merit pay, is it worth it? - benefits and compensation resources · 2015. 8. 16. · merit pay...
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Merit Pay, Is It Worth It?
A CCA Briefing October 12, 2011
Barbara Manny, Benefits & Compensation Resources (BCR), LLC Dale Moyer, CPS Don Hubbartt, Siemens Jeff Newman, HSBC
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The Agenda
n Overview n Merit Pay Landscape n 2 Companies Approach: — Siemens — HSBC n Breakout Discussions on 4 Major Questions n Panel – Open Forum n Conclusion
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Why Do They Exist?
n Merit pay systems have been around in some form since the early part of the 20th Century.
n Objectives of a Merit Pay System: — Attract, retain and motivate. — Develop a method to distribute pay equitably based on
performance. — Use of merit increase guidelines tied in with objective
performance measures.
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Current Economic Outlook
n Inching up of consumer price index that will affect inflation n Jobless claims are slightly down but
doesn’t capture under employment n Political gridlock because of election year n Lack of job expansion n Lack of economic expansion n Consumers’ confidence is low n Organizations are hoarding cash but not spending n Employee engagement is at an all time low n High potentials are at risk
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Current Economic Outlook
Organization Goals: During recovery maintain a lean posture and operate more efficiently with less people è work harder and smarter.
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Era of employees happy to have a job accompanied with an attitude of distrust and disenfranchisement and an unwillingness to align their efforts with organizational
goals.
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Motivating By Pay
n Expectancy Theory
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Components Description Instrumentality The relative pay received is higher for high
performers than low performers. Pay distribution is contingent on high-performance.
Valence The differential between low performance pay and high performance pay is significant to the individual.
Expectancy Good performance is clearly defined and under the influence/control of the individual.
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Conditions For Success
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Type of Conditions Impact Results In
Value Individuals must value increased pay more and be willing to work harder or spend more time meeting performance goals (Valance).
Higher performance.
Differential The differential in raises for high performance should be substantially higher than that awarded average or low performing individuals (Valence).
When differential is high increased effort is warranted.
Clear Communications
The criteria for good performance should be clear and communicated to employees (Expectancy; Role Expectations).
Employees don’t need to guess what they need to do to get good performance reviews.
Trust Employees must trust managers. There must be trust in the evaluation system so that employees do not perceive favoritism (Expectancy) and trust in the allocation system (Instrumentality).
Higher level of performance equals a higher raise.
Non-Zero Sum Everyone who meets high performance expectations receives a high increase.
When systems are zero sum, only the best employees receive the highest raises so middle and lower ranked employees lose instrumental motivation because even if they improve performance they don’t believe they’ll be rated higher than the “stars”.
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Flaws In Merit Increase System
n Some Design Flaws With Merit Pay Systems — Zero sum feature. — Timing – annual performance evaluations and pay
adjustments. — Annuity feature disconnect. — Small differentials between average and exemplary
performance. — Inequity. — Breakdown in group cohesiveness and cooperation.
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Snapshots n Average Salary Increases
— 2009: 1.8% — 2010: 2.4% — 2011: 2.7% — 2012: 2.9% (projected)
n Variable Pay Spending — 2009: 12.0% — 2010: 11.3% — 2011: 11.6% — 2012: 11.5% (projected)
n Salary Increase vs. Variable Pay: 1991 vs. 2011
9 Source: Aon Hewitt Survey – U.S. Salary Increases 2011/2012
Pay Component 1991 2011
Salary Increases 5.0% 2.7%
Variable Pay 3.8% 11.6%
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Where Are We Heading?
n Variable pay plans continue to grow. n Variable pay from employees’ perspectives:
— Lead to higher pay. — Minimize perceived negative consequences of performing well. — Create additional positive outcomes.
n From a research study, companies believe that variable pay is: — More effective motivational tool than merit pay. — Creates a better platform to improve employee performance.
n Variable pay is the wave of the future, even globally.
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Where Are We Heading? n Truly differentiate pay to motivate and improve
performance. — Salary increases will start taking on new forms to create value to
employees. — More careful tracking and monitoring of high potentials.
• Cost is 9 X pay to replace. — Better training and tools for managers to increase their
understanding of pay differentiation. — Paying closer attention to targeted audiences.
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Dale Moyer Officer Compensation and Benefits, CPS
Viewing the Merit Pay Process
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Merit Pay Process
From beginning to end, the merit pay process involves several collaborating functions: n Finance n Compensation n IT/HRIS n Communications n Payroll n Others
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Merit Pay Process
Results -- n Economy continues to show downward pressure on
wage growth n Small salary increases not commensurate with work
effort or performance n Employees derive little economic or psychic motivation
from small increases
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Merit Pay Process
Maintain a traditional,
conventional and expected salary increase process
Move to a more variable
model
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Choice for Firms May be a Trade-Off
There are Pros and Cons for Either Decision
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Jeffery Newman EVP NA Performance and Reward
HSBC: Life Without Merit
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HSBC Reward Strategy
The 7 'Key' elements of the strategy are: n Link variable pay funding to business performance - Commercial
approach to variable pay funding pool ensures linkage to business performance.
n Support total compensation approach - Single reward decision rather than individual elements (salary, incentive, shares).
n Base reward on market-oriented and competitive data - Use the right market comparison based on Group-wide and country specific competitor companies; fixed pay typically at market median, using full market range to differentiate performance.
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HSBC Reward Strategy con’t
The 7 'Key' elements of the strategy are:
n Differentiate performance through leveraged variable pay - Based on individual performance and contribution to business goals; the higher the performance, the higher the share of available rewards.
n Disconnect variable pay as a percent of salary - Allows more reward flexibility without pressuring fixed costs.
n Emphasize line management judgment in variable pay decisions - Provides necessary flexibility to ensure that compensation reflects performance, contribution and market conditions.
n Present long-term awards in form of restricted shares - Use of HSBC Restricted shares drives consistency and aligns employees' interests with shareholders' interests.
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HSBC Pay Transformation
One Shot Implementation in 2008 for 2009 actions — Moved from prior merit and target driven pay approach to 100%
discretionary — Imposed strict limitations on base actions for those at or above
median base Reinforced approach and philosophy in 2009
— Enhanced guidance and training — Webinar created to explain role of market and its impact on
reward decisions — No restriction on manager’s actions — Provided annual salary increase budget; relied on managers to “reserve” for off-cycle actions
Business As Usual for 2010 forward — Improved training to address gaps — Continue to monitor
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HSBS – Post Transformation Highlights Salary Action Participation Rates
— 2009 – 52% received a salary action during annual cycle; artificially low due to restrictions on “above market pay”
— 2010 – 58% participation; influenced by turbulent market and prior year restrictions
— 2011 – 62% participation; variation in rates based on market conditions (and leadership capability)
Position to Market — Achieved an aggregate Base compa-ratio of 98% — Varies by performance — Top performers at 103%; Strong 97%
Variable Pay Differentiation — Top performers have averaged 2.25 to 2.40 dollars of variable
pay for every dollar awarded to strong performers
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Lessons Learned
Highlights — Do it all at once – don’t delay the transformation — Don’t apologize for change — Get in front of employees – frank and honest conversations
about impacts and careers
Opportunities — Incredible complex job and market structures hinders ease of
use — Business ownership of “HR” initiative — More emphasis on the business impact
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Don Hubbartt Director Compensation, Benefits, HRIS
SIEMENS
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Merit Pay – Is it worth it?
YES • However, the look/feel of merit pay will continue to evolve
– Given the external market trends, expect that merit spend will reduce over time in favor of other means to reward/retain people
• Need to consider your audience / workforce in your organization • Need to balance merit pay with other programs available to
employees • Understand the objectives that your merit program can…..and can’t
achieve.
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Base Pay Merit Pay
& Benefits
Recognition Awards
Gainsharing Project Incentives
SPIFFs
Short Term Incentives/Bonus
Stock & Equity
Perquisites, other
Pyramid and Hierarchy of Needs …….from a compensation/benefits standpoint
Pay for performance, market, and career progression
Frequent reinforcement of behaviors
Job-specific rewards
Reward financial results
Ownership culture
Flexible perqs
Self Actualization
Esteem
Love / Belonging
Safety
Physiological
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Fixed pay or Variable pay?
*Source – Hewitt / Kenexa / Applied HR Strategies January 2011
Fixed pay Variable pay
Extreme pressure to hold down fixed costs Clear linkage with company results
High benefits cost impacts ability to increase base salaries
Scales with cost/profitability
Arguably, less impact on employee performance, “hygiene” factor
If well-designed, can help to drive the organization’s strategic objectives
In 10 years we will likely see an average merit budget of 2%*
…. and a variable pay budget of 16% of payroll (up from 11-12% for 2010)*
Most employees still expect merit pay to address cost of living, stay competitive with market
Generally seen as ‘on top’ compensation in most professions
Continue to see value in merit pay programs for the foreseeable future
Expecting to increase variable target spend over next two fiscal years
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Best practices: Successful merit pay
• Market-reflective budget (i.e. 3.0%); then ‘hold back’ portion of merit spend for mid-year / off-cycle adjustments (i.e. 0.25% to 0.5%)
0.5% allows for additional 5% increase to 10% of your population • “Career progression” increases are valued by employees and enhance the merit program • Implement a “pay for performance” metric – i.e. average increase of high rated must equal 1.5 – 2x average of average and lower rated employees • Consider performance, but also market competitiveness • Balance objectives of merit program with other programs (i.e. annual bonus, recognition, etc) • Ensure leadership, finance, organizational buy-in and understanding of the program
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Merit Pay
Discussion
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