Compensation Force

More on Implementing a Living Wage

We left yesterday's discussion of implementing a living wage at the step where your organization makes a decision on setting a living wage figure.

Once a living wage figure has been set, your next step is to ascertain where, and in what manner, it impacts your pay program and practices.  Opinions differ here, but my recommendation is that the identified living wage figure becomes, for all practical purposes, your new wage/salary floor.  No wage/salary steps, schedules or ranges should drop below this level, and no employees should be paid below this rate (with possible exceptions for situations like interns, student workers, etc.).

Most organizations who implement a living wage program will experience an increase in labor costs.  Some will be able to immediately absorb any costs involved; others may not.  As with any new pay initiative, I strongly recommend that you assess costs and affordability before any public announcement is made - internally or externally.  As with any new pay initiative, be sure that you are ready and able to put your money where your mouth is - or you risk ultimately creating more bad will than good. 

To be clear on a critical point, I do not see an incompatibility between a cost of labor based pay program and a living wage floor.  Any organization that I have worked with on a living wage initiative is very purposeful about paying for cost of labor, not cost of living, once the living wage floor has been exceeded.  We endeavor to be very clear on this when communicating to employees.

As I stated in my initial post, I do not claim to be an expert of any kind in the area of living wage.  The purpose of this post series on that topic is to set out the lessons I have learned, and then provide my readers who have knowledge and information on the topic the opportunity to chime in for the benefit of all.

And so, readers, I turn the mike to you.

On Implementing a Living Wage

Living wage is a term used to describe the minimum hourly wage (or annual salary) necessary for an individual to achieve a particular standard of living, typically to pay for the basic necessities of life.  It is different from the minimum wage set by law; it is typically established on the principle that the minimum wage fails to meet the requirement of a living wage. 

The living wage movement is an international one.  Here in the U.S., a range of government entities have enacted ordinances which set a living wage minimum for jobs within their jurisdiction.  In addition, a number of private employers have implemented a living wage policy covering their own employees, typically as a reflection of their organizational purpose and mission.

While it is indeed my typical position to advocate directing and defining compensation programs as based on cost of labor, rather than cost of living, (and, as I will elaborate later, I do not see this position as incompatible with the use of a living wage standard) I do also want to dedicate some discussion to the phenomenon of living wage, for the benefit of those organizations who decide that it behooves them and their particular mission to implement one. My intent here is not to argue the political or economic pros and cons of the concept of a living wage.  Rather, I accept that there are organizations (often, but not exclusively, not-for-profits) who have established this as an important and necessary step.  With them in mind, I wanted to take the opportunity to share some of what I've learned in this area.

I have not been involved in any public sector living wage initiatives, which is where the bulk of these efforts seem to take place, but I have assisted a few private client organizations in developing and implementing their own programs.  I have found this territory to be largely uncharted with respect to formal program development guideposts.  For this reason, I hope - with the assistance of informed readers - to shed a little light to help others starting down this path.

First of all there appears to be no universally agreed-upon standard for what comprises a living wage, or how you go about implementing one.  It is therefore up to your organization, and its governing body, to determine this.  We - my clients, their other advisors and I - have found sources such as the Economic Policy Institute and their family budget calculator to provide helpful information on detailed living costs for different geographic areas and different family configurations.  Readers, I am certain, can suggest others as well.  One of the first and most important steps your organization must take is to identify a living wage figure.

As with many aspects of implementing a living wage, there doesn't appear to be a lot to guide your decision.  I would simply recommend that you make the decision in a manner and using a process that reflects your mission and your original objectives for seeking to take this step.  If other organizations in your labor market have implemented a living wage, their decisions might provide useful precedents as well.  Finally, it may make sense to have key constituents - internal and external - weigh in with their thoughts and opinions.

Continued in tomorrow's post.

Free Resource: Sample Forms, Plans & Policies

I like to inform my readers of free resources I run across that I believe can be helpful to them in managing their reward programs.

One such resource is CompReport, a monthly newsletter published by Watson Wyatt Data Services.  In addition to compensation news (mostly that generated by WWDS research and surveys), the newsletter regularly features links to sample forms, plans and policies.  Recent editions, for example, have featured sample employee relocation policies, severance contracts and incentive plan documents.

I am not an advocate of simply lifting plans and policies from other settings and dropping them into yours; it is important to understand and design programs to meet the specific needs and circumstances of your organization.  Having said that, though, samples like these can provide a helpful starting place and ideas on structure and content.

Sign up for CompReport here.  Enjoy!

The Words "Discretionary" & "Incentives" Should Not Be Used in the Same Sentence

Discretionary awards are not incentives, not in the true sense of the word.  Not in my opinion, anyway.  Seeing the words "discretionary" and "incentives" used together, for me, produces an effect similar to fingernails being dragged across a chalkboard.

A discretionary award, typically, is one where the decision whether to grant an award and for how much is left to the judgment of an individual or group.  There are no formal rules, criteria or targets - although sometimes there is a general sense of what the judgment is based upon.

Here is the essence of the issue, for me:  A discretionary plan really doesn't communicate to participants what steps or actions are necessary to earn an award.  So you aren't really directing - or incenting - them to do anything in particular.  (Except maybe hope.)

A recent conversation I had with a manager - someone employed by a company with a history of annual discretionary bonuses - sticks in my mind.  When I asked him his opinion of the bonus plan, and the impact he thought it had on his work, he told me, "It's great when the bonus comes through; I really appreciate the additional money.  But I have no idea what I'm supposed to do to earn it.  I don't think any of us do."  To me, this sums up the entire issue.

I understand and appreciate that leaving a bonus decision up to somebody's last minute judgment seems like a safe thing to do.  It feels way less risky than making that upfront commitment (i.e. if you do X, we'll pay you Y).  The question is: What are you getting for those bonus dollars, other than the warm feeling that you've covered all your bases before handing them out?  You haven't driven any particular results or behaviors, have you?

So, go ahead with that discretionary plan, if you must.  Just don't kid yourself into thinking that you are incenting anyone.

 

Vacanza

I will be away from my office on vacation through this week and the next.  Posting, as well as comment mediation and response, will be on the slow side though this period, but I will do my best to keep some content coming to you.  Thanks in advance for your patience and understanding!

More Early Salary Budget Data: Salary Increases Look to Hold Steady in 2009

Preliminary results from the CompData 2008 survey shows pay budgets essentially remaining flat from 2008 to 2009.  According to the survey, salary increase budgets were reported at 3.60% for 2007 and 2008, and are projected to be 3.62% in 2009.

Although these early figures are a little lower than those released at the beginning of May by Economic Research Institute, which reported average 2008 salary increase budgets of 4.1% and 2009 projections of 4.0%, they do reinforce the theme of flatness.  Based at least on what we are seeing so far, it doesn't appear that 2009 increases, on average, will be substantively different from 2008. 

More to come on this, as some of the largest salary budget surveys will be releasing results later into the summer.

Just Don't Call it a Cost of Living Increase

We are all feeling the pressure of rising prices, and our friends at the Economic Research Institute predict that this will soon translate (and for many of you, perhaps already has) into pressure from employees to address the increase in cost of living.

Step carefully, for this is slippery territory.

I have posted before on the distinction between cost of living and cost of labor, an absolutely critical one when it comes to compensation philosophy and compensation communication.  It speaks - I believe - to the very purpose of your pay program.

Is it...

1. To reimburse employees for their cost of living, or
2. To pay employees the market cost of their labor?

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 (i.e., housing, transportation, groceries, etc.)

More on the cost of living and cost of labor from Linda Lampkin, ERI's Research Director:

What you spend -- your specific cost of living -- depends on how you choose to spend your money. And what you earn depends on what you do for a living and where you do it. The reality is that different people have different expenses, even though cost of living is often discussed as if it were a single discrete universal number.  The federal government tries to measure the changing prices of a fixed market basket of goods and services over time, but there is no one single cost figure that accurately measures individual expenses. The real 'cost of living' is based on decisions by individual consumers on how to spend the money they have.

Setting and adjusting wage/salary levels in light of today's dynamics is a tricky thing.  It must be done thoughtfully, with clear intent and informed by the right set of data.

And so, repeat after me:

We pay cost of labor, not cost of living.

We pay cost of labor ...

On Employees and Pay Maximums

Some of the most challenging conversations that I've had in the course of my compensation work have been with employees who were either at or over the top of their salary range maximums.  I'm guessing more than a few readers can say the same.  Following a comment exchange on this topic with a reader in a recent post on lump sum merit increases, I decided that a separate post might be in order.

Organizations with formal compensation programs in place typically establish salary ranges (or steps or schedules) for the purpose of managing base salary decisions in a consistent and equitable way.  Inevitably, based on continued tenure (or for a host of other reasons), employees reach the maximum salary rate for their assigned range or schedule.  On the positive side, range or schedule maximums are typically set at a premium over the "going market rate" for a position (in my experience, 15% to 20% is most common), so the employer has presumably allowed for some "extra" to reward those who have performed well in the position over time.  Also, it is good news that most organizations review and adjust their ranges and schedules on a regular basis in order to keep them competitive, thus providing even "at max" employees some opportunity for movement.  There is also the practice of providing lump sum merit awards in lieu of salary increases, in an effort to keep these employees "whole".

The undeniable bad news, however, is that employees in this situation will likely see their annual income move very slowly going forward.  Particularly in times of rising costs, this is not welcome information.

As a reward professional, I have two thought streams on this.

First, this.  It is a real but sometimes hard-to-swallow fact that different jobs and skill sets command different pay rates in the market for talent.  Accordingly, every job and skill set faces a pay limit related to its value in the market.  Want to earn more?  Then learn new skills, increase your capabilities, get a degree (all of these preferably in a high demand talent area) - in general, figure out how to bring more value to your (or any) employer.

I rarely, of course, get the standing O when I deliver this speech to a group of employees.  But I do it anyway, because I think I owe them the information and perspective, and because I think it is important for all of us to understand how the market for pay works.  And for all of us to appreciate that we each have a role and a responsibility relative to our wish to maximize our income.

Ok, then.

There is the other (second) side of the coin as well.  Employers, HR and reward professionals: If we are really about talent management (and not just personnel administration), we should be looking at these situations and asking ourselves is this a case of an overpaid employee or an underutilized asset?  Have we truly considered whether or not we can better leverage this person's talent and abilities in a higher value role?  Are we providing tuition benefits and other support that the motivated employee can tap into on their quest to continuously improve their skills?  Does our annual performance management process include (or mandate) regular conversations about stretching and development?

Certainly, it is often the case that we have set the employment stage well, with all the necessary support and assistance, and it is up to the employee to take the ownership and initiative for the next step.  But I'd like to leave you with Thomas Friedman's (he of The World is Flat, one of my favorite books) recommendation for the new employment contract between today's employers and employees, as food for further thought:

You give me your labor, and I will guarantee that as long as you work here, I will give you every opportunity-through either career advancement or training-tobecome more employable, more versatile. 

Know Ye the Regs When Awarding Bonuses or Lump Sums to Nonexempts

Cash incentive, bonus and lump sum merit awards are becoming increasingly prevalent for all employees, including those determined to be nonexempt from the requirements of the Fair Labor Standards Act (FLSA).  Many employers do not realize that there are regulations governing how these awards impact the compensation of nonexempt employees.

Bonuses paid to nonexempt employees are included in the determination of their regular wage rate, which impacts any overtime payments, unless the bonus falls into one of several exceptions.  To help us with the detailed ins and outs of these regulations and to shed light on the exceptions, Michael Moore of the Pennsylvania Labor and Employment Blog has a very helpful and informative post on the topic up today.

I learned a few things from Michael on this topic.  I was not aware of the first exception he mentions - the percent of total earnings bonus - and I take this as a piece of good news.  Many of us in the HR and rewards fields are most aware of the discretionary exception, but applying it means that you essentially abdicate tying the bonus to performance in any way, not an attractive choice for many employers.  I believe that this has prevented a number of organizations from offering a bonus or cash incentive plan to their nonexempt staff.  The percent total earnings exception, while laden with its own complications, provides a solid alternative worth considering.

Michael and I connected over his comment to my recent and related post on lump sum merit increases for "over max" employees - and decided that both of our readers would greatly benefit from more information on the regs surrounding nonexempt bonus/lump sum awards.  And for those who aren't already familiar with it, Michael's blog is a great source for keeping abreast of the legal angles of compensation and other HR topics - an excellent one to add to your reading list.

Offering Benefits to Part-Timers

We did a bit of research this week, for a client, on the topic of benefits for part-time employees.  Thought I'd share a few tidbits here.

The upshot:  About half or more of all organizations offer some benefits to part-time employees.  Bigger organizations are more likely to do it than smaller organizations.  Not-for-profit organizations are much more likely to do it than their for-profit counterparts.

The benefit most commonly offered to part-time employees (about 75%-80% of employers nationally) is the opportunity to participate in a defined contribution plan (i.e. a 401k).  On average these employers require a minimum number of hours  of just over 1,000 annually in order for a part-time employee to be eligible.  The next most common benefit offered to part-timers is paid vacation (about 70%-75% of employers nationally), with a similar average eligibility hurdle.

Based on the studies we considered, the benefit offered least often to part-time employees is disability coverage (less than 50% of employers nationally).