News & Articles

Human Resource Management
Published in the Rochester Business Journal
December 30, 2005
© 2005 HR Works, Inc.

Amid high benefit costs, small businesses sharpen and simplify compensation strategies

By Candace Walters

Jo Ellen Pinkham, Director of Compensation Services at HR Works, assisted with this article.


It’s that time of year again – when managers in charge of employee benefits are scrambling to complete open enrollment and anticipating the impact of more double-digit increases in health care costs. While health benefits are an important component of any small organization’s overall pay package, it’s important for employers to not lose sight of the other elements of compensation.

Compensation trends for 2006 will be determined largely by the nation's economy, influenced by events here and abroad. The economy is improving, measures indicate that recent job growth will continue into next year, and employers continue to enjoy a favorable labor market. However, with critical skills and key positions still in demand, small companies in particular will be wise to re-examine their compensation strategies and programs to ensure they can compete for and keep the best talent, while controlling the costs to do so.

Trend 1: Organizations concentrate on keeping their best people

Top performers are always in demand, especially at small firms where resources may be limited and one person can make a huge difference.

Unfortunately, organizations often focus too much time and energy on trying to improve poor performance, and not enough on developing, motivating and rewarding top talent. If an organization wants to attract and keep high performers, then it needs to create and reinforce a culture that sends the message that “we recognize and reward effort and results.”

What can your company do?

• Put in place a strong performance management system that helps managers and employees define goals and expectations, and encourages continuous feedback. Then use it.
• Identify employees who contribute the highest value and determine their key motivators and development goals.
• Allocate limited salary increase dollars toward top performers and away from poor performers.
• Differentiate between high contributors and other employees through an incentive- based or variable-compensation program that’s tied to the achievement of collective and/or individual goals.
• Develop a reward and recognition system that provides immediate, specific, customized rewards to employees who go above and beyond.
• Say thank you.

Trend 2: Variable-pay programs are on the rise.

Use of variable-compensation plans has grown steadily over the last decade and will likely continue. According to Hewitt Associates’ 2005-2006 U.S. Salary Increase Survey, ”Actual company spending on variable pay as a percentage of payroll increased to 11.4 percent (in 2005), up from 9.5 percent in 2004. Spending on variable pay in 2006 is projected to remain strong at 11.1 percent.”

Most companies seek to control fixed costs such as base pay while rewarding individual and/or group performance when business conditions warrant. Once the domain of executives and key employees, variable-pay plans are now being designed to work at lower levels, as organizations of all sizes seek to motivate their employees to produce better results in tough times.

What can your company do?

• Create or maintain a broad-based variable cash incentive program.
• Make the program simple and understandable, with clear, measurable, attainable goals.
• Offer substantial reward opportunities for meeting or exceeding goals.
• Review and update plans as appropriate, and communicate often about company and individual performance.

Trend 3: Benefit costs continue to escalate.

Benefit costs, particularly health care premiums, continue to rise by double digits, due to increasing prescription drug expenses, higher utilization, insurance company surcharges, technology services, an aging workforce, and general medical inflation. Unable to continue shouldering the increases, most employers that still offer health benefits are asking their employees to absorb a greater percentage of the bill.

What can your company do?

• Implement and communicate about flexible spending accounts.
• Educate employees about plan options and preventive care.
• Talk with employees about what benefits matter most to them.
• Review plan design and benchmark benefits to determine the best methods to contain benefit cost increases while offering acceptable coverage.

Trend 4: Organizations focus on communications.

Employees who understand their compensation and benefit programs tend to place a higher value on them. Beyond a minimum pay threshold, employee understanding and acceptance of company programs may be just as important as how much employees are paid. Good communications can boost employee satisfaction without increasing a company’s overall compensation budget.

What can your company do?

• Make it a priority to provide more, high-quality information, more often.
• Train managers on company compensation philosophy and practices.
• Integrate all components of your compensation program (base pay, incentives, benefits, and reward and recognition programs).
• Make managers responsible and accountable for employee compensation decisions, and build that into their compensation program.

Conclusion

The direct link between compensation and company profitability is clear. When it comes to using your compensation dollars to help build loyalty, performance and profitability, just pick an area and get started. Many trendy reward and recognition programs falter, strangled by bureaucracy and/or the desire to measure everything and apply it to everyone in an organization. If you simply start rewarding your best performers, employees throughout the company will get the message.

Candace Walters is president and CEO of HR Works, Inc., an HR management outsourcing and consulting firm serving more than 600 clients in the Rochester, Buffalo, Syracuse and Baltimore/Washington areas. HR Works provides HR Department outsourcing, part-time and interim HR managers, affirmative action plans, HR*Stars recruitment services, legally reviewed employee handbooks and supervisor manuals, compensation programs, training and more. To offer comments, write walters@hrworks-inc.com

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