Managing Compensation in a  Challenging Economy:   Trends in 2011-2012      December 6, 2011
PresenterMaureen Driscoll•   Managing Director for Verisight’s Compensation Advisory Services practice•   30+ years of exp...
Agenda•   Compensation Trends     – Economic Review and Forecast     – Economic Impact to Compensation Practices: Predicte...
Economic Review and Forecast                               4
Economic Review•   Slow economic recovery•   Signs of volatility remain in some industry sectors•   Attracting and retaini...
Economic Outlook                                  National Unemployment Rate109.5    98.5    8•       October 2011 nationa...
Signs of Recovery?•   April 2011 WorldatWork Salary Budget Survey:     – 62% of 2,256 responding organizations said they w...
Economic Impact to Compensation Practices           Predicted vs. Actual                                            8
Compensation Practices                                   Salary Increases                Predicted                        ...
Compensation Practices – Cont’d                                          Annual Incentives                     Predicted  ...
Total Rewards Philosophy                           11
Developing a Total Rewards Philosophy•   A sound philosophy should not just reflect popular ‘market’ trends, but be a refl...
Total Rewards Philosophy•   Should be identified by senior leadership, or Board for CEO compensation•   Outcome is written...
What is your organization’s total compensation philosophy?                         By IndustryCompensation          All In...
What is your organization’s total compensation philosophy?                         By RegionCompensation              Midw...
Where Short-Term Meets Long-Term•   Remember:    – Effective reward systems support business strategy and organization cul...
2011/2012 Verisight Compensation, Retirement and   Benefits Trends Report Preliminary Findings                            ...
2011/2012 Verisight Compensation, Retirement and Benefits                      Trend Report•   Conducted in October 2011• ...
Compensation Trends: Overall Salary Budget Projections                   Base Pay Adjustments for 2011 compared to 2010   ...
Base Salary Increases for 2011 Compared to 2010                                      All                 Midwest          ...
2011 Base Salary Increases*Mean                                     Execs             Mgmt/Exempt               Salaried N...
2012 Projected Base Salary Increases*Mean                                     Execs              Mgmt/Exempt              ...
2011 Structure Adjustments*Mean                                    Execs              Mgmt/Exempt              Salaried No...
2012 Projected Structure Adjustments*Mean                                    Execs              Mgmt/Exempt               ...
Salary Structure Adjustments                      Salary Range Structure                                              Mini...
Salary Structure Adjustment Caution •   Warning: Matching structure adjustment trends over time without checking     actua...
Pay for Performance                      27
Pay for Performance Trends•      Pay for performance has long been viewed as pay to:         – Motivate employees         ...
Pay for Performance Prevalence – All Industries What is your experience with pay-for-performance programs?                ...
Pay for Performance Practices                                                  All                              Finance/  ...
Average Salary Increase Based on Performance                                   All Industries                             ...
Variable Pay Design                      32
Variable Pay DefinitionsBonuses (usually “after the fact”)   Short-term incentives (“before the fact”)•   Recognition     ...
Eligibility to Participate in Short-Term Incentive Plans 70% 60% 50% 40%                                                  ...
2011 Short-Term Incentive Targets    Mean                                         All Industries                       Mid...
Opportunities and Cautions With Variable PayOpportunities                                 Cautions•   Compensation expense...
Key Design Steps                   37
Balancing Priorities              Financial                    Total Rewards            Considerations                  Ph...
Thank you!•   Maureen Driscoll, maureen.driscoll@verisightgroup.com, 612.376.9322•   For additional information about 2011...
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  • Compensation Trends RSM McGladrey, Inc.
  • Mn chamber of commerce presentation 12.6.11

    1. 1. Managing Compensation in a Challenging Economy: Trends in 2011-2012 December 6, 2011
    2. 2. PresenterMaureen Driscoll• Managing Director for Verisight’s Compensation Advisory Services practice• 30+ years of experience in designing and implementing a wide range of reward programs• 20+ years in consulting 2
    3. 3. Agenda• Compensation Trends – Economic Review and Forecast – Economic Impact to Compensation Practices: Predicted vs. Actual• Total Rewards Philosophy • Verisight Compensation, Retirement and Benefits Trends Report• Pay for Performance• Considerations in Variable Pay Plan Design 3
    4. 4. Economic Review and Forecast 4
    5. 5. Economic Review• Slow economic recovery• Signs of volatility remain in some industry sectors• Attracting and retaining high performing and skilled employees is STILL a critical issue for employers 5
    6. 6. Economic Outlook National Unemployment Rate109.5 98.5 8• October 2011 national unemployment rate: 9.0% – Decrease from 9.7% in October 2010 Source: Bureau of Labor Statistics 6
    7. 7. Signs of Recovery?• April 2011 WorldatWork Salary Budget Survey: – 62% of 2,256 responding organizations said they were in recovery mode – About three-fourths of participating organizations are budgeting for pay increases of between 2% and 4% in 2012.• Recent headlines: – “Fewer people seek unemployment benefits, a hopeful sign for struggling job market”(1) – “Unemployment rates drop in 75% of large U.S. metro areas in September”(1) – “Central Banks Spur Monster Stock Rally” (highest jump since March 2009)(2) Source: (1) StarTribune.com, Nov. 2011; (2) Star Tribune Dec 2011 7
    8. 8. Economic Impact to Compensation Practices Predicted vs. Actual 8
    9. 9. Compensation Practices Salary Increases Predicted ActualReduced frequency Pay freezes were common through 2009 – 2010. Most companies gave increases in 2011 and are planning for increases in 2012 with no “make up” for past freezesTied to significant growth in competency, Annual merit increases are still the mostpromotion, or labor market movement common type of awardGreater pay differentiation for performance Organizations are moving (or exploring how to move) in this direction 9
    10. 10. Compensation Practices – Cont’d Annual Incentives Predicted ActualIncentive eligibility will offset the Trends show that most organizations areexpectation for annual base pay increases still budgeting for annual increasesMore organizations will utilize variable pay After an increase in prevalence over theplans last 15-20 years, the use of variable pay has held steady for the last three years with 80% of organizations having at least one plan (1)Incentives will be available to a larger Based on Verisight’s survey, 40% ofsegment of employees, not limited to organizations provide a variable pay plan tomanagement and above non-exempt employees.(2) Mercer reports 47% - 55% of clerical/trades employees are eligible for variable pay(3)(1) WorldatWork 2011 Salary Budget Report; (2) Preliminary 2011/2012 Verisight Compensation,Retirement and Benefits Trends Report data; (3) Mercer 2010 Salary Budget Report 10
    11. 11. Total Rewards Philosophy 11
    12. 12. Developing a Total Rewards Philosophy• A sound philosophy should not just reflect popular ‘market’ trends, but be a reflection of the organization’s strategic direction and culture.• What’s in a philosophy statement? – Elements of reward package and purpose of each – Pay mix • Pay-at-risk or more secure fixed compensation – Position relative to market • Base salary • Total cash (base + incentive/bonus) • Total direct (total cash + long term incentives) • Can be influenced by other elements of the total rewards package (such as benefits) 12
    13. 13. Total Rewards Philosophy• Should be identified by senior leadership, or Board for CEO compensation• Outcome is written document – Can be shared with current and prospective employees – Articulates your ‘value proposition’ as an employer 13
    14. 14. What is your organization’s total compensation philosophy? By IndustryCompensation All Industries Manufacturing Finance/Banking Healthcare Philosophy Base Incentive Base Incentive Base Incentive Base Incentive Salary Comp Salary Comp Salary Comp Salary CompPosition Above 11% 22% 5% 27% 16% 24% 13% 16%Position at 72% 38% 76% 39% 73% 45% 71% 39%MarketSource: Preliminary results from the 2011/20126%Position Below 8% 7% Verisight Compensation,6% 3% Retirement and Benefits 8% 8% 7%Trends ReportMarketNo Formal 9% 33% 13% 31% 5% 24% 8% 38%Philosophy 14
    15. 15. What is your organization’s total compensation philosophy? By RegionCompensation Midwest Northeast* South West Philosophy Base Incentive Base Incentive Base Incentive Base Incentive Salary Comp Salary Comp Salary Comp Salary CompPosition Above 9% 22% 16% 19% 14% 27% 15% 25%the MarketPosition at 74% 38% 72% 42% 71% 35% 65% 31%MarketPosition Below 7% 5% 3% 3% 11% 5% 11% 12%MarketNo Formal 10% 36% 9% 36% 5% 33% 9% 32%PhilosophySource: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report * Sample Size < 50 15
    16. 16. Where Short-Term Meets Long-Term• Remember: – Effective reward systems support business strategy and organization culture – Tendency is to focus on market trends and/or common practices 16
    17. 17. 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report Preliminary Findings 17
    18. 18. 2011/2012 Verisight Compensation, Retirement and Benefits Trend Report• Conducted in October 2011• Final report still in process – Preliminary results shared today – Results published in mid-December• Data collected from small to mid-size organizations• National survey – 850 responses overall – 335 participants from the Midwest region 18
    19. 19. Compensation Trends: Overall Salary Budget Projections Base Pay Adjustments for 2011 compared to 2010 13% 30% Higher About the same 57% LowerSource: Preliminary results from the 2011/2012 Verisight Compensation, Retirement andBenefits Trends Report 19
    20. 20. Base Salary Increases for 2011 Compared to 2010 All Midwest Manufacturing Finance/Banking Healthcare IndustriesHigher 34% 30% 34% 29% 20% About the 57% 57% 55% 61% 61% same Lower 9% 13% 11% 10% 19% Source: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report• On average, 88% of all employees nationally received a base salary increase in 2011.• Number of organizations reporting a 0% salary increase budget for 2011 was 7-10%, down from 15-20% during 2010. Source: 2011 WorldatWork Salary Budget Survey 20
    21. 21. 2011 Base Salary Increases*Mean Execs Mgmt/Exempt Salaried Non-ExemptMidwest 2.3% 2.5% 2.4%All Industries 2.3% 2.5% 2.3%Manufacturing 2.4% 2.5% 2.2%Finance/Banking 2.7% 2.6% 2.7%Healthcare 2.0% 2.3% 2.2% Source: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report• 2011 WorldatWork Salary Budget Survey: for those organizations providing increases in 2011, the median was 3.0% *Includes zeros 21
    22. 22. 2012 Projected Base Salary Increases*Mean Execs Mgmt/Exempt Salaried Non-ExemptMidwest 2.6% 2.7% 2.6%All Industries 2.4% 2.6% 2.5%Manufacturing 2.6% 2.6% 2.4%Finance/Banking 2.4% 2.7% 2.8%Healthcare 2.0% 2.2% 2.1% Source: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report• 2011 WorldatWork Salary Budget Survey: approximately 83% of organizations are budgeting for some base pay increase in 2012 *Includes zeros 22
    23. 23. 2011 Structure Adjustments*Mean Execs Mgmt/Exempt Salaried Non-ExemptMidwest 1.5% 1.6% 1.5%All Industries 1.3% 1.4% 1.4%Manufacturing 1.5% 1.6% 1.6%Finance/Banking 1.3% 1.5% 1.5%Healthcare 1.4% 1.3% 1.3% Source: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report• 2011 WorldatWork Salary Budget Survey: on average, 64% of organizations adjusted their salary structure(s) in 2011 *Includes zeros 23
    24. 24. 2012 Projected Structure Adjustments*Mean Execs Mgmt/Exempt Salaried Non-ExemptMidwest 1.7% 1.8% 1.7%All Industries 1.5% 1.6% 1.5%Manufacturing 1.9% 1.9% 1.9%Finance/Banking 1.3% 1.6% 1.6%Healthcare 1.4% 1.4% 1.5% Source: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report• 2011 WorldatWork Salary Budget Survey: 81% of organizations intend to adjusted their structure(s) in 2012 by an average of 2%. *Includes zeros 24
    25. 25. Salary Structure Adjustments Salary Range Structure Minimum Midpoint Maximum• Traditional approach to updating salary $48,000 $60,000 $72,000 structure(s) $43,600 $54,500 $65,400 – Determine overall structure adjustment percentage $39,600 $49,500 $59,400 – Adjust salary range midpoints – Recalculate minimums and maximums using range spread formulas Projected Average Structure Adjustment: 2.0% $54,500 x 102.0% = $55,590 25
    26. 26. Salary Structure Adjustment Caution • Warning: Matching structure adjustment trends over time without checking actual competitive pay practices may eventually put your program at risk Competitive Pay PolicyCompetitive Pay Practice 26
    27. 27. Pay for Performance 27
    28. 28. Pay for Performance Trends• Pay for performance has long been viewed as pay to: – Motivate employees – Drive behavior – Reward high performers• Merit increases are 4 to 6 times more prevalent than other forms (i.e., COLA, other types) – 65% of organizations have a performance rating system tied to salary increases* *Statistics report from 2011 WorldatWork salary budget survey and Compensation Programs and Practices 28
    29. 29. Pay for Performance Prevalence – All Industries What is your experience with pay-for-performance programs? Have implemented throughout the organization 35% 36% Have implemented with some employee groups Have considered 9% 21% implementing in the next 12 months Have not implementedSource: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and BenefitsTrends Report 29
    30. 30. Pay for Performance Practices All Finance/ Health Midwest Manuf. Industries Banking CareHSource: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report More than half of all companies have implemented some form of pay-for-performance 30
    31. 31. Average Salary Increase Based on Performance All Industries MidwestPerformance Median % of EEs in Median % of EEs inLevel Increase (%) Category Increase (%) CategoryHigh 4% 41% 4% 35%PerformersMedium 3% 38% 3% 41%PerformersLow Performers 2% 21% 2% 24% Source: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report Median salary increase in 2011 for high performers (4%) is twice that of low performers (2%) for all industries 31
    32. 32. Variable Pay Design 32
    33. 33. Variable Pay DefinitionsBonuses (usually “after the fact”) Short-term incentives (“before the fact”)• Recognition • Formula driven• Project completion • Balanced score card• Sign-on/hiring• Long-term incentives (usually 3 to 5 years) Retention• • Usually only available at upper Spot awards management levels• Discretionary • Balance short- and long-term decision making • Retention 33
    34. 34. Eligibility to Participate in Short-Term Incentive Plans 70% 60% 50% 40% All Industries 30% Midwest 20% 10% 0% Executives Salaried Exempt - Salaried Non- Managerial ExemptSource: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and BenefitsTrends Report 34
    35. 35. 2011 Short-Term Incentive Targets Mean All Industries Midwest Executive 28% 24% Mgmt/Exempt 12% 12% Salaried Non-Exempt 7% 8% Source: Preliminary results from the 2011/2012 Verisight Compensation, Retirement and Benefits Trends Report• Structured incentive plans typically have threshold, target and maximum payout levels• Incentive opportunity often corresponds with a position’s ability to influence metrics used in the incentive plan 35
    36. 36. Opportunities and Cautions With Variable PayOpportunities Cautions• Compensation expense is a variable • Can become “entitlement” if not cost properly designed and communicated• Depending on plan design, can reward • Discretionary bonuses typically do not individuals, teams and/or organization- reinforce “pay for performance” wide performance • FLSA provisions complicate incentive• Allow targeted distribution of limited payouts for non-exempt employees compensation dollars who work overtime 36
    37. 37. Key Design Steps 37
    38. 38. Balancing Priorities Financial Total Rewards Considerations Philosophy Compensation Health & Welfare Benefits Retirement Benefits Perquisites Employee Competitive and Considerations Local Market Practices 38
    39. 39. Thank you!• Maureen Driscoll, maureen.driscoll@verisightgroup.com, 612.376.9322• For additional information about 2011/2012 Verisight Compensation, Retirement and Benefits Trend Report, or to participate in the 2012/2013 study, please contact Brian Repsold, brian.repsold@verisightgroup.com, 312.488.6747. 39

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