pay against our salary range and extent ofshort-term incentives.

Church & Dwight achieved the business goals it set when the deal wasmade, Levine says.

Compensation issues and our ability to retain employees were vitallyimportant -- and they became a significant consideration in the

language of the deal itself and in the ultimate success of thetransaction, he says.

Harmonizing the pay systems of merging companies is a complex anddifficult process. But its also an opportunity for HR to create new andimproved systems, which in turn can dramatically affect both theculture of the new firm and retention success.


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Barring any legal pacts to the contrary, companies usually have thefreedom to make changes to many elements of the total compensationpackage, which comprises base salary, short-term incentives (such asan annual bonus or profit-sharing), long-term incentives, benefits andother perks.

Starting from Scratch

Sometimes, the compensation policies of the merging companies areso different that the best approach is to throw them out and start over.Its unbelievable how frequently you have two companies cometogether with so many similarities but totally different compensationplans, says Stephanie Penner, senior compensation consultant in thePhiladelphia office of Mercer Human Resource Consulting LLC.

To start the process, a team of compensation professionals, HR andcompany executives took a complete inventory of the two companiescompensation policies, including executive management and generalsalary structures, job titles, performance evaluations and incentives.

The goal was to determine guiding principles, says Catherine Beck;director of compensation policy in the Arlington, Va., office of VerizonCommunications, the telecommunications giant created from BellAtlantics 2000 merger with GTE Corp. Beck was manager ofcompensation planning at Bell Atlantic then. During both mergers shewas merger project manager for general management compensation.

What the team found was a very different set of salary structures andincentive measures, Beck says. The sheer magnitude of the differencescalled for a large-scale change.

There was no way to reasonably map employees to a combined salarystructure given the difference in the number of pay grades. And onecompany used a team approach to incentives, while the other used anindividual approach, Beck says. So we essentially decided to throweverything out in favor of a completely new compensation system soupto-nuts revamp.

Completed in 1997, the mega-merger encompassed some 30,000management employees -- and also a team of union workers whocame on board with existing collective bargaining agreements in place.Integrating the new compensation plan took about a year, Beck says.

The evaluation and rollout process was repeated just a few years laterwhen Bell Atlantic announced its merger with GTE in 1998 -- a deal


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that involved about 60,000 management employees and made Verizonthe second-largest telecommunications firm behind AT&T. But thistime, there were many more shared similarities between the twocompanies compensation plans. The level of change wasnt as hugeas before, and, overall, it was a smoother transition, Beck says.

Once the policy decision has been made, the administrativecomplexities of implementation can be enormous. For example, in theBell Atlantic-GTE merger, the broad parameters of the sign-on bonuspolicy were established early, but it took six to eight months toincorporate and finalize that policy because two separate payrollsystems had to be integrated and there were other administrativeprocess delays.

You cant underestimate how long it takes and how complex it can be,Beck says of the integration and implementation process. There are

so many things that are touched by compensation matters.

Communicating the Changes

Whether you merge compensation plans or create a new one, bigchanges are in store for employees. To ease their uncertainty and fear,and to squash rumors, consultants and HR professionals agree that aprompt, straightforward communications strategy is critical.

The problem: Information may be limited, because even after anannouncement -- the sharing of certain data is restricted for antitrust

reasons or until due diligence is completed.

After an M&A announcement, theres often concern, fear andtrepidation among employees, customers and the public, too, saysRavin Jesuthasan, principal and practice leader of rewards andperformance management consulting in the Chicago office of TowersPerrin. Communication is often the most important part of a merger,yet it often falls between the cracks.

Insecurity over compensation issues such as earnings and benefits cannegatively affect morale and productivity. As a result, companies

experience a loss of momentum that may be difficult and time-consuming to recoup.

Its important to manage the messaging right away, agrees MercersPenner. If you dont form the message, it will be formed for you. Thatcan fuel the disruptive rumor mill, she says.


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When Church & Dwight acquired Carter-Wallace, the company tailoredspecific communications to all employees based on their currentcompensation and how their transition would be handled.

We communicated with employees as soon as we were able to, Levine

notes. We began with presentations at the various facilities conductedby the CEO and head of HR. This was followed by writtencommunications in the form of questions and answers, and more localand specific meetings conducted by functional vice presidents.

The goal was to show employees that everyone was focused on thesuccess of the merged companies, Levine says.

Historically, the big mistake is for companies to say we dont knowor we havent made any decisions yet, says Hewitts Kompare. Theworst thing is to say nothing. Whatever decisions you do know, tell

them as soon as possible. For those you dont know, describe thefactors involved in the decision-making and give employees a bestestimate for having an answer.

Once the deal closes and compensation plans are completed, decidehow best to present them to employees, says Penner. Manycompanies use a combination of approaches to get the word out, shesays. The important thing is to have a consistent response.

Commonly used tools include town hall-type meetings, one-on-onemeetings, site presentations and training, written or web-based

question-and-answer explanations and newsletters.

Communicating compensation changes to Bell Atlantic and Nynexemployees involved face-to-face meetings and training sessions,personal letters and periodic newsletters describing the policies, Becksays.

Pre-close, we would provide answers to [frequently asked questions] tothe company being acquired, Sartain says

This information would be general and not detail-oriented. Our

objective would be to let the new employees know we are concernedabout their well-being and to say, We know there will be issues, andwe are working on those and will have answers at the appropriatetime.

After a deal closes, Yahoo! provides letters to employees that explaintheir new role and any compensation changes, Sartain says. In


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addition, the company also holds meetings for all employees to outlinebasic compensation information, she says.

We also hold meetings with managers to explain the Yahoo!compensation philosophy and our guidelines, she says. Compensation

and reward guidelines are posted on the intranet.

Paying attention to communications during such times of change canpay off in better acceptance of the terms associated with pay,according to a recent survey of employee sentiment. Employees tendto believe their companys pay policy is fair if HR professionals fullyexplain compensation packages to them, according to a 2003 survey,SHRM/CNNfn Job Satisfaction Series: Job Compensation and PaySurvey Report, conducted jointly by SHRM and CNNfn, the financialnetwork of the CNN News Group in New York, and released in February.

Nearly half of the employees who were dissatisfied with thecommunications explaining how their pay was determined alsoreported dissatisfaction with their total compensation package.Conversely, when employees understand how compensation isdetermined, they tend to be happier with their pay and jobs overall,the survey concluded.

Whether to facilitate global expansion, emphasize internal equity,ensure effective governance or better manage labor costs, a significantnumber of multinational companies use a worldwide compensationstrategy, a survey by Mercer Human Resource Consulting shows.

Approximately 85 percent of major organizations responding to theAugust 2004 survey use such strategies. Respondents weremultinational firms primarily based in the United States and Europe;more than three-fourths have annual revenues of more than $1 billion.

Global strategies are fairly recent for the Mercer survey respondents,some of whom have operations in as many as 100 countries. Theyrepresent a range of industries that include chemicals andpharmaceuticals, information technology and telecommunications,engineering, and manufacturing.

Forty-two percent have used such a strategy for less than four years,and 43 percent have done so for more than four years. The remaining15 percent do not have a global compensation strategy but said theyplan to introduce one in the next three years.

Global expansion was the top reason for introducing global paystrategies. Cost management, process improvement, and governance
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and reporting also were cited as reasons for introducing a worldwidecompensation strategy, according to the findings released in Mercers2004 Research on Practices in Global Compensation Management.

Firms focus their strategies on positioning pay relative to the market,

short- and long-term incentive design, and consistent methodologiesfor job grading and leveling, respondents said.

Pay mix, benefits and consistent methodologies for salary structureswere elements of global compensation strategy for 45 percent ofrespondents. The variable pay mix for board-level employees is thehighest compared to the other levels of employees, breaking down50/50 between base pay and bonus, according to a majority ofrespondents. Most indicated the base/bonus mix is 80 percent/20percent or 70 percent/30 percent for global, regional and countrymanager roles. The most prevalent base/bonus mix for local country

employees is 95 percent/5 percent.

This raises questions regarding the extent to which organizations aredistinguishing high performers from average to poor performers and towhat extent they are creating a performance-based organization, thestudys executive summary points out.

Work/life, recognition and career programs; perks; and training anddevelopment were not common strategic elements. However,attracting and retaining key staff; using rewards to deliverperformance; and strategic alignment of rewards with business

strategy are the most pressing global rewards-related issues now andin the near future, according to the survey.

Organizations havent figured out how to deal with the training anddevelopment and career [programs] and how to deal with that on aglobal basis, said Corinne Carlson, a principal in international practiceat Mercer. Its definitely related to the whole staffing issue. I wouldntsay its being driven by employees themselves but by the businessneeds to attract and retain the right people. She foreseesorganizations taking baby steps toward globalizing those kinds ofprograms and including them in reward strategies.

A Watson Wyatt/WorldatWork Global Compensation Surveybased on a2004 polling of U.S. multinational companies on their globalcompensation practices suggested that strategic compensationstrategies can give an organization a competitive edge in attractingand retaining top talent and in increasing productivity, a December2004 Society for Human Resource Management Global Forum report
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said. That survey found that stock options remained a popular elementof global compensation plans, as did employee stock purchase plans.

Firms global compensation strategies are fairly detailed, Mercer found;52 percent said their strategies included fixed guidelines, 22 percent

have detailed policies for all employees, and 16 percent have detailedpolicies only for senior employees.

The challenge for human resource professionals is that only about halfof the firms surveyed said their local HR function has a direct reportingrelationship to corporate HR, according to Mercer.

Only 41 percent of firms monitor or govern their strategy primarilythrough global HR information systems; 42 percent use the annualbudgeting process; and about one-third conduct regular audits ofcountry and business practices.

This can make it extremely difficult to monitor pay strategies on aglobal basis to ensure their implementation and effectiveness, Mercerinternational consultant Corinne Carlson said in a press release. Shesaid she expects employers to devote more attention to this in thenext few years.

Conclusion Those are some notes about performance-based compensationprograms. We dont think theres any big secret as to what makes for agood compensation program. There are some fundamental questions

you should ask, many of which we explored above. Educate, ask theright questions and stay focused on building strong relationships andyoull have a compensation plan that is built to last.

In closing, heres a poem that sums it up nicely:Accelerate the Awareness

Embrace Good HealthCelebrate the Spirit and

Share the Wealth

HR Compensation Strategy

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