Market Leadership & Pay (Part 3)
By James T. Stodd, SPHR, SHRM-SCP
September 1, 2015
In Part 1 of this brief series on Market Leadership, the point was made that the most important thing employers should do is make sure they understand the compensation practices within their market, as well as their position within the market. The remainder of Parts 1 & 2 explored various data sources available for assessing practices and competitive position, and did so in fairly broad categories including government data, proprietary sources (including online data warehouses), as well as the data potentially available through professional and trade organizations. Now that we’ve examined the ins and outs of data sources, the remainder of this message will focus on what an aspiring Market Leader needs to do with the data.
From a total rewards perspective, the competitive points of comparison can generally be divided into four categories, including:
1. Base Pay/Salary
2. Normal Progression Through the Salary Range (i.e., the rate and amount of salary increases)
3. Total Cash Compensation (i.e., base pay plus bonuses, variable pay or other contingent pay)
4. Employee Benefits
The first three can generally be addressed through the data sources discussed earlier, and information about employee benefits is often available from the same sources or other published survey reports.
Employers can compete on each and every one of these points of comparison. In so doing, they may choose to “lag” the market in order to keep costs low, adopt and maintain a “compete” position by providing fairly typical or average pay practices that keep them in the game, or commit to a “lead” position which will secure them an advantage in attracting and retaining talent. But should we lead in all categories, a few key categories, or just one?
Clearly, any employer who takes the approach of leading in each of these categories would be able to claim they are the undisputed Market Leader, and claim the benefits that come with such status. However, I know of few organizations that are in such a position. And even when possible, prudence might require a very compelling business case to back-up market leadership in each and every category. For most organizations, a more practical approach is to establish itself as Market Leader on one or two of the above points of comparison, and to do so for those categories they feel are most advantageous, given practices within their competitive environment.
Being the Market Leader in any of the categories will always add to “fixed cost,” except one…that is leading on the basis of “total cash” compensation. Employers can do this by supplementing base pay/salary programs with additional cash compensation contingent upon affordability, as well as meeting specified business objectives. Moreover, in today’s world where increases in salaries have been, and are expected to be, quite limited, winning through “total cash” compensation seems to be a very prudent alternative. In fact, studies show contingency pay programs are occurring with increasing frequency, and it is estimated that between 87 and 93 percent of exempt employees will receive some form of contingency pay during the next year.(1) No doubt, contingency pay programs will also be on the rise with respect to nonexempt positions.
In order to effectively support a “total cash” compensation strategy, contingent and variable pay programs need to be well designed and meet the following objectives:
1. Affordability: Well designed plans always incorporate “trigger mechanisms” to ensure the employer has met stated financial objectives, and can comfortably afford the program before rewards are allocated.
2. Objectivity: Rewards are paid in exchange for meeting specified outcomes, objectives or results beneficial to the business, versus subjective evaluations of the employee’s value.
3. Immediacy: Psychologists have always maintained that rewards are most effective when the reward closely follows the desired behavior, or attainment of the desired outcome. Unlike traditional salary increases that are provided annually, contingency pay programs can be set-up to provide rewards on a weekly, monthly, or quarterly basis in order to maximize reward effectiveness. In fact, the payment of quarterly bonuses is proving to be quite common for retail, restaurant, manufacturing and sales jobs.(2) The key is to tie the frequency of the incentive payment to the shortest time interval fully supported by the performance metrics appropriate for the job.
4. Perceived Equity: Since well designed contingency pay programs reward on the basis of either individual or group accomplishment, there is no need for using a forced ranking system, or otherwise grading employees against each other. As such, these programs tend to be seen as more equitable, and to encourage collaboration and teamwork, not internal competition.
5. Instrumentality: Good variable pay programs positively affect employee motivation and retention because employees generally believe their performance has a much greater influence over the size of their bonus, than it does over the size of their salary increase.
Through the use of well designed contingency pay programs, even employers that choose to “lag” the market with respect to wages and salaries can be Market Leaders and enjoy an advantageous position when it comes to “total cash” compensation. And, they can do so without driving up fixed costs, thereby maintaining flexibility and ensuring their overall operating costs stay at levels necessary for them to compete effectively.
Finally, whatever approach an employer chooses, they need to have a stated compensation philosophy that is part of their employer brand, ensure that philosophy is shared with both employees and prospects, and then stick to it! For without appropriate communication, employers may not truly realize the full potential of their Market Leader position.
1 Miller, Stephen; Short-Term Incentives Are Playing Larger Retention Role, SHRM, August 11, 2015. http://www.shrm.org/hrdisciplines/compensation/articles/pages/incentives-retention.aspx
2 Miller, Stephen, Flat Pay Raises Spur Variable Rewards, New Metrics, SHRM, August 27, 2015 http://www.shrm.org/hrdisciplines/compensation/articles/pages/variable-pay-trends.aspx