Compensation Trends 2009 Kmp

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COMPENSATION TRENDSCOMPENSATION TRENDS FINANCIAL EXECUTIVES ROUNDTABLE

RSM McGladrey, Inc. is a member firm of RSM International – an affiliation of separate and independent legal entities.

Today’s PresenterToday s Presenter2

Kevin PaulsenDi t i RSM M Gl d ’ H C it l lti ti i th G t Pl i iDirector in RSM McGladrey’s Human Capital consulting practice in the Great Plains region20 years of Human Capital experience

Specializing in:C ti & P f M tCompensation & Performance Management

Wage & Salary StructureIncentive CompensationPerformance Management/Review Systems

High Performance Workplace designOpen Book Management & GainsharingTeam DevelopmentParticipative Management TrainingParticipative Management Training

Organizational PlanningManagement Team Roles & ResponsibilitiesManagement Assessment & Development

Why is this topic important?Why is this topic important?

Economic recession has had - and continues to have – significant 3

gimpact on organizations and employeesRetaining (and attracting) skilled employees is STILL critical Total compensation cost usually represent the greatest expense to organizationsEmotional issue for employeesEmotional issue for employees

AgendaAgenda4

Economic Outlook: The Current RealityyTrendsTotal Rewards PhilosophyVariable PayThe “New Normal”

E i O l k Th C R liEconomic Outlook: The Current Reality5

Economic OutlookEconomic Outlook6

O b ’09 l 10 2%October ’09 unemployment rate - 10.2%Increase from 4.8% in early 2008

7.6 8.1 8.5 8.9 9.4 9.5 9.4 9.7 9.8 10.2

8

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12

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4.9 4.8 5.1 5 5.5 5.6 5.8 6.2 6.2 6.6 6.8 7.2

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20082009

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n b h il y e y st pt ct v c

Une 2009

jan febma

rch apr

may

june

july

augu

sse

p oc nov

dec

Bureau of Labor Statistics

Economic OutlookEconomic Outlook7

Job losses continue in many major industry sectors but declines y j yhave moderated in recent months Annual CPI rate (August ‘09) was -1.6%March 2009 was first time since 1955 the rate of inflation for a 12-month period was negativeNo consensus among economists whether near term will be No consensus among economists whether near term will be inflationary or deflationary period.

Economic Conditions and Employee CostsEconomic Conditions and Employee Costs8

“Employees aren’t going anywhere in this economy”p y g g y yBenefit costs are still rising, particularly healthcareRetirement plan costs being examined or changedSome organizations not worried about compensation in 2010:

Frozen salary increase budgets in 2009 or reduced to almost thinothing

Reduction in pay levels, typically a ‘targeted action’

Factors Impacting Comp Planningp g p g9

•Business conditions and their influence

Costs/Ex penses Costs/Ex penses Industry Conditions Industry Conditions

Economic Factors

•Business conditions and their influence

nCosts/Ex penses

RisingCosts/Ex penses

FallingIndustry Conditions

Improv ingStagnating or Deteriorating

Cedar Falls/Wat 11 6 1 2 8C d R id 46 30 0 6 29Cedar Rapids 46 30 0 6 29Des Moines 7 6 1 0 4Dubuque 7 4 0 0 6

12 8 0 2 4Iowa City 12 8 0 2 4Quad Cities 9 5 0 0 7All 92 59 2 10 58% impacted 64.1% 2.2% 10.9% 63.0%

*RSM McGladrey 2009 Compensation & Benefits Trends Survey

Factors Impacting Comp Planningp g p g10

E l t diti d th i i fl•Employment conditions and their influence

Retaining Key Attracting Motiv ating B fit C t Ri i

Benefit Costs Employment Factors

ng y

Employ eesg

Employ eesg

PerformanceBenefit Costs Rising

Stabilizing or Falling

Cedar Falls/Wat 11 6 1 3 6 0Cedar Rapids 46 18 5 7 25 0Des Moines 7 3 0 0 2 0Dubuque 7 4 2 3 5 0Iowa City 12 5 4 3 6 0

9 2 1 1 5 1Quad Cities 9 2 1 1 5 1All 92 38 13 17 49 1% impacted 41.3% 14.1% 18.5% 53.3% 1.1%


Current Environment on Exec PayCurrent Environment on Exec Pay11

OrganizationEconomic OrganizationScandals

EconomicRecession

R f

Improved Governance (Executive Compensation Practices)

New Compensation andBenefit Environment

Reforms

(Executive Compensation Practices) Benefit Environment

Reforms

Congress & Regulators

StakeholderGroups

BusinessLeadershipRegulators Groups Groups

Total Reward TrendsTotal Reward Trends12

Reviewing and acting on trend information involves critical questions:g g qWhat do we want to accomplish?What can we afford to do?Wh ’ i i h k ?What’s going on in the market?Given the above, what actions should we take?

T dTrends13

2009 Salary Increases*14

2009 Salary IncreasesNational Data

Nonexempt Exempt Executive

All Industries 2.3% 2.2% 2.0%

Not-for-Profit 2.4% 2.3% 2.1%

Health Care 2.9% 2.8% 2.5%

Utilities 3.2% 3.1% 2.7%

Finance/Insurance 2.6% 2.5% 2.1%

R t il/Wh l l 1 8% 1 7% 1 4%*Zero increases included

Depending on the source, industry and employee group, anywhere from 30% -

Retail/Wholesale 1.8% 1.7% 1.4%

p g , y p y g p, y40% of employers froze salaries in 2009.

*World at Work 2009-2010 Salary Budget Reports

2009 Salary Structure Adjustments*15

National Data

2009 Salary Structure Adjustments




Health Care 1.5% 1.5% 1.3%

Utilities 2.2% 2.2% 2.0%


Approximately half of respondents reported no salary structure movement in 2009

Retail/Wholesale 0.9% 0.9% 0.9%*Zero increases included

Approximately half of respondents reported no salary structure movement in 2009

*World at Work 2009-2010 Salary Budget Report

2010 Projected Salary Increases*16

2010 Projected Salary IncreasesNational Data




Health Care 2.8% 2.8% 2.8%

*Zero increases included

Utilities 3.3% 3.2% 3.3%


Retail/Wholesale 2.9% 2.9% 2.8%


*World at Work 2009-2010 Salary Budget Report

2010 Projected Salary Increases*j y17

State DataProjected Base Pay Adjustment (overall)

Average Change

n Hourly Salaried Executive Last Year - All Groups

< 50 FTE 28 1.6% 1.4% -0.1% 2.5%50-200 FTE 41 2.2% 2.0% 1.6% 2.2%201-500 FTE 11 2.5% 2.7% 2.8% 3.6%> 500 FTE 12 1.3% 1.3% 1.2% 2.1%All 92 1.9% 1.8% 1.2% 2.4%

*Zero increases included *RSM McGladrey 2009 Compensation & Benefits Trends Survey

All 92 1.9% 1.8% 1.2% 2.4%


State DataProjected Base Pay Adjustment (overall)

Average Change

n Hourly Salaried Executive Last Year - All Groups

Cedar Falls/Wat 11 2.5% 2.3% 1.9% ndCedar Rapids 46 1.9% 2.0% 1.1% ndDes Moines 7 0.7% 1.1% -0.9% ndDubuque 7 2.4% 2.2% 2.0% ndIowa City 12 1.9% 1.1% 1.2% nd


y

Quad Cities 9 2.1% 1.9% 1.7% ndAll 92 1.9% 1.8% 1.2% 2.4%

Zero increases included*RSM McGladrey 2009 Compensation & Benefits Trends Survey


State DataHourly Base Pay Adjustment Compared to Last Year

Hi h S L lChange from previous year

Higher or more Same Lower or less< 50 FTE 4 12 1250-200 FTE 12 15 14201 500 FTE 1 5 5201-500 FTE 1 5 5> 500 FTE 1 4 6All 18 36 37% of participants 19.8% 39.6% 40.7%


% of participants 19.8% 39.6% 40.7%

Trends in the MarketMerit pay still the most prevalent form of increase

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Trends in the Market p y p

Nearly five times more common than other forms such as cost of living or lump sums.

In some cases, organizations are extending the time between increases (averaging approximately 12.5 months) While a number of organizations are freezing salary budgets most While a number of organizations are freezing salary budgets, most are finding money – even if not budgeted – to fund at least some pay increases

Rewarding those who drive results is keyNearly 80% of survey respondents use some form of variable pay (incentives/bonuses)pay (incentives/bonuses)

Trends in the Market – Aligning Pay and Performance Rating

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Rewarding high performers and key employees is more important that

Performance Rating

g g p y p y pever. Employers are doing a better job of differentiating increases, but have room to improve.

Average Increase by Performance Category

5.2

4.24.9

4.4456

e

Average Increase by Performance Category

3.4

1.7

3.5

1.8234

% In

crea

se

Mgmt/ExemptNonexempt

01

Highest Above Average Below

Nonexempt

Highest Rating

Above Average

Average Rating

Below Average

Watson Wyatt 2009-2010 Salary Budget Report

Trends in the Market – Controlling Employee CostsEmployee Costs

Cost Containment/Reduction Attraction/Retention Practices22

Wage freeze/no increasesPay reduction

Sign-on/hiring bonusEmployee referral bonus

Reduction in hoursHiring freeze

Flexible work schedulesSpot bonus

Limit/eliminate overtimeReduction in forceEarly retirementEarly retirementIncrease employee share of health care premiumsp

T t l R d Phil hTotal Rewards Philosophy23

Importance of Establishing a Total Rewards PhilosophyImportance of Establishing a Total Rewards Philosophy

Aligns business strategy with rewards

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Aligns business strategy with rewardsEstablishes performance/position expectationsEstablishes a clear employee value propositionEstablishes a clear employee value propositionSets direction for program designStrongly encouraged by the IRS for defending potential S o g y e cou aged by e S o de e d g po e aexcessive compensation issues

Total Rewards Package ExampleOrganization “X” vs MarketOrganization X vs. Market

25

40K

Organization X Market

Variable V i bl 35K

30KBenefits

a ab ePay *

Benefits

Variable Pay *

* Variable Pay = Bonus/Incentive

25K

20K

Benefits Benefits Bonus/Incentive

15K

10K

Base Pay Base Pay

Total Reward PhilosophyTotal Reward Philosophy

Identified by senior leadership26

y pElements of the total reward philosophy:

Reward components and objectives B i f j b l (i t l t l) Basis of job value (internal vs. external) Reward focus Structure Administration

Outcome is written documentC b h d ith t d ti lCan be shared with current and prospective employeesArticulates your ‘value proposition’ as an employer

Total Rewards PhilosophyTotal Rewards Philosophy27

Sample questions for senior leadership:Sample questions for senior leadership:What components will make up our total rewards package? What is the purpose/objective of each component offered?Wh t lt / t ill b t d ith h t d t ?What results/outcomes will be connected with what reward system?Which is more important – how jobs compare to one another internally or how they compare to the external market?y y pWho are our labor market competitors? How should our rewards compare to the market – overall and for each component? Does this differ by employee group?differ by employee group?What should be the basis for making adjustments to wages?

Total Rewards Statement28

TOTAL REWARDS STATEMENT – example verbiage TOTAL REWARDS STATEMENT example verbiage Example Company recognizes that our employees are the key to our success as a community bank, and retaining and attracting employees is critical to achieving our goals and objectives. … O l d i i h i i i d h d i ifi Our total rewards program supports an organization that continues to experience industry change and significant market competition. … To meet our partnership commitments Example Company will:

• Establish a market driven flexible total rewards program At the same time internal relationships between• Establish a market driven, flexible total rewards program. At the same time, internal relationships betweenjobs will be monitored for equity. Progress toward market rates will always depend upon the Bank’s overallfinancial performance.

• Maintain a total rewards program that is competitive with financial institutions for jobs requiring financialand/or banking backgrounds and all industries for staff and support jobs Local and/or regional data will beand/or banking backgrounds, and all industries for staff and support jobs. Local and/or regional data will beconsidered depending upon the position.

• Encourage high performance and reward employees on the basis of individual and/or bank-wide results.

• Consider adjustments to wages on the basis of individual performance and labor market conditions.

V i bl PVariable Pay29

Performance Criteria vs. Reward VehiclesPerformance Criteria vs. Reward VehiclesPerformance Criteria Reward Vehicles

Job

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BasePay

Job Responsibilities

Variable Pay(Incentives or

Behavioral Competencies

Standard (Incentives or Bonuses)

Standard Objectives

Atypical ResultsRecognition

Atypical Results

Value Creation

Special Goals or Projects 30

Variable Pay DefinitionsVariable Pay Definitions

Bonuses (usually “after the fact”)

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Bonuses (usually after the fact )RecognitionProject completionSign-on/hiringRetentionSpot awardsSpot awardsDiscretionary

Short-term incentives (“before the fact”)( )Formula drivenMay consider balanced scorecard metrics

Variable Pay DefinitionsVariable Pay Definitions

Long term incentives (usually three to five years)

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Long-term incentives (usually three to five years)Typically provided only at executive or upper management levelsgEncourages key stakeholder thinkingBalances short- and long-term decision makingRetentionIn non-profit organizations, typically used to supplement retirement benefitsretirement benefits

Prevalence of Variable Pay33

Nearly 80% of organizations have at least one variable pay plan for y g p y pat least some segment of their employee base

Most prevalent in retail/wholesale, manufacturing and b ki /fi (84% 89%)banking/finance (84% - 89%)Least prevalent in not-for profit and healthcare (53% - 55%)

80% of organizations reported that variable pay has no impact on 80% of organizations reported that variable pay has no impact on base salary budgets for nonexempt workers, while more organizations take it into consideration for exempt and

i / l ( 0% & 66% i l )executive/management employees (70% & 66% respectively)

*World at Work 2009-2010 & Watson Wyatt 2009-2010 Salary Budget Reports

Rewards – Holiday Bonusy34

State DataHoliday Bonus - by Employment

Current Practice

None offeredLess than

$200/person for allMore than

$200/person for allVaries on tenure or

performance< 50 FTE 14 4 4 6

22 9 3 750-200 FTE 22 9 3 7201-500 FTE 5 4 0 2> 500 FTE 9 3 0 0All 50 20 7 15All 50 20 7 15% of participants 54.3% 21.7% 7.6% 16.3%


Rewards – Targeted Incentive AmountAmount

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State DataTargeted Incentive - by Employment

Incentive - Targeted AmountHourly Supervisory Management Executive

< 50 FTE 3.2% 4.5% 10.7% 10.5%1 8% 3 6% 5 8% 10 9%

Incentive Targeted Amount

50-200 FTE 1.8% 3.6% 5.8% 10.9%201-500 FTE 1.7% 3.3% 6.8% 11.1%> 500 FTE 2.3% 5.8% 5.0% 32.8%All 2.2% 3.9% 7.5% 12.7%


Rewards – Incentive Planningg36

Salaried Incentive Opportunity Compared to Last YearChange from previous year

Increased Stayed the Same Decreased< 50 FTE 5 16 650-200 FTE 1 23 11201 500 FTE 2 5 2201-500 FTE 2 5 2> 500 FTE 1 4 1All 9 48 20% of participants 11.7% 62.3% 26.0%


% of participants 11.7% 62.3% 26.0%

Prevalence of Variable Pay37

Despite the economy, variable pay budgets have stayed steady. p y, p y g y y

35 31.4 30 30 7

20253035 31.4 30 30.7

gete

d

51015

5 4.7 511 10 11

% B

ud

02008 2009 2010

Nonexempt Exempt Exec/Mgmt

Watson Wyatt 2009-2010 Salary Budget Reports

p p g

Opportunities and Cautions With Variable PayVariable Pay

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Increased compensation i i bl t

Can become and “entitlement” if t l i t d

Opportunities Cautions

expense is a variable costDepending on plan design, can reward individuals teams

if not properly communicatedDiscretionary bonus typically do not reinforce “pay for can reward individuals, teams

and/or organization-wide performance

do not reinforce pay for performance”FLSA provisions complicate

Allows targeted distribution of limited compensation dollars

incentive payouts for non-exempt employees who work overtimeovertime

Key Design StepsKey Design Steps39

Th “N N l”The “New Normal”40

The “Old Normal”The Old Normal41

Inherent assumptions:pExpected and appropriate to increase salary levels every year. Salary increase budgets been averaging between 3.5%-4% for l t fi last five yearsEmployees see a minimal difference between an average salary increase that is 1-2% above or below the “average” increaseincrease that is 1 2% above or below the average increaseIncentive compensation is most appropriate for higher level positions

The “New Normal”The New Normal42

Treats investment in people with same importance as other critical strategic investmentsWorking to ‘re-engage’ employees (especially high performers) as the economy recovers.y

Recent survey from Watson Wyatt reports employee engagement levels have decreased 10% overall since last year, 23% for top performers.

Salary adjustments linked to significant growth in competency, y j g g p yperformance, promotion, or labor market movement

Reduced frequency and greater differentiation in salary increases based on performancepReplacement of annual salary increase opportunities with incentive compensation eligibility

Transparency and work force involvementTransparency and work force involvement

Opportunities With the “New Normal”Opportunities With the New Normal43

Challenge your underlying assumptions considering economic g y y g p gconditions that existed when practices were adoptedEliminate certain programs/practices that do not support the culture

d di ti f i ti d d ’t k i t d ’ and direction of your organization, and don’t make sense in today’s economyCreate the future you would like to see Create the future you would like to see

Compensation Trends 2009 Kmp

Business

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