Effective Compensation Program Design

Effective Compensation Program Design

HR& BENEFITS March/April 2014 Retirement Income Solutions with Guaranteed Minimum Withdrawal Benefits RETIREMENT Retirement income solutions (RIS) are retirement plan investment options designed to generate a post-retirement income stream from participant-accumulated retirement savings, and include guarantees of minimum withdrawal amounts for life. These products, generically known as guaranteed minimum withdrawal benefit (GMWB) programs, intend to address the very real issue of retirees exhausting their savings during their lifetime. These products incorporate benefits of equity investing (i.e., target-date funds) with annuity income features and minimum withdrawal guarantees for an added fee (presently 50–100 basis points depending on guarantee provisions). RIS/GMWBs are currently experiencing dynamic product development and are attracting significant interest in the press and among plan sponsors. Effective Compensation As these products continue to evolve and become more accessible, this concept is Program Design also receiving support from Washington HUMAN RESOURCES regulators who are concerned about the issue of retirement readiness of the Compensation should always be an important term to use when employees are simply population in general. Phyllis Borzi, assistant consideration for organizations. After all, unhappy about their jobs in general. In other secretary of the Employee Benefits Security remaining competitively positioned in the cases, providing “compensation” as a stated Administration (the enforcement arm of the marketplace for talent plays a central role reason for resigning from the organization is Department of Labor [DOL]), is stimulating a in the retention of top performers. However, more politically acceptable than reporting “I national dialogue on the topic of participant it is a particularly compelling concern for can’t stand my supervisor.” retirement readiness and potential solutions organizations at this point in time, as the to the well-documented problem that few Therefore, while it is important to take seriously economy continues to improve and many participants are on track for successful employee complaints, concerns and turnover businesses resume their plans for growth that may be related to compensation issues, and/or expansion to new markets. Continued on Page 3 it is perhaps more important to ensure Recognizing that a compensation program that we analyze and properly examine the is potentially ineffective can be relatively organization’s compensation system and how straightforward. For example, current it compares to compensation offerings in the employees may voice dissatisfaction with their marketplace in which we compete for human base salary or bonus, sales staff may complain capital. The following are some key points to Need more information? that commissions do not adequately reward remember before we begin the development For information on any their results or resigning employees may and/or analysis of an organization’s report in exit surveys that they are leaving the compensation system: of the articles in this company for higher wages elsewhere. Consider the current culture and the culture newsletter, please contact However, we should remain mindful that not you aim to create. Is the organizational culture your benefits advisor. all employee complaints or reports about a performance-oriented or entitlement-oriented inadequate or inequitable compensation are, at one? How will we create a compensation their core, actual compensation problems. In program that attracts, motivates and many cases, “compensation” is a convenient retains top-flight performers? How will our Continued on Page 2 HR& BENEFITS 2 “Effective Compensation Program Design” continued from Page 1 compensation system drive the achievement of Before establishing a compensation system, Perform a competitive analysis. Once the our business and financial objectives? the organization must define the appropriate organization has considered its unique culture, geographical area from which it recruits decided its market pay policy and determined All of these questions should be considered each individual position. the relevant marketplace for labor, then it should and resolved before developing a new benchmark compensation for every position compensation system or analyzing the and repeat the process in regular intervals every current one. Effectively designing a new one to two years. Decide where the organization wants or revised compensation This complex analysis requires the use to position itself in the marketplace. The of survey data (commercially available to organization must decide on a pay policy, system requires the HR/compensation practitioners) to compare which illustrates how it intends to react to base pay, bonus/incentive/commissions pay market changes and pressures. organization to first invest and total compensation of each position with In doing so, the organization establishes time in considering and that of the same or similar positions in other whether it will: analyzing important internal organizations in the relevant labor market. This process is undertaken to determine external • Lead the market by paying employees and external factors. (marketplace) equity. above-market wages A separate analysis may also be completed • Match/follow the market by paying However, the result is a to determine internal equity for each position. employees comparable marketplace rates compensation strategy This process involves the hierarchical ranking • Lag the market by paying employees of all positions to determine their relative worth below-marketplace wages for their and program that can in the organization. The ranking process is respective jobs be more effective in undertaken to ensure that each position is compensated according to the value of its Organizations that pay above-market rates recruiting, motivating contributions (both tangible and intangible) often do so to attain or retain marketplace to the organization. It can also be utilized dominance, or to secure and retain the “best” and retaining exceptional to determine if individual employees within talent available. talent, and increasing a particular position/job classification are Those that pay below-market rates may do compensated equitably as compared to one so because of an overly abundant supply of organizational performance, another, given each incumbent’s education, labor in the market. However, more often, productivity and profits. experience and work history. these organizations pay lower wages out At the completion of these efforts, the of necessity — they simply cannot afford organization has sufficient information to build a marketplace pay rates and/or the organization competitive and equitable base compensation itself is in a period of decline/demise. • Revenue and size: The organization’s revenue and number of employees grid, including pay grades and pay ranges, Most organizations choose to take neither a are important factors as well. Larger or salary bands, depending on its approach. leading nor lagging role with respect to wages, organizations with healthy revenues are It also presents a starting point for designing and instead pay comparably with that of other generally more willing and able to pay bonus/incentive and commissions plans for employers in the relevant labor market. employees competitive wages, while smaller some or all positions. Determine the relevant marketplace for organizations with fewer resources may Effectively designing a new or revised labor. Regardless of where the organization be less so. This is not always the situation, compensation system requires the organization positions itself in the labor market, it must however, as in the case of a large employer to first invest time in considering and determine the relevant marketplace in which that is in a period of decline/demise, or analyzing important internal and external it competes for labor. This is not necessarily a smaller employer that is in a period factors. However, the result is a compensation the same marketplace as the one in which of rapid growth. strategy and program that can be more the organization does business or competes For purposes of defining the relevant labor effective in recruiting, motivating and retaining for customers. market, though, we generally choose exceptional talent, and increasing organizational Several factors are involved in determining the to compare the organization to those of performance, productivity and profits. relevant labor market, such as: similar size with respect to revenues and To learn more, look for webinars offered by NFP HR number of employees. Services. These programs offer a comprehensive • Geographical location(s): Where does the • Industry type: The types of industry or look at HR topics and include best practices for organization operate? From where do we managers. As part of our total partnership offering, industries in which the organization operates recruit employees? From what area(s) do NFP HR Services extends a wide range of human candidates come to us for employment? and in which it competes for talent are also resources solutions to our clients, through our network significant factors in determining the relevant of highly capable, senior-level consultants. We offer One organization may recruit in the only labor market. Declining industries, such as customized, solution-oriented consulting for all of your metropolitan area in which it operates. manufacturing or railroads, generally pay less

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