Building Your Compensation Road Map

1. Building Your Compensation Road Map IPMA Western Region Human Resources Conference April 27, 2011 Dianne Burt-Green, CCP, SPHR MBL Group, LLC

2. Introductions! Dianne Burt-Green, CCP, SPHR MBL Group, LLC (503) 224-7249 x13 dianne@mblgroup.com www.mblgroup.com • Conference Attendees • Name / Title • Organization • Job responsibilities

3. Road Map Agenda • Building a Compensation Philosophy & Strategy • Mapping Your Compensation Project • Hazards to Watch Out For • Compensation Fundamentals • Key Signals of System “Distress” • Guiding Principles of a Compensation Philosophy and Strategy

4. First . . . Show of hands: • You have responsibility for the compensation system • You have a formal background in compensation • Drew the “short straw” and have no background in compensation but are responsible for the discipline

5. Compensation Fundamentals

6. A Few Words about the Fundamentals position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable budget revenue target index survey data cut job evaluation classification total rewards position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable budget revenue target index survey data cut job evaluation classification total rewards position description job analysis essential function external equity compa ratio benchmark overtime percentage net pay gross payroll nonexempt market incentive grade alignment salary differential standard deviation median weighted average percentile scattered distribution trend line minimum midpoint quartile maximum range spread fixed variable time • Complex • Mysterious • Tedious • Divisive • Strategic • Powerful • Creative • Systematic

7. The Compensation Discipline Compensation Is: Check ( ) one An “Art” A “Science”

8. Strategic Astrategic compensation system forms a visible link between organizational objectives, strategies and business metrics, while balancing the expectations of its employees with the costs to the employer, AND Be fluid and flexible enough to meet changing economic and market conditions.

9. Powerful As a system, compensation is: • Communicating your culture and values as an organization • Driving (and incentivizing) employee behavior • One of largest items on your financial statements (if not the biggest)

10. Creative Every compensation system is unique! • Directly tied to organizational culture, industry, size, complexity • Each organization, even within the same industry, may have distinct goals which vary the system • Identifying how your goals will drive your structure requires innovation & ingenuity

11. Systematic Designing compensation programs does require a logical methodology • How and why design decisions are made • There is a framework, either explicit in published guidelines or understood by administrators • Ensures an equitable and defensible system

12. 5 Reward Categories Direct financial rewards (pay) Indirect financial rewards (intrinsic/extrinsic benefits) Work content (the work itself) Careers (long term opportunities for development / advancement) Affiliation (the feeling of belonging)

13. Key Signals of System Distress

14. “Distress” Signals Time Metrics Labor Market Motivational Goals

15. Distress #1: TIME Unchanged compensation plan Number of years, decades, millenniums since compensation system underwent total review HR / Compensation / Total Rewards Staff Resources Staff as “fire fighters” vs. “innovators”

16. Distress #2: METRICS What do the Metrics tell us?

17. Distress #2: METRICS • Ensure evaluation & understanding of metrics • Benchmark your metrics against your region, industry and comparable organizations • Track your metrics over time

18. Distress #3: LABOR MARKET What is the labor market doing? • Economy • Political environment • Availability of talent • Variable in job categories; while some jobs have a flood of candidates others jobs have a scarcity of talent • Ease of obtaining comparable data

19. Distress #4: MOTIVATIONAL GOALS Strategic Alignment • Values of the organization / values of the workforce • Performance, productivity • Clarity and communication • Transparency of the system • Ease of administration

20. Guiding Principles of Compensation Philosophy

21. Compensation Philosophy . . .Who has one? • WorldatWork’s Compensation Programs & Practices research report (9/2010): • 9 out of 10 organizations report having a compensation philosophy • 61% have a written philosophy • 29% have an unwritten philosophy • 42% reported that all or most of employees do not understand the compensation philosophy

22. Compensation Philosophy . . .Why have one? Foundation and guide for future compensation decisions • Intentional practices • Direct actions strategically in good times and bad times Clear, consistent understanding and communication • You, Executives, Employees, Elected Officials, Union – On the same page!

23. Compensation Philosophy . . .What it should explain? Who the organization defines as its competitors for labor How the organization prefers to set pay levels for its various titles compared to market What the balance is between internal equity and the external marketplace What role performance plays What role incentives play The amount of transparency

24. Setting the Foundation Building (or re-building) your philosophy sets the foundation for: • Determining the needs and outcomes of your total compensation system • Building the right mix of compensation components for your organization • Evaluating your compensation system through periods of change

25. Elementals of the Foundation Where the Market Is Where Your organization Is External Equity Internal Equity Workforce, organization & industry factors Market rates & trends, economic factors Budget, balance sheet & organization success Ability to Pay

26. One Size Does Not Fit All . . . . • A Strategic Compensation Philosophy: • Links to the unique factors of your organization • Bonds to your values & culture • Accounts for the overall market, industry and workforce • Inseparable from your ability to pay • Not a “Best Practice”, your “Inspired Practice”

27. Compensation Philosophy & Strategy in a Public Sector Organization

28. Differences between Public & Private Sector Perception vs. Reality People speak as if there are distinct differences Private sector = product innovation, operational excellence, nonprofit, publicly traded, business differentiation, market based, performance based, stock option rich Public sector = homogeneous group w/o organizational variations, seniority based, general increase, entitlement style Reality is compensation systems in public sector are varied; some reflect current private sector practices

29. The “Key” The “key” to the successful development of a compensation philosophy/ strategy, in the public or private sector, is to follow a process from the initial business case through program implementation

30. Sponsorship Sponsorship must be at the organization’s Senior most level Tie process to full Executive team vs. any one Executive May take years and a charismatic Executive Anticipate influence at the political level May stop or re-direct initiative (sometimes in a totally opposite direction) Anticipation of this element may “justify” ultra conservative approach which will offend no one, but accomplish little

31. 4 Stage Process Business Case Due Diligence Philosophy / Strategy Development Implementation

32. Step 1: Business Case Research the business / organization and its workforce Identify stakeholders (Besides management and employees): Union? Political bodies? Media? Public? Peer organizations? Identify why compensation strategy is critical to future organizational success Careful “costing” to include systems or process improvements

33. Step 2: Due Diligence Create project team Comprised of individuals influential enough to “champion” the project both within and outside the organization Guided / facilitated discussions Stakeholder communications are critical, but must be carefully orchestrated Too little information leads to apathy; too much information may lead to analysis paralysis Determine what resources are necessary and what systems, policies and procedures will be affected

34. Step 2: Due Diligence • Assess your compensation system today • What is working? What is not? • Is the system well defined? • Does staff understand the compensation system? • Does the compensation system link pay to performance? Longevity to pay? Skills to Pay? • What are the goals of the Total Compensation System

35. Step 2: Due Diligence Link to your organization What stage is your organization in today?

36. Step 2: Due Diligence Linked to your organization Who is your workforce? • Competition for talent • Motivational drivers • Perceptions of staff • Investments in hiring, orientation, training • Turnover costs • Union impact • Generational influences

37. Step 2: Due Diligence Bond to your culture & values What is your culture? • Individual Pay for Performance or Team Based Pay • Emphasis on base? Incentive? Benefits? Or all? • Emphasis on flexibility or structure • Reward performance, innovation, productivity, tenure • Transparent or closed system • Ability to administer (simple, complex)

38. Step 2: Due Diligence Bond to your culture & values What are your values? • Work/life balance • Family focused • Stability • Career growth • Flexibility • Living wage • Wellness

39. Step 2: Due Diligence Step 2: Evaluating the external market What (or who) do you benchmark to? Who are your market comparables? • Geography: Local / Regional / National • Industry Sector: Public? Private? Both? • FTE Size • Revenue / Operating Budget • General Rule: • Where you recruit from / Where do you loose talent to

40. Step 2: Due Diligence Positioning to market Lead, Match or Lag • What is the relationship to your Total Compensation Package? • Should the market position be the same for each compensation component of your system? • Base Pay • Variable Pay • Benefits • Should the market position be the same for all employee groups? • Vary by function (i.e., production, design, administration) • Vary by level (entry vs. experienced)

41. Take Comfort If at any point, you find the project and/or process is not ideal, take comfort, it never is. Remember this is both an Art and a Science. Carry on because once the development of a strategy is initiated, you will find it is difficult to stop the momentum. The relationships you develop with the project members and stakeholders are the key to success. Press on!

42. Break Time!

43. Step 3: Philosophy / Strategy Development Written statement of philosophies, objectives and standards Not specifics on design or administration detail Defines all the major elements of total compensation and how they will support the business strategy Base pay Additional cash Benefits TOTAL COMPENSATION Perquisites Draft strategy “tested” stakeholders

44. “Sample” Total Compensation Philosophy The City of Wagga Wagga, Department of Adorable Animals, is a newly created public agency focused exclusively on serving the needs of koala bears. We recognize that the people at the agency are our primary asset and our principal competitive advantage. To achieve the organization’s mission, we must attract, retain and motivate a highly qualified and competent workforce. Accordingly, we target our base pay at the market median (50th percentile) for other public agencies, while remaining internally equitable. Wagga DoAA will utilize organization-wide, performance based incentive programs to supplement our base pay such that the average direct compensation will approximate market median + 5% (55th percentile) of cash compensation vs. our defined competitor group when our overall financial performance meets or exceeds target. In addition to direct cash compensation, Wagga DoAA will provide a comprehensive benefits package for our employees to include health and welfare and income security. We value the components of the work experience including a positive and healthy work environment that addresses the physical and emotional well-being of employees and their families and is consistent with Fortune Magazine’s “100 Best Companies to Work For.” Total rewards shall not exceed 60% of Wagga DoAA annual revenues, including statutory benefit contributions.

45. Step 4: Implementation Detailed assessment of existing programs, processes and CBA’s to determine how well they fit with the new strategy Implementation / Budget Impact Analysis No compensation system works if you can’t afford it Caution about quick hits or low hanging fruit May only result in confusing comp processes that do not gel well with overall system Detailed listing of desired changes along with timelines, costing and measures of success Changes to CBA may take form of long-term negotiating agenda

46. Step 4: Implementation • Stay strategic by setting system goals first • No one is allowed to re-write the philosophy / strategy unless business conditions change Keep the Total Compensation Philosophy “front and present” • As you address balance sheet actions • In reaction to the recession • In recovery from the recession

47. Your Total Compensation Philosophy Establish, Revitalize your Total Compensation Philosophy • Set the foundation which will guide your decisions • A Strategic Framework which is Your Size: • Linked to your organization, industry and workforce • Communicates your culture • and values • Within your ability to pay

48. Mapping Your Compensation Classification Project

49. Tools for the Trek Internal A Champion Data, data, data . . . Org chart Budget / financial information Job descriptions Employee census data Employee Opinion / Climate Survey results Time (and more time) Technical capabilities to perform analysis & design programs • External • Salary Surveys • Industry Benchmarking • Compensation Consultant?

50. When to Hire a Consultant When the organization needs: Independent third-party objectivity Security / confidentiality Insight into the organization’s competitive market HR expertise to supplement in-house staff resources An expert opinion in a litigation support role Where internal or external resources are lacking When internal resources are spread too thin, or when the nature of the initiative would benefit from an external perspective / voice