Compensation Force

Pay Transparency: (Not) The Solution to Pay Discrimination

In this week's Balancing Act column in The Miami Herald, Cindy Krischer Goodman quotes me and others in her examination of fair pay legislation.  One of her key points: That salary secrecy contributes to pay discrimination.  She quotes financial analyst Suze Orman who is a big proponent of open discussion of salaries and who believes that access to salary information would empower and protect employees.

It sounds good in theory, I admit.  I don't believe it would work out quite so smoothly or easily in real life practice, however.  John Hollon, Editor at Workforce Management/author of The Business of Management blog, and I had a recent exchange on this topic, which he posts on here.  I find myself agreeing with John's take (as a longtime manager) on the issue, which is "nobody wins when workers know what everybody else makes."

One of the biggest problems with this "transparency doctrine" is that comparing salaries and drawing conclusions about their fairness requires a measure of independence and objectivity.  I have had many, many one-on-one conversations with employees about their pay over the course of my compensation career, and this experience has convinced me of a basic truth:  We simply cannot be completely objective about the value of our jobs and the work we perform.  Nor can we be completely objective when comparing our jobs, our work and our pay to others.  Can you say inherent conflict of interest?

Somebody would need to convince me of how the positive consequences of open access to salary information would outweigh the potential negatives - as John puts it, "bad feelings, bad blood and bad karma."

What's more, employees themselves hold a bit of a double standard in this regard.  According to recent research by Ceridian, while 46% of employees are interested in learning the salaries of colleagues, 89% are reluctant to have their own salary information shared with those colleagues.  That tells me that there is a privacy issue at stake as well.

I don't mean to get employers off the hook for transparency, though.  While I am not in favor of sharing the what (employees make), I am a big proponent of sharing the how and the why:

• The How is about the mechanics of pay in your organization; how jobs are valued, how increases are determined, etc.

• The Why is about your organization's pay strategy, the objectives management is seeking to achieve and the rationale underlying the pay program.  This includes questions like how the organization defines its competitive market for talent and the way in which performance influences an employee's pay.

To empower employees, to assure them that they are being treated fairly and to make clear the standards to which they should hold us accountable in that fair pay treatment, we must provide them with the information they need to put their pay situation in as objective a context as possible.  As I've said before, without this proactive communication employees are left with no choice but to draw their own conclusions about the organization's intent and practices.

Sales Commission Calculation - Just the Basics, Ma'am

Like many of you, my fourth quarter included a lot of sales compensation design, review and revision.  Given the business environment and the forecasting difficulties that many organizations are facing, some are still working - even now - to get sales incentive plans nailed down in final form.  With this in mind, I thought it might be helpful to dedicate a post to the basics of sales commission calculation.

No, don't run away yet - I promise you it is clear, straightforward and relatively painless.

At its heart, sales commission calculation rests on a simple formula:

(Target Incentive Amount/Target Volume) x 100 = Commission Rate

Target incentive amount represents the amount of incentive (commission) that the sales person should receive if they achieve target sales volume.  Target sales volume (which may also be expressed as a quota) is the sales production goal for the sales person, in revenue dollars, gross margin dollars, units sold - whatever metric is determined to best fit the sales job's focus and responsibilities. (Note that I am leaving the design questions aside here - although they are clearly critical - in order to focus solely on commission calculation.)

Let's say that a particular sales job has a target incentive amount of $40,000 and a target volume of $2,000,000.  In other words, we have set a target or quota of $2,000,000 for the position, and we intend to pay $40,000 in commissions if the sales person achieves that target.  The commission rate necessary to accomplish our objectives is calculated by applying our simple formula, as illustrated below.

($40,000/$2,000,000) x 100 = 2% Commission Rate

That's it.  What you have in this 2% is a classic flat commission rate, which pays out at the same rate for every sale. On its own, a solid approach for many sales jobs.  There are also multi-stepped commission rates, progressive or accelerated rates in order to provide greater upside for outstanding performance, regressive or decelerated rates in order to "tamp down" earnings beyond a certain point (typically an alternative to any kind of "cap") - even "matrixed" commission rates as a way of addressing competing sales objectives.  The list is probably endless.

But I thought this basic formula might be a good place to begin, and to help my HR colleagues start gaining a solid footing in the sales incentive arena.  Happy calculating all!

Image: Creative Commons Photo "Studying till the Sun Goes Down" by Jekert Gwapo

Talent Takes a Leap Forward: Introducing FOTv

It's Must-See TV for the talent blogosphere ... head over to Fistful of Talent to check out the pilot episode of Fistful TV.  The first installment features FOT bloggers Kris Dunn, Jessica Lee and Josh Letourneau riffing on camera about the Employee Free Choice Act, social media, needy candidates, firing employees who interview for other jobs and job descriptions that suck. 

Thanks for the shout out Jessica!  Great job pulling it all together Kris!

Recession-Driven Sense of Shared Destiny - Are We Missing An Opportunity?

Difficult times drive changes in our personal priorities.  Who among us hasn't experienced that over the past few months?

The findings of a recent Towers Perrin study of employees (469 employees from mid to large sized U.S. companies conducted December 3-11, 2008) indicate that difficult times are causing not only a shift in priorities, but also a subtle shift in attitude toward employers, when compared to a similar study completed just 4 month earlier in August 2008.

Employee priority changes, when polled about the top five factors most important to their work experience, include:

• "A secure position they can count on for the long term", not surprisingly, topped the list with 59% ranking it among their top five, up from 46% in August.

• "Adequate benefit protection for themselves and their families", again not difficult to understand, rose to the #2 slot with 56% putting it in their top five, up from 37% in August.

But from here I find it gets interesting.  Breaking into the top five list for the first time was "working for a successful organization with a strong future".  So employees recognize the important role that their employer plays in their future.  What's more, they understand and appreciate their own responsibility to help that employer succeed - 76% agree that they are personally motivated to help their employer succeed, up from 69% just 4 months earlier.

So, if we take a leap and generalize from these findings, more than three-quarters of employees are indicating a sense of shared destiny - shared responsibility - for their organization's success. 

Born out of self-interest or not - it's there.  What an opportunity for getting people engaged and focused on doing the right things!  The question is - are we taking advantage of it?  Are we ...

• Talking regularly and honestly about what is going on in the organization, in response to this interest (communication)?

• Providing the clearest possible information and direction on how they can contribute to the organization's future prosperity (performance management)?

• Putting the plans in place to share the rewards of everyone's efforts to drive the organization toward future success (incentives)?

• Taking advantage of the chance to cement this sense of partnership into our employment brand - for the tough times and, eventually, the good times that will come our way?

If not, why not?

Lily Ledbetter Fair Pay Act Passes Senate

Yesterday evening, the Senate passed the Lily Ledbetter Fair Pay Act of 2009 by a vote of 61 to 36.  President Obama has already indicated that he will sign the bill into law, so there are no real remaining hurdles for this legislation.

For details and information on the Act and how it will affect HR professionals, see these very informative posts -

Lily Ledbetter Fair Pay Act Passed by Senate and Awaiting Obama Signature - Pennsylvania Labor and Employment Blog

Lily Ledbetter Fair Pay Act of 2009 Passes Senate, 61 to 36; President Will Sign - Connecticut Employment Law Blog

A Fair Business Case for Different Pay Treatment?

Recent debates about the respective roles of free market and government regulation in pay determination brought to mind the story of a company I worked with several years ago.

This company was a highly entrepreneurial, fast growing and profitable niche healthcare provider.  A large portion of their workforce served in one role - a role both central and critical to their core service.  Let's call this job Certified Healthcare Technician (or CHT).  At the time that I was involved with them, this company was at the forefront of a boom of sorts in this particular medical niche.  Because of this boom and the limited supply of CHTs in their particular specialty, attracting and retaining talent in this important role was becoming very difficult.  In addition, this company had particularly rigorous performance standards for its CHTs, standards that they believed to be critical to the company's success.  This posed a challenge for recruiting and retention, because CHTs had the choice of working in other, less demanding environments for nearly the same wages.

After deliberation, management landed on a unique, two-tiered compensation strategy:  Compensation for CHTs would be positioned at the 100th percentile of the local market, while compensation for all other company jobs would be positioned just above market median (50th percentile).  Note to the statistically inclined: we had a number of discussions about what, exactly, constitutes the 100th percentile;  but essentially what management agreed to was a commitment to be the highest payer in the local market.  Period.  If someone brought in verifiable evidence that another local employer was paying more for the position, they agreed to either match or exceed it.

This was made completely transparent to the entire workforce.  Senior management's message, in rolling out the new philosophy and program, boiled down to this:  Filling this role with qualified, high performing employees is critical to our mission.  If we aren't sufficiently staffed in this position, we cannot open our doors for business.  Want to be paid at this level?  Fantastic!  We offer full tuition reimbursement for the 18 month certification program - please see Human Resources about enrolling today!

My take?  I thought this was a solid and smart move on the company's part, built on a strong business case and executed in an honest and transparent way.  Like any other strategy, naturally, it would have to be examined annually in order to see whether it still fit and to adjust it as the situation demanded.

Interesting twist, though - and here's what made me think about it.  The CHT population at that time was predominantly female.  My recollection puts it somewhere in the neighborhood of a 70%/30% gender ratio.

What if the CHT was a male-dominated job; for conversation's sake, let's say with a gender ratio of 99%/1%?  Would I feel differently about the wisdom and fairness of that compensation strategy and the pay differentials it created?  Would you?

Could this strategy be construed as discriminatory, particularly in light of "possibly soon to come" pay fairness legislation?  Certainly there were other jobs at this employer that were "comparable" to the CHT in education and experience requirements, in level of decision making and problem solving, etc.

I'd like to say no...  What's your take?

The Carnival of HR is Up!

The Carnival of HR is up and running over at Michael Moore's Pennsylvania Labor & Employment Blog, featuring some of the best wisdom and advice in the HR blogosphere. 

Click over and check it out!

Image: Creative Commons Photo "IMG-6371-1"  by Brent Moore

Addressing, Avoiding Moral Hazard in Executive Compensation

Wikipedia defines moral hazard as "the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk".  In an article focusing on moral hazard in executive compensation, Frederic Cook discusses how this can play out when executive teams are "rewarded for the positive outcomes of good investments, but insulated from the negative consequences of investments that turn sour". 

A timely topic given the focus on executive incentives, by our representatives in Washington and the public at large, and their potential role in the credit crisis.

In the article, Cook provides a thoughtful examination of the concept of moral hazard in executive compensation.  He walks us through the ways that some of the more common executive incentive devices may fall short in mitigating potential moral hazard, and offers some "thought starters" to business leaders interested in avoiding this pitfall in their own compensation design and governance efforts.  I encourage you to read Cook's brief article in its entirety to check out all his ideas; here, however, are a few that make a whole lot of sense to me:

• Pay modest or no severance for failed performance. Senior executives could be subject to two tiers of severance benefit – one, a higher tier, for "no-fault" terminations; the other, a lower tier, for "good reason" terminations relating to failed performance that fall short of "for cause" definitions. The public simply cannot understand why boards allow executives to receive multi-million dollar settlements when they are fired for leading the company to failure. It undercuts public support for good executive compensation practices and contributes to public perceptions that the game is rigged in executives' favor.

• Prohibit "flipping" of option gains. Require executives who exercise valuable options to hold a portion of the after-tax profit shares. For example, requiring executives to hold 25-50% of the net after-tax profit shares remaining after covering the option exercise price and taxes for one year after exercise is not onerous. It would function as a form of "claw back" if the executives exercised at a high point and the stock subsequently declined because of poor performance.

Sound ideas from one of the premier experts in the field, and a reminder to any of us involved in executive compensation design:  While we must keep in mind the need to attract and retain the executive talent required to lead our organizations in these difficult times, we must also ensure that the pay programs we implement reflect a responsible and sustained balance between the interests of all affected parties.

Image: Creative Commons Photo "Hazards! Ahead!" by Podknox

2009 - A Game Changer for Long Term Incentives

With the economy and markets in turmoil, many organizations are struggling to find the best response across all elements of their compensation strategy, but particularly for their equity-based pay plans.

In an article covering initial results of its recent study "Weathering the Storm in 2009", Mercer discusses the game-changing nature of what we are now facing, notes some of the early approaches being taken, and suggests a list of factors to consider in finding the solution for your organization.

From the Mercer article...

We believe that many companies will be hard-pressed to maintain the same value of LTI grants for upcoming awards due to plan share deficiencies or the appearance of overreaching, or both. The economic turmoil in today’s markets is unprecedented, so unprecedented actions are likely to be taken.

While companies are still planning their actions for 2009 grants, early indications are that many companies will be reducing grant levels this year, potentially by significant levels (10 percent – 30 percent). While strategies are still evolving and we are seeing a wide range of responses to these market conditions, early approaches include the following:  

-Reducing value by a fixed percentage – Some companies are considering an across-the-board haircut to target LTI grant values. For example, a 10 percent to 30 percent reduction in grant guidelines from 2008 is being considered to recognize the market decline and mitigate share usage. 

-Using an average share price and volatility to calibrate grants – Instead of using a current “spot” price of stock for calibrating the number of shares granted, companies may use historical 3-, 6- or 12-month average prices to smooth the impact of recent price declines. Similarly, companies could adjust share price volatility calculations to mitigate the impact of recent sharp price declines on option values. (Note that these suggestions apply to the calibration of award levels and should not be used to set the fair-market exercise price or determine accounting costs.)  

-Using a “collar” approach to at least partially adjust grant levels to meet a target value – Companies are allowing an adjustment to the number of shares to adjust to value, but are providing a cap on the maximum adjustment to share grants versus the prior year (for example, 25 percent to 50 percent increase). 

-Calibrating grants in light of company performance – Performance for 2008 can be used as a barometer for grant sizes. For example, LTI grants may be adjusted proportionately to be directionally in line with annual incentive payouts relative to targets. This approach takes a performance-granting perspective of awards.

Current surveys generally reflect practices from early 2008 while proxies reflect LTI grants from 2007. This means that market data will play a modest role, if any, in decision making for 2009. We recommend that companies evaluate a range of factors to determine the best course of action for 2009 to suit their unique situations. 

-Impact of the economic environment on your company and industry – Consider the shareholder perspective. Share prices in some industries, such as consumer packaged goods, have held up well in this environment, while others, such as financial services organizations, have been hit hard. Grant value reductions are likely to be greater in those sectors with greater share price declines.

-Total share usage and plan capacity – Model the total share usage as a percentage of common shares outstanding under a range of grant scenarios to assess the share-based run rate and implications for share plan capacity. Run rates over the past few years have declined substantially. While 2008 levels may be unrealistically low to replicate for 2009, a dramatic increase (for example, two to three times in the prior year) may be too much. Further, the amount of shares available may not support grant levels without adjustments, and it may take a while for performance to recover enough to obtain a significant new authorization. 

-Economic run rate – Consider the proportion of a company’s total market capitalization delivered in equity awards relative to the prior year, and relative to peer organizations. This value is the market value of share grants and the Black-Scholes value of options, divided by market capitalization. This provides perspective on the value transfer and executive “stake in the enterprise,” and is scrutinized by shareholders. 

-Retention value of outstanding awards – Analyze the value of unvested LTI awards under a variety of stock price scenarios over the next two to four years to understand the role 2009 grants need to play in retaining critical talent. Unvested gain of two to four times base salary for executives is a guideline to consider to counter potentially attractive hire-on offers from competitors. 

-Differentiation for critical talent and high performers – Assess the impact of maintaining values for critical talent and high performers, but reduce grants significantly for others to drive the allocation of awards based on impact and the need to retain. This may require making changes to LTI eligibility or participation rates at certain levels, or for specific job families within the organization. 

-Financial expense – Many companies that are aggressively cutting costs and equity expenses may come under review as well. Modeling the impact on accounting expenses will help frame the tolerance for LTI grant levels and how to balance dilution versus value.

-Shareholder and advisory guidelines – Institutional shareholders and proxy advisers such as RiskMetrics Group (formerly ISS) have guidelines on share and economic run rate levels. The impact of grants on those levels should also be examined. 

-Compare relative impact on peers – If peer share prices have declined more than your company’s, you may need to use proportionately more shares than your peers for this year, and vice versa. This may point the way to what your peers’ share usage may look like in 2009 to assess the competitive imperative for adjusting grant levels.

These are challenging times, particularly for those of us charged with managing LTI and equity-based compensation programs.  I suspect we'll continue to learn our way - collectively - through this unique period, but it helps to get the kind of perspective and guidance that Mercer offers here.

Summary Thoughts on the Paycheck Fairness Act

The Paycheck Fairness Act has passed the House and has been introduced into the Senate.

I posted on this legislation and related topics several times last week (here, here and here); by now regular readers are probably aware of my fears that this Act will bring us more harm than good.

A few final thoughts here and then - like everyone else - I'll be waiting to see what happens as the Senate considers this potential law.

I certainly share the concerns expressed by others about the "trial attorney windfall" aspects of the Act, which include:

• The elimination of any limits on punitive and compensatory damage, without requiring any proof of intent to discriminate, and

• The fact that workers are automatically made members of a class action suit, unless they opt out.

Additionally, while the overt comparable worth provision appears to have been removed from the legislation, a lot of the language and provisions that remain (including the rather potent phrase "similarly situated employees") appear "comparable worth like" in their intent and description.  At the very least, they would give the motivated prosecutor a lot to work with.

And so I fear that the outcomes of this legislation would go beyond intentional and even inadvertent discrimination to pursue and punish employers for maintaining differences in pay that are based in market demands and business needs.

I see the Act, if passed, as having a substantial impact on the work and priorities of those of us in the reward profession.  Driving business growth and success through insightful reward design may have to take a back seat to defense.  The name of the game will be compliance, baby - recession or not.

The biggest winners will be the trial lawyers and - yes - the consultants.  Everyone else, including women, I'm not so sure.

With that, I will return you to our regularly scheduled programming...