The Face of Compensation for 2013

Compensation Planning
by Stephen Bruce, PhD, PHR
"Unfortunately, where we hoped to be in 2013 isn’t where we are, but there are still strategies that will serve us well, says consultant Terry Pasteris."

Where We’ve Been

First of all, let’s look at where we’ve been, says Pasteris, who is president of TLMP Consulting Group. She offered her suggestions during a recent webinar sponsored by HRHero/BLR. In the past few years, she says, we’ve seen:

  • Hiring freezes
  • Promotion/relocation freezes
  • Reduced or postponed bonuses
  • Salary freezes
  • Salary cuts
  • Layoffs
  • Survivor anxiety/burnout
  • Reduced or eliminated benefits (e.g., 401(k) match)

Where We Hoped We’d Be by Now

We hoped that by now we would be:

  • Hiring
  • Promoting
  • Giving bigger merit increases
  • Restoring bonuses

But It’s More Like …

Unfortunately, here’s what it’s actually like, says Pasteris:

  • Uncertain economy.
  • Fiscal cliff, debt ceiling, taxes, and spending cut uncertainty.
  • Cautious hiring.
  • Merits rebounding but not more than last year.
  • Some promotions for gaps.
  • Some bonuses, but with higher goals.
  • Mixed news on benefits with healthcare reform.
  • Hiring/promotion/relocation freezes lifted in most companies.
  • Reduced or postponed bonuses restored for the most part. (Bonuses are especially attractive because they’re a onetime cost—no roll-up costs, so no continuing effect on base, life insurance, 401(k) match, etc.)
  • Salary freezes and cuts rare.
  • Salary increases happening, but sparingly.
  • Layoffs now typically for rightsizing only.
  • New attitudes about when to retire. (Normal promotion vacancies for younger workers coming up aren’t there).
  • 401(k) matches restored, but some holding back or not fully restored.
  • 3% merit budget “the new normal”; might change if the economy really heats up.
  • Labor market heating up. (A lot of people didn’t move because there weren’t opportunities, but now there are.)

Be sure to use comp tools effectively, says Pasteris. For example:

  • Retention bonuses (“I’m always surprised at how little it takes in the way of a retention bonus to keep an employee. They work because inertia is in your favor,” says Pasteris.)
  • Referral bonuses
  • Hiring bonuses

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So What Do We Do Now?

Remember to be thinking of total compensation as you consider how you are rewarding your employees, Pasteris says. It’s not just about base and equity. It’s also about short-term and long-term disability, perquisites, bonuses, the reputation of company, doing a good thing in the world, having a life, work/life balance, and so on.

Differences in Perspective

Also keep in mind who is in our workforce and what their interests and attitudes are, says Pasteris. Different perspectives may require different rewards. Different generations rate what attracts them:

Attraction Drivers

Gen Y*

Gen X*

Boomers*

Career Advancement

1

2

8

Competitive Base

2

1

1

Learning/Development

3

6

Challenging Work

4

3

2

Convenient Location

5

4

3

Reputation as Good Employer

6

7

4

Flexible Schedule

7

5

5

PTO

8

10

 

Competitive Benefits

9

9

 

Reasonable Workload

10

 

Organization’s Financial Health

8

 

Competitive Retirement

10

Source: Towers Watson “2011 Talent Management and Rewards Survey”
*Note: Gen Y = under age 30; Gen X = ages 30–46; Boomers = ages 47–64 (and older because they are not retiring).

Compensation Philosophy and Strategy

Make sure what you do in comp is linked to your business strategy, says Pasteris. If your strategy is to be the low-cost provider, you’re probably not going to be the highest payer. And if your message is, “We’re the best in product and service,” your pay is probably going to be on the higher side.

Here are the trends Pasteris sees:

Public Companies

  • Scrutiny of Pay Practices:
    • Continues unabated.
    • Although the public scrutiny is limited to top execs, there’s a trickle-down effect.
  • Say on Pay:
    • Increases public profile of executive compensation;
    • Increases institutional shareholder clout;
    • Requires enhanced disclosure; and
    • Eliminates controversial compensation elements such as private jets.
  • Continuing to Link Pay to Performance
    • Equity awards with performance vesting and full value vs. options;
    • Clawbacks;
    • More board discretion;
    • Reduced severance;
    • Move to double‐trigger CICs (Change in Control); and
    • Elimination of tax gross‐ups.

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Private Companies

  • The Internal Revenue Service’s (IRS) continued focus on unreasonable compensation.
  • Owner’s pay as false or de facto cap (The owner’s big payday is when the company experiences a liquidity event, so the owner may not get paid as much as market would require, and that can trickle down to depress all other salaries.)
  • Key contributors who will never be owners. The company doesn’t have equity to award as with a public company.
  • Issues include:
    • Dilution. (Owners often don’t want dilution of their shares.)
    • Disclosure.
    • Estate planning and family dynamics are often in the way of good management.
  • Approaches that work:
    • Phantom stock;
    • Profit participation;
    • Profits interest (limited liability companies only); and
    • Nonvoting stock.

In tomorrow’s Advisor, how to stretch the 3 percent merit budget, plus an introduction to the all-comp-in-one-place website, Compensation.BLR.com.

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