Creative Compensation Strategies to Maintain          Morale and Retain Talent                       Presented by         ...
Strategic Edge Series•   Seven Core Principles to Maximize the Value of Your Business    During Its Life and Upon its Sale...
Agenda• Explore turnover in the rebounding economy• Review steps for designing a market-based  compensation system• Recogn...
Unemployment in Improving Economy• Common perception, supported by monthly reports from  the U.S. Bureau of Labor Statisti...
Projected Turnover as Economy Improves• According to a recent WorldatWork survey, more than  half of employees intend to l...
Compensation System Design                             6
Designing a Market-Based Compensation System •   Plan and collect data •   Ensure job documentation accuracy •   Complete ...
Purpose of a Compensation System•   Implement compensation philosophy•   Ensure efficient allocation of resources•   Provi...
Job Documentation            Job Documentation              Market Matches                                9
Market Pricing Methodology• What is market pricing?• Valuation of pay for jobs in the external labor markets• Key consider...
Market Pricing Methodology• Reliable Data   – Published survey data     • Major consulting and surveying firms     • Stati...
Designing Salary StructuresRange Spread                         midpoint                  Midpoint Differential   12
Assessing Current State of Compensation Program                                            13
Merit Matrix Approach                        14
Compensation Strategy – Merit Matrix Approach• Affects pay increases, not pay structure• Rewards performance• Focuses doll...
Merit Matrix - Concept• Employee 1 ( 1 ) and Employee 2 ( 2 ) are both accountants  with exactly the same tenure, experien...
Merit Matrix - Concept• In this example, all other factors are equal except current base  salary. To whom would you provid...
Merit Matrix - Concept • Finally, all other factors being equal, to whom would you   provide a higher pay increase, high-p...
Merit Matrix - Example  Typical  Matrix                                          Quartile in Range             Performance...
Merit Matrix - Example  Best Practice  Matrix                                          Quartile in Range             Perfo...
Merit Matrix - Example  Ultra-Aggressive  Matrix                                           Quartile in Range             P...
TypicalResults   Matrix                                                             Quartile in Range                    P...
Merit Matrix - Results                                            Company XYZ                                           Co...
Merit Matrix - Results                     Company XYZ                                             Costs by Performance Le...
Merit Matrix - Employee Analysis            First                                Salary Grade                             ...
Merit Matrix•   Cost neutral•   Rewards performance•   ―Targeted‖ turnover•   Fair and efficient method for administering ...
Merit Matrix – Common Pitfalls• Structures out of alignment with market   – Garbage in, garbage out   – May improperly all...
Assessing “Reasonable”Executive Compensation in Closely Held Businesses                            28
Reasonable Compensation in Closely HeldBusinesses•   The determination of reasonable compensation is    particularly impor...
Reasonable Compensation Overview• There is no single recognized definition of reasonable  compensation.• This is one of th...
Reasonable Compensation Overview•   According to the IRS, there are two key elements of    determining reasonable compensa...
Reasonable Compensation – Intent•         Compensation is reasonable only if the amount          provided was both intende...
Reasonable Compensation – Amount•       ―It is, in general, just to assume that reasonable and true        compensation is...
Effect of Performance on ReasonableCompensation•   Measuring Performance    – The courts have recognized significant profi...
Additional Considerations•   Nonprofit compensation•   Fair pay based on race and gender•   Online performance management•...
Summary/Key Takeaways• Market-based compensation system• Merit matrix• Compensation in closely held businesses
CBIZ CompCasts                 How to Set Pay Ranges that are Fair and EffectiveCompCasts        Nonprofit Quick Guide to ...
QUESTIONS?             38
CBIZ Human Capital Services Contact  Edward Rataj  Managing Director   314.692.5884  erataj@cbiz.com
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Creative Compensation Strategies to Maintain Morale & Retain Talent

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This presentation discusses key compensation strategies to maintain morale and retain talent. This includes *The turnover in the rebounding economy
& steps for designing a market-based compensation system
*Recognition and sustaining high performance through a merit matrix
*Compensation in closely held businesses

For more information, visit http://www.cbiz.com.

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Creative Compensation Strategies to Maintain Morale & Retain Talent

  1. 1. Creative Compensation Strategies to Maintain Morale and Retain Talent Presented by Edward Rataj, CCP Managing Director, CBIZ Human Capital Services
  2. 2. Strategic Edge Series• Seven Core Principles to Maximize the Value of Your Business During Its Life and Upon its Sale – May 18th• Creative Compensation Strategies to Maintain Morale and Retain Talent – June 22nd• Don’t Be Held Captive: Go Captive to Manage Your Risk and Expenses – July 20th• Federal Incentives That Can Show You the Money – August 17th• Protecting Your Legacy with Succession Planning – September 21st• State Tax Nexus: No Physical Presence Required – October 26thAll these webinars are from 2:00 – 3:00 ET. Here is the link for registration for any of these webinars - www.cbiz.com/strategicedge 2
  3. 3. Agenda• Explore turnover in the rebounding economy• Review steps for designing a market-based compensation system• Recognition and sustaining high performance through a merit matrix• Discuss compensation in closely held businesses• Answer your questions 3
  4. 4. Unemployment in Improving Economy• Common perception, supported by monthly reports from the U.S. Bureau of Labor Statistics:• 10% unemployment• In reality, a strong negative correlation exists between unemployment percentage and education: Bachelor’s degree or above 4.8% Some college or an associate’s degree 8.1% High school graduate 9.8% Less than high school diploma 15.3% Bureau of Labor Statistics Table A4: Employment status of the civilian population 25 years and over by educational 4 attainment
  5. 5. Projected Turnover as Economy Improves• According to a recent WorldatWork survey, more than half of employees intend to leave their current job as the economy improves.• The survey asked: Do you plan to pursue new job opportunities as the economy improves? – 60% — Yes, I intend to leave – 21% — Maybe, so I’m networking – 6% — Not likely, but I’ve updated my resume – 13% — No, I intend to stay. 5 www.worldatwork.org/waw/adimComment?id=35633
  6. 6. Compensation System Design 6
  7. 7. Designing a Market-Based Compensation System • Plan and collect data • Ensure job documentation accuracy • Complete market analysis • Design pay structures • Model implementation costs • Assess internal equity • Create procedure manual • Report results 7
  8. 8. Purpose of a Compensation System• Implement compensation philosophy• Ensure efficient allocation of resources• Provide rational basis for pay decisions• Assist supervisors in evaluating and rewarding performance 8
  9. 9. Job Documentation Job Documentation Market Matches 9
  10. 10. Market Pricing Methodology• What is market pricing?• Valuation of pay for jobs in the external labor markets• Key considerations when determining labor markets: – Location • Local • Region • Nation – Industry • Industry specific • Broad spectrum of employers 10
  11. 11. Market Pricing Methodology• Reliable Data – Published survey data • Major consulting and surveying firms • Statistically validated • Standard deviation analysis of data• Unreliable data examples: – Self-reported data – DOL – Data from one or two competitors 11
  12. 12. Designing Salary StructuresRange Spread midpoint Midpoint Differential 12
  13. 13. Assessing Current State of Compensation Program 13
  14. 14. Merit Matrix Approach 14
  15. 15. Compensation Strategy – Merit Matrix Approach• Affects pay increases, not pay structure• Rewards performance• Focuses dollars on employees that are most likely to leave because of pay 15
  16. 16. Merit Matrix - Concept• Employee 1 ( 1 ) and Employee 2 ( 2 ) are both accountants with exactly the same tenure, experience, education and pay. Only performance differentiates them. To whom would you provide a higher pay increase, low-performing Employee 1 or high-performing Employee 2? High 2 Low 1 16
  17. 17. Merit Matrix - Concept• In this example, all other factors are equal except current base salary. To whom would you provide a higher pay increase, high-paid Employee 1 or low-paid Employee 2? COMPENSATION Low High 2 1 17
  18. 18. Merit Matrix - Concept • Finally, all other factors being equal, to whom would you provide a higher pay increase, high-paid/low-performing Employee 1 or low-paid/high-performing Employee 2? COMPENSATION Low HighHigh 2Low 1 18
  19. 19. Merit Matrix - Example Typical Matrix Quartile in Range Performance 1 2 3 4 Exceptional 3.5% 3.5% 3.0% 3.0% Exceeds Expectation 3.0% 3.0% 3.0% 3.0% Effective 2.5% 2.5% 2.5% 2.0% Development Needed 2.5% 2.5% 2.0% 2.0% Critical Need for Improvement 2.5% 2.0% 2.0% 2.0% 19
  20. 20. Merit Matrix - Example Best Practice Matrix Quartile in Range Performance 1 2 3 4 Exceptional 6.5% 5.5% 5.0% 4.0% Exceeds Expectation 6.0% 5.0% 4.0% 3.0% Effective 5.0% 4.0% 3.0% 2.0% Development Needed 2.0% 1.0% 0.0% 0.0% Critical Need for Improvement 0.0% 0.0% 0.0% 0.0% 20
  21. 21. Merit Matrix - Example Ultra-Aggressive Matrix Quartile in Range Performance 1 2 3 4 Exceptional 13.0% 11.0% 5.0% 3.0% Exceeds Expectation 11.0% 6.0% 3.0% 1.0% Effective 4.0% 0.0% 0.0% 0.0% Development Needed 0.0% 0.0% 0.0% 0.0% Critical Need for Improvement 0.0% 0.0% 0.0% 0.0% 21
  22. 22. TypicalResults Matrix Quartile in Range Performance 1 2 3 4 Exceptional 8.0% 7.0% 6.0% 5.0% Exceeds Expectation 6.0% 5.0% 4.0% 2.5% Effective 4.5% 3.5% 3.0% 2.0% Development Needed 2.0% 0.0% 0.0% 0.0% Critical Need for Improvement 0.0% 0.0% 0.0% 0.0% Cost Summary Payroll: $30,400,917 Budget $: $1,064,032 Merit Increases: $1,071,120.86 Budget as % of Payroll: 3.5% Model fits Percent Increase: 3.5% within budget Cost Detail Quartile in Range Performance First Second Third Fourth Exceptional $83,979 $184,222 $88,669 $15,200 Exceeds Expectations $109,175 $158,310 $58,617 $0 Meets Expectations $108,116 $191,830 $36,698 $3,650 Development Needed $32,654 $0 $0 $0 Critical Need for Improvement $0 $0 $0 $0 Total Cost: $1,071,121 Employee Count Detail Quartile in Range Performance 1 2 3 4 Exceptional 24 36 16 4 Exceeds Expectations 36 60 20 0 Effective 52 96 16 4 Development Needed 36 40 20 4 Critical Need for Improvement 24 32 12 4 Total Employees: 536 22
  23. 23. Merit Matrix - Results Company XYZ Cost by Quartile $600,000 $500,000 Critical Need for Improvement $400,000 Meets Merit Increase Cost Expectations $300,000 Exceeds Expectations $200,000 Exceptional $100,000 $0 1 2 3 4 23 Quartile in Range
  24. 24. Merit Matrix - Results Company XYZ Costs by Performance Level $400,000 $350,000 $300,000 Fourth $250,000 ThirdCost $200,000 $150,000 Second $100,000 $50,000 First $0 Exceptional Exceeds Expectations Meets Expectations Development Needed Critical Need for Improvement 24 Performance
  25. 25. Merit Matrix - Employee Analysis First Salary Grade Perf- Merit New MeritLast Name Name Job Title Min Max Salary Quartile ormance Percent Salary IncreaseBrown Stan HR Generalist $47,042 $72,915 $46,000 1 4 6.0% $47,042 $2,822.52Phillips Kevin IT Analyst $53,058 $84,892 $64,550 2 4 5.0% $64,550 $3,227.50Pence Skyler Construction Manager $47,042 $72,915 $76,000 4 5 5.0% $76,000 $3,800.00Pratt Jason Controller $70,169 $112,270 $103,299 4 2 0.0% $103,299 $0.00Beals Susan Maintenance Manger $47,042 $72,915 $59,000 2 3 3.5% $59,000 $2,065.00Duncan Elizabeth President $153,058 $229,587 $200,000 3 5 6.0% $200,000 $12,000.00 Adjustment due to employee being below Lump sum increase salary range due to employee being at top of salary range 25
  26. 26. Merit Matrix• Cost neutral• Rewards performance• ―Targeted‖ turnover• Fair and efficient method for administering pay• Accelerates employees to market competitive pay levels 26
  27. 27. Merit Matrix – Common Pitfalls• Structures out of alignment with market – Garbage in, garbage out – May improperly allocate limited salary increase dollars based upon the current competitiveness of pay• Performance scores not calibrated – Supervisors can learn to game the system – Cheating is rewarded – Top performers may not be properly rewarded• Matrix results outside of budget 27
  28. 28. Assessing “Reasonable”Executive Compensation in Closely Held Businesses 28
  29. 29. Reasonable Compensation in Closely HeldBusinesses• The determination of reasonable compensation is particularly important when: – Arm’s length transactions are less likely, – Large amounts of compensation are provided to a visible position and – The boundaries between owners and employees are blurred.• Examples include divorce cases, S and C corporations and executive holdings of a significant number of company shares. 29
  30. 30. Reasonable Compensation Overview• There is no single recognized definition of reasonable compensation.• This is one of the key reasons that compensation frequently comes under scrutiny – without a clear approach to establishing what is reasonable, subjectivity bears heavy influence. 30
  31. 31. Reasonable Compensation Overview• According to the IRS, there are two key elements of determining reasonable compensation: 1. Intent Is the payment in exchange for services provided? 2. Amount Is the payment reasonable given the services rendered? 31
  32. 32. Reasonable Compensation – Intent• Compensation is reasonable only if the amount provided was both intended to be and treated as compensation at the time of payment.• Intent is typically questioned when there is an appearance of ―disguised dividends.‖• Considerations used in measuring intent include:1 1. The salary history of the employee 2. The dividend history of the corporation 3. The formality and timing of corporate action 4. The degree to which salary negotiations were conducted at arm’s length. 32 1 Moran, 290-4th T.M., Reasonable Compensation.
  33. 33. Reasonable Compensation – Amount• ―It is, in general, just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances.‖ Regs. 1.162-7(b)(3)• The Internal Revenue Manual identifies several factors that IRS personnel should consider in determining the reasonableness of compensation, including:1 – The nature of the employee’s duties – The employee’s background and experience – The size of the business – The employee’s contribution to the success of the business – The amount paid by similar size business in the same area to equally qualified employees for similar services 1Moran, 290-4th T.M., Reasonable Compensation. This is not an exhaustive list, but rather a listing of factors recognized as 33 principal considerations.
  34. 34. Effect of Performance on ReasonableCompensation• Measuring Performance – The courts have recognized significant profitability as rationalization of seemingly high executive compensation. This is particularly true for personal service organizations. – Other financial ratios that may be considered as indicators of corporate success include revenue growth, return on shareholders’ equity, return on assets, return on sales, earnings per share and return on capital.1 1 This list is not necessarily comprehensive. Rather, it is a representative list of financial performance metrics cited 34 by the courts as factors that may suggest superior performance.
  35. 35. Additional Considerations• Nonprofit compensation• Fair pay based on race and gender• Online performance management• Sales compensation 35
  36. 36. Summary/Key Takeaways• Market-based compensation system• Merit matrix• Compensation in closely held businesses
  37. 37. CBIZ CompCasts How to Set Pay Ranges that are Fair and EffectiveCompCasts Nonprofit Quick Guide to Navigating Intermediate Sanctions Creating and Using a Salary Increase Matrix Fair Pay: Maintaining Equality in Today’s Litigious Society In development at: www.cbiz.com/hr/compcasts 37 37
  38. 38. QUESTIONS? 38
  39. 39. CBIZ Human Capital Services Contact Edward Rataj Managing Director  314.692.5884  erataj@cbiz.com
  40. 40. Thank You

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