Total Compensation Strategies-January 2016 workspan

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Information about Total Compensation Strategies-January 2016 workspan

Published on January 22, 2016

Author: jimsillery


1. TOTAL COMPENSATION STRATEGIES FOR EMPLOYEES © © 2016 WorldatWork. All Rights Reserved. For information about reprints/re-use, email | | 877-951-9191 01|2016 The Magazine of WorldatWork©

2. | 49january 2016  workspan AN employee compensation strategy is not a new concept, but it’s an important one to review often in order to stay competitive in the labor market. A company would not take its products and services to market without a marketing strategy. In the same way, a company should not try to attract, retain, and motivate the employees needed to execute that marketing strategy without a strategy that enables it to compete effectively in competitive labor markets. In other words, companies should have a strong vested interest in their employees because they are integral to their success. A recent workspan article by Buck Consultants at Xerox called, “Executive Compensation Strategies: Do You Have an End Game?” discusses how companies can use a clearly articulated executive compensation strategy to create alignment among the organization, the leadership team and its shareholders/stakeholders. When properly implemented, such a strategy can create an environment and culture that contribute to higher performance and long-term value creation. A Key to Workforce Engagement By James Sillery, Buck Consultants at Xerox Can compensation strategies boost workforce engagement?

3. 50  | workspan  january 2016 The article raised an important question: Should a company also have a total compensation strategy for employees? If so, would it be different from the total compensation strategy established for executives? The answer to both of these ques- tions is yes. A total compensation strategy for employees can create a framework that links a company’s reward structure with the drivers of workforce engagement. By doing this, the company can create alignment with organizational strategies and build greater workforce commitment. The result can drive cost effectiveness, improve productivity and increase company performance. In fact, most companies would say with conviction that they have a compensation strategy for their employees, but if you ask how well their strategy is working, the answer is less certain. Authors Herbert G. Zollitsch and Adolph Langsner of “Wage and Salary Administration” state that a compensation strategy is designed to attract qualified employees. It is designed to motivate employees to develop and perform at their highest levels by offering both financial and non-financial rewards as an incentive. This strategy can help to control costs by providing policies and procedures that ensure internal equity while at the same time providing a compensa- tion opportunity that is externally competitive with the market. It can provide a structure that serves as the basis for effective hiring, utilization and development of employees. It can also promote a positive relationship between the employee, the company and its management. The environment that HR profes- sionals work in is constantly changing and increasingly challenging. Companies regularly expect higher returns on their human capital invest- ment, yet the tools for increasing productivity in this knowledge-worker world are often rooted in the past. The professionals who manage the HR functions in global companies still struggle to find their seat at the table. Levels of disengagement for employees in the corporate world are stubbornly persistent. Based on this, how can we make sure that an employee compensation strategy works in today’s environment? A study of compensation practices shows that employee compensation strategies have, in fact, evolved over this period. But, have they kept up with the pace of change? Why Compensation Strategy Exists Historically, a company’s compensa- tion strategy has been an integral part of the employer-employee relation- ship. Initially, these relationships were one dimensional with companies providing competitive compensation based upon management’s view of Figure 1  |  Five Generations in the Workplace   Gen 2020   Millennials   Gen X   Baby Boomers   Traditionalists Source: Bureau of Labor Statistics Employment Projections 2020 2015 2010 2005 0% 20% 40% A total compensation strategy for employees can create a framework that links a company’s reward structure with the drivers of workforce engagement.

4. | 51january 2016  workspan employee needs. For example, if an employer provided an employee with continuous employment and competitive pay, that employee would reciprocate with long-term service. However, things began to change. Companies could no longer promise long-term employment. The competi- tion for business and talent became global. There was a shift in supply and demand for labor as companies had to compete for new skills in response to technological changes. At the same time, companies were looking for more than loyalty. They were also looking for commitment, motivation, time and productivity. The simplistic model that had been in place for years evolved into a more complex, two-dimensional model, based on a quid pro quo between the employer and the employee. This “employee value proposition” redefined the employ- ment deal that defines what an employer expects from its employees and what it provides in return. Over time, companies have expanded the definition of pay to include benefits, rewards and recognition, short- and long-term incentives, and other forms of compensation. Career progression and the opportunity for advancement were added to the mix. Most recently, we have seen aspects like work-life balance included. Taken in its entirety, this total rewards model provides a comprehensive offering to address a range of employee needs. However, while this model has been evolving, there has been a steady decline in workforce engagement and an increase in workforce mobility, according to Gallup’s “State of the American Workplace” report. In this case, employee engagement has become critical. Working With a Global Workforce Today companies are looking at opportunities opening across global markets and the characteristics of these markets have undergone dramatic changes following the last recession. For many companies, the decisions made today will determine their success for years to come. A global knowledge-based economy is dependent on people and their knowledge, skills and commitment to a degree not seen in the past. To be successful, companies need to fully engage their workforce. Best practices show the top drivers of workforce engagement are related to an employee’s perceptions of his/ her career. Increasingly, employees are offering a new definition of career that is based on current and future opportunity for pay, personal enrichment, professional growth and employability. Within this definition, an employee is free to continually make trade-offs between these factors as he/she moves through his/her career. Career also carries a more dynamic definition. Career is a life journey and not a job progression. It is not bound by the current employment relation- ship. Instead, it is a continuum, with the current relationship serving as a link between past, present and future experiences. Also, work and life are now integrated. Today’s worker has one life that moves from personal to professional and back in continuous fluid motions, without interruption. It also drives different motivations. While Baby Boomers may leave a company because they perceive their Events that have an impact on the workforce: Black Monday: The stock market crash of 1987 Great Recession: December 2007 — June 2009 Equity markets have shifted from static to dynamic to constrain to volatile. Businesses have shifted their focus from local (domestic) practices to exporting U.S. practices as well as implementing shared global practices. A growing multigenerational workforce that includes a Baby Boomers and Millennials as seen in Figure 1. Labor markets. The work- force is becoming more global as organizations expand in different countries. The “currency” of compen- sation is evolving from security, to cash, to equity and opportunities as companies respond to new economics. Rewarding the workforce. In response to a changing workforce demographic, companies are looking at different ways to meet employee needs accordingly. Beware of these disengagement drivers: Shortages in talent that exist side-by-side with long-term unemployment. Persistent levels of workforce discontent remain unaddressed from the last recession. Retention that is jeopardized by “latent turnover.”

5. 52  | workspan  january 2016 work is not appreciated and Gen Xers may leave because they perceive they are treated unfairly, Millennials are likely to leave because they perceive that they have stopped learning. Basis of Compensation Strategy Given this, the purpose of an employee compensation strategy needs to expand beyond attracting, retaining and motivating talent to a strategy that drives engagement and commitment. Developing this defini- tion requires two-way communication and mutual understanding. It also requires that companies expand their definition of “compensation.” That does not mean that we move away from compensation. Studies show that compensation remains an important part of the equation. Instead, we need to redefine compen- sation. According to Merriam-Webster, the use of the word “compensation” is not new; it dates back to the 14th century. It has had several mean- ings, but today, it most commonly means money or something else of value that is provided to someone in return for something (such as work) or as payment for something lost, damaged, etc. Historically, that definition meant that the company provided pay when the worker provided something of value (commitment and/or productivity). Today, this value proposition has changed. The employer-employee relationship is now a segment on the chain that forms a career. Workers are looking for something that is more consistent with their perceptions of value. And because employees define career beyond their employment relation- ship with any single company, this value proposition may need to have a horizon that goes beyond the tradi- tional employment lifecycle. So what companies need to provide is a valu- able link in that chain. If companies build a comprehensive reward structure that resonates with an employee based on his/her career definition, then the perceived value that employee places on his/her career can motivate positive behav- iors that are valued by the company. In other words, to engage workers, companies must manage based not just what they want, but what the employee wants (Figure 2). There is no one-size-fits-all solu- tion you can implement, but there are several steps that a company can take to understand the requirements for a rewards solution that is specific to employee needs: ❙❙ Understand your business strategy and needs, i.e., who you are as a company and the types of people, skills, and competencies that will Workers are looking for something that is more consistent with their perceptions of value ... So what companies need to provide is a valuable link in that chain. Figure 2  |  Response to Employee Value By providing value to employees Employer      Engagement      Employee Employees respond by providing value to the company

6. | 53january 2016  workspan support your needs. Understand how your culture can create align- ment around this. ❙❙ Understand what attracts an employee to you. If it is pay alone, you may be competing on price. If it is your culture, you may be competing on value. ❙❙ Know who your employees are. Your workforce can cut across a broad range of demographics with perceived values that can have roots in differences based on generations, cultures, gender identity and more. ❙❙ Gather employee input, but know who you are listening to. While feedback from your entire employee population can give you a lot of data, amplified voices can provide you with insight and information. ❙❙ Invest wisely based on what your employees value. Plotting a cost/ value scatter gram analysis can show you where your highest return (measured in employee response) may be relative to your invest- ment (measured by cost), i.e., is it low cost/high value or high cost/low value? ❙❙ Broaden your reward structure to include what employees are both interested and capable of doing, not just what they are doing now. ❙❙ Build a platform for communica- tion and delivery. By following this process, a company can implement a strategy that maximizes employee engagement. This not only helps to attract and retain employees, it also increases the organization’s overall productivity. What should your compensation strategy look like? As discussed earlier, one size will not fit all. The below message was posted on WorldatWork’s community discus- sions page in response to a question about compensation philosophies and communicates an impressive holistic message: “Similar to any other company we’re trying to attract, hire and retain the best and the brightest talent in our industry. We do this by offering competitive base pay (using quality, industry-relevant salary surveys with a focus on matching the market between the 50th and 75th percentiles), broad use of equity with a vesting schedule more favorable than our competitors, innovative cash incentive plans for all employees, higher than average merit increases and a generous benefits plan. Our entry-level professionals are evaluated and rewarded twice per year to ensure their compensation remains aligned to the market as their skills grow. (No sense training them to take a job elsewhere, right?) Additionally, we offer a dynamic yet casual work environment where employees can lead projects and make a big impact. We have a great office location close to prime dining and shopping and we offer free parking or bus passes to all employees (their choice). And yes, we have free bever- ages too. I honestly couldn’t ask for a better company to work for ...” This is not an easy undertaking, but is it worth it? Studies show that, in a typical company, only about one- third of the workforce is engaged. What would it look like if two-thirds of your workforce was engaged? The competitive advantage that it would offer could be unbeatable.  James Sillery  is principal and an executive compensation leader at Buck Consultants in the Minneapolis-St. Paul area. He can be contacted at Understand what attracts an employee to you. If it is pay alone, you may be competing on price. If it is your culture, you may be competing on value. resources plus For more information, books and education related to this topic, log on to and use any or all of these keywords: ❙❙ Career Development ❙❙ Employee Engagement ❙❙ Global Workforce.

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