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Why Should You Conduct a Compensation Audit?

Why Should You Conduct a Compensation Audit?

As an HR or Compensation Leader, are you confident that your organization is paying employees fairly for their work? Are you sure your company is complying with labor laws and regulations? Are your compensation offerings competitive to attract, motivate and retain talent? If you have any uncertainties to these questions, then a compensation audit should be performed which will serve several crucial purposes.

Objectives

  1. Equity and Fairness: Firstly, a compensation audit ensures that pay practices are fair and equitable. By examining how employees are compensated, companies can identify any discrepancies or inequalities among individuals performing similar work.
  2. Attracting Talent: Competitive compensation is a powerful tool for attracting top talent. When companies conduct audits, they can adjust their compensation strategies to align with industry standards and attract skilled professionals.
  3. Reducing Turnover: Fair pay contributes to employee retention. When employees feel valued and adequately compensated, they are less likely to seek opportunities elsewhere. A compensation audit helps address any discrepancies that might lead to turnover.
  4. Enhancing Productivity: Properly compensated employees tend to be more engaged and productive. Additionally, by evaluating compensation practices, companies can optimize pay structures to motivate and retain high-performing staff.
  5. Legal Compliance: Ensuring compliance with labor laws and regulations is crucial. A compensation audit helps identify any potential legal risks related to pay practices, allowing companies to address them proactively.
  6. Strategic Alignment: Compensation is not just about numbers; it reflects a company’s values and priorities. An audit ensures that compensation aligns with the organization’s overall strategy and culture.

Get Started!

Remember, fair and transparent compensation is not only a business necessity but also a reflection of an organization’s commitment to its employees and their well-being. Contact Alliance Compensation today to learn more about conducting a compensation audit for your organization.


Nancy Ellington is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the US in public and private companies. She has over 30 years of experience in corporate leadership roles and consulting, and lives with her husband and two kids in Redmond, WA.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services related to this topic are Market Analysis, Salary Structures, Job Architecture, Pay Equity and Employee Pay Planning Tools.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/.

Image by rawpixel.com on Freepik

As an HR or Compensation Leader, are you confident that your organization is paying employees fairly for their work? Are you sure your company is complying with labor laws and regulations? Are your compensation offerings competitive to attract, motivate and retain talent? If you have any uncertainties to these questions, then a compensation audit should […]

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Pay Satisfaction

Pay Satisfaction

Many people strive for happiness, but it can be elusive and dependent on various internal and external factors. Pay satisfaction is quite like happiness – elusive and seemingly outside of a manager’s control because of other factors.  However, the perception of how equitably a person is paid is largely a function of the skill of their manager.  How can this gap ever be closed?

Managers live with changes and constraints in their jobs every day. Knowing the key drivers of pay effectiveness and satisfaction are important. The perceptions of employees around equity and fairness may provide an altogether different understanding. Employees perceive what is “fair” and the manager has a rather critical role in achieving that result.

Equity not Equality

There is a perception amongst some experienced managers that what employees want is equality in their pay – to receive at least the same base pay increase, bonus, stock, etc. as another, whether inside the company or at another company. One part of that perception is correct, that employees make comparisons between their situation and those of other comparable employees both inside and outside the company. But those comparisons are usually not made to achieve equality; they are made to achieve equity.

Equality would require all things to be equal (same amount). Equity makes a comparison of the inputs and outputs such as performance inputs (employee vs. others) and outputs (the manager’s decision on the rewards amount). As a result, the employee may be very satisfied with their level of inputs and the resulting rewards decision.

Finding the Balance

On the other hand, if there are imbalances in the equity equation that aren’t remedied to the employee’s satisfaction, they may try to re-balance them on their own. For example, if they were to reduce their inputs (commitment, dedication, effort, loyalty, etc.) they may be more satisfied with the lower end of the manager’s rewards decision. In another scenario, the employee may have a whole different idea of what is relevant to the manager’s pay decision, or the manager may have a different perception of what is a relevant reward. Overall, without some constant and ongoing communications between manager and employee, the pay equity scale may never be in balance.

Pay Satisfaction Drivers

The Compensation Roundtable of the Corporate Executive Board (now Gartner) has conducted extensive research on perceptions of employees as to satisfaction with how they are paid. It resulted in two primary discoveries with quantitative results that thus drive employee performance (their discretionary efforts) and retention (intent to stay). Both of these satisfaction drivers are able to be influenced by a manager because they are based on the employee’s perceptions, and those perceptions are formed from the manager’s action or lack of action on how they set, communicate and evaluate performance targets as well as communicate the company’s intent and strategy for pay programs that the manager administers. The two drivers are:

Pay process fairnessEmployees who believe that pay processes are fair are half as likely
to leave a company as those who believe that they are not.
Pay distribution fairnessEmployees who believe that pay distribution is fair are likely to give
half again as much effo1t as those who believe that they are not.
The perception of fairness in pay processes and distribution are both able to be influenced by a manager.

Process and Distribution Fairness

(First off, let me just say here that I’ve never been a fan of using the word “fair” to describe pay. “Fair” is a large public event that happens every summer in US counties, with rides, games, and agricultural exhibits.) But back to a more serious tone…

Process

Perceptions of process fairness are driven from organizational design of systems and processes, and manager decision-making:

  • The perceived understanding of the performance and pay system (organization, performance targets, communication)
  • The perception that the system in which performance and pay decisions are made is fair (organization, equitable achievable targets, communication)
  • The perception that performance ratings and pay are determined in a fair manner (manager)
  • The perceived understanding of how individual performance and pay decisions are made (manager)

Distribution

Pay distribution fairness is linked to two familiar levers for pay systems, internal equity and external competitiveness. In order to improve perceptions of fairness, employees need to believe that their pay is fair compared to others within their organization and that their pay is fair compared to others in comparable organizations. You should have a regular list of comparator companies with which to compare your external pay practices.

Within the distribution satisfier, the decisions your managers make on pay and rewards are typically done within the context of tools and budgets that are provided. Some of the common tools include:

  • competitive pay ranges (to allow differentiation of pay for higher performers and to be able to pay competitively to the external market);
  • a merit matrix (to allow managers to distribute funds in base pay increases based on competitiveness and performance);
  • if you have incentive plans, any sort of individual factor or element that managers control that provides greater payouts for top performers.

Other elements of decisions that managers make around rewards for employees may recognize especially significant achievements. Cash examples: (cash or other recognition program). Noncash: days off, key project assignment, visibility/ exposure, or others. Remember though that perception of what the reward is may be different than how the employee feels or perceives it.

Communicating

Finally, communicating pay is not just an annual event. Managers should discuss their performance expectations with employees. Employees should know how targets are determined. And similarly, managers should share their decision process, and current and future compensation growth potential.


Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services related to this topic are Market Analysis, Salary Structures, Job Architecture, Pay Equity and Employee Pay Planning Tools.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/.

Picture attributed to wirestock

Many people strive for happiness, but it can be elusive and dependent on various internal and external factors. Pay satisfaction is quite like happiness – elusive and seemingly outside of a manager’s control because of other factors.  However, the perception of how equitably a person is paid is largely a function of the skill of […]

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Think Outside the Box: Better Labor Cost Management

Think Outside the Box: Better Labor Cost Management

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“What is our average compa-ratio, Jim?” asked the CEO as I sat down to report on our annual focal exercise.

Having been through enough of these meetings over the years, of course I had the answer; as a matter of fact, I had it calculated not only for the whole company but for each division, each country, and each corporate function. But I didn’t want to just spout off the answer, I wanted to educate him about how to think differently about his labor cost. Unfortunately, he had worked with enough compensation professionals over his storied career and had been taught by each and every one that if he could just get the compa-ratio to 1.0, another year could be put in the books.

“We ended at 0.99,” I said, “but what I really wanted to review with you was…”

“That’s great Jim, and tell your team that Jerry thinks they did a grrreat job! Could you ask Kathy to come in here on your way out?”

I shook my head again as I headed for the door. Not only because he still referred to himself in the third person, but again I was not getting the sort of traction that would really make a difference in the company’s performance. I mumbled to myself, “Yes Jerry, it’s just wonderful to know that all your averages are aligned. In addition, do you know you have 20% more Senior Professionals than your competitors? Do you know that when it all adds up our labor cost is 4.5% more than your competitors, and on a $200M payroll, that’s $8M, or about $0.05 per share?”

As the aisle row occupants of cubeville stared at me talking to myself again, I decided I needed a better approach than expecting the CEO to just nod his head and hang on my every word. What I needed was a few more people with some time and some skin in the game in order to make the difference bottoms-up rather than top-down. I needed people with shortages of resources to get their jobs done. I needed Human Resources.

Even then it was a hard sell. I had a solution looking for a problem. I finally found an ally in the HR Director of the Technical Services organization, a group that was in the process of trying to manage her global labor cost through a planned migration to lower cost-of-labor markets and away from some of our higher-cost US urban locations.

It didn’t take long for her to get it – it seemed she was “high-potential” after all! Her organization’s costs and associated factors looked something like this, with these assumptions:

  1. Our average wages were the same as the market at each job family level
  2. Our benefits were equal to the market, 35% of base pay
  3. Our incentive targets were competitive and identical to the market

The difference in how we’d looked at this in the past was taking off the “Jerry Glasses” and looking at the data in a whole different way – our total labor costs, not just our average labor cost… our “Portfolio” of employees. You see, you have choices in how you manage the decisions around factors and variables that make up your labor costs, even while maintaining the typical “50th percentile” strategies that so many companies employ.

So even though we’re matching the market in all the traditional senses we’ve become accustomed to, we’re still exceeding the overall market cost-of-labor by 4.5%, or with this example the sum of $13,000,000!! Would that make a difference anywhere in your business – hiring more skilled technicians, salespeople, funding a new product line, avoiding layoffs… you fill in an example.

How does this happen? Here are a few things to check for after you’ve done an analysis like this:

  1. What is your promotion policy and practice? At Our Co, we enabled a process that says that people can come to expect promotions when they are high performers. Nothing really wrong with that on the surface, but it got away from us, and we didn’t take into account how many people we already had doing work at senior levels. We probably should have thought about more rapid promotions for employees hired at lower levels and slower rates for higher leveled employees.
  2. We’ve had a few difficult years on the merit budget, so pay increases have been hard to come by. But when a new employee is hired, they can be hired at pretty much whatever level the manager wants. Our managers started over-hiring levels because they didn’t expect they’d be able to give pay increases. We’ve got a lot of competitively paid but under-skilled people as a result.
  3. We’ve ruled out the geographic labor cost issues – we know that the cost of labor is higher in places like the Bay Area, so that’s not a factor here.
  4. Obviously we also discovered a few more dollars hiding from us, since incentives and benefits are a factor of base. Never forget that, as a business it’s all about fully-loaded labor costs.
  5. One thing we did do right was we “gated” movement into the P5 or expert level of the job family. That means it requires additional approval to promote or hire someone there. It is more administration, but at that level the responsibilities are so much greater and implications of misplacement are of greater consequence so it’s worth it.

What can HR do with data like this? Thinking first of a popular topic, how about an element of workforce planning, as in an overlay around labor cost? How about coming to the table with a proposal to reduce labor costs over time by realigning skill requirements and leveling? Obviously, there are many other aspects of workforce planning to consider, but armed with cost-of-labor data, a smart HR Leader can create hiring plans around needed skills and determine whether training and development may enable business needs rather than taking an expensive hiring or replacement route.

Data can be intimidating, or at least that’s what people tell me when I ask why they never got into compensation. But almost anyone can see the clear benefits that present themselves when looking at data differently than the way we’ve been training everyone else to do so for so many years.

——

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

Data can be intimidating, or at least that’s what people tell me when I ask why they never got into compensation. But almost anyone can see the clear benefits that present themselves when looking at data differently than the way we've been training everyone else to do so for so many years.

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I Could Tell You, But Then I’d Have To…

I Could Tell You, But Then I’d Have To…

I have enjoyed teaching a couple of compensation certification classes for WorldatWork, the association for total rewards professionals. I would get a lot of questions about a lot of topics, but one that frequently surfaced – whether in a module or not – is “this is great, but would you tell your employees that?” Yes, compensation transparency. And this isn’t some super-secret recipe for the incentive plan funding that makes you an insider, this is some of the compensation basics like pay grade, pay range, that sort of thing.

Sharing for Success

So just to get it out of the way let me say that I am a believer in sharing more openly about compensation than most people I’ve met. That belief doesn’t come from a beating I took or something I learned when I was young, it comes after seeing what happens when you don’t share more openly. The best thought-out programs with the most strategic elements and execution can still fail when not properly communicated. As a matter of fact, I’d say the two things that most often are an anchor around the neck of an otherwise successful program are the lack of management training (related topic, different time) and the lack of effective communication.

Think of it another way. What if for one of the biggest investments most people ever make (like your house) all you were told was, “it has a total of 11 rooms. Sorry, I can’t be more specific.” Is that enough information for you to be all-in as a buyer? Should the seller, who really wants to unload the house reasonably expect to sell it?

Top 5 List

Compensation is a huge investment your company makes, and if you are keeping secrets you probably aren’t getting the most from your money. Here are my Top 5 reasons you should communicate as much as possible about your compensation programs:

  1. Employees will make up the part they don’t know.
  2. Missing information is a constant negative and anxiety producing reference point.
  3. Most of your employees are adults and you expect them to act like adults in all other ways.
  4. Underlying problems don’t require secrecy, they require fixing.
  5. Put accountability where most of us want it anyway, in the hands of managers.
  6. I’ll just throw this one in for free — Transparency laws.

Top 5 Detail

Making it up
  • This is a very real outcome of not communicating compensation. For example, a base pay program is typically the largest ongoing investment an employer will make, yet one of the areas that can be shrouded in greatest mystery when pay grades and ranges exist but are closely held secrets in HR. And the associated HR strategy implications in areas like succession planning and career development can’t be overstated if an employee doesn’t know what sort of pay opportunities you’ll offer them for their continued growth of skills and abilities. Without facts from you, other opportunities with known facts are certainly more realistic outcomes.
Negative Reinforcement
  • Your employees make decisions every day about their engagement. The anxiety that can be produced in a person when managing critical aspects of life without sufficient information isn’t something that should come from something that represents a major part of someone’s life and livelihood. And even though it’s not really lying, you’ve got to dance your way out of it every time someone asks you a question your policy doesn’t allow you to answer, and that doesn’t leave a lasting positive impression either.
Act Like an Adult
  • Maturity is a two-way street. Since most of your employees are adults and you expect them to act like adults, what makes you think they can’t handle the truth? The best example I’ve experienced of telling the truth about compensation was at a company I worked for during the first recession, when we knew we weren’t going to be able to give base salary increases that year. We told employees three months in advance of the usual date. Sure, there were a few rants, but by the time it came to execute the program, it was a non-event.
Fix the Problem
  • If you have something uncommunicated because it would cause unrest, fix the underlying problem – design, training, whatever, don’t mask it. Salary range spreads causing compression? New hires coming in above current employees? Neither a good reason to stop communicating about pay ranges, but good input for the next program design cycle. Segmenting your promotions budget so organizations with more entry-level employees get more funding? Explain how job families work and the concept of promotion velocity for early-career employees. These aren’t difficult problems to solve when you communicate openly.
Manager Accountability
  • Providing needed compensation information to those who make the day-to-day decisions about the base pay, promotions, classifications, bonuses, recognition, etc. only makes the most sense. One common issue with open compensation communications is who has control. After all as it is frequently said, information is power. Do you really need “Compensation Power?” or can you afford to let managers do what their job descriptions tell them they are supposed to be doing? Sure, there are some who abuse it, but realistically that is a small minority. Most management jobs come with some level of fiscal authority anyhow, and in most cases that is many multiples above what we’d ask of them in a compensation program.
Legislation
  • Transparency laws. Every state is a little different in what is required, and this is an area that is constantly changing.

I strongly encourage you if you see yourself somewhere on the secrecy side of the communications spectrum to re-evaluate your approach to compensation communications. At least start asking yourself whether the way it works now couldn’t be improved. Good communication won’t repair a flawed rewards program, but ineffective communication will cause a well-designed program to fall short of expectations.

——

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

So just to get it out of the way let me say that I am a believer in sharing more openly about compensation than most people I’ve met. That belief doesn’t come from a beating I took or something I learned when I was young, it comes after seeing what happens when you don’t share more openly.

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Is Sales Compensation Coming From The Battery Drawer?

Is Sales Compensation Coming From The Battery Drawer?

My mouse started acting up the other day. That usually means the batteries are wearing out, so I headed over to the battery drawer for new batteries.

What a mess. Lots of batteries, finding a fit wasn’t the problem. I just had no idea if any of them were any good. So I did what was necessary, which was try all the various combinations of those batteries until I got something like the performance I needed to make the mouse run again. But at this rate I have no idea how long it’ll work because I somewhat randomized my chances for success by just taking what I could find. (If your battery drawer is better organized than mine, I salute you!)

“…and I thought I was Eveready…”

When you start “going through the battery drawer” to design a sales compensation plan, you have just about as much chance to get it right as I did with my mouse. Problem is, the stakes are a lot higher for your company and the sales force. You might find a great combination that results in a super-charged field sales team, producing at unheard of performance levels. Winner winner, chicken dinner!! On the other hand, think of all the other possibilities, like great payouts but not so great results, or any combination that results in detrimental effects on the sales force or the company..

So randomizing the inputs probably isn’t how you’ll be successful in this particular compensation expertise. You need to be thoughtful with sales compensation plan design so unlike my experience with the battery drawer, you’ll produce the kind of excellence you can rely on. For example:

What Else Other Than the Batteries?

Batteries might not be the problem. Sure, it’s easy to check the batteries first, but you should always start with the owner’s manual! Consider all the factors that influence the results your sales force are getting. Are they trained? What’s the status of your product or service, are you growing or falling behind the competition in features and benefits? Is marketing generating demand? Did the business strategy change and the sales plan didn’t? Are finance or other processes keeping the sales force from getting desired results?

Call MacGyver?

Use the right size batteries, put them in the right way and don’t mix sizes. I’ve opened up battery cases and found the wrong sized batteries even though almost every battery case made is pre-molded to the right size. But desperate times call for desperate measures, right? It can be so easy to just try something and hope it works and everyone can get back to work. But not having the right mix between base and incentive, unclear sales role definitions, having the wrong people on sales incentives or using any old performance measure mix may work for a while but will eventually short out.

How Old Are Those Batteries?

Some batteries aren’t accessible. Many newer electronic products use battery power, but you aren’t supposed to open the battery case. If you’re being told there’s nothing wrong with the sales plan, and you haven’t seen any supporting performance data, I’d suggest getting another opinion. Typically sales operations groups are rich with data, and with a little market data you can fairly quickly get an idea for just how effective your plans are, and whether getting at those batteries might just be a worthwhile project after all. For example, are top performers earning at the desired excellence levels? How much are underperforming reps earning? Did most of the sales force achieve quota last year? Were they supposed to?

“I sat next to this guy on the plane…”

Don’t use used batteries, and safely dispose of the old ones. Chances are your business isn’t really exactly like the one your new sales VP came from, or where your HR/compensation peer works. You have so many options and alternatives when it comes to designing sales incentives; don’t give away your creativity to others. And after you’ve tried something and it didn’t work, make sure you’ve documented what the issue was. Chances are you are probably doing something right but could just use a fresh set of eyes (or new batteries?).

Help?

Sometimes you have to go to Batteries+. Although batteries are available at most corner stores, sometimes you need an expert to help figure out what to do next. Over the years I’ve found that most people seem to think they are compensation experts. As a matter of fact, count the total employees in your company and subtract one and that is the number of people who seem to know as much (or more) about compensation as you do. And you probably don’t need an external consulting expert for every single thing every single year. But if it’s been a while and you’re not sure you’re still getting the most out of sales compensation, there are folks like me who do this work, and by the way really enjoy it. I’ve found few places in a company where you can learn more about a company and what it takes to make them successful than in the process it takes to design sales compensation plans.

Problem solved? Not so much!

Last night we were going to sit down and binge on a show on one of the streaming services. I went to turn on the TV and a message came up, “No Source Identified” so I take the remote and start pushing buttons, nothing happens. I shout downstairs, “Bring up 2 AAA batteries for the remote!” One, I hadn’t opened the remote fully other than to see it had AAA batteries, and two, I hadn’t thought what else might be wrong. Turns out I was wrong on two counts (the wi-fi needed to be reset, and the remote required 4 AAA batteries). After I reset the wi-fi, everything worked and we happily binged away.

I’m happy again, and continue to learn about batteries.

——

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

Over the years I’ve found that most people seem to think they are compensation experts. As a matter of fact, count the total employees in your company and subtract one and that is the number of people who seem to know as much (or more) about compensation as you do. And you probably don’t need an external consulting expert for every single thing every single year. But if it’s been a while and you’re not sure you’re still getting the most out of sales compensation,

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Big, Hairy, Audacious Compensation

Big, Hairy, Audacious Compensation

A while back (1994 to be exact) a term called a BHAG (Big, Hairy, Audacious Goal) was coined.  Think Boeing in Seattle getting into the jet airliner business as an example.

What do you think the compensation plan was like for Boeing executives and engineers?  Do you think it matched the size, scope and impact of their goal – and accomplishment?

Probably not.  And probably never really entered the mind of those, or most rewards designers since.  Isn’t it time to re-think what rewards should look like when someone really and truly “hits one out of the park?”  I’d say so.  It’s not going to be about what the surveys say, or what percentile you decide to pay at.  It should be differentiation on a scale beyond all those things.

Naysayers – WNDITWB

Some might continue to point to their existing plans and programs and say, “That’s what our recognition plan is for,” or “That would be covered in our annual incentive plan,” or “But then they’d make more than the CEO,” or even “We’ve never done it that way before,” (or WNDITWB)

(That last one makes me shudder.)

I recently worked with a client, a small but fast-growing software firm with offices in Silicon Valley and Portland that is making big inroads into data storage and management.  The path to success is clear – create growth and you create value, and being able to do that without outside financing creates exponential value.  Wouldn’t we all agree that creating exponential value would be worth exponential rewards?  Now not something unreasonable, but it has to be impactful.

Think Differently

In my client’s case (software as a service) we discussed the real drivers of value in that SaaS space where they play  – long-term contracts, pre-paid business and attracting logo business.  Other industries will of course have other value drivers that are specific to their type of business, competitiveness, and where they are on the business cycle (start-up, growth, maturity or decline).  Now here’s the thing about rewards under the BHAC thinking.  The amounts can’t scare you, no matter your industry or experience.  They are, by design, BIG AND SCARY (and of course, hairy but that’s not something I’m going to blog about)!

What might a $2M, 2-year contract be worth under a regular commission plan?  5%?  So $10,000, and if structured like most plans, pay that out over the life of the contract.  $416.67 a month – THAT’s exciting!!

It’s the Value, stupid

This isn’t necessarily intended to just get you thinking about sales incentives though.  And as I said earlier, it isn’t going to help if you get caught up in percentiles.  A BHAC plan is about VALUE.  Who would look back 2 years after landing a logo client in Los Angeles that doubles your revenue and increases your market value by $5M and say, “Gee, it was probably a mistake to pay Colleen that $50,000 bonus, don’t you think?”

Let’s pivot to a favorite value creator, product designers.  Could be software engineers in Santa Clara or apparel designers in Beaverton.  I may be wrong, but from my experience, those roles typically come with a caveat on who owns what, i.e., intellectual property.  One company I worked for years ago had a very talented stable of design engineers who over the years created product after product that were patented.  Their reward?  A nice plaque, an original copy of the patent with their name, maybe a promotion, maybe a few percentage point increase in their merit increase that year.  If the company also did well that year, maybe a somewhat larger bonus (say 20% instead of 15%).  Again, how exciting is that?!

Go Wild?!

We do need to be a little careful though, BHAC isn’t necessarily for everyone.  Some occupations (engineering being one) attract the type of person who may get enormous satisfaction just from the accomplishment.  Some cultures (no matter what the occupation) have a much stronger aversion to individual recognition than others.  Still, it can’t hurt to think bigger than where the data usually lands, right?

——

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services that could help with your BHAC plan include Executive CompensationSales Compensation and Short and Long-Term Incentives.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

Think creatively about compensation and rewards for your deal makers and paradigm breakers.

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Avoiding the Holiday Gift Trap

Avoiding the Holiday Gift Trap

We have all heard stories where a friend or family member received a holiday ham or turkey as a company holiday gift. I don’t know about you but when I first heard about these gifts I was surprised.  These types of company holiday gifts or gratuities could have mixed success but hopefully they are appreciated for their intended gesture.

I was curious what types of holiday gifts are the most popular, and according to Connie Chen of Business Insider, these are her top 5 corporate holiday gifts:

  1. A low-maintenance plant to brighten up a desk
  2. A tumbler that keeps nearly any drink at its ideal temperature
  3. A candle that’s particularly giftable (or re-giftable)
  4. A reusable bag fit for errands
  5. A journal that’s meant for developing ideas.

Considerations

If you are thinking about what holiday gift or gratuity to provide your employees or co-workers, here are some things you should consider:

  • How to make the recipient feel valued and appreciated and they were not an “after-thought”.  If you live in Seattle and send it to Denver on December 24, chances are it might not have the same effect as if it was sent a week earlier.
  • Your relationship with the recipient. Workplace relationships can range from acquaintances to very good friends and even relatives. Make sure your gift shows them they are valued but don’t be too personal or you might make them uncomfortable.  For example, perfume or cologne is probably not a good idea.
  • What are their interests? It is best to give something they will appreciate, use and remember. A co-worker once gave me a 24-inch-tall Christmas Minion plush toy and I LOVE IT.  Each year it is displayed with our Christmas decorations and it always gets a lot of discussion with guests. And I’ll never forget where and from whom it came from.
  • How to provide the gift not expecting anything in return. Remember, a gift is not an incentive.
  • How to recognize the recipient knowing not everyone celebrates the holidays in the same way or at all.  Staying away from specific themes can help you avoid this pitfall.

Keep in Mind

When considering gifts to current or potential customers, be aware of:

  • Company policies. Some companies have very strict policies and you will want to make sure you follow them. You don’t want to encourage someone to cross a line.
  • Cultural norms.  It is important to understand the cultural aspects of gift giving and receiving to avoid problems. 
  • Gift Value.  It is best to provide something with a nominal value so you do not inadvertently create pressure to buy your goods/services or become a client. Of course, you also do not want the gift to be mis-interpreted as a bribe.  One very large company I know in Santa Clara even calls this out in their sales incentive plan policies.

The Tax Man

Lastly, do not forget to consider the potential tax implications of giving a holiday gift.  Depending on the situation, the Internal Revenue Service (IRS) might consider the value of the gift as taxable income and therefore taxes have to be paid by the company and possibly the employee.  If you are personally providing a gift to an employee(s) and the company is not paying for it, then you probably do not have anything to worry about. However, if the company is paying for and providing a gift, you need to think about it. If you give a gift card with more than a de minimis value then the IRS might consider it income. Being conservative might be the best action.

Summary

Giving holiday gifts can be a great experience that has a positive effect on the relationship with the recipients.  If done well, it can result in deeper relationships which could turn into lasting friendships. If you choose to provide gifts, try to: have fun with it, be creative, and provide something you believe the recipient will enjoy and value.

To read other blogs, go here: https://alliancecompensation.com/blog/

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

_____________________________________________________________________________________________________________________

David Adent is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 30 years of experience in corporate and executive compensation roles, and lives with his wife in Post Falls, ID.

We have all heard stories where a friend or family member received a holiday ham or turkey as a company holiday gift. I don’t know about you but when I first heard about these gifts I was surprised.  These types of company holiday gifts or gratuities could have mixed success but hopefully they are appreciated […]

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Follow The Leader

Follow The Leader

When I first thought about this idea — that a lot of what we do in the compensation world is to follow the leader — it was the children’s game that came to mind.  Remember – if I’m the leader and I skip in a circle, you do to; if I put my right-hand pinkie finger in my ear, you do too.  Sort of a cousin of Simon Says.

Then my mind went to what really happens when we play follow the leader in compensation.  Maybe some or all of this has been on your watch:

  • We let market data dictate what “we believe” jobs are worth and how employees are paid
  • We design incentives based on how our competitors do it, or how the VP did it at her last company
  • We enable management’s somewhat mistaken belief that benchmarking is the only valid approach to program design

When we play Follow the Leader, we handicap our creativity to align our reward programs and systems to our unique business philosophy, strategy, objectives and values.

Throw Out Benchmarking? In Compensation? Heathen!

It’s not my intention to totally scrap the idea that we can learn from others.  Some of the best learnings I’ve had in my career have been from people that have faced challenges and found unique solutions that worked.  For years I kept paper copies of presentations I had attended at conferences, industry meetings, consultant presentations, etc.  And I did go back over them to pull out ideas, but I didn’t take that material and just paste my current company logo in the upper left corner.  It did help though to add elements to programs that would fit the needs of the problem I was trying to solve.  For example, should a bonus program have a payout threshold?  Should a vesting component be used?  These are ways to put real value into company bonus, sales incentive and executive compensation plan designs.

Reasonable Thought

There are other aspects of benchmarking that I am solidly behind (especially when it reinforces my own beliefs!).  Of course, many pay programs are benchmarked to a local market – Seattle, Los Angeles, Phoenix, you name the location and that’s probably right when it comes to certain jobs and levels of pay, for example non-exempt work.  And for example, I see pay practice surveys that show the quantitative metrics participants use in their broad-based bonus plans and the prevalence of that.  (I’d bet right now that not many readers of this know what EVA is, but I worked in a company once where it was the primary metric in the employee bonus plan).  I could easily show how it simply wasn’t appropriate for the level of employee that needed to understand it, but it took an executive departure before we could wrestle that one down.

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(By the way, bonus points if you know the answer to this related quiz question.  What are the two most common quantitative metrics that companies use for their bonus programs?)

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Lemmings?

You might be living under a rock if you’ve never heard (herd?) of Herd Immunity.  (Talk about follow the leader, and yes that’s a jab). One of the more common applications of the compensation ‘herd mentality’ is on market pricing of jobs.  If you are an old-timer like me, you probably know that at one time, job evaluation systems like point factor, classification or factor comparison systems were more prevalent than market pricing.  And if you haven’t taken C2 (the job evaluation class) from WorldatWork, you may never have heard of those.  But much more so than market pricing, they enabled companies to determine how to pay their employees when they selected what was important to them rather than letting the market do it for them.

I still tell my clients that “the market is… interesting… but don’t let it tell you what to do.”  What I mean by that is this: Follow the Leader isn’t always your best choice.  And as a trusted advisor in your company, take heed that if you are going to play that game then you know what you’ve signed up for.

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Quiz Answer: Revenue and Profitability

Internal and External Linkages

To read other blogs, go here: https://alliancecompensation.com/blog/. Here are some of our services related to this topic: Market Review, Short and Long-Term Incentives, Sales Compensation.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/.

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Jim Harvey is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and four dogs in Sherwood, OR.

When I first thought about this idea — that a lot of what we do in the compensation world is to follow the leader — it was the children’s game that came to mind.  Remember – if I’m the leader and I skip in a circle, you do to; if I put my right-hand pinkie […]

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Best Laid (Delayed?) Plans

Best Laid (Delayed?) Plans

You are a well-respected, knowledgeable, and smart compensation/rewards professional, with a lot of success behind you.  You’ve just put together one of the best pieces of work that is sure to be a “game-changer” (to use an over-worked phrase) for your company.  A GREAT IDEA. You have the time booked with the CEO.  And you walk out rejected and dejected.

I’ve worked for a lot of great companies over my career – Portland, Phoenix, Bay Area — but not always for people that had the greatest insight into rewards and compensation.  Sometimes that’s the HR leader, but more frequently it’s the CEO, or as I affectionately call him/her, the Chief Compensation Officer (CCO).  That means instead of meaningful answers on key questions or a great idea, you get responses like:

  • Gobble-de-gook:            “We need incentive programs that will enable us to save on expenses, not pay outsiders.” (Huh?)
  • Ostrich:                            “I don’t hear a whole lot of negative feedback, things must be working.”
  • Black or White:               “Turnover isn’t a problem so compensation must be OK.”
  • 4th and long (punt):        “The Executive Committee needs to decide on our funding priorities.”

Or here’s where you really know things are going sideways: “This would look better if the line was green instead of yellow. I thought you said this was a great idea?!” (Play sound of your hair ripping out.)

Thus the subject of this blog post.  I’ve just experienced something like that again, but this time indirectly as a potential client in Seattle was unable to move ahead because the CEO didn’t want to make the changes to the compensation plan… that he had designed… and gave him the ability to change all the decisions made by managers…

So Now What?

As an external consultant, you can say “OK then,” and move on to the next opportunity.  But what if you are working for the CCO?  There are still things you can do that continue to advance a great idea and strategies.  Here are some specific steps you can still take that while not optimal for your original compensation plans could at least help to prepare for a time when you get the go-ahead to move forward.

  1. For incentive and equity plans, review your plan documents.  Look at those specific areas where you’ve observed some friction or perhaps where errors exist.  For example, does your commission plan describe credit splits as 50/50 while Sales Operations is paying 100/100?  Do you have new pay grades eligible for the company bonus plan, but haven’t updated the appendix where eligible grades are listed?  Go after those areas that may only affect a small portion of your population but could cause a big headache when challenged.  Use data to prove the need – best reply to a Black or White or an Ostrich.
  2. Spend some quality time with finance.  It’s fine to try to engage with finance on the fly during a design project, but so much easier to have already established roles and responsibilities, and in some cases, educating on design principles and such when there’s no pressure or deadlines involved.  And when you have a finance ally with you next time with the CCO it could be a different result.
  3. Invest some time in looking at all your labor cost data, not just the incentive or bonus element.  Most CFO’s are willing to discuss if the company pays out cash in fixed or variable form, but they really care about the total going out the door.  When you look at things like employee distributions in grades, management spans and the like, you start to uncover elements of total labor costs (a GREAT idea) that may help fund future variable pay programs for the broader workforce or add a penny or two to EPS.  Taking the CCO additional business metrics they may never have seen before could jump start a decision.
  4. Poke at your administrative processes and payment mechanism.  If you’re lucky you have this well in hand, but most of us have opportunity here either to re-ask why we do things a certain way, whether we are compliant with our own pay policies, and if plan payouts are being calculated and paid correctly.  For example, if your sales incentive plan is supposed to pay incentives against a year-to-date quota, is that really happening? Or is there a spreadsheet error somewhere paying every month independently? Nothing derails a CCO conversation faster than sending you to the woodshed for poor execution of a current program.
  5. Test different approaches and ideas.  Sometimes the best socialization approach with a CCO is a slow drip of the concepts rather than quick change.  This works especially well when you can run your idea in parallel to the current plan and show any differences.  One of the best approaches to slow decision makers in my experience. And sometimes a great idea takes time to mature.
  6. To take #5 a little further, ask to run a pilot.  That may not be something you are used to doing, but why not gather the experience in real time?  It may even create a little “buzz” in the rest of the work force.  This happened to me once with a large hi-tech company in Santa Clara. Executive support existed for a change in our employee recognition program globally. But IT and HR leaders couldn’t figure out how to support it.  A brave HR leader of a large organization volunteered to run a pilot. She saw the opportunity to make significant inroads for employee engagement and greater simplification of existing programs.  It was a tremendous success and we had other organizations clamoring to get in, creating the “pull” needed to overcome the barriers.  And it proved to the CCO that it was not just some hair-brained idea.

Always Remember…

I have an axiom I’ve followed for many years in compensation and the business world in general.  You may have seen this written in different ways, but it basically goes like this:

“There is nothing more difficult to take in hand, more perilous to conduct, than to take the lead in the introduction of things, because the innovation has for enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well under the new.”

Remember, it probably isn’t personal – so once you get past the surprise, find a productive way to move ahead.

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Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com), a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 40 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services to consider when your plans are delayed include Short and Long-Term Incentives, Pay Policies, and Compensation-as-a-Service.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/

You are a well-respected, knowledgeable, and smart compensation/rewards professional, with a lot of success behind you.  You’ve just put together one of the best pieces of work that is sure to be a “game-changer” (to use an over-worked phrase) for your company.  A GREAT IDEA. You have the time booked with the CEO.  And you […]

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Keys to a Successful Partnership with Finance

Keys to a Successful Partnership with Finance

To be successful in any job or sport, there is always a key partnership that is critical and most important.  In baseball, it’s the pitcher and catcher. American football is the quarterback and center.  In Compensation, the relationship and partnership with Finance is essential.  In all three examples, each individual and organization has to be in sync with the other to avoid fumbles, passed balls, and missed opportunities.

For over 30 years I have had the pleasure of working with some fantastic Finance partners. When thinking about what made the partnerships great, four (4) common themes were always there.

There Was Trust

In every situation, we knew we each had the best of intentions and that we would have “each other’s back”.  No one should be surprised; we were both prepared and showed-up well to meetings especially with senior leadership.

Tough Conversations Were Held Behind Closed Doors

As in any partnership, both parties want the best outcome.  To do this, it is essential to have tough conversations in a way that is safe.  Only by having those open and honest conversations can you understand each other’s perspective and get to the best answer.  As in any good personal relationship, it’s best to have those conversations behind closed doors so both parties feel safe and secure.

We Agreed to Disagree

We always desired to be aligned in the recommendation; however, that didn’t always happen.  In those times, we agreed to disagree. We believed everyone had valid points and the best answer was a matter of perspective or desired outcome. Fortunately, this did not happen often but when it did, we took all of the information to senior management and presented both sides equally sharing our perspectives. As a result each of us was heard and management made an informed decision.

We Validated the Math & Models

A good portion of what a compensation professional does involves math and models. And, when designing programs for large groups of employees, the numbers start getting pretty big and can impact the bottom-line.  Don’t keep your models secret and instead share your models with Finance and have them validate your methodology, assumptions, and results. When meeting with the CFO, CEO or the Compensation Committee, it is great to have everyone giving a thumbs up on the analysis and results.

To win a baseball or football game takes time and practice.  Building a great partnership with finance also takes time and you have to be intentional about it.  Reach out and get to the know your partner personally as well as professionally.  Not only will the partnership be great and help both of you be successful, you might just find that you made a really good friend as well.

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services most frequently associated with partnering with finance include Compensation-as-a-ServiceExecutive CompensationSales Compensation, Short and Long-Term Incentives and Market Review.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/


David Adent is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 30 years of experience in corporate and executive compensation roles, and lives with his wife in Post Falls, ID.

To be successful in any job or sport, there is always a key partnership that is critical and most important. In Compensation, the relationship and partnership with Finance is essential.

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Increase Your Impact, When to Hire an Expert

Increase Your Impact, When to Hire an Expert

If you are like me, you like to do things yourself. I generally know how long things will take and I like the satisfaction of saying “I did it.”  But there are times when I pause and ask myself does it make sense for me to do this. Should I hire an expert? This is especially true when I’m busy, and I must choose between projects or a relatively simple but urgent request. I can end up in a situation where an opportunity to increase impact escapes me.

I’m Not a Plumber

For me personally, I really dislike plumbing and I’m not good at it. No matter what I struggle to squeeze into those little spaces and feel like I am going to break something. And there always seems to be a leak when I’m done. So, even though I don’t like to spend the money, for me an expert is always the way to go!

Do You Need to Hire an Expert?

At your company, there are several situations where it makes sense to go with an expert including:

  1. You do not have someone on your team with the knowledge or experience,
  2. When you are dealing with issues that impact a very sensitive employee group or a lot of employees where it is critical to get it right,
  3. When you need or have to improve credibility with stakeholders including management or employees,
  4. There are special laws that need to be considered and you just don’t deal with them on a regular basis,
  5. You have team members who are on leave or vacation, and of course,
  6. Your team is already at or beyond capacity and you do not need or want to hire someone but you just could use the extra hands.

Example of an Expert: Executive Compensation

When thinking about executive compensation, it makes sense to get help from an expert when hiring executive officers. There are a lot of factors to consider in this situation including internal equity, employee perceptions for publicly disclosed compensation information, the Compensation Committee, the Board of Directors, and how your investors and shareholder advisory groups will view the situation. Making a mistake here can create headaches for you when it comes time to seek shareholder approval of your executive compensation practices or proposals.

When you do decide to hire an expert, remember, their help can take many forms.

Extension of Your Team

We all know that during the year, there are times when there is more work than our teams can handle. Also, our staff will take vacations or go on family medical leave. Consider hiring a partner who can act as an extension of your team with dedicated hours to do what you need done for a period of time or just be available when you need help. Your partner can help with critical projects or the day-to-day work (e.g., market pricing or job offers) so you can focus on other priorities.

Content Creation

Experts will create the design, or fine tune yours. Creating everything that supports rolling out the design including presentations, communications, and plan documents. This approach is great when you do not have the expertise OR bandwidth for the project. Hire an expert.

Co-Author Work In Partnership

This is a great idea when you want to be involved in the work while getting expert help. Your company can learn a lot using this approach.  Remember, this also creates a situation where you are partners and have an equal stake in the results. I was fortunate to partner and co-present with Jeremy Erickson of Pillsbury Winthrop Shaw Pittman LLP and Jon Burg of Infinite Equity on the impact of the CEO Pay Ratio requirements at a Global Equity Organization conference. Working with Jeremy and Jon provided the opportunity to partner with an expert and gain expertise and directly apply it in a business setting.

Expert Plan/Content Review

External viewpoints are very helpful when making sure your proposed designs, plans, programs and/or content are designed and communicated well. External advisors typically look at things differently since they have exposure to multiple companies and designs. You will most likely appreciate their insights and suggested improvements. And, it provides you the ability to say an expert agrees with your approach which will increase your impact.

Doing projects yourself is very satisfying; however, sometimes the decision to hire an expert is the right choice. Use a model that works well for you and your company.  Each project and situation is different; trust your judgement on when to “jump in the pool” and hire someone.  For me, hiring a plumber is always the right thing to do!

To read other blogs, go here: https://alliancecompensation.com/blog/. Our services associated with our specific expertise include Compensation-as-a-Service, Executive Compensation, Sales Compensation and Market Review.

To see our Linked-In company page, go here: https://www.linkedin.com/company/alliance-compensation-llc/about/


David Adent is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 30 years of experience in corporate and executive compensation roles, and lives with his wife in Post Falls, ID.

Doing projects yourself is very satisfying; however, there are times when hiring an expert is the right choice especially when you use a model that works well for you and your company.

Read More