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February 11, 2011
Compensation Struggles Back Toward Good Health

Here’s a hot topic: how to thaw out pay freezes. The irony is not lost on Paul R. Dorf of Compensation Resources, Inc. ( who says the thaw is happening slowly, almost like a glacier in reverse. “I’ve seen a couple of sources showing the pay increase budget for 2010, on average, was 2.3% or 2.4%,” he says. “The projection for 2011 is 2.8% or 2.9%, so only a .5% increase.”

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His prediction doesn’t necessarily mean more money for everyone who suffered a takeaway in the last few years, though. “I think what we’re going to see is that where there were takeaways or freezes, the money is going to be given back, but not across the board,” he says. “Companies are doing it on a much more discrete basis, targeted to those employees who have really shown that they are contributors to the company overall.”

Some companies are aware that they need to do something for long-suffering employees, who have endured the cutbacks and pay freezes so common in the last few years. As the thaw continues, they don’t want to be caught losing employees because they failed to reward that patience and loyalty. Other companies, though, don’t see the need. They believe that their low turnover indicates employees are happy with the company and with their jobs. Dorf sees that as a mistake.

“It’s a phenomenon that I think is interesting,” he says. “When you talk to some companies about turnover, they are unfortunately taking their low turnover rate as a sign that they have done something right. They shouldn’t. In most cases, the reason turnover has been low is that people are afraid to go look for a job, to move on.

“There have been a number of studies that asked people if they were happy in their jobs. People said ‘No, and when the market improves I plan to look for another job.’ That is fairly widespread. What that tells me is the companies which are telling me they have done things right and that’s why their turnover is low are just totally off-base. They are fooling themselves. True, it could be a coincidence, and their people may love the company, but it’s more likely that people are afraid.”

4 Steps to A Sensible Compensation System

If you recognize that employees may be impatient as they wait for the Big Thaw, there are some things you can do to encourage them to stick with you. Step One toward moving from a ‘duck and cover’ position back to the normal, ongoing mode is to develop your corporate compensation philosophy, says Dorf. “Have a heart-to-heart talk with senior managers and owners of the company. Decide what your philosophy is on how you are going to pay your people. Ask, ‘are we willing to put in a pay-for-performance program that will allow our people to make the same or more money, with part of it based on performance?’

“There are very few industries now that are not paying some sort of variable compensation. It serves a couple of purposes. One is that you only pay if the results are there. If the employee doesn’t get the results, he makes less money.”

The second purpose of variable compensation is to encourage employees to strive for better results. Dorf illustrates the point using a word picture of children on a carousel. “Variable pay has a motivational effect, because it allows employees to reach for that brass ring. The kids on the carousel are all hanging on desperately with their left hands to the reins of their painted horse, while they’re leaning out to try to get the brass ring with their right hands. They’re stretching for it; they’re being more aggressive in whatever their work habits are in order to make more money.”

Once you’ve decided upon the compensation philosophy, Step Two is creating a compensation strategy. Dorf explains, “Determine a strategy from an organizational standpoint. Who are you going to compete against in the marketplace? Are you competing against XYZ company, or companies in your same industry? Remember that you’re competing for bodies, not necessarily for customers.”

Banking institutions and credit unions, for example, at times do not accept that they are competing for the same employees because they view their niche in the financial services market as different. “That may be true for some positions,” says Dorf, “but the reality is that the majority of their employees are tellers, platform personnel, clerical folks, and they each need those people. They are the same person, whether they are working in a bank, a credit union or a Walmart. You really need to look beyond the name of the organization and ask yourself, ‘Where do we get our employees, and where do we lose them?’ That’s who you’re competing with.”

When to Call the Experts

Part of the strategy is identifying where your company is, in terms of compensation, in the marketplace. “That’s not as easy to do as it used to be,” says Dorf. “There are a fairly good number of compensation surveys out there, but the problem is that not everybody participates. Many companies cut back and didn’t participate, as a cost-saving measure, so there is less concrete data available than we would like. Professionals like us are trying to figure out what jobs are really worth in the marketplace, and it can be very complex.

For example, in the Washington D.C. market, Georgetown always has an additional 10% cost for labor. Their metro system doesn’t go to Georgetown, so people have to take the bus (which takes more time) or drive their own car (which means paying for parking). It makes for higher job pricing. That kind of thing happens, and that’s what we, as professionals, are supposed to be figuring out.”

Step Three is determining the elements of the compensation program. “You need to determine if you have anomalies or shortfalls. Are there people who are overpaid or underpaid? Now you need a strategy on how you want to implement whatever changes you plan to make. And Step Four is very important: make sure you have a good performance evaluation system in place, a way you can compare employees against the job’s requirements and skill sets and accomplishments, and see whether or not they should get more money.”

He cautions, though, that you have to be consistent in how you do that to ensure you’re treating everybody fairly. “The justification for pay increases can’t be subjective; make sure you are basing performance evaluations on something real. Keep your better people and reward them properly. At the same time, the people you can afford to let go, you should let go.”

This becomes particularly important in the current climate, where companies are talking about how to restore pay cuts. As Dorf mentioned earlier, small pay increase budgets are likely to mean increases that are much more targeted. But he cautions companies that they must make the increases in a strategic manner, based on real data. “If the money you’re giving out is going disproportionately to younger people, you may open yourself up to a discrimination case,” he says. “I have a class action situation going right now, in which the company brought in new people at higher levels than the people who were already in the jobs. As you might suspect, the people who were in the jobs were older; all over 40 and some over 60. It looks pretty blatantly like there was some discrimination.”

“There is a growing awareness from companies that employees have been patient, and it’s time to do something for them,” says Dorf. But as you think about what that might be, remember the four-step process: philosophy, strategy, elements, and performance evaluation. Then, you can protect yourself, your business, and your important employee relationships.

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