Analyze This . . .

Ensuring investments in employee compensation fully support business plans and expectations for success is one of the most challenging issues facing company leaders these days, although not every executive has yet accepted this reality.

But the facts setting up this imperative are very clear:

• The labor market is getting tighter and this situation is only going to get worse.
• Attracting, retaining and motivating key talent continues to be difficult with retention being the most problematic.
• Turnover rates are on the rise, job opportunities are increasing, unemployment is declining, as is worker productivity, putting new pressures on hiring.
• These trends all impact the time it takes to fill jobs, which in today's market keeps extending.

In such an environment it is critical for companies striving to remain competitive to be constantly reevaluating their compensation plans, looking for the most appropriate mix of direct and indirect compensation to meet specific business needs.

Without question one of the largest costs companies face is people expense. Because of this alone, it is obvious that the companies that do the best job of getting the absolute maximum value or largest return for the compensation dollars they invest, come out ahead.

Managing to this outcome today can be a tall order with multiple pressures converging on compensation management all at once, like the fact that:

• Stock plans and the use of stock today are looked at differently, pushed along by the issue of "expensing" stock for financial reporting purposes.
• Restricted stock is gaining in popularity, which will continue for the next several years.
• Total compensation expenses are up because of changes in the tighter labor market.
• Executive compensation is being examined much more closely because of Sarbanes-Oxley, consumer group and stockholder interests.
• The march toward greater emphasis on variable compensation and a broader use of "pay for performance" both continue as options for keeping fixed costs low.
• Overtime rules have changed.
• Merit budgets have ticked up this year for the first time in about five -- now tilting toward four percent growth on average.

So, if these facts and pressures represent the challenges you are facing -- how prepared are you with your current compensation plan to meet them?

• Did your compensation plan appropriately support your objectives and drive the results you set and expected for your business last year?
• Was your compensation budget sufficient to attract and hire the types of employees you needed to achieve your objectives?
• Were the pay rates competitive in the market from which you were trying to attract this talent?
• Did your comp plan meet the expectations of current employees and managers?
• Regardless of how your compensation plan performed last year, has the market shifted since, in terms of product and the subsequent types of employee skills required?
• What is the availability of the type talent you will need going forward?
• Do you know how similar talent is being paid in other businesses in your market?
• With a continually changing economy, how have employee needs changed and what elements of your total compensation package do they find the most desirous, or need the least?
• Companies accomplish long-range plans by meeting any number of short-term goals. If your long-range plans have changed, have you changed your incentives for accomplishing new short-term goals?
• Are employees and managers clear about what the company's goals are and what they specifically can do in their jobs to help accomplish them?
• Do employees and managers understand how your compensation plan works, how pay levels are determined and what part their performance plays in their pay?
• Is their pay affected by their performance?
• Do employees understand the financial issues facing your business in the next 12 months?
• If the business will be stressed to sustain the current level of compensation next year, given the forecasts, how will your spending priorities be determined and will you be able to explain them to employees?
• Do you have a process for frequently assessing and discussing shifts in business priorities and appropriately altering the pay schemes to produce different, or more profitable results -- particularly within your sales organization?

Business forecasters and futurists don't see the market becoming any more business friendly any time soon when it comes to recruiting and keeping qualified talent. This makes it all the more critical that your compensation program is working for you and not acting as a further inhibitor to reaching your goals.

Every company is different however, making it imperative that your compensation plan appropriately reflects your uniqueness with a pay philosophy that addresses your culture, industry, stage of development of both the business and products, and of course your company's ability to afford the investment.

If we can be of assistance as you analyze the effectiveness of your compensation plan to meet your business needs in this environment, please be in touch. If you are interested in a series of discussion papers on the major elements of an effective compensation plan we will be glad to share that information with you.

-- Rod Hanna, Principal Merit Resource Group