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Compensation and Big Data – The Targeted Merit Budget

Big Data Merit Pay BudgetBig Data is delivering a more intelligent approach to merit budgets, but with a caveat.

Big Data is just that, Big and general, and far from perfect.

At one time or another, we’ve all been victims of computer algorithms that judge us unworthy of credit, or direct marketing to us based on algorithms that really don’t apply.

The same can happen if we set our merit budgets—using analytics– at the granular level. That’s why it’s important, once you’re using more Big Data, to leave some room for manager judgment.

 

Compensation and Big Data – Bringing Science to Pay

It’s a common belief in HR that compensation is both art and science. With the introduction of Big Data and data visualization, the art portion is becoming a much smaller part of the equation. This trend will profoundly impact the comp analyst’s job.

Say Goodbye to One Size Fits All

Here’s how merit budget presentations used to go:

“OK, after all of this beautiful data we’ve shown you, we recommend a merit budget of 3.25% across the board.”

Umm, no. You can no longer spread merit budgets evenly with a “peanut butter” tactic. The emerging focus on analytics and big data, along with more sophisticated technology, means that multiple solutions for merit budgets and other compensation elements will become the norm.

Technology is making it progressively easier to use analytics to evaluate relationships in your external and internal data. You’ll finally be able to confirm or disprove long held beliefs about the interaction of pay with other factors. One of the inevitable results of all of this will be merit budgets that vary significantly across the organization.

Takeaway: Don’t stop at a beautiful, intuitive presentation of data and conclusions. Follow up with targeted recommendations that make use of those conclusions.

Be Smart in How You Use Your Compensation Research

Most compensation plans do not give a manager a higher merit budget just because s/he has a performance distribution skewed toward higher ratings. In fact, you’re probably chuckling at the very idea. We don’t trust the managers not to manipulate the system.

But, what if you had other measures of performance that could not be so easily manipulated and you knew they positively influenced performance?

Would you use them in the creation of merit budgets? With the advent of big data analysis, that situation is very likely to arise.

If you found, for example, that merit increase size influences turnover among high-performing employees with five to ten years of experience, would you be willing to give managers of those employees a higher merit budget?

And, just as important, give less to the managers whose people were not in that category?

 

A Simple Compensation Example

Take the simple example of displaying the position to market of different job families. If you present the data in a bar chart, before and after the “all for one” merit budget, the chart will actually change very little.

The jobs significantly below market will stay significantly below market. Internal relationships among jobs will remain the same.

 

Current Position to Market

(PTM) By Job Family


PTM After “All For One” Merit Budget


PTM After Targeted Merit Budget
(Targeted by Job Family)

 

 

Merit based on performance ratings will help move salaries faster for the top performers, but the difference is often so small that it really doesn’t affect the outcome.

Takeaway: Let the data tell you the differences and use that information to develop a targeted merit budget to better align your PTM.

Why San Francisco Salaries are Higher than Other Cities (and it’s not just the Cost of Living) – The Power of Geographic Differentials

What are Geographic Differentials?

Geographic differentials are market-driven pay variations between locations.

Companies use these differences when pricing the same job in different geographic markets. The objective is to control costs where it is not necessary to pay at national levels, or to ensure adequate pay in areas where the market is much higher than the national average.

Now you might think that living in San Francisco, one of the more expensive cities in the U.S., would naturally have higher salaries because of the cost of living alone.

In spite of what many think, it is not an adjustment based on cost of living.

Salary Geographic Differentials

Geographic differentials are usually expressed as a

percentage that’s applied to a national market rate.

For example, a job with a median national salary of $60,000 might pay twenty percent (120%) more, or $72,000, in San Francisco, but ten percent less, or $54,000, in Jackson, Mississippi.

How are Geographic Differentials  calculated?

Geographic differentials are expressed as a percent of the base-line data point.

Example:  

If research shows that a geographic location pays, on average, 90% of the national average, or in other words 10 percent less than the national average:

  • Plus/Minus Geo Diff: -10%\
  • Geo Diff Ratio:    90%

Note:  You will find compensation professionals use the same term for both calculations, depending on their original training.

Ensure that your group is consistent in using this term. For purposes of example, we are going to use the Geographic Differential ratio.

Calculation of Market Rates

Some companies adjust their market data for geographic differences before reporting it to management or using it to develop their compensation program.

(Of course, this would not be appropriate for market data that is already adjusted for geographic differences, such as “by region” cuts of the data).

Example:

National Salary Range Example

Salary structure differences

This is one of the most commonly used methods to address geographic differentials.

  • Compensation professionals create a “core” range, based on their headquarters location or a national average, and then create structures for each geographic region starting with the core range points.
  • This recognizes differences in average pay levels for each location, allowing you to manage different control points, or slot jobs up or down through salary grades on the basis of local market data.
  • Usually, the different geographic locations are grouped into salary areas or plans and ranges created for each grouping.

Example:

Salary Range Geographic Differnetials

 

Individual pay adjustments and differentials

Companies typically increase the pay for individuals when they move to a location that demands higher rates of pay. It is rare to go the other direction adjusting pay downward when someone goes to a lower pay location.

Example:

Mary H. is transferred from her job in Buffalo, New York to the same job in New York City.

The company has only one salary range for this job, which is closer to Buffalo pay rates than those in New York City. In order to make up for the difference in pay levels between the two locations, Mary is given a 10% raise to go to New York City.

(Typically, Mary is not asked to take a salary reduction if she returns to Buffalo, unless it’s made clear in the original move).

 

Temporary pay adjustments or re-assignment bonuses

These are typically used when an employee is on assignment in a higher wage area. If the change is made to the employee’s salary, the wage adjustment will continue until the employee is re-assigned, returns to the prior job or transfers to another location.

Example:

Mary H. from the above example receives a 10% increase in pay while she is on assignment in New York City. When she returns to  Buffalo, her pay is reduced.

Supplemental payments

Supplemental payments are often used when an employee is on temporary assignment in a higher paying geographic area.

Supplemental payments differ from temporary pay adjustments in that supplemental payments are usually used in very short assignments (A few days to a few weeks) and provided in one or two payments rather than a temporary salary increase.

What should you consider when choosing a geographic differential methodology?

  • Are you recruiting nationally or locally for each job or job grouping? National averages may still work for you in the former case.
  • If you’re creating your own geographic differentials, are there industry differences that may account for some of the differences you’re seeing in your data?  The industry difference may have originated from a survey whose participants are from one or two key industries only.
  • Do they apply to non-exempt, lower paid jobs?
  • Or are there actual differences for higher paid positions from different cities?

How are differentials  used? For creating ranges?  Or applying to market data?

They’re used both ways, based on a variety of different circumstances. Much depends on your company’s compensation philosophy, history, politics or, sometimes, whim.

Where can you obtain Geographic Differential market data?

There are two ways to obtain the differential from external resources. You can calculate the differentials based on the survey data you have for various geographic regions…or you can use formulas provided by one of the big consulting firms such as ERI, Towers Watson or Mercer.

It’s better not to rely on government created tables (Bureau of Labor Statistics, etc) because they have other factors built in that can exaggerate the differences, and the data is often too old by the time it’s published.

Making Geographically Differentiated Pay Equal – Begin with a Sound Methodology

The basic principle you need to work from is that employees expect equal pay for equal work. Geographically differentiated pay can still be equal, but you need a sound methodology to back it up. Meantime, subjective arguments can be thrown at you from managers with their own agendas.

Compensation professionals have heard managers argue it both ways:

“I must pay more in rural locations to attract the good people from the metro areas”

vs.

“I must pay more in large metro areas because the competition is stiffer for talent”

This latter argument usually wins the day in a contest of wills. However, the better handle you have on your geographic differential statistics, the more you can keep your organization’s policies on track with the real world, based on real numbers.

Watch Your Words with Geographic Differentials

Be careful when naming the different geographic groupings — use non-offensive language. Remember that status and ego are easily affected by categorizations in the compensation world, and you don’t want to go around slapping on labels that make some people feel their jobs are somehow less valuable than those at other locations.

This actually applies to all labels you use in the compensation arena – and business in general today. In a socially driven world, communication about compensation is of critical importance.

How to Get the Right Payouts to the Right People – A Simple Checklist – Incentive Plan Design

 

Incentive Plan Design – Success is in the Execution 

notes

Sure you’ve got your incentive plan in place, getting it executed on time and by the right people is the real key to success.It comes down to making sure all the key actions and deadlines are achieved in an orderly fashion. If any of those are missed, the payouts can get delayed or lost…and you’ll be caught up short.

The compensation professional’s role is to ensure that recommendations for individual payments are made and approved, then actually land in your employees’ pockets.

Whether you have software applications to support the process or you’re still using Excel, there remain a number of items on the checklist to cover.

The Checklist

1. Go over your plan document in detail. All of the “special” circumstances mentioned in the document have administrative consequences for you.

2. Make sure you have a knowledgeable contact in your Finance group who is set to provide you with the financial results of the incentive plan’s objectives.

3. In many cases, incentive plan payouts must be made by a certain date. Paste that date on all of your calendars and walls, and work back from there. If incentive payments require a management or compensation committee approval, ensure that you know that date as well.

4. If the incentive payments must be approved by a management or Compensation board committee, find out what summary and individual employee information they will require. Ensure that you are set up to provide that information right away, and keep it in retrievable form for when management inevitably makes changes to their original requests.

5. Have a contact in the Payroll department who knows what’s happening and can shepherd this special process through payroll. That individual should be familiar with all of the key dates and be able to tell you what Payroll needs, and when they need it.

6. If you have plan objectives with results determined outside of the Finance group, identify who is going to give you that information, and when.

7. If your incentive payments are based on target percentages of salary, which salary will you use?

There are rules and regulations that contribute to the determination of this field, especially for non-exempt employees.

  • Do you include overtime?
  • All W-2 income?

(We have a special field set aside in our applications for this salary figure because it is so commonly NOT the current annual salary for each employee.)

Remember the “Line of Sight”

This is a principle of incentive plan design saying that each individual employee in the plan should have a clear view of how his/her performance affects the incentive plan payout. It normally implies that the goals set for individuals in an incentive plan should be directly related to the organization’s objectives.

Communicating with Employees About the Plan

If your company has determined that they want their employees to fully understand their incentive payments, prepare a report format in advance that will aid in this communication.

  • Some companies lay out each incentive plan objective in these communications, with each result and how that result contributed to the employee’s payment.
  • This may include company finance results, sub-organization results and individual employee modifiers.
  • Know in advance how you are going to get those results into the report quickly (and prepare for last minute changes, as management is sometimes very sensitive about publishing this information!).Better yet, get management’s approval in advance on what you will tell the employees through this incentive communication.

If you are careful about following the checklist outlined above, those incentive payments will flow smoothly into employees’ paychecks on schedule. And when the results are communicated out to everyone, they will understand and appreciate how the payments were determined.


Note: This is easy to do in areas of the organization that have a direct effect on revenues. It is very difficult in “softer” areas, such as corporate staff departments. In the first case, it is critical that the organization’s goals be set judiciously, as everyone in these departments will throw themselves into meeting them. In the second case, where the line of sight is “fuzzy”, there is a big danger that management will create specific “measurable” goals that do not make sense to the plan participants.


INCENTIVE PLAN DESIGN QUIZ

If a department’s incentive budget amount is the sum of the incentive targets for its employees, how much is the overall budget for the department with the four employees shown below?

Employee Incentive Target Percent Incentive Salary
1 5.0% $50,000
2 10.0% $105,000
3 7.5% $76,000
4 3.0% $42,000
A. 6.375%B. $273,000

C. $19,960

D. 10.2%

 

 

 

Answer: (C) $19,960

The 5 Critical Steps to Create the Bulletproof Merit Budget 2016

BULLETPROOF MERIT BUDGET 2016

Merit Pay delivers different rewards for different employees.
Merit Pay delivers different rewards for different employees.

Few compensation communications will have more impact on your organization, and   be questioned pointedly and relentlessly, than your presentation of a merit budget.

Top executives, finance professionals and managers will all quiz you on how you derived the number and how it supports the company’s compensation strategy. With 2016 around the corner, it’s a good time to review and bulletproof your merit budget.

Here is some guidance on all the ins and outs of a merit budget, to help you both develop and defend your calculations. 

WHAT IT IS

Typically, the merit budget is a tiny subset of the salary budget. It represents planned growth in average salaries for the people you have on board at one snapshot in time.

WHAT IT’S NOT

A merit budget is different from the Finance department’s expected salary expense budget. It is not the cost of the actual salary expense increase, but rather an estimate of the growth in your current average salary.

1. What Should You Look At First?

Your organization’s position to market should be a key factor in creating a merit budget. Knowing what market data to consider means you must understand your company’s compensation philosophy.

Ensure that you know the answers to these questions:

• Do we age market data to the beginning, end or middle (lead/lag) of the planning year?
• Are we shooting for the average, 50th percentile or some other percentile of market?
• Have we compared to the right market rates, especially in international locations (e.g., base salary, guaranteed pay, total cash, etc.)?

Definition: Position to Market

A term used throughout the compensation community. Unfortunately, many don’t understand what that means. If you’re a mathematician, you’ll assume that position to market means the difference between your salaries and those in the market, divided by the market as in this formula:

Your Salaries – Market Salaries/Market Salaries

In HR though, you should use your salaries in the denominator because your merit budget will be a percentage of YOUR salaries.

Your Salaries – Market Salaries/Your Salaries

2. Measuring Your Organization’s Financial Strength

Like a gate objective in your incentive plan, your organization’s financial strength will determine or modify your merit budget.

(After all, it doesn’t matter that you’re five percent below the market if you can’t afford a five percent merit budget!)

But can you afford it even if your company is suffering financial problems?

Maybe. You really need to know how many layoffs and new hires, if any, are planned, to fully understand..

·        It could be that the merit budget is such a small part of the overall salary expense budget that you can be more generous than you think.

·        Also consider that your employee population is going to be jittery during these times and may need the encouragement brought with a healthy merit budget.

3. Promotions and Adjustments…Do They Matter?

You may be asked to carve out a portion of your budget for promotions and adjustments. Regardless of whether these factors are in or out, you still need to know how they affect your budgeting.

Look at your organization’s history in this regard.

·        What percentage of people got promotions and adjustments in the past few years?

·        Did managers stay within guidelines in giving them?

What is Everyone Else Planning?

Find out what other companies are doing through the myriad of surveys on the topic. World at Work and many others provide their survey results on this subject in late summer.

4. Coming Up with the Final Budget

Based on the factors discussed above, decide on an overall merit budget for your organization.

Be sure that you’ve considered special groups and locations that require larger or smaller budgets, particularly if you have international locations.

See our Compensation Case Study below for some right and wrong examples of merit budget formulas.

 

5. Getting final approval

Before offering the final numbers, prepare yourself to present information covering the company’s past trends, what you know about your competitors’ merit budget projections for next year and your organization’s position to market.

Compensation Pros Tip

Senior management wants you to make the decision easy for them, so show them how the merit budget you’re projecting will actually affect the organization’s bottom line, for both the upcoming fiscal year and the one after that.

This thorough review will show management and the finance group that you considered the nuances, and evaluated the critical factors.

 

COMPENSATION CASE STUDY: Merit Budget 2016

If you consider only position to market and competitor merit budgets, how would you calculate your merit budget?

Your Position to Market: -2.5% (below market)
Projected Competitor Merit Budgets: 3.0%

What is your Merit Budget:

A. 5.5%

 

B. 5.575%

 

C. .475%

 

D. 3.25%

 

Answer:

 (b) 5.575% 

You increase your current salaries by 2.5% to match market, then another 3.0% to ensure that you meet market after your competitors have completed their increases.

Calculation: ((1.00 X 1.025) X 1.03) =1.05575 or 5.575%.

The 1 Performance Review Most Often Forgotten

“The result of bad communication is a disconnection between strategy and execution.”

Chuck Martin, former vice president, IBM

compensation plan performance review
Remember to review your compensation plan.

Performance reviews that evaluate based on subjective opinions are giving way to a new form of review based on performance and results.

Yet the most often forgotten is likely

your compensation plan performance review.

Completing annual compensation reviews is such an all-consuming process that most of us need a vacation when it’s over, and eager to shift focus elsewhere. But your compensation plan is a key communication tool connecting strategy to execution, especially in the eyes of your employees and management.

You conclude the review process with the usual graphs, charts and summaries to senior management, but one thing that’s often neglected is whether the compensation plan itself performed well relative to your goals.

As a change,  you dive into the data and see how you did by the numbers, quantifiable, and how your compensation plan is one of the key measures to acquiring and retaining employees.

When you set up the compensation planning process, your assumptions influence the decisions you make resulting in certain outcomes.

What if your assumptions were wrong about market movement and how managers would use their budgets and merit increase grids?

Start by reviewing the assumptions:

  • Did the merit budget actually move you closer to market?
  • Then look at what factors may have influenced that. Manager decisions may have gone differently than you anticipated.
  • The ways they used the merit grid and whether they stayed within the budget both could affect your plan’s performance.
  • When you gave managers discretion, did they use the full range of merit increases, individual modifiers, etc.?
  • There may be other behaviors you can predict and account for with your next round.
  • Breaking out your manager population by the factors they have in common (Business Unit/Age/ Line vs Corporate), you may see a difference from group to group in their decisions about merit increases, incentive plan payouts and other compensation factors.

The overarching goal is to design programs that contribute to the company’s financial success (i.e, motivating the right people to stay and discouraging the wrong people). That means comparing actuals to your assumptions about the incentive plan.

  1. Did the payouts on the incentive plan match what you expected?
  2. Was your forecast to the Finance department on bonus accruals accurate?
  3. Looking at the actual numbers will tell you whether you designed an incentive plan that worked in motivating staff to contribute to the bottom line.

Why do a Compensation Plan Performance Review?

Evidence-based compensation management is gaining widespread acceptance, so hopping on that train is a good move. If you think you’re too busy, you may be ensuring that you’re not busy at all in the future.

A rigorous review of your compensation plan’s results may be the last thing you want to do at the end of annual review season. It should be tackled at some point well before the next review cycle begins.

Continuous review, quality improvement and goal alignment will help you prove to senior management that the program you designed is creating more value than it costs, and that you’re an ace at your job.

What could be more important to review than compensation?

How to Prove Compensation Planning Tools are Worth the Investment

“The over-all point is that new technology will not necessarily replace old technology, but it will date it. By definition. Eventually, it will replace it. But it’s like people who had black-and-white TVs when color came out. They eventually decided whether or not the new technology was worth the investment.”  Steve Jobs

compensation costs


Many companies contact us, asking how to justify the costs of a new compensation planning tool.  Recently this has been coming from Suite software; the compensation modules are the weak link, and companies often come looking for a solution after 6 months, the time it takes to figure out the Suite’s compensation tool is weak.


Some are exhausted from the spreadsheet process they currently use, but they don’t know how to talk to management about the value of getting a more efficient system.


Compensation Planning Tools – Be Careful How You Define ROI

The fact is that many of the ROI calculations for these products use “squishy” logic, such as relating turnover to the compensation planning cycle.


Though we can see how turnover in the compensation department should be considered (“I’ll quit if I have to manage the compensation planning process again!”), it is harder to draw a direct connection between turnover and a poorly run compensation planning cycle.


Nevertheless, there are some genuine considerations that will make a difference to your management team. The most obvious is the time saved by managers who no longer have to work with spreadsheets and who are given better guidance through an online system.



For example:

  • Total Number of Managers: 500

  • Average Manager Salary: $70,000

  • Average Manager Hourly Salary: $33.65

  • Average hours saved per manager: 1.5

  • Total Cost Savings: $25,239


Then, of course, there’s the time spent by individuals in the HR department. How much time would be saved if there was no longer a need to consolidate spreadsheets, respond to manager requests for new spreadsheets because of changes in staff, etc.?


Look at the number of people involved and how much time each spends on this process. You can complete the estimate in the same way as shown in the example for managers.


Finally, if your organization has trouble getting managers to stay within the budget provided, the addition of an online tool may make a big difference.


We had one client who saved a million dollars in the first year because they were finally able to track the budget at every step of the process. If that’s the case with your group, add the potential “opportunity costs” of spending that money on merit budget versus investing it.

Mastering the Data Game – Which Market Surveys do you choose, and why does it matter?

masteringdata

Slogging through the job matches and other data in annual market surveys – or even just figuring out which surveys to use – is a daunting and very often confusing task.

This post shows why you may often get mired in a guessing game when it comes to sorting through multiple variations on job titles and salary benchmarks.

By learning the right questions to ask, you will understand how to use market survey data like a veteran, and how to apply your best professional judgment to all the variables.

 

Decisions to Make Before You Look at the Data

 

  • Who is your contact at the survey company if you have questions?

 

  •  Which data element will be the important one for your organization?

 

  1. Does it vary by functional area or employee level?
  2. Are you going to look at the weighted or unweighted results?
  3. Percentiles or averages?

 

  •  Do you have a threshold for the number of participating companies or incumbents before you will include the data point in your analysis?

 

  • If your incentive plan is based on financial results, what do you compare to market when those results are extremely bad, or extremely good? Plan ahead for these circumstances and ensure that you have management’s agreement on the approach.

 

  •  Are you looking at Total Cash Compensation for everyone, or just those who are eligible for an incentive program? Many surveys provide both, so be sure you know what you want.

 

  •  How big a difference from market will be of concern to you? If your pay falls five percent below market, will you consider that a problem? Only for certain key jobs?  

What will you consider significantly above market?

 

  •  Which of your jobs do you consider “benchmarks”? It is key in your analysis to know which jobs you can count on for good market data.

 

Those with the highest number of incumbents—across the broadest breadth of companies—will give you the most reliable results.

 

If you’re an insurance company, you would choose job titles that are consistent across your industry, for example.

 

Remembering Last Year’s Survey – How  & Who in Your Organization Participated

 

  •   Was someone familiar with the jobs involved in the matching?

 

  •   If not, did you at least have good job descriptions?

 

  •   Did you include as many quality data points as possible?

 

  •   Did the managers of the employees in the jobs agree with your matching?

 

Know the Surveys; Separate Wheat From Chaff

Once you’ve evaluated your own participation, take a look at the reputation of the survey—is it typically consistent? Are the results typically higher or lower overall than in your industry?

First, don’t use self-reported data on the internet or any organization’s data claiming to include “major surveys” but doesn’t tell you what they are.

Second, understand that different surveys are relevant to different jobs. Finally, your competitors are likely not the only ones hiring for these roles.

Surveys aren’t always perfect, so cast a critical eye before you bank too much reliance on them. In many cases, they could:

 

  •   Have wacky data and analysis (for example, take a look at year-over-year results for jobs that have not changed descriptions);
  •   Only include a particular type of employer (not at all close to your organization in size, employee demographics or business results);
  •   Not include anyone in your industry when it matters (an engineer in one industry can be significantly different than an engineer in another);
  •   Be new to the scene, with little history to tell if they are any good;
  •   Be too industry-specific (Don’t look ONLY at your competitors when deciding on pay for a general job, like administrative assistant, hr generalist, actuary, etc.); or
  •   Be sloppy at checking the matches from participants.

It’s up to you to ensure that you’re using the right surveys and the right data.

Compensation surveys are hardly foolproof. Because of the subjective decision making that goes into every job match, getting a handle on the big picture and understanding how data is selected will help make the process less mysterious and daunting.

By spending a little time and thought before completing or utilizing a market survey, you can take command of the data with greater confidence, and take the guesswork out of future survey participation. It takes a lot of scrutiny, discernment and a healthy dose of skepticism to master the data game.