Modernizing Base Pay Delivery - MT\|SHRM · 2018-06-06 · 6/5/2018 3 The importance of base pay...

$Page 1: Modernizing Base Pay Delivery - MT\|SHRM · 2018-06-06 · 6/5/2018 3 The importance of base pay remains a constant Drivers of attraction and retention 7 Top drivers of attraction$
6/5/2018

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A New Era in Compensation: Modernizing Base Pay

June 8, 2018

Pamela Murray, Associate Director – Talent & Rewards

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Remember the days…

Base Pay

© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only 2

Remember the days…


6/5/2018

2

The current world is very different

4

And continues to evolve and change

Everythingis personal

Technologyis everywhere

ConnectedAlways online

Ready access to

information


No surprise … everyone has an opinion on pay

5

Increased pay legislation activity

U.S. - Key takeaways across the states


▪ (U.S.) Proposed expanded EEO-1 reporting▪ (U.S.) Activity across states and cities

Substantially similar work

Equal work

Across locations

Samelocation

Encourage discussion of

wages

Can’t discuss wages

Can’t ask salary history

Can ask salary history

No surprise … everyone has an opinion on pay

6© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only

▪ Pay equity

▪ Pay Fairness▪ Data availability

▪ Millennials believe

information

should be shared openly

Employees

Media

6/5/2018

3

The importance of base pay remains a constant

Drivers of attraction and retention

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Top drivers of attraction Employee view Employer view

Base pay/salary 1 2

Job security 2 5

Career advancement opportunities 3 1

Challenging work 4 4

Opportunities to learn new skills 5 7

Reputation of the organisation as a great place to work 6 3

Healthcare and wellness benefits 7 ---


Top drivers of retention Employee view Employer view

Base pay/salary 1 2

Career advancement opportunities 2 1

Physical work environment 3 ---

Job security 4 ---

Ability to manage work-related stress 5 4

Relationship with supervisor / manager 6 3

Trust / confidence in senior leadership 7 ---

Source: 2016 WTW Talent Management & Rewards Survey / Global Workforce Study

Generational shift and reward preferences

Source: 2015/2016 Global Benefits Attitudes Survey, U.S.

Sample: Full-time employees only.


Companies are starting to think carefully and deliberately about

what it is that they’re paying for…

Pay for the role / work

Internal equityExternal

competitiveness

Tracking more closely to market for some jobs may mean differentiated increase budgets and structures for their administration

Pay for the person

Last year’s results

Future potentialKnowledge /

skills

Is last year’s performance necessarily the best indication of future performance / potential?


6/5/2018

4

… and for the first time in years we’re seeing changes to base pay

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Paying market rate

for skills instead of

last year’s

performance

Recognizing that

differentiation may not

always be the right

answer

Favouring

‘meaningful’

minimum increase

amounts over

‘something for

everyone’

Rethinking the

frequency of

increases

Designing programs to pass

a transparency test,

regardless of what you actually

communicate to employeesDefining the purpose

of base pay

1. Modernization

2. Segmentation

Unlikely that one size fits all is

the right ‘answer’

Segmentation examples include critical

skills, future potential, team/network, etc.


… and for the first time in years we’re seeing changes to base pay

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3. Communication

4. Alignment

Being deliberateAlign pay progression with

career progression

Understanding the purpose of

different reward elements and

communicating them effectively

Owning the debate /

conversation about pay

rather than reacting to it

Educating employees about how pay

is determined and managed using

relevant and appropriate examples

Influencing through social media

rather than being held hostage by the

views / assumptions of others

(Glassdoor, etc.)


willistowerswatson.com

Modernizing Base Pay Administration


6/5/2018

5

Base pay structure design

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Continued tension in what’s most important


Modernizing your base pay model starts by thinking about four key

design considerations

From To

CompetitivePositioning

Focus on external equity; targeting the same market data point for all

Paying more for critical skills, in-demand roles and less for legacy roles

or those with a talent surplus

Segmentation

Homogenous pay philosophy - paying everyone the same regardless of the

work they do, where they work and the

value they create for your organization

Differentiation for defensible business-aligned criteria; segmenting in broad

‘buckets’ considering geography,

critical skills and/or scarcity of talent

Differentiation

Defined by merit matrix, taking into account position in range and last

year’s performance

Meaningful amounts for a smaller number of people over ‘something for

everyone’

PayTransparency

Pay processes and decisions are kept under lock and key within HR

Line managers and employees have a common knowledge on how pay is set

and managed


Compensation design considerations

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Where are you currently and where should you be going forward?

You will pay what it takes to recruit and retain the talent

you need in the job market

Reward costs are relatively

unconstrained, as long as ROI

is increasing

Assumes people can add

sufficient value to justify high reward costs

You would rather accept the

risk of over-paying than miss

out on the best talent in the

market

Salary budgets are severely constrained and centrally

monitored and controlled

Assumes people are to some

extent a replaceable

commodity

You’re willing to accept the

risk of missing top class talent in order to maintain lower

employment costs

Competitive positioning


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Market position

16

General Employee

Population

Critical Skills,

Talent Deficit Roles

Legacy Skills,

Talent Surplus Roles

Is it the same for all or different for specific segments?


Position in the market

External Factors (Market specific)

Supply of talent High Low

Talent mobility Low High

Industry stability High Low

Industry attractiveness High Low

Internal Factors (Company specific)

Role criticality Low High

Company image Good Poor

Performance targets Low High

Workload Low High

Employee value proposition Strong Weak

Hiring needs Low High

Impact of turnover Low High

25% 50% 75% 90%Potential position in the market:


Audience Poll

18

What roles do you target at a higher market rate?


6/5/2018

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It’s important that everyone is treated the same in terms of

pay regardless of the work

they do and the value they create for your organization

Pay elements should be treated the same regardless of

department or job family

You believe roles contribute in different ways and have

greater or lesser relative

importance and as such, these differences should be

reflected in how pay is

managed / delivered

You recognize that the labor

market for roles is different and should be reflected in the

positioning of pay relative to

geography and skills

Segmentation



Segmentation

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Geography can influence pay – do you consider the cost of labor for the areas in

which employees work?


Los Angeles

114.5%

San Fran

126.7%

Grand Rapids

96.3%

DC

115.2%

NYC

123.1%

Jackson, MI

89.5%

Ft. Lauderdale, FL

100.7%

Nashville, TN

93.3%

Geographical DifferentialsGeography is a factor that influences pay levels for a given job.

Cost of Labor versus Cost of Living

■ Cost of labor reflects what a particular

geographic market offers as

compensation for a specific type of

work.

■ Cost of Living reflects the cost of goods

utilized by a typical consumer, including items such as housing, groceries and

transportation.

Lo

w C

ost o

f

La

bo

r S

tru

ctu

re

Hig

h C

ost o

f

La

bo

r S

tru

ctu

re

Group locations with

similar market values into

the same structure


6/5/2018

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Accounting for cost of labor in different geographies

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Discretionary or formal structures to better manage?


The importance of salary structures and pay ranges

Managing pay differences via a formal salary structure(s)


Minimum Midpoint Maximum

75% range spread

Single National

Structure

Low COL

Structure

High COL Structure


10% below national


20% above national

Emergence of premium pay


Premium Pay

▪ Premium pay allows for maintaining base salary, but provides an additional pay component to

accommodate job requirements, such as

performing the work in a specific location

▪ This approach may be simpler as base pay may

be set at national levels, and premiums may only

be used in higher cost-of-labor locations

As organizations prepare for different approaches to sourcing talent and are

rethinking traditional employment, organizations are concerned about internal

equity and have taken a renewed interest in premium pay

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6/5/2018

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Organizations are starting to think more carefully about how to

segment base pay management for defined employee groups

Start of Year 6 Months Year-End

Entry Intermediate Lead

Specialized approach to retain high potential ‘early career’ professionals

Return to ‘job rates’ considering skills and abilities

▪ More frequent increases (bi-annual))

▪ Increases based on skills assessment

▪ Lower tolerance for below market positioning – simulate

the external market practice of ‘big increases’ for

demonstrated experience of emerging skills

▪ Individual pay tied to a defined market / job rate considering

career level

Review Review

$$ $$$$$$

$$$

▪ Other approaches include:

▪ Continued alignment to individual performance

▪ Pay progression driven by an assessment of potential

▪ Skill-based pay (aligned to business need – e.g., hot skills or increase in depth and breadth of skills)

▪ Milestone-based pay where meaningful progression is linked to demonstrating significant (defined)

increases in capability

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There is little differentiation between low and high

performers

It is not fair to favor any

employee/role over another

Dollars should be equally

distributed to recognize that

we all equally contribute to the organization’s success or

setbacks

It is important to differentiate between low and high

performers through pay

decisions

Differentiating will drive the

right behaviors and motivate employees to go the extra

mile

We all contribute at different

levels to the organization, and

this should be reflected in pay outcomes

Differentiation

“Pay for

Performance”


65%

55%

49%46%

41%

72%

65%68%

66%63%

59%

63%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Achievement ofindividual goals

Demonstration ofknowledge and skills

required in current role

Achievement of teamgoals

Possession of skillscritical to the successof the future business

model

Perceived potential Final rating in mostcurrent year-end

performance review

HR view Manager view

HR and manager views on the factors that should influence base

pay increases differ…

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HR

17% gap

Most important factors from Managers’ view

Most important factor from HR’s view

17% gap

18% gap

13% gap

Source: Willis Towers Watson Talent Management & Reward Survey 2016


6/5/2018

10

… the HR community agrees that something needs to change

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Source: Willis Towers Watson pulse survey 2017

92%

8%

Yes No

6%

6%

8%

10%

12%

14%

20%

24%

0% 5% 10% 15% 20% 25% 30%

Budgets

Org. complexity

Segmentation

Flexibility

Technology

Data quality

Future focus

Mgr. capability

Does pay management need a refresh? What needs to change to improve it?


Meaningful Amounts

Base Pay Management Principles

Annual Increases

Broad-based market increases:▪ In slow-moving labor markets, broad-

based increases need not be annual

▪ “Minimum” increase thresholds may differ by job level

Pay for performance increases

▪ What amount is large enough to be

considered “meaningful”? Programs

should be designed with conscious choices

Short Term Incentives▪ Becoming a more common way to

motivate and reward employees at private

companies, especially at small and

midsize firms as well as at nonprofit employers.

▪ 96% had STI programs in 2017, up

from 94% in 2015*.▪ Spending on STI increased to a

median of 6% of operating profits,

up from 5%.▪ About 66% of nonexempt

employees were eligible for annual

incentives, up from 52%.

+

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Best practice - set a lower limit or zero increase amount for those not meeting

expectations and provide bonuses to further drive differentiation


* World at Work Incentive Pay Practices report

Reward Elements

Does Not Meet

Minimum

Expectations

Approaching

Competent

Meaningful

ContributorExceeds Expectations

Exemplary

Performance

Merit Increase0 x average merit

(e.g., 0%)

¼ – ½ X average

merit (e.g., 1% –

1.5%)

Average merit

(e.g., 3%)

1 ½ - 2 x average

merit (e.g., 4.5% –

6%)

>2.5x average merit

(e.g., 8%)

Short-term

Incentive Award

(or GIP)

No incentiveNo incentive to ½

target incentive

Target incentive1 ½ x target incentive 2x target incentive

Training

Opportunities

Minimal training;

focus on

performance

Remedial training Normal trainingHigh-performer

training opportunities

High-performer

training opportunities

Development

Opportunities

Immediate

performance

improvement plan

Close monitoring and

coaching

Eligible for

development

assignments

Targeted for

developmental

assignments

Identified as high-

potentials and

targeted for special

assignments

Promotions

Not eligible for

promotion

Not eligible for

promotion; but may

be eligible for lateral

move

Eligible for

promotional

consideration

Targeted for

promotional

consideration

Targeted for

promotional

consideration

Percent of

Population5% – 10% 10% – 15% 60% 10% – 15% 5% – 10%

Best practice: Differentiating across various reward elements

Organizations significantly advance alignment across systems by specifying how various reward elements vary by performance, where relevant

Differentiating across Total RewardsPay for performance – linking with other programs

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6/5/2018

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Differentiation, individualization and consumer like experience

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Pay for performance

Your Basic Package is:

Reward Element

Basic pay

Fixed cash allowances

Children’s education benefits

Annual leave days

Other leave days

Retirement

Life and disability insurance

Unemployment insurance

Basic medical insurance

Health assessment

Mobile phone

Workplace flexibility

Points based on

previous performance

period and

increase in line with

higher performance

Reward Element Cost (Points) Select

Cash bonus 10 points per dollar

Additional annual leave 1,000 points per day

Sabbatical 20,000 points per month

Retirement contribution 6 points per dollar

Child care vouchers 6 points per dollar

Emergency eldercare 6 points per dollar

Gym membership 1,000 points per month

Additional medical insurance 8 points per dollar

Children’s education account

contribution8 points per dollar

Company car 50 points per day

Training course 20 points per dollar

Career management programs 100-200 points

Enhanced maternity/paternity 500 points per day

Tuition reimbursements 8 points per dollar

Mark, you have been recognised as a high performer, thank you for your hard work!

Your Performance Points Balance is: 23,000 points. Select from your Performance Rewards Shop…

Note: point calibration is illustrative

Hello Mark, welcome to your Performance-based flexible rewards!


Short term incentives

32

With merit budgets holding steady at 3%, more companies are looking at short

term incentives to recognize performance


Simpler incentives are the new norm

33

Focus on reducing complexity and establishing more rigor in setting company

and individual performance goals

• Simplicity is especially valued when implementing broad-based employee incentives, particularly at smaller organizations.


Median Target as a % of salary = 80%





6/5/2018

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34


Pay decisions are ultimately the responsibility of line

managers. They have a high

degree of freedom to make decisions. The role of HR is to

coach, advise and support to

ensure consistency

All aspects of pay management are centralized

and controlled by the HR

Function working with Senior Management. A strong focus

on standardization in terms of

process and outcome

Ownership and governance



35


Only communication is upon initial hire or when an increase

is provided (i.e. merit,

promotion, etc.) and then only individual salary. Pay ranges

are kept secret and

employees may not even

know the minimum and maximum of their own pay

range.

Line managers have some

degree of understanding

related to pay processes and practices. Example; ranges

and merit matrix/budget.

All efforts are made to be as transparent and open as

possible about pay

management, Line managers and employees have a

common knowledge on how

pay is set and managed.

Significant efforts are put into

communications direct to employees to improve

openness and understanding

of pay.

Communication and Transparency


Companies are increasingly required to be…

Transparent

Open communication is becoming the norm to establish a

positive culture and meet compliance requirements

Proactive

Mounting requests and a growing need to be on top of the

issues makes it inevitable to pre-plan and respond to the

changes in advance

Leading

Organizations want to be best-in-class to create an engaging,

fair and honest dialogue with employees to promote the

understanding of total rewards across all employee segments


6/5/2018

13

Legislation is driving us towards greater transparency


Manager capabilities

Because managers play a key role in

delivering an organization’s compensation

program, organizations need to provide

them with the training required to

understand and implement their

programs.

It’s also essential to equip managers with

the right tools and information to enable them to make good, balanced

compensation decisions and

communicate those decisions to their

employees.

Employee Communication

Our research shows that employees globally are looking to work for

organizations that offer fair and

competitive base pay.

In addition, there’s a growing expectation

of openness and transparency regarding

pay and pay equity issues overall.

Requiring a focus on

Source: 2016 WTW TM&R and Global Workforce Studies

What does it mean to be transparent?

Black Box Complete Transparency

Difficult to manage

employee expectations

regarding compensation

No sense among

employees of fair or

consistent treatment

Gives employee sense of

fair treatment

Remains difficult to

manage expectations

Employees understand

structure and their own pay

opportunity

Improves perceptions of

fair treatment

Full disclosure can promote

greatest sense of trust,

fairness and consistency

Requires training of

managers to improve their

ability to deliver

communications

38

Nothing is

communicated

We have a structure

and formal approach

for managing

compensation

We have a structure

with X levels

Your job is assigned

to level Y

There is a formal

range of pay

established for your

level

Structure and

number of levels

Grade assignment of

your job

Pay opportunity for

your job:

Salary range

Incentive targets

Everything is known:

Structure and all

ranges

Grade assignments

of all jobs

Target incentives

for all levels

Compensation

management

policies

Implications


Transparency is an evolution

Getting compensation right

39

Keys to creating a competitive, effective program

1. Assess how compensation aligns with your business, talent management and total rewards strategies.

2. Prioritize pay design.

▪ Carry out comprehensive benchmarking – focusing and adopting a

different compensation strategy for critical roles and/or high performers.

3. Consider segmentation and differentiation.

▪ Throw out the model that everyone gets something – your high performers and those with critical skills more greatly affect business success – reward them accordingly..

4. Communicate and educate

▪ Provide employees with high level insight into how compensation is assessed and pay decisions

made .

▪ Equip managers with training, tools and technology to make effective compensation decisions and

have effective compensation discussions.


6/5/2018

14

In a constant struggle for top talent

…

a credible, competitive

compensation program can mean

the difference between attracting

and retaining top talent or

settling for leftovers.


41

Pamela MurrayAssociate Director, Talent & Rewards

225 Schilling Circle

Hunt Valley, MD 21031

E [email protected]

Thank You!!!


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