Mn chamber of commerce presentation 12.6.11

Managing Compensation in aChallenging Economy:Trends in 2011-2012

December 6, 2011

Presenter

Maureen Driscoll

• Managing Director for Verisight’s Compensation Advisory Services practice

• 30+ years of experience in designing and implementing a wide range of reward programs

• 20+ years in consulting

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Agenda

• Compensation Trends

– Economic Review and Forecast

– Economic Impact to Compensation Practices: Predicted vs. Actual

• Total Rewards Philosophy

• Verisight Compensation, Retirement and Benefits Trends Report

• Pay for Performance

• Considerations in Variable Pay Plan Design

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Economic Review and Forecast

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Economic Review

• Slow economic recovery

• Signs of volatility remain in some industry sectors

• Attracting and retaining high performing and skilled employees is STILL a critical issue for employers

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Economic Outlook

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8.5

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9.5

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National Unemployment Rate

• October 2011 national unemployment rate: 9.0%

– Decrease from 9.7% in October 2010

Source: Bureau of Labor Statistics

Signs of Recovery?

• April 2011 WorldatWork Salary Budget Survey:

– 62% of 2,256 responding organizations said they were in recovery mode

– About three-fourths of participating organizations are budgeting for pay increases of between 2% and 4% in 2012.

• Recent headlines:

– “Fewer people seek unemployment benefits, a hopeful sign for struggling job market”(1)

– “Unemployment rates drop in 75% of large U.S. metro areas in September”(1)

– “Central Banks Spur Monster Stock Rally” (highest jump since March 2009)(2)

Source: (1) StarTribune.com, Nov. 2011; (2) Star Tribune Dec 2011

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Economic Impact to Compensation Practices

Predicted vs. Actual

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Compensation Practices

Salary Increases

Predicted Actual

Reduced frequency Pay freezes were common through 2009 – 2010. Most companies gave increases in 2011 and are planning for increases in 2012 with no “make up” for past freezes

Tied to significant growth in competency, promotion, or labor market movement

Annual merit increases are still the most common type of award

Greater pay differentiation for performance Organizations are moving (or exploring how to move) in this direction

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Compensation Practices – Cont’d

Annual Incentives

Predicted Actual

Incentive eligibility will offset the expectation for annual base pay increases

Trends show that most organizations are still budgeting for annual increases

More organizations will utilize variable pay plans

After an increase in prevalence over the last 15-20 years, the use of variable pay has held steady for the last three years with 80% of organizations having at least one plan (1)

Incentives will be available to a larger segment of employees, not limited to management and above

Based on Verisight’s survey, 40% of organizations provide a variable pay plan to non-exempt employees.(2) Mercer reports 47% - 55% of clerical/trades employees are eligible for variable pay(3)

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(1) WorldatWork 2011 Salary Budget Report; (2) Preliminary 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report data; (3) Mercer 2010 Salary Budget Report

Total Rewards Philosophy

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Developing a Total Rewards Philosophy

• A sound philosophy should not just reflect popular ‘market’ trends, but be a reflection of the organization’s strategic direction and culture.

• What’s in a philosophy statement?– Elements of reward package and purpose of each– Pay mix

• Pay-at-risk or more secure fixed compensation– Position relative to market

• Base salary• Total cash (base + incentive/bonus)• Total direct (total cash + long term incentives)• Can be influenced by other elements of the total rewards package (such as

benefits)

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• Should be identified by senior leadership, or Board for CEO compensation

• Outcome is written document– Can be shared with current and prospective employees– Articulates your ‘value proposition’ as an employer

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What is your organization’s total compensation philosophy?By Industry

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Compensation Philosophy

All Industries Manufacturing Finance/Banking Healthcare

Base Salary

Incentive Comp

Base Salary

Incentive Comp

Base Salary

Incentive Comp

Base Salary

Incentive Comp

Position Above the Market

11% 22% 5% 27% 16% 24% 13% 16%

Position at Market

72% 38% 76% 39% 73% 45% 71% 39%

Position Below Market

8% 7% 6% 3% 6% 8% 8% 7%

No Formal Philosophy

9% 33% 13% 31% 5% 24% 8% 38%

Source: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report

What is your organization’s total compensation philosophy?By Region

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Compensation Philosophy

Midwest Northeast* South West

Base Salary

Incentive Comp

Base Salary

Incentive Comp

Base Salary

Incentive Comp

Base Salary

Incentive Comp

Position Above the Market

9% 22% 16% 19% 14% 27% 15% 25%

Position at Market

74% 38% 72% 42% 71% 35% 65% 31%

Position Below Market

7% 5% 3% 3% 11% 5% 11% 12%

No Formal Philosophy

10% 36% 9% 36% 5% 33% 9% 32%


* Sample Size < 50

Where Short-Term Meets Long-Term

• Remember:

– Effective reward systems support business strategy and organization culture

– Tendency is to focus on market trends and/or common practices

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2011/2012 Verisight Compensation, Retirement and Benefits Trends Report Preliminary

Findings

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2011/2012 Verisight Compensation, Retirement and Benefits Trend Report

• Conducted in October 2011

• Final report still in process

– Preliminary results shared today

– Results published in mid-December

• Data collected from small to mid-size organizations

• National survey

– 850 responses overall

– 335 participants from the Midwest region

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Compensation Trends: Overall Salary Budget Projections

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30%

57%

13%

Base Pay Adjustments for 2011 compared to 2010

Higher

About the same

Lower


Base Salary Increases for 2011 Compared to 2010

• On average, 88% of all employees nationally received a base salary increase in 2011.

• Number of organizations reporting a 0% salary increase budget for 2011 was 7-10%, down from 15-20% during 2010.

Source: 2011 WorldatWork Salary Budget Survey

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MidwestAll

IndustriesManufacturing Finance/Banking Healthcare

Higher 34% 30% 34% 29% 20%

About the

same57% 57% 55% 61% 61%

Lower 9% 13% 11% 10% 19%


2011 Base Salary Increases*

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• 2011 WorldatWork Salary Budget Survey: for those organizations providing increases in 2011, the median was 3.0%

Mean Execs Mgmt/Exempt Salaried Non-Exempt

Midwest 2.3% 2.5% 2.4%

All Industries 2.3% 2.5% 2.3%

Manufacturing 2.4% 2.5% 2.2%

Finance/Banking 2.7% 2.6% 2.7%

Healthcare 2.0% 2.3% 2.2%


*Includes zeros

2012 Projected Base Salary Increases*

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• 2011 WorldatWork Salary Budget Survey: approximately 83% of organizations are budgeting for some base pay increase in 2012



Midwest 2.6% 2.7% 2.6%





*Includes zeros

2011 Structure Adjustments*

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• 2011 WorldatWork Salary Budget Survey: on average, 64% of organizations adjusted their salary structure(s) in 2011


Midwest 1.5% 1.6% 1.5%





*Includes zeros

2012 Projected Structure Adjustments*

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• 2011 WorldatWork Salary Budget Survey: 81% of organizations intend to adjusted their structure(s) in 2012 by an average of 2%.


Midwest 1.7% 1.8% 1.7%






*Includes zeros

Salary Structure Adjustments

• Traditional approach to updating salary structure(s)

– Determine overall structure adjustment percentage

– Adjust salary range midpoints– Recalculate minimums and

maximums using range spread formulas

Salary Range Structure

Minimum Midpoint Maximum

$48,000 $60,000 $72,000

$43,600 $54,500 $65,400

$39,600 $49,500 $59,400

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Projected Average Structure

Adjustment:2.0%

Projected Average Structure

Adjustment:2.0%

$54,500 x 102.0% = $55,590

Salary Structure Adjustment Caution

• Warning: Matching structure adjustment trends over time without checking actual competitive pay practices may eventually put your program at risk

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Competitive Pay Policy

Competitive Pay Practice

Pay for Performance

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Pay for Performance Trends

• Pay for performance has long been viewed as pay to:

– Motivate employees

– Drive behavior

– Reward high performers

• Merit increases are 4 to 6 times more prevalent than other forms (i.e., COLA, other types)

– 65% of organizations have a performance rating system tied to salary increases*

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*Statistics report from 2011 WorldatWork salary budget survey and Compensation Programs and Practices

Pay for Performance Prevalence – All IndustriesWhat is your experience with pay-for-performance programs?

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36%

21%9%

35%

Have implemented throughout the organization

Have implemented with some employee groups

Have considered implementing in the next 12 months

Have not implemented


Pay for Performance Practices

MidwestAll

IndustriesManuf.

Finance/ Banking

Health Care

Have implemented throughout organization

39% 36% 33% 45% 42%

Have implemented with some employees

21% 21% 22% 15% 15%

Have considered implementing

8% 9% 8% 6% 12%

Have not implemented 33% 35% 37% 34% 31%

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More than half of all companies have implemented some form of pay-for-performance


Average Salary Increase Based on Performance

All Industries Midwest

Performance Level

Median Increase (%)

% of EEs in Category

Median Increase (%)

% of EEs in Category

High Performers

4% 41% 4% 35%

Medium Performers

3% 38% 3% 41%

Low Performers 2% 21% 2% 24%

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Median salary increase in 2011 for high performers (4%) is twice that of low performers (2%) for all industries


Variable Pay Design

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Variable Pay Definitions

Bonuses (usually “after the fact”)

• Recognition

• Project completion

• Sign-on/hiring

• Retention

• Spot awards

• Discretionary

Short-term incentives (“before the fact”)

• Formula driven

• Balanced score card

Long-term incentives (usually 3 to 5 years)

• Usually only available at upper management levels

• Balance short- and long-term decision making

• Retention

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Eligibility to Participate in Short-Term Incentive Plans

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0%

10%

20%

30%

40%

50%

60%

70%

Executives Salaried Exempt -Managerial

Salaried Non-Exempt

All Industries

Midwest


2011 Short-Term Incentive Targets

• Structured incentive plans typically have threshold, target and maximum payout levels

• Incentive opportunity often corresponds with a position’s ability to influence metrics used in the incentive plan

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Mean All Industries Midwest

Executive 28% 24%

Mgmt/Exempt 12% 12%

Salaried Non-Exempt 7% 8%


Opportunities and Cautions With Variable Pay

Opportunities

• Compensation expense is a variable cost

• Depending on plan design, can reward individuals, teams and/or organization-wide performance

• Allow targeted distribution of limited compensation dollars

Cautions

• Can become “entitlement” if not properly designed and communicated

• Discretionary bonuses typically do not reinforce “pay for performance”

• FLSA provisions complicate incentive payouts for non-exempt employees who work overtime

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Key Design Steps

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Balancing Priorities

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Competitive and Local Market Practices

Employee Considerations

Financial Considerations


Compensation

Health & Welfare Benefits

Retirement Benefits

Perquisites

Thank you!

• Maureen Driscoll, [email protected], 612.376.9322

• For additional information about 2011/2012 Verisight Compensation, Retirement and Benefits Trend Report, or to participate in the 2012/2013 study, please contact Brian Repsold, [email protected], 312.488.6747.

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Mn chamber of commerce presentation 12.6.11

Business

Transcript of Mn chamber of commerce presentation 12.6.11