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Original Brodcast: Thursday, October 18, 2016, 1:30 PM
Summary: In this webinar, Insight Performance discusses the upcoming trends and updates for compensation in the workplace in 2017.
Nancy Saperstone: Hi everyone, thank you for joining us today for our Compensation Update and Trends webinar. This is Nancy Saperstone and I am here with Liz Bernaiche, our Compensation Practice Leader at Insight. This is always a very hot topic in terms of it, every fall we have this webinar to hear about the upcoming trends and projected increases for the following year. I think we are going to get a ton of information today.
Just a few housekeeping items before we get started. If you are having any problems, just send a question to me and I will be able to help you out throughout the webinar. Also, if you do have any questions as we go through the webinar, send those as well and we will either try and answer them as we go through the webinar or if we don’t answer it during the webinar, we will try to address it all at the end. You will also see there is a handout that is a copy of the slides if you want to take your notes there, that is in the handout section as well. Without further ado, I’ll hand it over to Liz.
Current Economy
Liz Bernaiche: Thank you, Nancy. I want to welcome everyone to our annual compensation trends webinar. In terms of the agenda, I’m going to start out with a very quick update on what’s going on in the economy. Then we’ll move to what we’re seeing in the market around 2017 compensation planning. I will touch on regulatory updates [and] equal pay – [these] are two of the hottest topics and the [are the] ones that will probably be giving you the most headaches in the coming months as we prepare for some of those regulatory changes. Then I’ll go through a couple of quick hot topics of what we’re seeing around total cash compensation and performance management. We’ll finish up with some of the key takeaways from this webinar and any questions that you might have.
In terms of the economic update, in terms of inflation, it’s been relatively flat. In August or September, the report was about 1.1%, which has been very consistent month to month. We are seeing a slight uptick this month to about 1.5%. But overall, inflation isn’t really moving in any particular direction right now. A few years ago, the energy industry was very high, salaries were very high, [and] increased budgets were high. We’ve seen a pretty significant drop in that industry and that’s really had an effect to salary increased budgets in related industries heading in to 2017. We’ll talk a little bit about that as well.
Unemployment
Unemployment has actually been steadily improving. In 2009, it was about 9.5% and we’re down to 4.9%. That can be a little bit misleading. It’s relatively flat and going in the right direction, but there’s some belief in the market that is probably due to the fact that we have over 500,000 discouraged workers. Those are people who are actually not even looking for employment anymore because they don’t feel like there is a job in the market for them.
The gains that we are seeing around employment are in professional and business services and healthcare. At least we are moving in the right direction with unemployment, but we need to be cautious about what that statistic actually means. Finally, there continues to be a lot of volatility in the international markets and that really adds to the uncertainty about how the global economy is doing and that has an effect also to what companies are doing around salary increased budgets.
In terms of 2017 planning, when we think about this economic update, I’m going to speak to merit budgets [and] salary range adjustments if you have a salary structure in place. What we’re seeing around the new graduates coming out of college and what their opportunities are in the market and what we continue to see around variable pay trends.
This is a projection that we show every year. It’s the five-year look back on salary increased budgets and as you can see in 2013, we were just below 3%, we had a slight climb up in 2014, and then things have been very flat at 3%. We are expecting that 2017 will continue with the same trend. The actual spend in 2016 was 3% however, that was nationwide. If we look at Massachusetts specifically, Massachusetts came in at 2.8% for salary increase spend. The local market is tracking slightly behind the national market. Two of the reasons really that we’re not seeing a lot of movement with the budget again, is the concern about the global economy and also with inflation remaining so low, employers aren’t really feeling the push to increase salary budgets since inflation really isn’t going up that much.
If we look at the budget for 3% for 2017, we’re finding that the same thing is happening as in the prior two years. There isn’t a differentiation across employee groups. Gone are the days of the executive population would be at 4% or 5% and then the rest of the budget would be budgeted down for other groups. It’s pretty consistent across all types of employees in the organization. In the larger metropolitan areas in the country, budgets are really going to fluctuate around that 3%. They are going to go from about 2.8% up to 3.4%. Depending on what city some industries are located in, they might see a slight downward trend on budgets or slight up check in the budget.
Some industries will continue to pay higher than the 3%, somewhere between 3.1 and 3.3. Others are going to lag the national salary increase budget targets, some industries are actually going down as low as 0% up to 2.6%. When we did this webinar last year, we said that trends showed about 1% to 2% of companies, which froze salaries in 2016. It actually ended up being 10% of companies [that] froze salaries in 2016. A lot of that really was related to oil and energy in those related industries where they really had a downward turn. As a result, they ended up freezing salaries for employees.
Assuming the economy continues to strengthen, many of these employers who froze salaries in 2016 said that they will provide some type of salary increase in the coming year. When we look at actual industries and geographical areas that are going to lag the 3% trend in the market, the industries are the main ones that coming in below clearly are education at 2.7%, transportation at 2.6%, [and] oil, gas, energy industry at 2.4%. Keep in mind some of those oil and gas companies are actually going to stay 100% in some cases for their salary increased budget.
Geography
In terms of geography, Texas is certainly going to struggle to stay below the 3% or coming in between 2.6% and 2.8%, and Boston being the other area that’s already identified a downward trend at 2.8%. When you think about merit budgets, we continue to see a lot of challenges in the market around managing merit pay. First of all, salary increases have a cost. They really increase fixed cost within an organization and sometimes salaries are linked to an increase in benefit cost. If you think about PTO or disability programs, those will track with increases in base salaries. A lot of companies are struggling with how to use merit pay or cost of living adjustments when they think about what the on-going cost of those programs is going to be to the organization.
There’s also a lot of challenge around motivating and rewarding employees with merit pay, because merit budgets are just too small to really make a difference. Very hard to differentiate pay when you’re working with a 2% to 3% salary increase budget. Many organizations almost use merit pay today as a link to cost of living where everybody gets a set percentage, and it really hurts top performers, because they are not being awarded above that cost of living amount and it doesn’t reflect that they’ve over performed in their goals.
Finally, another challenge with merit pay is just the prevalence. There’s a movement in the marketplace to really do away with merit pay programs and replace them more with variable cost programs that reward true performance. When we talk about hot topics, I’ll mention one of the trends we’re seeing around how merit pay is going to be used going forward and how that will impact variable pay programs. If you are using salary structure today, which is really a way of administering your pay philosophy and managing your employee costs, we are typically finding, as we have in the past, that salary structures are going to be lagging merit budgets by about 1%.
If the merit budget is 3%, salary range adjustments or the ageing of a salary structure is usually around 2% and that is the trend that we’re seeing in the market for 2017. Typically, we recommend you do keep pace with market with your salary structure. If you let your structure go too many years without adjusting it, the structure itself falls behind market. So, what you have is your entry pay level or your maximum level of pay for a given job becomes out dated with what the market is doing. So, it’s very important to try and keep that structure on target especially if you’re going to be rewarding employees with base salary increases.
New Hires
In terms of new hires, the National Association of Colleges and employers doesn’t add an annual salary survey to take a look at how college graduates are doing coming out of college. Overall, the message is pretty positive, employment has improved, we have less college grads looking for jobs and more college grads getting positions right out of the gate, [and] starting salaries are up. The average starting salary that we’re seeing across all disciplines is just over $50,000 for a four-year degree. There are some disciplines that are continuing to pay well above that in the market. A lot of them are in the field of science and engineering, and then general studies. Basically, we’ve a lot of degrees paying anywhere between $69,200 down to $52,900.
The one thing that we are seeing is that engineering, although it’s still paying relatively high for college grad at $63,764, it’s one of the few professions where the employment levels have started to flatten out and starting salaries are down. The demand isn’t as high in the market for engineering versus the supply, and I think that it’s forcing some of those salaries to remain a little bit more flat than they have been in prior years.
Variable Pay
When we look at variable pay, we’re talking about annual incentive, short-term cash programs, the usage of variable pay is expected to continue into 2017. Aion does a study every year and they found that 89% of the companies that they survey are actually focused very heavily on variable pay as their primary way to reward for employee performance, Overall, we’re seeing a very flat level of spending as a percent of payroll for variable pay. Last year it was 12.8%, its projected to be 12.8% again in 2017. That’s more of a national look at variable pay based on where an organization is located. The city and the industry and the economic conditions of that area can certainly drive up the 12.8%, or on its flipside, it could really show lower spending for those particular areas.
We see that variable pay programs continue to be focused on answering a few of the critical questions. They really should be answering the question of what it is the organization wants to accomplish. The actual design of the incentive plan is only going to be effective if it’s tied to what the company’s goals are, their mission, and the culture. You also want to have a handle on what your competitors are doing in terms of variable pay so that you can keep pace and stay competitive with the market.
Variable pay programs are typically based on a combination of company performance. They may also look at department or team performance and individual performance. Often, we see that incentive targets vary based on the level within the organization. For example, in 2017, we expect non-exempt employees to have a bonus target of about 5% of salary, exempt professionals somewhere around 12% on average, and the executive population are quite a bit higher around 35%. Obviously within a particular job function, those percentages may vary, but this is generally what we’re seeing in the market around trends in variable comp targets.
Nancy: Liz, there is a question just to clarify what is variable pay and by that we’re talking about bonuses and then salary.
FLSA and Mass Equal Pay
Liz: Yes, talking about commissions, sales incentives, annual cash incentives, typically plans that are 12 months or less in duration between pay outs. I’m going to switch gears for a second and we’re going to talk about FLSA and mass equal pay. These are two of the biggest regulatory updates that we have all been invaded with this year. FLSA obviously is more immediate because it is going to go into effect on December 1st, and it really requires employers to be ready to comply with the updated regulations. As a point of reference to the number one thing that came out of this FLSA update is the increase to the salary basis test. Currently it’s $23,660 a year, and on December 1st it will increase $47,476.
The one thing that we try and make clear with our clients is that it doesn’t matter if an employee is full time or part time, that is not even a factor with the new regulatory updates. It’s just about what somebody’s earning in a given week. Currently, you have to earn $455 a week under the current FLSA regulations. On December 1st, that will increase to $913 a week. If somebody is not making $913 a week and they are in a position that you duty tested against the FLSA exemption test, the individuals would need to be non-exempt and paid on [an] hourly basis.
There is also an increase to the highly compensated exemption test, today that is set at a $100,000 and it will increase quite a bit to $134,004. This test can include non-discretionary costs run during the year. That was a part of the highly compensated exemption test in the past and it will continue to be a part of it going forward. Keep in mind with a highly compensated exemption test, it’s not just about the salary level, the employee still needs to pass at least one of the duties under the executive administrative or professional exemption test, and they have to be performing work that is either office or non-manual in nature.
For all of the other positions, there is a new element to the FLSA which says that an employer can use up to 10% of non-discretionary bonuses or commissions towards meeting that $47,476 threshold, as long as those non-discretionary awards are paid at least on a quarterly basis — but it is only up to 10%. It’s not 10% every quarter, so something to keep in mind and if you have great tracking mechanisms in place to track some of the quarterly commissions that you pay out, then you could take a look at whether or not you could factor those into meeting the salary basis test.
Unlike prior years, the salary threshold is going to increase every three years automatically. It’s going to update again on January 1st, 2020, it’s really going to track to that 40th percentile earnings off of the census.
Finally, there is no change to [the] primary duties test, that’s something that they were considering but haven’t made any additional changes yet.
Nancy: Liz, question for you. Can you just very briefly, I know it’s a huge topic it’s how the elections could have been different [and] things in the press in terms of different lawsuits again, stopping this going through and what our clients — what you should be doing now preparing.
Liz: Perfect question. I’m going to move to the next few slides and it will cover that question in detail. First of all, there are two lawsuits pending in Federal Court, one was filed by Nevada in Texas on behalf of 21 states. They really feel that the new regulations disregarded the intent of the FLSA. They said that the automatic increasing of the salary threshold every three years doesn’t allow for the common notice period, and basically, they’re saying that the law is unconstitutional. That’s one lawsuit that’s pending.
The second one was filed by 50 different business groups really speaking on behalf of small businesses and non-profit organizations, which are the ones that are really going to be impacted by this change and asking that the law be vacated and the ruling be at least be postponed until a more depth analysis can happen. In addition to that, the House passed a bill to delay on the December 1st effective date. That bill will go to the Senate, and the next session, and the only session left this year, is [the] November 14th session, which we all refer to the lame-duck session, because it will come right around election time. Generally speaking, people think it’s highly unlikely in the time that we have left that this regulation will be postponed. Our recommendation is to continue to proceed with the implementation and be ready to go on December 1st.
How to Prepare for Upcoming Changes
All right, what is it that you need to be doing? The number one thing is to make sure that all of your job descriptions are updated and they accurately reflect the responsibilities in the minimum qualifications for each position. The job description is the basis for the FLSA testing, so if the job descriptions are out-of-date, it’s certainly going to have an impact on the classification process. And then we recommend that you actually go through the FLSA classification for each position using one of the FLSA exemption tests and there are several, there’s executive, administrative, professional, outside sales, and then there’s the computer employee test as well.
So, you should be testing your jobs against one or more of those exemption tests to determine if they are non-exempt or exempt. Classification, you then need to assess the current employee salary versus the updated salary basis test. One of the things that is different about this update to the FLSA is that in the past, typically you would set the classification at the job level. A job is either non-exempt or exempt and everybody in the job would follow the classification. With the new regulations, you technically could have a job that passes the duties test [and] the job is exempt. However, you may have some employees in the job who are not at the $913 a week. Those employees would then be non-exempt. Potentially, you could be managing jobs where people are a combination of either exempt or non-exempt. That could pose some pretty serious challenges for employers to deal with motivation and concern around sitting next to somebody doing the same job, one person getting overtime and one person not. Just put a lot of time in determining what you’re going to do with the results of the FLSA classification.
Once you’ve looked at salaries, you have to identify the jobs that are misclassified and identify the employees that potentially are in a job that is classified as exempt but who do not meet the $913, and then determine what your strategy is going to be for managing their jobs and their compensation going forward. One option is to declassify employees who are below $913 to non-exempt, so they’ll be overtime, and the other is to increase their salary to get them up to $913 in a week and leave the job as employee non-exempt.
Obviously, there’s a lot to consider there. There’s the cost implication either way if you move employee from salary to hourly, there could be some potential overtime exposure from a financial stand point. Certainly, if you increase salaries to get people to the new threshold, you are going to incur a cost. Those are ongoing costs that can really add up for a company.
The most important thing we stress is the importance of communication. We’ve been working on some of these projects with clients, we’ve spent a lot of time on communication, we’ve done corporate wide messages, all managers and employees understand the law, we’ve targeted specific managers who are going to be managing employees through the change, and we have also met with individual employees and given them clarification as to what this change meets. Some of the key messages that you’re going to be communicating to your employees for the most part, this is a neutral change, employees who are going from salary to hourly should basically receive the same wages overall.
Potentially, they could earn more money if they get overtime hours. What they will see on their check is, probably if they’re looking at their paycheck, I know many people don’t do that anymore, but they should occasionally. What they might see in their paycheck is a difference in how their pay is displayed, whether their pay is displayed as hourly, or it’s whether it shows their biweekly or weekly full salary amount. That’s really all that they should see, nothing changes with withholding, they shouldn’t see any changes to the benefit deductions, it’s just a different way of being paid.
The second important message is that the employee’s job is still valuable. There is nothing about the change to their classification that impacts the organization’s need for the position, or the value [of] the job, or [how] they value their employee’s contribution. That’s a very important message, and that is where we are spending a lot of our time with employees who have moved from salaries to [hourlies] who feel like they’ve been demoted. We try and explain it has nothing to do with the company’s position, this is a federal law that organizations are required to comply with.
I think that’s the third message, is letting employees know that this is a law, it’s something that’s coming from outside the organization, and the organization is required to comply by December 1st. As an employer, you should provide training to newly classified employees on time keeping to make sure they understand what they need to do. If your employee is moving from salary to hourly, they need to track their time. If they are leaving the office, whether for lunch or an appointment, that’s time in and out of the office, they only get paid for the hours that they work. We also recommend that you create a strict overtime policy. One thing that is important is to make sure that employees know that they need to prove to work overtime before they actually work it. That gives you some control over those additional costs that you could incur for newly classified hourly employees.
Managers have a couple of roles in this process as well, they need to closely manage hourly employees and approve time cards. Those time cards should be submitted on time, because payroll should not be paying hourly employees unless they’ve recorded their hours. Managers, obviously, need to also keep track of and approve overtime before it’s worked.
Equal Pay Law
We are going to move on to the second big change from a compliance stand point, and that is enhance equal pay law which was passed in July 2016. It actually doesn’t go into effect until July 1st of 2018, but there a lot of things that organizations can be doing today to prepare for ensuring they are compliant with the new law. The basic elements of the law, basically what it says is that if people are doing work of comparable value, they should be getting paid the same regardless of whether they are male or female. It also allows employees to openly talk about salary with their coworkers without any retaliation on the employer’s part.
It also prohibits you as an employer from asking applicants about their salary history or what they were making in their last job. Whatever it might be around compensation, those questions can no longer be asked as of July 1st, 2018. It’s really is meant to provide additional support to women and families, especially single household families. There are few exceptions where pay differentiation is allowed, the most obvious is seniority. If two people are on the job, and someone has five years more than the other person, generally speaking, the more senior individual should be earning more compensation. There are also allowances [that] you have in a pay system. If you have a pay for performance program that pays higher performers more than average or low performers, then some differentiation in pay is allowed.
The third category is around production, if there is a formal measurement system in place and it’s based on production, and the most obvious example is sales quota, then employees are paid for their performance against that production goal [and] it’s okay to have a differentiation in compensation. Basically, they are doing the same job, one is clearly outperforming the other in terms of production, and they are getting compensated for that.
Another category is geographical location. If you live in New York City versus Kansas City, and [two people] are doing the exact same job, it is okay potentially to pay them slightly differently if the local market pays the position at a different rate.
Education training and experience to [the] degree they are related to the job can also play a role. If somebody has additional certifications or specific training that is helpful for the position, or even required for the position, they should be earning more than other individuals that are probably not there yet or don’t have as higher degree of training in education.
Finally, the other category is travel. Assuming travel is necessary for the job, the employee who is travelling more will certainly get additional compensation to compensate them for their time. What we recommend is that you benchmark your job against the market peer group to just make sure you have a really good sense of what competitive pay market levels are for positions within your organization.
One way to do that is to conduct a market study. Ideally, you would want to market price every position on your organization against the markets. So, you have a good sense of how the market is paying for every role. In the absence of being able to do that, you could look at some key benchmark jobs, prices in the market and come up with some salary ranges that’ll help you manage all the positions across the organization. Then you want to take a look at employee compensation and determine how employees are getting paid relative to the market. What is your internal positioning relative to market?
Then determine within your organization how employees getting paid in relation to each other, and if there is differentiation, where does that exist [and] why does it exist? This is not a two-hour project, this is a multi-week in-depth analysis, it may require you to take a look at employment files, somebody’s job history, it’s not something that you want to wait a year to start, you want to have a good sense of where pay differences are justified and where they are not justified.
If you go through this assessment and you determine that you have some employees who are not being paid what they should be paid, all things considered equal, two people in the same job, same performance level, same skill set earning different levels of pay, there needs to be some course of action to rectify that differential. It could come in the form of a salary adjustment [or] some type of special increase to really get those employees back on track with each other.
The other thing you would need to do with your employment applications is make sure is that you remove any references or requests for salary history from candidates who are applying for jobs. That has to be completely taken out of the employment application. We would also recommend you provide training to managers and recruiters so they know exactly what they can ask and what they cannot ask. It’s a very natural question to say, “What are you currently earning in your role, your current employer or what are you looking for salary?” Those are things you really won’t be able to ask going forward.
Finally, update any pay practices that you have to ensure they are fair, they’re equitable and they’re consistent. One way to do that is to have very consistent guidelines around starting salaries, around salary increases, and promotion opportunities and clear pathing, so there aren’t any gray areas where you could fall into the case of not really being on top of employee competition.
Hot Topics of 2017
All right. Now, we’re going to switch gears and talk a little bit about some of the hot topics that we’re seeing in 2017. I’m going to focus primarily on two areas. One is trends and cash compensation, and the second trend is with performance management. One of the most recent things that we’re seeing is that there’s a trend in the market to move away from merit pay based on performance and base pay increases on market value. What would happen in this instance is an organization would benchmark all its positions. It would then take a look at how employees are getting paid internally. For those employees whose market value increased, they would be eligible for base salary increase. For employees whose jobs’ market value decreased or held steady, their salary would be frozen and it wouldn’t increase at all.
The thought is that some of the dollars that are being put towards these pay increases could be saved by this approach. And then, that money could be funnelled into other types of incentive programs or variable pay programs to really reward top performers. It’s an interesting concept, because the most important thing is to be market competitive. In some ways, you can get people in the door and keep them at your organization. If you’re really looking at salary as being just market value, it’s one way to keep your eye on the external marketplace.
The next is linking performance to short-term incentive reward. Really trying to engage and retain the top performers, putting the right carrots out there for employees who are strong performers, and it almost is encouraging lower average performers [to] either step up and get some of these stretch incentives or move on or move out of the organization. One of the benefits of incentive programs that are really linked to performance is you get away from this concept of sandbagging, where companies are creating what they call incentive plans and they’re giving employees money every year. But the plan isn’t actually [incentivizing] anything, it’s just money at the end of the year that they’re paying back to the employees for a good overall company performance. Really what you want to do is get away from across the board types of rewards and really focus rewards on individual performance that is contributing to what the organization is trying to do.
In terms of incentive plan funding, as I already mentioned, one of the trends is to take some of the money from salary increase budget that’s not being used, and putting that into an incentive pool of dollars. It’s not going to be a lot of money, but it can be a little bit of an added incentive to boost up some of those awards for higher performers. Some organizations are also going to more of a self-funded type of incentive plan. Where if the company over achieve its set goals financially, a portion of that over achievement would then be the money that’s use to fund incentive plan. Variable comp plans are also focusing more on line of sight and meeting performance goals, what we often ask our clients to think about is what line of sight does an employee have to the results of the company. If they can individually drive a particular business school or financial goal in the organization. Then their variable comp, their annual incentive should be tied to their ability to move that dial on that particular performance factor.
We also are seeing that companies are doing a lot better around setting appropriate targets at the threshold. We often say with incentive plans, “You should have a point where if the company doesn’t hit a particular threshold, you’re not paying any type of incentive out. If you hit the target, your plan should fund.” And then, you should also include a stretch goal, so if the company overperforms by 10% or 20%, some of that money should go back out to the employees who helped you get there, so really setting up a more widespread approach to award payouts at the threshold target.
Finally, the other trend we’re seeing is that companies are saying that their cash compensation plans are more effective when they involve goals setting and communications. The two top things with any variable comp plan, number one, cascading goals. The organization should be setting goals at the top. Those goals should be cascading down into departments, ultimately to teams and actually down to the individual employees so that they have a specific line of sight to what the plan is trying to achieve. Finally, having a plan document in place that the employee receives at the start of the year that outlines the eligibility, the financial and business goals that they have to achieve, and the payout schedule. Timely communication is probably the most important part of a variable comp plan.
The other trend we’re seeing is in performance management and several of you may have seen this. It’s comes out through so many different consulting firms, whether it’s Mercer or WorldatWork or AIM, all talking about the concept of eliminating performance ratings. Performance ratings have created some concern that there’s gender or racial bias in ratings. Employees with it expressed frustration with the overall review process. They’re very focused on if they don’t get an above average rating, they’re not going to get an appropriate salary increase. And a lot of times, there’s a lack of clarity around what the actual performance rating is doing in terms of motivating, developing, and retaining talent. There’s a movement away from you’re a 1,2,3,4,5 level performer to more of, what’s your overall performance? How are you doing against pre-established goals and what does that mean in terms of how you should get compensated? So less of a numeric rating system, more of a conversation.
The other thing we’re seeing around performance management is the move away from an annual sit down. We’re going to sit down once a year, we’re going to do a written review, we’re going to talk about it and then it’s going to go in somebody’s drawer and there’s no conversation. There is a thought that the end review doesn’t add a lot of benefits in any way, so it’s not rewarding at the right time because maybe somebody performed really well earlier in the year and now it’s been nine to twelve months since that event. Or maybe there are performance issues and they’re just not getting addressed in time. The move now is towards regular performance conversation where the managers are sitting down on a somewhat regular basis, be it monthly or every other month, to have a regular discussion around what’s working and what’s not working, feeling that will really drive a higher level performance.
With all the millennials in the market, a lot of companies are really focused on professional development. Millennials want to know what their pass is, they want to know what their opportunities are and so there’s a drive towards more professional development and training, and more involvement in this ongoing performance management process, ongoing engagement of the younger workforce to make sure that they are motivated and want to stay with the organization. Finally, a greater focus on removing gender bias from the review process.
Nancy: Well, just to your point, I think we’re seeing a lot of people really moving to and having no ratings, and really setting up quarterly or monthly meetings. But to make sure those meetings are formal and not just the informal conversation that you have with your direct employer on that basis, they are also formal quarterly meetings or bimonthly or whatever they may be if you are removing those ratings. But that’s definitely is the trend. And then also speak to the millennials in terms of their development, you could really keep their report going so much better.
Liz: And I think the conversation isn’t what you have on your list this week, what’s the hot things we need to talk about. It’s more, “All right, we have these five deliverables for the year, how are we doing against those? What assistance do you need from your manager? What kind of training do you want to do? Where is your career going?” They’re just more focused on the broader performance discussion and the career development aspect, as opposed to the day-to-day, not being able to get certain things done.
In terms of key take away, number one is rethink your compensation budget. You really want to make sure you’re getting the biggest bang for your buck, and remembering that base salary increase budgets are small. Probably not getting a lot of bang for that buck. Mix it up a little bit. Do you need to give more incentive pay and less base pay or do you want to go to this market value approach to base salary increases? It’s a smart idea I think, at the comp professional, the biggest focus we have is on the marketplace and what is the market doing. If you’re really trying to tie in that market piece to your pay program, that is one way to stay on track and then really using incentives to reward performance. Especially, when you think about the fact you have 3% to work with on average for a base salary increase.
Second thing is really know the law and how it’s going to impact you in 2017 and beyond, who is going to be impacted by FLSA, who’s going to be impacted by the Equal Pay Act, what is the cost impact or the morale impact to some of these updated regulations? We’ve had a lot of conversations with actual employees during this FLSA process, for those clients that we have that have already moved forward and what we have found in talking to employees is that, the behind the doors chatter that they have with each other creates a lot more morale issues, and if you get in front of the employees and you walk them through the law, the regulatory changes, [and] the impact that it has for the way that they see their pay or their record-keeping requirements, it dispels a lot of the rumors that they’re hearing in the office.
Know how and when you’re going to communicate to your employees. If you are making changes for December 1st, we really strongly encourage you to do that process at least a month before the effective date of any changes. Employees need time to process the change [and] you may need to do some work around your record-keeping system. There are a lot of steps involved in making the FLSA implementation seamless and if you wait too long to do it, it will be a little bit more difficult, I think, to make it happen smoothly without some bumps in the road.
The third thing is really know the market for your jobs. This is going to become so important with the Equal Pay Law, because you won’t be able to ask a lot of the questions that you ask today. Really understanding a competitive level of pay for each position is going to be incredibly helpful, and then understanding how that competitive pay level impacts FLSA Equal Pay Act, etc.
Understand market pay versus organizational pay. Knowing the market also assumes you have a philosophy in place internally as to how you want to pay relative to that market. You don’t necessarily have to be at market for every job or maybe you want to be above market for every job, but knowing what your philosophy is and then assessing organizational pay versus the market, will really help you identify any gaps that can impact how you recruit people and ultimately how you retain them at your organization.
Finally, ensure that all you pay practices and policies are updated, they are documented, they are fair, equitable, consistent, and they are communicated to employees. When in doubt, we always say consult a legal adviser if you need to, it’s best to have these policies where they are tied to the law, firmly buttoned up and accurate and communicated on time.
Conclusion & Questions
Nancy: Great. That information was amazing, ton of great information for next year or for now and next year. We do have a couple questions that have come in, but before I address those questions, just want to make a note to people, that we are now offering certification credit. If you need any continuing education credits, please let us know, you can send an email either to Julie or to myself, Nancy, and we will make sure that you have the information that you need in order to get those credits. Or, you can send a chat or questions to me right now and I can make sure, I can take a list of your names, if you do want the credit. But we will address the questions, we’ll start with the first one that we had come in which was, when you’re giving a merit increase, what would you suggest in terms of documentation for a merit increase based on performance? How do you document the different increases?
Liz: In terms of giving something physical to the employee?
Nancy: Yes. Well, physical but I also think in your file too, what should you be putting in the employee’s file?
Liz: It can be a simple one-page statement that shows the employee’s current salary, the increased percentage, increase dollar amount, the final salary and then what that’s comprised of. Some organizations do a combination of increases at once, So they might do a small COLA, everybody gets a COLA, for example, 2% and then stronger performers may get an additional 1%. Then maybe you’re getting a promotion at the same time. You can easily spell that all out in one easy statement and that statement can go to the employee and it can go in the employment file.
Nancy: Now we have a question regarding the Equal Pay Act, how you handle different levels of the same job? Assume accountant one, two and three.
Liz: That’s a good question. From my perspective, if you have three different jobs and they are documented as separate jobs, accountant one, accountant two and accountant three, [and] the assumption is that each of those jobs have different responsibilities, different qualifications, in terms of education and experience. You would actually look at those jobs separately, everybody in the accountant role one, everybody in the accountant role two. The expectation is that the accountant two employee should be earning more than the accountant one.
Once you do that basic review, I do think it would be important to do across the job family. You may identify an issue where you have a senior accountant who is making less than an accountant at level 1 and that may be justified, the accountant one maybe somebody that doesn’t have the skills to move up to level 2 and level 3 but has been in the job for 20 years and then you easily can account for that pay differential. But I would start with unique jobs and then I would look across job families.
In addition, I would also if you a grading system, I would look at jobs within the same grade. Maybe you’re looking at an accountant one, an HR, rep one and a, whatever it might be, a help desk. They’re all in the same grade, they have the same level of education and experience required, take a look within grade, [do] you have any glaring discrepancies and can you justify those by any means?
Nancy: Are there maybe cases that somebody has the specific education or certification that kind justify those?
Liz: Correct. And that’s why it’s not an overnight process. Years ago [at] my first job, we did OFCCP audits. It could take us a month to get through this analysis because it required us to go back through employee files, understand the person’s history, look at their performance management and all those are the factors that play into that. Again, although we have until 2018, I think we have until 2018 because it’s not a simple process, we should start that soon.
Nancy: Kind of in the same vein, we have a request regarding if you can explain a little bit more about the gender bias from the review process.
Liz: In the market in some cases, some companies use very specific performance management forms, and in some cases those forms might be geared toward a particular area of the business. For example, we had a client that had a performance management form that was very operations focused because that’s where the majority of the jobs in the organization set. But the roles that were performed in that operations group were predominantly roles that men typically would have.
So, the women in this particular instance were being rated against the same review form and felt that potentially, because of the design of the performance management process, it was skewed a little bit more towards males versus females. I think you just want to make sure that your review it is gender neutral and that it incorporates the values and the competencies that you are looking to measure [and] that are important to your organization, regardless of if it’s a man or woman that’s performing the job.
Nancy: What would you suggest in terms of determining comparable pay, if you can’t really talk to employees? How do you gauge it and you don’t have much faith in salary surveys, how do you go about determining comparable pay?
Liz: Well comparable pay is people getting paid approximately the same for work that’s considered comparable or similar. It’s not just looking at the market, it’s also looking internally. If you have a sense of what the job pays and you’re taking a look at individual salaries, you’re not going to be talking to the employees [about] this process. This is really, you are going back to the employee’s history, you are pulling their employment file, you are looking where you can, their history before they came to the organization. I would not recommend sitting down with employees unless in the absence of any kind of information, where you need to gather their history. It’s a lot of check work, it’s not an exact science.
Nancy: Well, I think that was all our questions. A couple people have asked about the copy of the presentation. Again, before you close out, it is in the handout section of your control panel, you will see where [the handout is], if you just click there you should see a PDF of all the slides and be able to download it directly yourself. Also, when you close out, you’ll have a questionnaire, if you could just complete that and give us some feedback, we’ll appreciate it. And thank you so much, Liz, for all this information it was very, very informative and helpful and we will be talking with everybody next month.
