Category: Compliance

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Directors Pay Evolves

Lifted by larger equity awards, pay for board members of the largest U.S. companies rose to a median of $240,000 in fiscal 2013, according to research from consulting firm Towers Watson & Co.

That’s 6 percent more than what board members earned in 2012 and 39.5 percent more than what they were paid in 2007, when proxy disclosure rules began requiring companies to report actual values received by directors.

The pay raise came in the form of stock compensation. Cash payments remained flat, but annual and recurring stock awards increased 4 percent.

But the structure behind cash payments has evolved, said Robert Newbury, director of executive compensation resources at Towers Watson.

Companies are moving away from per-meeting fees and toward fixed retainers. Less than one-quarter of companies pay directors per-meeting fees for attending board meetings and only 28 percent pay-per-meeting fees for attending committee meetings, Towers Watson data show.

Retainers have increased for serving on audit committees and others under increased scrutiny and requiring more work in an era of increased shareholder activism and rules in the Sarbanes–Oxley Act of 2002 and other laws, Newbury said.

Aaron Boyd, director of governance research at pay-data firm Equilar Inc., said the more frequent discussions among board members introduced a basic problem with pay-per meeting: What qualifies as a “meeting”?

“We’ve seen companies move away from meeting fees toward retainers because the job has become more involved and because directors are spending more time on it, defining what a meeting fee is a little fuzzier,” Boyd said.

Fortune 500 companies also increasingly separate the roles of CEO and board chair, with 47 percent adopting this board-leadership structure, Towers Watson said.

Calls for independent board chairs were the most prevalent type of shareholder proposal at annual meetings in 2014, according to Institutional Shareholder Services Inc., the nation’s biggest proxy adviser.

“More and more companies are under crosshairs of maintaining independent board leadership and getting people with combined chair and CEO roles to give up that role,” Newbury said.

Companies paid these nonexecutive board chairs a premium — a median of $150,000 — for their services, Towers Watson’s research found.

“When the majority of U.S. companies are separating that role,” Newbury said, “it will be a monumental event in the course of governance practice and board leadership among companies.”

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Pay Transparency: Paid in Full Disclosure

Namasté Solar practices what CEO Blake Jones calls “extreme transparency.” “There are basically no company secrets,” he said.

Every document and every meeting is open to all 105 employees of the Colorado-based company, which installs solar-powered systems. And everyone knows what everyone else makes.

“At my best employers, there was always a lot of water-cooler talk about how much other people made,” said Jones, whose résuméincludes a stint at a subsidiary of Halliburton Co. “We’re saying, ‘Here’s the exact information. We don’t want you to incorrectly speculate.’ It’s all very clear. We even share what total compensation is — the cost of all health insurance and payroll taxes and everything else.”

Employees have access to salaries, meeting minutes and other documents through the company’s intranet. Namasté Solar also shares finances and other key data in what Jones calls monthly “big picture” meetings. During annual salary reviews, the spreadsheet is distributed by email.

The transparency reflects the values of the 10-year-old company, said Jones, who calls it a “democratic workplace.” It’s cooperative, where 50 of the 105 employees own equal shares. After one year, workers become eligible to buy a share for $5,000.

“An important democratic value is transparency,” Jones said. “It builds trust. It instills a sense of ownership. When everyone understands what’s going on in the company, they ultimately will do a better job.”

No Secret

Namasté Solar is one of a number of young but vocal organizations that have rejected the long-established corporate norm of pay secrecy and instead embrace the other extreme. They’re providing a real-world test to what academics have wondered for decades: What effect would pay transparency have on performance? Such a policy has the potential to avert discrimination, but it also has the potential to create acrimony, if co-workers become jealous of another’s pay. And the uneasiness goes deeper with public employees, who face the ire of taxpayers when their pay — even if justified — becomes the subject of mean-spirited diatribes. It also has organizational leaders and workers debating where to draw the line.

ON THE WEB

Transparency Is Key

Don Tapscott, co-author of “The Naked Corporation” calls transparency one of the key principals of what he labels the Open World. In the era of the naked corporation, he said “fitness is no longer an option.” Companies must “undress for success.” Workforce.com/NakedCorporation.

“There really hasn’t been a definitive series of research studies that say all you have to do is make public and you’ll have a disaster or everything will get better,” said Edward Lawler III, director of the Center for Effective Organizationsat the University of Southern California Marshall School of Business. “There are a lot of ifs, ands or buts.”

Lawler, who has studied the topic for 50 years, has found negative effects in pay secrecy. People tend to overestimate the pay of others and become dissatisfied, leading to turnover because employees perceive they’re underpaid.

“If you don’t give people information, they make assumptions,” he said.

SumAll, a New York-based a data analytics company,maintains a file on its network that lists the equity allocations and the salaries of everyone who works there. Its 50 employees have access to it, CEO Dane Atkinsonsaid, and a transparency committee ensures the data are kept current.

Atkinson creditsthe salary transparency with producing a lot of“natural positive effects”: fairness instead of inequities, dedication instead of detachment, and collaboration instead of fiefdoms.

“It does make for a better company, and it does make for a more equal world,” Atkinson said. “It’s a necessary idea.”

It also helps employees take charge of their careers, modeling behavior after co-workers who earn more or switching to jobs that pay more. But he acknowledges that the transparency also forces executives to explain, rather ignore, the fact that the company’s salespeople make a lot of money considering their backgrounds.

“We have to talk to spectacularly trained scientists who went to Harvard about how the guy who went to Miami University is making the same amount of money as he does,” Atkinson said.  “Those are the hard conversations that usually people are spared, but in our environment they have to live through.”

Transparency hasn’t fueled turnover, he said. In fact, SumAll has less than 10 percent churn, Atkinson said, compared with an industry range of 30 to 50 percent.

Social media startup Buffer went a step further. It gained national attention in 2013 when CEO Joel Gascoigne posted on his blog the company’s salary formula along with all of its employees’ salaries. Buffer continues to use those formulas, spokeswoman Courtney Seiter said. This January, Gascoigne introduced the Transparency Dashboard, where visitors may access salaries, revenue and other key data.

In some ways, these startups are mirroring what has happened in the public sector. Pay of public officials long has been available through state and federal freedom of information laws. In recent years, some states have passed laws that make government pay and benefits more easily accessible. Arkansas, for example, created a website in 2011 that allows anyone to search for salaries by employee name.

AnneWeismann, interim executive director of the government-watchdog group Citizens for Responsibility and Ethics, believes that government accountability includes taxpayers having a right to know the salaries of public employees.

“You’re using taxpayer money,” Weismann said. “Taxpayers are entitled to some accounting for it.”

Several watchdog organizations asked the Obama administration to disclose publicly the calendars of public officials, inspector general reports and correspondence with Congress.

“It stems from the same fundamental belief that how public officials function, who they are meeting with is of public interest and should be readily available,” Weismann said.

However, transparency comes with a price. After a California newspaper published a story about more than 500 teachers earning six-figure salaries, hundreds of readers posted comments debating their wages — something that management consultants, software engineers and many other occupations never experience.

“While many schools suffer financially these rich teachers laugh all the way to the bank,” a commenter registered as Jerry Jones wrote. “Then sit in front of their tax preparer looking for ways not to pay taxes.”

Commenter Adrian Arancibia wrote: “Teachers’ hefty salaries are driving up taxes, and they only work nine or 10 months a year. It’s time we put things in perspective and pay them for what they do — babysit. We can get that for less than minimum wage.”

Labor economist Linda Barrington said employees have begun to question pay as websites such as aGlassdoorand PayScale began posting salary data.

“They think it may be good comparison data, but it may not be,” said Barrington, executive director of the Institute for Compensation Studies at Cornell University. “But it’s out there. And then they think, ‘How come that’s not me?’ ”

Pay for Performance

The structure of pay also has changed. American employers increasingly have shifted from paying hourly wages to performance-based salaries. Anxiety about pay has been an unintended consequence of pay for performance, Barrington said.

“There’s more of your income being determined in this black box, which is you met your objectives to this degree and, therefore, you’re getting paid this much,” she said.“People start to wonder: ‘Am I being evaluated fairly? Am I being paid fairly? Maybe everyone should just post all the salaries.’”

Often when people think of transparency vs. secrecy, they think of it as all or nothing, Barrington said. In reality, there’s continuum. Companies could be transparent about how a particular performance score translates into a particular merit increase. Or companies could be transparent about pay grades.

In a way, a lot of power rests with employees. They could make pay transparent. That’s because employees could write their pay on a chart in the break room, she said.But people shy away from pay transparency when it’s posed that way.

“Part of the catch is psychological,” Barrington said. “You want to know everyone else’s pay, but you don’t want everyone else to know yours.”

Cynthia Estlund, a professor at New York University School of Law, said company rules — and tacit norms backed by threats of discipline — that forbid co-workers from discussing pay violate the National Labor Relations Act.

“Not only should employees have the right to talk about their pay,” Estlund said, “they do have the right to talk about pay.”

An engineering firm in Texas learned that lesson in 2013. The National Labor Relations Board determined that Houston-based Jones & Carter Inc. illegally had fired an employee for talking about pay with co-workers.

The board ordered Jones & Carter to rescind its policy that had forbidden employees from discussing salaries and to pay back wages and offer reinstatement to the fired employee.

Estlund herself has worked for private universities, where pay wasn’t disclosed, and public ones, where pay was known. She appreciated the accountability that came from more openness about pay, but she acknowledges that she has mixed feelings.

“I’m not rushing to talk with my colleagues about pay here,” Estlund said. “I can understand why employers, in the interest in workplace harmony, might want to keep pay secret.”

However, she has concluded that the benefits of pay transparency outweigh the costs. The No. 1 benefit: shining a light on pay gaps based on gender or other unjustifiable reasons.

‘When everyone understands what’s going on in the company, they ultimately will do a better job.’

—Blake Jones, CEO, Namasté Solar

“I don’t know if there is anything on the other side that is as clear of a loss as that clear gain from transparency,” she said.

Whole Foods Market Inc. remains the largest company to make salary information of all employees available to any team member of its 400-plus stores.

John Mackey, the company’s co-CEO, has said that the transparency eliminates gossip and averts favoritism and nepotism.

The naturaland organicgrocery chainalso limits the salaries of its executives, most recently setting it at 19 times the average full-time team member’s salary.

One challenge for large companies to adopt pay transparency: skeletons in the closet, said Lawler, the USC business professor.

“Often when I’ve preached to companies about making pay more public, they’ll say, ‘Give us a couple of years to get things in order, and then we’ll make it public,” Lawler said. “The veil of secrecy encourages, or at least allows, people to think they can get away with indefensible pay decisions.”

Little research has assessed effects of pay transparency outside of the lab.

Economist David Card of the University of California at Berkeley and his colleagues conducted one of the few studies to look at the effects in the real world. They evaluated the happiness of a sample of University of California employees before and after they were told about a database that gave salaries of all state employees.

Workers with salaries below the median for their occupation were more dissatisfied with their pay and job after they knew that they earned less. That finding may not be surprising. But the researchers also found that employees earning above the median reported no higher pay or job satisfaction after they knew they were in the top half.

Maureen Driscoll, a principal in the Minneapolis office of compensation and benefits consulting firm Verisight Inc., believes that employees should be encouraged to treat their own compensation levels as confidential and that employers should help employees understand the organization’s total rewards philosophy.

She encourages her clients to show employees the salary range for their job, where they fall within the range and ways to merit a raise.

She also recommends educating managers and supervisors about the basics of compensation — the source of benchmarking data, how often it’s updated and why the organization considers it reliable — so they’re able to address questions.

“Let’s say a company has a very generous benefit program, better than what the market provides. The company might choose to have its base salaries slightly below the market because its total package is actually better than the market,” Driscoll said. “Part of it is an education process with managers and supervisors to understand what is the philosophy in our organization about our total package.”

Recently, Namasté Solar asked its employees about its complete compensation transparency. Should the status quo continue? Or should the company remove names or move to total secrecy? The result: Near-unanimity to maintain complete transparency, the company said.

“Once everybody is used to it, it’s just not a big deal,” Namasté’s CEO Jones said. “And we can say that from experience.”

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The Tyranny of the Merit Matrix

Photo courtesy of Thinkstock.

When you think about the biggest lies in the world of HR, there’s one that comes to mind at the end of the year when most companies are considering the annual review and the pay increase that’s tied to the yearly performance ritual.

The lie? “We believe in pay for performance.”

Maybe “lie” is too strong a word. Everyone loves seeing a high performer get a 10 percent raise just for being a star. It doesn’t happen enough, and the reason is pretty simple. In this Darwinian world we call global business, cost pressure is everywhere.

As a result, we’ve got to budget for annual salary increases, and then live by the budget to make sure razor-thin margins stay intact.

Enter the merit matrix, which has a strange way of making no one happy. 

True stars in your company have options. They can give themselves a big raise by taking another job.

The merit matrix is a feature of mature compensation theory. It’s designed to take the budgeted number for salary increases companywide and create a grid telling your managers what raise is recommended for every employee based on performance and relative position in that worker’s salary band (often referred to as “compa-ratio”).

The morality play resulting from the merit matrix happens everywhere. We need average performers to make the business formula work. We’d rather give the star a flat raise than tell the average performers they’re getting little or nothing, which is what it takes to put pure pay for performance in place in a company with an aggressive, unyielding merit matrix. Sound familiar? Of course it does.

But if you’re sick of that process, you can break out of the merit matrix blues by understanding some consistent realities in corporate America. 

The first way to unshackle yourself is to understand that there are different rules for stars. It’s hard to get an exception made to the merit matrix at the end of the year.

That’s why smart managers don’t wait until the end of the year to take care of their stars. They take care of them long before the annual review/merit process kicks off.

True stars in your company have options. They can give themselves a big raise by taking another job. They know it. You know it. The people who run your company know it.

If your goal is to get a nice raise for the top talent on your team, the time to do it is in May, not in December or January. Simply raise retention of stars as a true risk and make a skip-level recommendation on an equity increase to lower the odds they’ll jump ship.

The funds are there via unfilled positions that take longer to fill than expected. Making this request with turnover risk as your rationale is the best way to take care of the star. Do it long before the merit matrix raises its ugly head.

That takes care of the stars, which are a limited group. To understand how to get pay for performance out of the standard merit matrix for the masses, you’ve got to stop treating everyone equally.

Start by acknowledging that former General Electric CEO Jack Welch was right about forced ranking; he just went too far.

Welch’s theory that you should identify the lowest performers on your team and treat them differently than your stars was technically correct. The concept of forced ranking goes south when you start firing average employees.

But the theory of forced ranking works well for merit increases, especially when you combine it with some analytical work regarding when employees are most likely to leave your company. Study voluntary turnover and you’ll find something interesting related to tenure. Average employees are much more likely to leave you between the one- to three-year marks of tenure.

The reasons for that are pretty simple. In the first year, employees still have that new “afterglow,” with the world (and your company) full of promise. Once employees hit the three-year mark at your company, they’re less likely to churn based on real and perceived benefits of tenure. 

The tyranny of the merit matrix is that you have limited resources and many mouths to feed. You believe in pay for performance, but you can’t get true separation via the merit budget you have. Mixing Welch’s philosophy and turnover trends are the best hope you have. Your path to a better blend of pay for performance that rewards top performers is to rapidly decelerate increases for average performers with more than three years of tenure, regardless of compa-ratio. 

There’s no such thing as a free lunch. Somebody has to pay in order for you have something approaching pay for performance for the masses.

Take care of your stars early, and be more strategic about how you distribute merit increases for the rest. It’s your only shot at pay for performance in today’s corporate world.

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How Salaries, Standard of Living Vary by State

Every talent manager knows salary and lifestyle go hand in hand. But depending on which state you live in, the same salary can afford vastly different lifestyles.

Based on city and state taxes, housing prices and other standard of living measures, a person's salary in, say, Mississippi can go a lot further on the lifestyle front than it would in New York.

This fun little Web tool from Rasmussen College uses U.S. government data on salary and standard of living to figure out, based on occupation, which states can stretch certain salaries the furthest.

So which state gets the most out of workers' paychecks? According to the tool, workers in Washington, D.C., earn the most both before and after taxes.

Click to see how far your salary can go.

This story originally appeared in Workforce's sister publication, Talent Management.

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Benefits and Compensation Orientation Guide

When Doug David joined Rosetta Stone Inc. in 2013 as the director of sales compensation and operations, he discovered the previous director had built an elaborate and extremely complex variable compensation program that was entirely contained on Microsoft Excel spreadsheets. “It was very sophisticated,” David said. “But no one else knew how to read it.”

That lack of transparency wasn’t just an issue for David. The sales team had no way to track their compensation in real time, so it didn’t really offer them any tangible incentives. They never had any sense of whether they were close to their targets or what they needed to do to push to the next level, he said. “Once a month, he just sent the spreadsheet to the sales team to validate their numbers, and they didn’t see it again until the next month.”

He also found that the spreadsheet model failed to meet Sarbanes-Oxley Act requirements for audits, which put the global language training software company at risk for compliance issues.

That’s a mistake a lot of companies make, said Scott Olsen, U.S. leader of HR service for PricewaterhouseCoopers. “Governance isn’t sexy, but it’s an important part of comp and benefits programs,” he said. When companies don’t implement effective governance, they put themselves at risk.

So one of David’s first tasks at Rosetta Stone was to get rid of the spreadsheets and implement new incentive compensation sales management software, called Xactly. Having a software-based system gave the sales team much clearer insight into their goals, and it gave David the flexibility to make changes and create multiple plans for different roles, regions and product categories. “It made my job easier, and it’s much more flexible for our users,” he said.

Creating transparency, oversight and flexibility is critical for every compensation and benefits program, said Elissa Tucker, research program manager of the American Productivity & Quality Center, or APQC. “You can have the best plan in place, but if it is not motivating employees, it’s not working.”

HR’s Toughest Task

Building an effective compensation and benefits program isn’t easy. In fact, many industry experts say it is one of the most challenging things HR has to implement.

“One of the biggest issues is that it is both complicated and high-stakes,” said John Bremen, managing director of talent and rewards at Towers Watson & Co. He noted that, in most companies, compensation and benefits represent the largest single annual expenditure. “A typical company with 20,000 employees will spend $2 [billion] to $3 billion per year on comp and benefits. That’s huge.”

ROADBLOCKS

Don’t Overthink It.Sometimes a bonus plan can be too complicated, or lack of communication can cause employees to think an otherwise competitive program is unfair, the APQC’s Elissa Tucker said. “Identifying those pain points by talking to employees will give you a road map for change.”

Don’t Overdo It. The goal of incentives is to motivate people, but if you try to offer incentives for too many behaviors or outcomes, people can’t prioritize. “The magic number for incentives is three,” said Xactly Corp. CEO Christopher Cabrera. “After that, the level of performance can go down because the incentive program becomes too complicated.”

What’s Your Vendor Plan? The technologies and vendors you choose will depend on your size, global footprint, plan design and existing systems. Some companies work with multiple vendors to administer different aspects of their compensation and benefits programs, though that adds complexity, said Towers Watson’s John Bremen. “If you can find one vendor to manage as much as possible, it will likely provide the best cost advantage and eliminate the need for you to be your own general contractor.”

And with the growth of pay-for-performance and variable incentives, finding the right balance of cost, motivation and legal compliance can feel like an insurmountable task.

“It used to be that the workforce was homegrown and you could have one comp and benefits program for everyone,” Bremen said. “Now, with the global workforce, different generations of workers and different types of employees, you need to be much more tailored to accommodate a diverse audience.”

Yet, many companies fail to employ the rigor and differentiation these programs require to effectively motivate all of their employees. Instead they leave compensation and benefits decisions up to gut feelings, and how much money is in the bank when someone is hired. That is not only a poor use of funds, but also it puts the company at risk for compliance failures, financial losses, litigation and unhappy employees, Tucker said. That’s not only wasteful, but also it can be a disincentive for employees who feel underpaid and undervalued.

What High-Performing Organizations Do

The most effective organizations have clearly defined job families and individual positions, and they employ pay-for-performance, differentiated incentives and career management strategies that are tied directly to productivity goals and business performance, Bremen said. It can be a complicated program to build and manage, but the payoff is clear.

Towers Watson’s 2013-14 Talent Management and Rewards survey shows organizations that have an integrated approach to total rewards strategy are five times more likely to report that employees are highly engaged and twice as likely to report achieving financial performance compared with their peers.

Unfortunately, Bremen said, differentiating is not as widely practiced as it should be, especially for employees with critical skill sets. As a result, the positive effect of incentive programs on employees is disappointingly low.

A 2013 report from Mercer shows similar results. While 9 in 10 organizations said they have a “pay-for-performance philosophy,” just 4 in 10 actually track and measure alignment between performance ratings and compensation decisions.

Pay-for-performance programs can be very motivational, but only if they are managed effectively, said Lori Holsinger, a Mercer analyst. You need to decide what pay for performance means for your organization, what performance will receive merit increases, and how you will reward employees. Otherwise, it won’t be effective, she said.  “It requires a lot of work, and you have to be diligent.”

Case Study: Makeover at Acme

In 2011, Acme Scenic & Display in Portland, Oregon, was coming off a three-year pay freeze. Bruce Farnsworth, the company’s chief operating officer, wanted to implement a new round of raises, but the company had no formal method for offering employees incentives through salary or benefits programs. “It had always been a haphazard process,” he said. So he attended a workshop on how to use external industry data and internal employee information to create a formal compensation and benefits framework, and he started rebuilding his program.

He spent eight months creating job classes and categories; he then wrote a job description for every position. He used PayScale Inc., a salary profile database company, to find equivalent jobs in related industries, and set three-tiered salary ranges based on those numbers. “It forced us to do grading and identify equivalencies in jobs,” he said.

He rolled the program out in 2012, and saw immediate results.

Having a formal structure for raises allowed Farnsworth to predict his compensation and benefits budget more accurately based on the time and percentage of anticipated salary increases for employees. He also let all employees know how the new program worked, and where they fell in the pay range, so there was consistency across the organization.

“That communication piece was so important,” Farnsworth said. It helped dispel arguments from some employees that they were being underpaid, and it let everyone see where they were in their salary range and what they needed to do to improve. “People can now see their growth over time, and what they can accomplish if they push themselves.”

PLAN

Get a Number. The first step to building a balanced compensation and benefits program is understanding your budget and workforce management goals for the year. “Think about what you have to work with and what you want to achieve,” said Elissa Tucker of the APQC.

Don’t Work in Isolation. Whether you are creating a new program or updating the one you have, involve finance and legal from the outset to ensure the structure and administration of the program is both legal and affordable, said Scott Olsen of PricewaterhouseCoopers. “They are going to get involved eventually, and if you wait until the end, it can lead to a lot of unnecessary rework.”

Gather Internal Data About Your Current Program. Benefits usage data, employee satisfaction surveys, exit interviews and focus group discussions are all useful places to find out whether employees value your compensation and benefits programs, and what they would like to see changed. You should also ask whether they think the program is easy to use, fair and if there is enough communication about the plan.

Review External Research. To ensure your compensation and benefits program is competitive, study market data and compensation surveys for your industry, region and key job titles. “Review reports at least yearly to identify new trends,” Tucker said. “And more often for hard-to-fill roles.”

Build a Career Framework. Having clearly defined jobs and job families for every department will give you a foundation to fairly compensate and promote employees, said Mercer’s Holsinger. Each job should include a job scope, required experience and expected performance or outcomes. Then create levels within each job and job family to determine what level of compensation an employee should receive. “This creates consistency and fairness across the organization.”

Choose an Incentive Program and Stick to It. Whether you offer pay-for-performance, bonuses or other incremental incentive programs, they have to be consistent, and employees need to understand how they work. Otherwise it can cause strife and dissatisfaction among employees.

Think Global. Remember to factor in cost of living, compensation trends and global employment laws for overseas employees, said Rosetta Stone’s David. Many countries have employment laws related to paid time off, percentage of income that can come from bonuses and requirements for profit-sharing — all of which can affect the legality and competitiveness of your offering. “Do the research because there are a lot of variables to consider,” he said.

How to Lower Costs and Increase Value.

If you take the time to find out what employees want most from a compensation and benefits program, you can generate more value for fewer dollars. And if you don’t, the opposite can happen, said Scott Olsen of PricewaterhouseCoopers. For example, studies show most people are willing to trade an annual bonus for 75 cents on the dollar in salary.

DO

Divvy It Up. Based on your budget, goals, research and career framework, define salary ranges, bonuses and benefits for each job category and job level.

Offer Incentives. One of the most effective tools for motivating employees is an annual incentive program, according to a Towers Watson report. This can help employers re-energize top performers while managing costs. “Differentiating pivotal workforce segments enables employers to lower base pay increases, incentive payouts for low performers …  and re-allocate full and appropriate compensation to high performers.”

Crossroad

The Stock-Option Dilemma. Stock options can be a valuable incentive or a waste of money depending on how you present them. If all employees are granted stocks, they will take them regardless of whether they value them, said Scott Olsen of PricewaterhouseCoopers. If you offer limited shares in exchange for salary, the employees who value stock options will take advantage of the program, and those who don’t won’t — but they will still appreciate having the option. “One program costs more and has less value, while the other costs less and has more value.”

Take Advantage of Technology. A 2013 Mercer study shows that more than half of respondents use some form of compensation technology. “Technology can afford key benefits, such as ready access to accurate data and actionable insight to all stakeholders,” the report said. Compensation and benefit software can also provide ease of use to HR and managers as they hire new employees or promote from within, and support more efficient audits for internal and external governance processes.

Ideally your compensation and benefits technology will be integrated with your existing human resources information system, Olsen said.

Communicate. “Communication is a huge piece of the comp and benefits program, but it often gets forgotten,” Tucker said. That can put all of your hard work to waste.

HR needs to communicate frequently and consistently with employees about how the compensation and benefits program works, how it compares to market standards and what they can do to take advantage of it. “Consistency of message is key,” Olsen said. When employees understand the value and can see how their behavior affects their incentives, it becomes more motivating.

REVIEW

Summarize Results for Leadership. The C-suite doesn’t need to get deeply involved with compensation and benefits administration unless there are problems or big changes afoot, Olsen said. Instead, tie compensation and benefits reporting to broader workforce management meetings, sharing results in conjunction with performance management outcomes, employee satisfaction surveys and future workforce planning initiatives.

Review Internal and Market Data. At least once a year, re-evaluate your program based on employee feedback, satisfaction surveys, turnover rates and external market research to ensure your program remains competitive and it is driving the right behavior. “A program may look great on paper, but you have to monitor it in the field to see how people respond,” Tucker said.

Leave It Alone. Don’t make changes unless something is actually broken. When you constantly tweak your program, people become suspicious and assume they are getting the short end of the stick, Olsen said. If you must make adjustments, change one element at a time, and map its effects on the entire program before you implement it. “You’ve got to look through a broad lens, because a lot of codependencies exist.”

Plan, Do, Review

Plan

• Determine your budget and what business strategies you would like to offer incentives in for benefits and compensation.

• Gather internal and external research on what employees want and what’s competitive for your industry.

• Build a career framework that clearly lays out how different jobs and levels of experience will be compensated to create consistency in your compensation program.

Do

• Use technology to gain transparency, ease of use and compliance.

• Limit the number of outcomes for which you offer incentives to maximize performance.

• Communicate with employees about the program and how it works. Let them know how they can take advantage of it, and what they can do to improve their performance.

Review

• Revisit internal and external data about the program to identify any pain points and ensure your offerings are still competitive.

• Tie compensation and benefits reporting to broader workforce planning reports.

• Don’t make changes to the program unless they are absolutely necessary.

Comment below or email editors@workforce.com. Follow Workforce on Twitter at @workforcenews.

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Employer Match Game: Lump Sum or Per Paycheck?

How companies match employee contributions to their 401(k) accounts has gotten a lot of attention recently, thanks to AOL Inc.’s public reversal of its plan to give workers an end-of-year lump-sum matching contribution.

But industry experts say AOL’s blooper caused an unnecessary panic.

“A few are making it a bigger deal than it is,” said Chad Parks, president and CEO of The Online 401(k). “There are all different flavors of benefits packages. It’s all about what [employers] are comfortable using. AOL got a bad rap because of how they handled their situation and the excuse they used.”

Earlier this year, AOL CEO Tim Armstrong announced the company planned to switch to a lump-sum matching 401(k) contribution at the end of year, instead of each pay period. The announcement became garbled when Armstrong said the reason the company changed its policy was to offset the rising costs of health care.

It was a public relations nightmare, so AOL reversed its plan and is sticking with its original strategy, matching employee contributions each pay period.

But it didn’t stop there. In February, the Massachusetts Securities Division sent a letter to 30 financial firms asking for statistics on clients who use year-end lump-sum matching contributions.Employer Match May 2014

“At a time when most Americans have much of their retirement savings in these 401(k) plans, it is crucial that they are made aware of the risks involved when a company shifts to a year-end distribution,” said Massachusetts Secretary William Francis Galvin in a written statement. Galvin was not available for comment. By the March 10 deadline to respond, Galvin’s office received some answers and granted a few extensions, a spokesman said.

It’s important to remember that, by law, companies don’t have to make contributions to participants’ 401(k) accounts, Parks said. Overall, about 83 percent of companies make a matching contribution, according to the Plan Sponsor Council of America’s 56th Annual Survey of Profit Sharing and 401(k) Plans, reflecting 2012 data. There are a wide variety of formulas, but survey data show nearly 74 percent of plans match contributions on a payroll period basis.

Several companies receiving the letter from the Massachusetts Securities Division did not want to comment, but Fidelity Investments provided a statement.

“Fidelity provides 401(k) recordkeeping and other employee benefits services to more than 20,000 companies. A very small number of these companies — primarily large employers — have moved in the direction of annual lump-sum matching contributions. In general, we are not seeing a big shift away from the more traditional method of matching employee contributions per pay period,” a Fidelity Investments spokesman said in an emailed statement.

Doing a year-end matching contribution is a strategy companies tend to consider during down economies to save money, said Robyn Credico, defined contribution practice leader at benefits consultancy Towers Watson & Co. Only about 8 percent of Towers Watson clients do it, according to company data, Credico said. The most typical lump-sum match is 50 percent on the first 6 percent of worker contributions.

It can hurt workers because they can’t take advantage of dollar-cost averaging, a way to reduce risk by investing a little each pay period instead of one large amount at the end of the year.

But for companies with tight budgets, a year-end lump-sum contribution might be the right strategy to save money — as well as keep and reward talent. If workers quit before the end of the year, then they aren’t eligible for the company match.

“If you have a certain budget, and you are trying to maximize it and give the most you can to the employees who stay with you, then I don’t have a problem” with the end-of-year lump-sum match, Credico said.

Parks added that companies using this strategy often liken it to a profit-sharing contribution. When the benefit is communicated, employees learn that the amount they’re receiving at year-end is a result of their hard work during the year. It’s a good way to keep workers at companies longer, given the U.S. Bureau of Labor Statistics’ July 2012 data showing workers hold an average 11.3 jobs between ages 18 and 46.

Employers need strategies that can help reduce the risk of turnover, Parks said.

“Employers do want to reward loyalty and to control cash flow. There is an argument to be made that pay as you go doesn’t give the employer the full value of the benefit offering,” Parks said. “Companies bring on people and invest in them heavily. It’s disheartening when they walk out after eight months.”

Patty Kujawa is a writer based in Milwaukee. Comment below or email editors@workforce.com. Follow Workforce on Twitter at @workforcenews.

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Bathroom Breaks Do Not Equal Breaks in Pay

Yesterday’s post on the Occupational Safety and Health Administration’s bathroom rules generated an interesting reader question: can an employer deduct bathroom time from an employee’s pay?

The answer is no. Under the Fair Labor Standards Act, “Rest periods of short duration, running from 5 minutes to about 20 minutes … must be counted as hours worked.” The Department of Labor includes “restroom breaks” as an example of these short-duration rest periods for which an employer must pay its employees.

Thus, failing to pay your employees for time spent taking care of their personal business will subject you to a claim for unpaid wages.

Moreover, if the employees are exempt, pay deductions will also jeopardize their exempt status. You are required to pay exempt employees a weekly salary. Taking short-time deductions from an employee’s pay treat them like hourly employees, which, in turn, destroys the exemption for that job class.

In addition to these legal reasons to pay your employees for bathroom time, there is also a good practical reason. Treating your employees like tagged wildlife — tracking and recording their every move within the workplace — will create an work environment of distrust and apathy. Instead, you should treat all employees like professionals, and address performance-based issues as they arise. Is an employee failing to produce because he or she is spending too much time in the bathroom (or taking smoking breaks, or hanging around the coffee machine, or looking at Facebook, etc.)? Then address the performance issue. Is there a medical reason for which the employee needs a reasonable accommodation? Is the employee not busy enough and is looking for other way to fill time? Or is the employee a slacker that needs counseling, and if necessary, discipline?

Address the underlying performance issue on an employee-by-employee basis; avoid implementing company-wide edicts that will alienate the majority of your employees.

Written by Jon Hyman, a partner in the Labor & Employment group of Kohrman Jackson & Krantz. For more information, contact Jon at (216) 736-7226 or jth@kjk.com. You can also follow Jon on Twitter @jonhyman.

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A Reminder About Holiday Pay

wage-and-hour

The July 4 holiday is a paid day off for many American workers. I previously wrote a post titled, “8 things you need to know about holiday pay.”

In light of the holiday, I thought it was a good idea to revisit that list.

1. Do you have to pay for holidays? You are not required to pay non-exempt employees for holidays. Paid holidays is a discretionary benefit left entirely up to you. Exempt employees present a different challenge. The Fair Labor Standards Act does not permit employers to dock the salary of an exempt employee for holidays. You can make a holiday unpaid for exempt employees, but it will jeopardize their exempt status, at least for that week.

2. What happens if holiday falls on an employee’s regularly scheduled day off, or when the business is closed? While not required, many employers give an employee the option of taking off another day if a holiday falls on an employee’s regular day off. This often happens when employees work compressed schedules (four 10-hour days as compared to five 8-hour days). Similarly, many employers observe a holiday on the preceding Friday or the following Monday when a holiday falls on a Saturday or Sunday when the employer is not ordinarily open.

3. If we choose to pay non-exempt employees for holidays, can we require that they serve some introductory period to qualify? It is entirely up to your company’s policy whether non-exempt employees qualify for holiday pay immediately upon hire, or after serving some introductory period. Similarly, an employer can choose only to provide holiday pay to full-time employees, but not part-time or temporary employees.

4. Can we require employees to work on holidays? Because holiday closings are a discretionary benefit, you can require that employees work on a holiday. In fact, the operational needs of some businesses will require that some employees work on holidays (hospitals, for example).

5. Can we place conditions on the receipt of holiday pay? Yes. For example, some employers are concerned that employees will combine a paid holiday with other paid time off to create extended vacations. To guard again this situation, some companies require employees to work the day before and after a paid holiday to be eligible to receive holiday pay.

6. How do paid holidays interact with the overtime rules for non-exempt employees? If an employer provides paid holidays, it does not have to count the paid hours as hours worked for purposes of determining whether an employee is entitled to overtime compensation. Also, an employer does not have to pay any overtime or other premium rates for holidays (although some choose to do so).

7. Do you have to provide holiday pay for employees on the Family and Medical Leave Act leave? You have to treat FMLA leaves of absence the same as other non-FMLA leaves. Thus, you only have to pay an employee for holidays during an unpaid FMLA leave if you have a policy of providing holiday pay for employees on other types of unpaid leaves. Similarly, if an employee reduces his or her work schedule for intermittent FMLA leave, you may proportionately reduce any holiday pay (as long as you treat other non-FMLA leaves the same).

8. If an employee takes a day off as a religious accommodation, does it have to be paid? An employer must reasonably accommodate an employee whose sincerely held religious belief, practice, or observance conflicts with a work requirement, unless doing so would pose an undue hardship. One example of a reasonable accommodation is unpaid time off for a religious holiday or observance. Another is allowing an employee to use a vacation day for the observance.

Here comes the disclaimers. The laws of your state might be different. If you are considering adopting or changing a holiday pay policy in your organization, or have questions about how your employees are being paid for holidays and other days off, it is wise to consult with counsel. Also, these 8 tips assume that your company lacks a collective bargaining agreement.

Jon Hyman is a partner at Meyers, Roman, Friedberg & Lewis in Cleveland. Comment below or email editors@workforce.com. Follow Hyman’s blog at Workforce.com/PracticalEmployer.

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Employees Finding Their Financial Fitness Footing

Workers are more proactive in determining their financial future, but not without a little help from their employers, a new study shows.

Financial Finesse Inc., a financial education company, creates quarterly financial wellness scores from its client database. For the first quarter this year, the El Segundo, California-based company saw employee financial wellness scores improve to 5.2 out of 10—up from 4.9 a year ago.

While the bump may seem small, employees took large steps to improve their financial picture in the first quarter of 2013. Results showed nearly half of workers evaluated their investment risk tolerance, up from 43 percent in the first quarter of 2012. Meanwhile, 39 percent of workers say they felt confident with their investment lineup compare with 33 percent last year. And, more employees—40 percent—are using retirement calculators compared with 37 percent in 2012.

It has been a compelling shift to follow, says Liz Davidson, Financial Finesse’s CEO and founder. Ten years ago, only a handful of workers took advantage of financial education tools, she says. Now that the majority of employers sponsor self-directed accounts such as 401(k) plans, workers are realizing they need to be more self-reliant, but need access to financial education. At the same time, employers see they can’t fully fund health care or provide employer-run defined benefit plans, so they are looking for other ways to help workers reach financial goals.

“Two things are causing this change,” Davidson says. “Employers are providing more [financial] tools, but also employees are asking for help in greater numbers.”

This collision happened recently for Black Hills Corp., a natural gas and electric utility company based in Rapid City, South Dakota. In 2010, the company froze its defined benefit plan to new employees, and offered these workers a 401(k) plan, says Deb Bisgaard, retirement services manager.

In making the switch, Black Hills conducted a survey to find out whether employees needed financial education.

“With the shift to a defined contribution plan, we wanted to make sure people wanted the education necessary to manage their finances,” Bisgaard says. “We found our employees were hungry for this information. They wanted to know ‘When can I retire, how do I know when I can retire, and what do I need to know about retiree health care?’ “

Because it normally takes four years of training for Black Hills to replace skilled workers, the company had a significant interest in getting employees to be on track for retirement, says Lynn Burton, Black Hills human resources senior administrator.

In working with Financial Finesse, Black Hills rolled out a pilot program for workers age 50 and up in 2012. The financial education program had three steps for eligible employees: a mandatory, online wellness assessment; a voluntary group retirement plan workshop; and—for a $100 fee—a financial planning meeting with an adviser.

About 56 percent of the eligible employees attended the workshops, and nearly a quarter of those completed the one-on-one planning meetings, Bisgaard says.

Black Hills hasn’t yet evaluated results since the meetings recently concluded. The next step for Black Hills is to roll out the program to younger workers, and to keep the program going on a biannual basis, Burton says.

“Word of mouth got out, and so we are expecting this to be a very popular program,” she says.

Patty Kujawa is a writer based in Milwaukee. Comment below or email editors@workforce.com. Follow Workforce on Twitter at @workforcenews.

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SCOTUS: Picking Off Individual Plaintiffs Moots Wage and Hour Collective Action Claims

The pickoff is one of the most dramatic defensive plays in baseball. It can single-handedly kill a rally. The tying run on first? One deft move by the pitcher to first base, coupled with a lead that’s one step too cocky? Rally over.

We love baseball in part because it can be a metaphor for much that happens in our lives. Today, it’s a metaphor for wage and hour law.

The issue the Supreme Court faced in Genesis Healthcare Corp. v. Symczyk (4/16/13) [pdf] was whether a case becomes moot when the lone plaintiff receives an offer from the defendants to satisfy all of the plaintiff’s claims. Last December, I predicted an employer loss in this case (the link also provides all the case background you’ll need).

I’m happy to report that my prediction was very wrong. In a partisan 5-4 decision, the Court held as follows:

Because respondent had no personal interest in representing putative, unnamed claimants, nor any other continuing interest that would preserve her suit from mootness, her suit was appropriately dismissed for lack of subject-matter jurisdiction.

In other words, because there was nothing left for the plaintiff to litigate after the rejected offer of judgment, the plaintiff had no right to pursue the remaining collective claims.

Here’s the money quote from the Court:

In this case, respondent’s complaint requested statutory damages. Unlike claims for injunctive relief challenging ongoing conduct, a claim for damages cannot evade review; it remains live until it is settled, judicially resolved, or barred by a statute of limitations. Nor can a defendant’s attempt to obtain settlement insulate such a claim from review, for a full settlement offer addresses plaintiff’s alleged harm by making the plaintiff whole. While settlement may have the collateral effect of foreclosing unjoined claimants from having their rights vindicated in respondent’s suit, such putative plaintiffs remain free to vindicate their rights in their own suits. They are no less able to have their claims settled or adjudicated following respondent’s suit than if her suit had never been filed at all.

There is perhaps no greater threat facing employers than the risk of a wage and hour collective action—both because of the difficulty in complying with the Fair Labor Standards Act’s maze of anachronistic rules and regulations, and because of the expense incurred in defending such a claim. Genesis Healthcare confirms that employers have a powerful weapon at their disposal to cut these dangerous claims off at their knees—a Rule 68 offer of judgment.

Much like a baserunner failing to anticipate a deft pitcher’s move to first base, the Court confirmed that a valid offer of judgment can catch your opponent off-guard and end their hopes of a successful collective action.

Written by Jon Hyman, a partner in the Labor & Employment group of Kohrman Jackson & Krantz. For more information, contact Jon at (216) 736-7226 or jth@kjk.com.