As I start to write, I'm humming the Beatles tune of a similar title in my head. Their lyrics were  poetic and prophetic, even when it comes to matters of the heart at work, because money can't buy workplace love.

That's not to say that many a manager and employer haven't tried to use money to counter other deficiencies in treating/managing/leading/recognizing/rewarding their workforces, but it rarely works as intended. In today's world of commonplace mass layoffs, "doing more with less" and "working smarter, not harder" a few extra bucks isn't going to buy a Whole Lotta Love (I'm starting to hear another classic coming on..., but I digress).

Don't get me wrong; people work for money, and so market competitiveness, especially for base pay, is critical to the ubiquitous "attract, motivate and retain" objective we often hear mentioned. (Base pay is mostly for the "attract" part, and to a slightly lesser degree the "retain" element; not so much for the "motivate" part, but that's a post for another day). Because cash compensation is so important, it's critical to make sure the cash elements of your rewards programs are competitive with the relevant external labor markets in which you compete for talent.

But if you think you can buy workplace love, engagement, loyalty, or commitment, you're mostly dead wrong. Some people can be bought psychologically, but not that many (excluding politicians, of course!).

Substantial research confirms the disconnect between money and commitment or engagement at work. For instance, a recent study conducted by WorldatWork (membership may be required to view study results), in collaboration with the  Hay Group and others, confirms that indeed, non-pay elements of the total work experience are the key drivers of employee commitment and engagement.

The study, a survey of hundreds of compensation/rewards professionals, reports that organizations realized better outcomes in their efforts to "engage" employees if non-HR employees were also involved in the development of reward and engagement efforts.  Regarding key reward elements, "non-financial rewards, as opposed to financial rewards, are viewed as having more impact on employee engagement," says Tom McMullen of the Hay Group.  He goes onto say that "quality of work, career development, organizational climate, and work-life balance have a greater perceived impact on employee engagement than financial rewards." 

The perceived quality of managers and top leaders are also more important than financial rewards on impacting engagement.  "Quality of leadership has a profound impact on employee engagement and motivation" says Paul Rowson of WorldatWork, who also says that "organizations must think it terms of total rewards and not just financial rewards if they are to enhance employee involvement, commitment, job satisfaction - and performance."

Assuming your compensation levels are already competitive, the next time a weak manager seeks approval to use increased pay to enhance retention or morale, maybe we should be thinking about fixing the manager, rather than throwing money down the drain of worker discontent, especially with their management and/or leadership.

You may have heard the phrase that employees join companies, but they leave their managers - this is so true (just think about the last really bad manager you worked for).  Of course, some will leave for more money or opportunity elsewhere, for sure, but when people are poorly treated and/or managed, virtually all of them want to leave!

Once your workforce is paid fully competitively, additional reward dollars would be better spent on programs and actions that enhance culture, employee commitment and engagement, and ones that strengthen your management and leadership.

Don't try to buy employee love and loyalty; earn it instead.  It's cheaper, and more effective.

Doug Sayed is principal and founder of Applied HR Strategies, Inc., a Seattle-based compensation consultancy, and developer of the StrategicPay Series, a series of hands on, "do it yourself" guides for developing your own strategic compensation programs.

A couple of recent posts via the excellent Compensation Force blog and the Ohio Employer's Law Blog really got my attention.

The 2nd Circuit Court of Appeals made a decision on Fair Labor Standards Act (FLSA) exemptions for sales persons that could potentially affect thousands of employers, eventually.

Until now, determining exemption status for sales professionals was fairly straightforward. The short and simple version is that "outside" sales persons who work primarily in the field (outside of the office) and who engage in selling maybe classified as exempt, while "inside" sales is virtually always non-exempt from the overtime provisions of the FLSA.  Sometimes where the distinction is not so clear, some sales persons can be classified as exempt under the administrative exemption of the FLSA, so long as the employees in question have significant discretion and independent judgement in their roles (it's more complicated than that, but this is Cliff Notes version).

First some background: Jon Hyman, in a post on his great Ohio Employer's Law Blog, calls the 33 page opinion (Novartis Wage and Hour Litigation) a must-read for any business that employs salespeople and pays them as exempt.  Here are the highlights of Jon's post:

Outside sales exemption: The (Novartis) sales reps do not qualify for the outside sales exemption because they do not actually sell any products. Instead, in their brief sales calls on physicians, they merely promote their employer's product. The physician cannot neither buy directly from the rep, not commit to making a purchase. In sum, where the employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot  lawfully even obtain from the physician a binding commitment to prescribe it, we conclude that … the employee has not in any sense … made a sale.

Administrative employee exemption: The sales reps do not qualify for the administrative employee exemption because their jobs lack the exercise of discretion and independent judgment. Specifically, the court pointed to the reps' lack of any role in planning marketing strategies or formulating the core messages delivered to doctors, inability to deviate from the promotional core messages or to answer any questions for which they have not been scripted, and quotas for doctors' visits, sales pitches, and promotional events.

At this point you might be thinking to yourself "So what? We're not a pharmaceutical company!"  If you leave it at that, you'll be missing some potentially important distinctions here.  For instance, what about "relationship selling," where the primary role is to get other companies/customers interested in your product or service, but the sales person doesn't really sell, directly at least? What about account managers, who often have the primary role to manage relationships with existing customers, but may do little or no direct selling? What about product "evangelists," that are common in software and other technology companies?

If you have exempt sales persons who may not explicitly meet the sales exemption test of the FLSA, or if you're not sure, you should contact your labor/employment attorney for a qualified opinion in light of this game-changing court decision.

Now that the economy and labor market has started to (weakly) recover, does this mean that it's back to business as usual for rewards professionals?  The short answer, in my opinion, is no.

Not that we won't be performing many of the same activities that we have for years, but ongoing trends, along with the devastating impact of the 2008-2009 recession, have combined to create the perfect storm for potential change in the ways we look at base pay management, variable pay, and qualitative or non-financial rewards.

Just as many economists feel the recession has led to some fundamental changes in consumer behavior, I believe that some fundamental changes in in the way that various forms of rewards are utilized are already underway.  For instance, a report done by Hewitt last year, predicted that over the next decade variable pay budgets will continue to rise (to 16% of payroll, up from about 12% today and half that back in the early 90s), while base pay increase or "merit" budgets will continue downward, from close to 4% prior to the recession, to about 2.5% to 3.0% today, and to about 2% in 2020. While no one knows if these specific numbers will hold up 10 years out, I believe they have nailed the general trends with their predictions.

Over the next decade employers will continue to endure painful benefits costs increases (healthcare reform or not, medical costs are rising out of control), crowding out potential spending on other rewards programs, especially for base pay increases.

Base pay is destined to be a serious pinch point for both employers and employees, as companies strive to keep fixed cost increases moderate, while employees lament the lack of pay growth. Between the long-term shift towards more variable pay, the cost squeeze created by ever-increasing healthcare costs, and the weak labor market (and predicted to be weak for some time), base pay has no where to go except barely up. Some pundits also see a change coming in the way merit pay is doled out.  For instance, see "Paying it Forward:Ideas Beyond the Traditional Merit Matrix" by Ann Bares via the Compensation Cafe.

To augment the lack of excitement at the base pay level, many savvy employers are paying more attention to qualitative rewards, i.e., rewards that are not based on monetary payouts, but more focused on addressing other "higher order" needs (in Maslow's Hierarchy of Needs), such as building a culture of appreciation and recognition, offering greater opportunities for training and skill development, offering greater work schedule flexibility and other work-life fit options, and in enhancing the overall culture of the organization in ways that are more employee friendly.

There are not going to be a lot of fixed dollars to throw around in the next few years, and so it will be incumbent on organizations and rewards professionals to make better and more creative uses of the various rewards alternatives available to them.  Motivating and retaining workers has never been "just about the money," but that concept will prove to be even more relevant in the 2010s.

Doug Sayed is principal at Applied HR Strategies, a Seattle area compensation consultancy, and lead author of the StrategicPay Series Base Pay Toolkit, a guide for helping non-compensation experts to develop their own strategic compensation programs.  Doug is a Certified Compensation Professional (CCP) with over 25 years of HR and compensation experience, and a Master's degree in HR management from The Ohio State University.

Thank you to my "guest posters" for sitting in while I was away!  I'm back, but will have a few more guest posts, because so many colleagues were nice enough to contribute.  Getting back to my own work though, temporarily at least, the following post is a from my recent post at the Compensation Cafe.

The days of near-guaranteed base pay increases and growing employer contributions to ever-increasing benefits costs are slowly (but surely) dwindling.

No, base pay isn't going away, nor are periodic pay increases, but the battle against the growth in fixed compensation costs (base pay, health care costs, etc.) is gaining strength, even as the economic recovery starts to take hold.

Most employers are willing to pay out increased compensation, but today much of those pay increase budget dollars are going into variable pay, which typically flexes with organizational performance and ability to pay. The trend toward increased variable pay has been going on for two decades, but it seems to have hit a "tipping point" in recent years, as organizations struggle to absorb a never-ending battle with health care cost increases (crowding out merit budgets in the process), while trying to get more "bang for their buck" with their compensation dollars.

While organizations try to keep a lid on fixed costs, more enlightened employers realize that there's more to the "attract, motivate and retain" equation than just base pay and benefit dollars. But before going on, let's look at some general reward trends over the last few decades, and how we ended up where we are at today.

• The 1970's and 1980's: plain-vanilla base pay and benefits; defined benefit (DB) pension plans were common in larger, manufacturing and/or unionized organizations. Variable pay is confined largely to executives and sometimes middle management.
• The 1990's: many employers add variable pay (or push variable pay into lower levels of the organization) and other reward elements into the mix, such as stock option programs. Many employers freeze or eliminate DB pension programs and retiree medical as just too costly to maintain. Health care cost sharing is increasingly pushed down to employees. The 401(K) is the new pension program.
• The 2000's: a greater movement towards "total rewards," including variable pay for the masses and a greater recognition of the need to pay more attention to qualitative vs. purely quantitative (dollar dominated) rewards. Employers continue efforts to contain fixed costs, especially in the form of sharing increased health care costs with the employee base.
• The 2010's: as we enter a new decade, we see a greater focus on comprehensive or "holistic" rewards, including a movement away from purely quantitative rewards to qualitative and work-life rewards. Qualitative rewards include career/job growth and development opportunities, increased focus on organization culture and communication, work flexibility options, work-life "fit"options, and  creating a culture of appreciation/recognition.

Decades ago, Herzberg's work on motivation and job enrichment theorized that that pay is a more of a "satisfier" (it can meet basic needs and satisfy, but cannot make employees "happy" about their employment).  Confirming this, many studies have shown that pay is generally not the reason employees leave organizations (unless pay is noticeably below what's available in the relevant labor market); it was considered more of a "hygiene" (in Herzberg's terminology) or satisfaction factor. I believe this is an accurate characterization of base pay's role in job satisfaction, even today.

In reality, it's how managers treat and manage their staff, and how leaders lead their organizations that has the greatest impact on retention, job satisfaction and the propensity to turnover.  This is where rewards are headed; not just dollars (there are so few to spread around these days), but with qualitative or psychological rewards that can help to engage and retain employees (or to dis-engage and repel workers when not provided, or provided poorly or disingenuously).

Qualitative or psychological rewards focus more on genuine management/leadership, honest communication and regard for employees; building a culture of respect and appreciation, providing honest and constructive performance feedback, offering career and professional development opportunities, offering work flexibility and work-life balance fit options.

With the limited merit budgets of today and (predicted) for the future, there is just not enough "oomph" in the dollars that employers can offer to assist too much with the critical ideal of "attract, motivate and retain." Variable pay will help, but most of the rest will have to come from other types of rewards.

It's time to start thinking beyond dollars...


Doug Sayed is principal at Applied HR Strategies, a Seattle-area compensation consultancy and author of the StrategicPay Series Base Pay Toolkit, and hands-on, "do-it-yourself" (DIY) guide to developing a strategic market-based compensation program, complete with dozens of pre-built tools and templates, ready for use.

The StratigicPay Blog's primary writer is on vacation for the next couple of weeks, but that won't prevent us from supplying you with some of the thought leaders in the field.  Today's guest post is from fellow Compensation Cafe blogger Chuck Csizmar. Chuck is one of the several great writers at the Cafe'.

Why Managers Don't Manage Pay

When an employee is promoted to their first manager's position, they are given the proverbial Keys to the Kingdom – your company.  They now have the authority to spend your company's money.  From hiring, to promotions, to salary reviews and equity adjustments they are now able to make the decisions that directly impact (increase) your labor costs.

However, most of these managers turn out to be, at best, well intentioned amateurs at the process of making pay decisions that are appropriate for the needs of the business.   Fresh from being anointed they often lack the basic internal education necessary to make business vs. emotional decisions – and their actions commit you and the company to costs that may not be in your company's best interests.

Actions taken by these managers not only increase direct costs, but often irritate other staff members as the circumstances become known, creating morale and internal equity problems at the same time.  The net result is usually a corresponding lack of engagement and ultimately separations by disenchanted employees. 
 
Note:  Most employees leave managers, not companies.  Thus actions do have consequences.  Likely this is not what you envisioned when you made that promotional decision. Now, how did (fill in the name of your company here) get themselves into this mess? First of all, no one really trains managers on how to properly attract and reward employees via base salaries and incentive pay.  A few anecdotal examples:

• Just because some bloke is a good "XYZ Operator" does not mean they will be an equally good "XYZ Manager".  The skill sets for success are dramatically different.
• How many managers understand your company's philosophy about pay?  Do you?  How many understand the workings (the what and the why) of the company's pay practices and methodology?  These are the folks responsible for spending 40% to 60% of your revenue in the form of employee pay, and even the most well-intentioned is prone to make mistakes.
• Managers want to be liked; they do not wish to pick favorites, do not want to discriminate on the basis of performance and definitely do not want to have their decisions challenged.  They would rather point a finger at HR and assign the blame to them for having to assess performance and distinguish one employee from the other.  Left to their own devices they would give everyone as much as they can.

If you were a high performing employee, would you like to work for this sort of Manager?  If you were coasting at work, barely putting your time in, would you want to work for this sort of Manager?  Which sort of employee do you think will eventually tire of being undervalued, and quit?   Leaving the Manager with a staff of . . . .  You get the picture.

Ineffective managers are always afraid that an unhappy employee will decide to quit, but that is usually a selfish thought.   Their prime concern is more often what your departure would mean to their deliverables, to their reputation as a manager.  Your departure is typically viewed as an inconvenience to them, not an avoidable loss for the company.  A reflection of this is when managers resist a transfer that is clearly in the employee's career interests.  The manager's concern is how that transfer affects their department – and whether their personal success becomes that much more difficult to attain.
 
Ineffective Managers can be a defensive lot, challenging attempts at reform.  Why?  Because of their fear that spotlighting reform action will demonstrate their ineffectiveness (make them look bad), and that is unacceptable.  Typically their advantage within the company is that the more ineffective the manager, the stronger their political connections.   And as senior management oftentimes surround themselves with those most agreeable to their own way of thinking, it's not surprising.

Assuming the company's willingness to make key decisions and the presence of the all-important support from senior management, companies can correct the problems that they've created.  They can:

• Select candidates for management positions on the basis of their skills / potential for actual management (dealing with people, managing projects, business-oriented, professional demeanor, etc.)
• Educate Managers in the philosophy and methodology of the company's pay programs, ensuring that this information is shared with their staff
• Construct job specifications that call for a Manager to manage, as a prime accountability, limiting or even eliminating the retention of individual contributor responsibilities.
• Measure and reward the performance of the Managers  primarily on the basis of how they have actually managed their employees, or on the performance of their unit
• Encourage Managers to develop the potential of their employees, to the point that a staff member being promoted / transferred upward is a mark of success for the Manager
• Ensure that procedural checks and balances are in place to ensure that pay decisions are reviewed by at least one higher level
• Hold Managers to an annual salary budget; let them develop the budget and monitor/adhere to it during the year

Consider the above as a checklist that can be used to test your company's vulnerability to wasted money, employee morale problems / turnover and avoidable cost increases. 
Would you be comfortable with how your own company would score?

My advice to clients is to face these issues straight on, to implement policies & procedures that save money without penalizing high performers or mistreating their employee base.  But the challenge will always remain, as there is an inherent reluctance on the part of many managers to make the tough decisions, because we do want to be liked, we do like to give good news, and we do not like to play judge and jury with an employee's career. But that behavior is not managing is it?

Pay increases in 2009 were at an all-time low, at least since good records have been kept on this type of data. In 2009, over 50% of companies either froze pay or worse, by far the highest pay pull-back/retrenchment numbers I have seen in my 25+ year career in HR and compensation.

2010 portends to be a bit better for employees, but employers are still keeping a pretty tight clamp on their purse strings, and understandably so, with economic recovery still looking a bit tepid.  Predictions are for pay increase budgets of about 2.7% in 2010, a vast improvement compared to an average 1.8% increase in 2009, by far the lowest year on record. Both of these data points are from a recently released Hewitt report.

Variable pay budgets (budgets for incentive or "bonus" programs) are expected to remain stable at about 12% for 2010. While the 2010 variable pay budgets are about in line with 2008 and 2009, the long-term trend has seen a slow but steady upward march, and we at the StrategicPay Series expect that trend to continue.  In 1990, corporate variable pay budgets were about 5% of payroll, and today they are more than double that, while merit pay budgets have been at historically low levels since the 2001 recession. 

Hewitt expects variable pay budgets to slowly continue upwards.  In a study released in the spring of 2009, Hewitt predicted  an average variable pay budget of 16% of payroll and a base pay increase pay budget of 2.0% in 2020.

While, of course, no one knows what's going to happen 10 years into the future, the predicted trends are clear: continued pressure on fixed-cost compensation increases (i.e. base pay), combined with a continued willingness to pay for performance, in the form of variable pay.  We agree.

Note: this is an updated version of my recent Compensation Cafe Post.

Amid all of the talk about motivation and incentives in the past few months, as HR and compensation influencers, we need pay attention to what we're paying for, why we are paying it (are we getting what we think we're paying for?), and in communicating this information throughout our organizations.

In their classic book "Pay People Right," Zingheim and Schuster argue that base pay should be pay for ongoing value, not for results. Each person brings to work their unique set of education/training, skills, experiences and talents, and base pay is to compensate for use the of skills and abilities that employees bring to work every day.

Zingheim and Schuster go on to say that variable pay (typically in the form of short-term cash incentives) should be used as pay for results. Using their model, we can use base pay to pay for what I call the employee's "toolkit" (all those skills, abilities, etc.), while reserving variable pay for the actual results achieved via a combination of the employee's abilities and efforts.

Although employee efforts are a key component of achieving desired outcomes, efforts do not always equal results, and so we should separate them from each other in terms of pay and rewards.

Efforts are critical though, especially those "discretionary efforts" that we as HR and rewards professionals seek out, and thus, while we probably shouldn't pay for them per se, we certainly can recognize, applaud and occasionally even celebrate these "above and beyond" efforts.

In the book "17 Rules for Successful Companies Use to Attract and Keep Top Talent" author David Russo states ("Rule #6") "applaud effort; reward contribution" and I couldn't agree more.  Efforts are critical, and worthy of recognition and applause, but not of pay per se.

If we pay for effort alone, in the absence of tangible results, we run the risk of creating rewards confusion (especially for those who actually achieve intended results) and possibly of mis-placed rewards expectations and/or feelings of entitlement ("I busted my butt on that project...").

Of course, we need to be clear and transparent about what we pay for and why; what base pay is for, and what variable pay/incentives reward. If we don't do that, many of our pay related programmatic efforts will be waisted, because people will not understand what they are paid for and how they can improve their own personal rewards system.

Doug Sayed is principal at Applied HR Strategies, a Seattle area compensation consultancy and author of the StrategicPay Series Base Pay Toolkit, a hands-on, "do-it-yourself" (DIY) guide to developing a strategic market-based compensation program, complete with dozens of pre-built tools and templates, ready for use.

WorldatWork Survey, January Update: Pay Cuts Not as Prevalent as Pay Freezes in 2009
 
January 19, 2010 – Washington, D.C. – In response to the sluggish economy, many corporations either froze or cut pay in 2009. Even as the economy starts showing signs of life, a majority plan to remain conservative when it comes to pay practices in 2010. The WorldatWork 2009-10 Salary Budget Survey, January 2010 Update (fielded in October 2009), found that 52% of U.S. employers froze pay for some or all employees in the 2009 recession, while 13% cut pay.
 
Will employees see their pay restored in 2010? At least 22% of organizations that froze pay in 2009 are planning to prolong the freeze into 2010, while 54% plan to resume normal pay activities this year. More than a third said they were in a recession (in October) and were not in a position to unfreeze pay.

 Of those organizations that cut pay, 37% said they remained in a recession and were not yet considering recovery actions; 29% planned to restore pay in full, while 15% said the pay cuts were permanent.
 
"Employers are taking a 'wait and see' stance when it comes to returning to normal pay practice," said Jim Stoeckmann, CCP, compensation practice leader at WorldatWork. "There are risks both ways. Moving too fast in restoring salaries and merit budgets leaves employers vulnerable if the recovery fails to materialize. Moving too slowly creates the risk of turnover as employees look for a better opportunity with another company. Even with jobs scarce, there are always opportunities for employees with the right skill set."
 
As salary budgets remain tight and employee satisfaction low, organizations are turning to other ways to motivate and reward employees. Employers are focused on providing or enhancing career development opportunities (33%), non-cash rewards and recognition (28%), leadership training on employee motivation (21%), flexibility options (20%), monetary rewards for high performers (19%), and monetary rewards for mission-critical talent (15%).
 
"With lower than normal employee satisfaction levels, it is crucial for employers to center the employee value proposition on the entire total rewards package," said Alison Avalos, research manager for WorldatWork. "Employers can cultivate employee loyalty by highlighting non-cash rewards, particularly for key employees. These programs validate the employee's time, effort and talent, even in the absence of salary increases."
 
About the Survey:
The WorldatWork 2009-10 Salary Budget Survey, January 2010 Update was fielded in October 2009. Survey respondents are WorldatWork members employed in the HR, compensation and benefits departments of mostly large U.S. companies. N = 875.

Good riddance to 2009! It's onto 2010 and beyond...

For many of us, the second half of 2008 and most of 2009 was like a bad bad dream that was all too real: massive layoffs/job losses (over 6 million) and skimpy (or no) pay increases for those that survived the crunch; terrible business conditions and plummeting sales and profits (if you were lucky enough to have profits!); tapped out consumers and losses on real estate and retirement holdings, to name a just few fond memories of the past 18 months.

Indeed, let's move on. Here's a brief summary of the current outlook for 2010 for us HR and compensation professionals, with links to additional information.

Employment and Hiring

The most recent national employment data is encouraging, and indicates we are in a bottoming phase, if not getting ready for a slight rebound in early 2010 (don't expect a barn-burner turnaround anytime soon).  Job losses in November 2009 were only 11,000 nationally, which is by far the lowest total in well over a year. The U.S. unemployment rate dropped from 10.2% to 10.0%, and 36 states reported slight to moderate drops in their unemployment rates for November as well.

The recently released Manpower Employment Outlook Survey also reveals some encouraging trends and data.  While 12% of employers expect a decrease in employment in the 1st quarter of 2010, an equal percentage expect an increase.  While this may seem less than inspiring news, when the data is seasonally adjusted for typical seasonal employment patterns, there is a net 6% increase in expected hiring over historical employment trends for the 1st quarter.

When compared to a year ago, employers in the Western U.S. are the most confident, but all areas show improved employment outlooks. Using the seasonally adjusted data, all regions anticipate moderate quarter-over-quarter increases in employment levels.

Bottom line, the outlook is from flat to improving in the first quarter, depending on who you ask, but compared to the past 18 months, this is a huge improvement, and should provide encouragement to job seekers and businesses alike.

For more information on the labor market, see my recent post at the Compensation Cafe.

Base Pay Compensation Trends

While merit budgets for 2010 will be near to historical lows (2.5% to 3.0% in most studies we've reviewed), at least there will be pay increase budgets for the vast majority of employers, unlike late in 2008 and in 2009. (See earlier posts from this blog for more specific information).

2009 merit budgets (most commonly implemented in late 2008 or in the first quarter of 2009) were slashed or eliminated by large numbers of employers.  Depending on the study, 25% or more of employers had 0% pay increase budgets for 2009, and many actually cut pay.  Well over three-quarters of all employers reduced their original planned merit budgets for 2009, but we do not think we will see anything close this type of wholesale budget-slashing in 2010.  Recently completed studies (Mercer, Hewitt, Culpepper, etc.) suggest only about 10% of employers are planning 0% budgets or pay reductions for 2010, and we expect these percentages to drop further, assuming the nascent recovery continues.

Incentive Compensation Trends

Incentive compensation/variable pay budgets (but not necessarily payouts) are holding strong, despite the weak economy and labor markets.  Variable pay is getting more and more ingrained into the foundation of compensation plans in the U.S. (and internationally too, just more  slowly than here). Hewitt, who does a major survey of variable pay trends each year, reports that variable pay budgets dropped a very modest 0.2% (from 12% of payroll to 11.8%) in their latest research on the topic.

Despite this minor drop, the long-term trend toward increased variable pay budgets remains intact.

Executive Compensation in 2010

Executive compensation is the fastest moving target in the world of compensation.  From rapidly evolving reporting and disclosure requirements, to increased government intervention in executive pay, to shareholder activism concerning perceived excesses in executive compensation, it's been a wild past few years for anyone who follows this topic, and the pace of change isn't likely to slow down anytime soon.

The changes are so numerous (and in some instance convoluted) that we won't even attempt to describe them here, but here are a few thoughts as to where we are likely heading:

• New and increased executive compensation disclosure requirements for public companies (see "A Holiday Present from the SEC - New Proxy Disclosure Rules!"  from our friend William Parsons at CompWiser).
• Greater intervention/intrusion by the Federal Government into the executive compensation arena in general (already a very heavily regulated area).
• A greater focus on pay/performance linkages and increased transparency for executive compensation plans.
• An expectaion from various stakeholders (shareholders, unions, shareholder advisory groups, etc.) to see reduced excesses in executive compensation (expensive perquisites, tax gross-ups, huge "parachute" payouts, etc.).  This is already starting to happen, but this one has a ways to go still.

Longer-Term Compensation and Related Trends

• Continued historically low merit budgets. Don't expect a surge back to more normalized merit budgets, even after the labor market gets back to a more healthy supply/demand balance. Some are predicting a long period of historically low merit budgets, and we largely agree, as we see a greater willingness of companies to invest in variable pay than increasing their fixed costs via base pay increases.
• An on-going upward bias towards increasing variable pay budgets, in lieu of larger merit budget pools.
• Pay for performance (real pay for performance) will continue to increase in prevalence and intensity, and will become the the new "merit pay."  Only this time, it will be delivered via various incentive vehicles, rather than via a slight up-tick the annual base pay increase. Follow our friend Paul Hebert at Incentive Intelligence for daily lessons on all things incentive and motivation related.
• Taking better care of people psychologically (not just financially) will become more in vogue, and for good reason: most people desire more feedback and appreciation, and respond positively to it. Increased communication and various forms of recognition can help to build and maintain a healthier workplace. To get you thinking more about recognition and related concepts, see "12 Gifts for Cash-Short, Recession-Weary Workplaces" and "All I Want for Christmas" plus two recent recognition postings here at the StrategicPay Blog from our friend Theresa Chambers at Recognition Works.

Well that's about it for now.  Hopefully you haven't fallen asleep while reading this. We at the StrategicPay Series will continue to keep you informed of the latest information, thoughts and research in 2010.

Until then, here is wishing everyone a happy and safe New Years, and great start to 2010!!

As a compensation professional who tries his best to stay up on what's happening on the business, HR and compensation world, I must say that I'm astonished at how much information and advice is available, especially on-line.  There is an amazing array of information for HR and compensation professionals on the web, but but it requires a fair amount of sifting through the mass of information to find the really valuable pieces of information out there.

One blog posting I read this morning while catching up on the latest happenings really got me going. The post, "Six Pay Raise Alternatives" presents some good issues and ideas to think about, but also floats a fair amount of questionable ideas and advice.  Briefly paraphrasing, here are six pay raise alternatives that were suggested:

1. Pass into your employees some of the perks you as a manager receive. The primary examples used were sporting and concert tickets, such as "a $150 ticket to a Billy Joel concert goes a long way, and provides maximum ROI." First of all, while this would be a nice firm of recognition, it's not a credible pay raise alternative.  Second, if the company is following the IRS code (always a good idea!), this example would create a taxable event for the employee, but I digress...
2. Treat your employee to a luxury meal. Certainly a nice gesture, and one that many employees would appreciate, but this is another form of recognition that should be an ongoing part of being a good manager, by recognizing and expressing appreciation for your employees and their performance. 
3. "Give cell phone breaks." Another nice gesture, but something employers should already be assisting with or providing for employees who are expected to be available or reachable most hours of the day.  This is a mild perk/benefit, but certainly not something virtually any employee would consider to an alternative or substitute for a merit-based pay increase, even a small one (which most of them are today).
4. "Award your employee a new title."  Yikes!  As compensation advisor that spends a good chunk of his time trying to untangle the messes and expectations that lie behind the indiscriminate awarding of job titles, this is really unsound advice (and I'm struggling to stay diplomatic).  Anyone who tells you that job titles are "free" or don't change expecations doesn't understand what they are talking about, because inflated or "vanity" titles almost inexorably lead to internal equity concerns, revised and/or unrealistic pay expectations, etc.
5. "Offer flexible schedule or telecommuting."  Yea, something we can agree on, but not really a pay increase alternative, although this would be considered is a valuable benefit to some.  Many employees appreciate the opportunity to save on commuting time and related time and cost elements of going into the office every day.  This benefit should be reserved for highly motivated self-starters that don't need a lot of prodding or supervision (in other words, the employees you should fight to give a raise to, and to ensure their on-going pay competitiveness).
6. Let your employees come up with their own perk, and if it's a viable option, implement it immediately.  This option has appeal on it's face, but be aware of potential perceptions of internal equity issues or favoritism.  I'm not opposed to individualized rewards and recognition, but most employees are are keenly aware of what they observe around them, and it they sniff "unearned" or obviously inequitable rewards, you as a manger will will suffer from other morale and internal equity concerns that can challenge your credibility and effectiveness.

There are actually some really good nuggets embedded in here: recognition is a good thing, but it's not something that should be done only on special occasions.  It's a part of being a good manager and component of being an employer of choice. Other nuggets: people really appreciate being appreciated, and we recommend showing appreciation as a habit, and not something done on an infrequent or special-occasion basis.

In short, there is a lot of information and advice out there, but be discriminating and choose carefully, because when it comes to base pay and other forms of rewards and recognition, there can be negative or unintended consequences of poorly designed efforts and programs.

For instance, if you're looking to implement a new recognition or incentive program, or a strategy to address pay issues while keeping down fixed cost increases, talk with a specialist or at least someone who truly understands the issues, alternatives and consequences of of various strategies and approaches.  Too much is at stake to to take the chance of implementing poorly-designed programs or un-vetted ideas without considering the consequences.

OK, I'm getting off the soapbox!