Personnel e.bulletin – November 2014

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Compensation – Pay from an HR Perspective
Prepared for the PHCC Educational Foundation by TPO, Inc.

Business owner are responsible for managing operating expenses. Workforce costs comprise the majority of operating expenses (as high as 70%) – in the form of compensation and benefits. No wonder business owners are constantly in need of insights as to how to best strike the balance between paying enough to attract and retain top talent and managing the compensation budget. This article examines some trends, forward thinking practices, as well as highlights some types of compensation and the major laws affecting compensation.Compensation Trends and Best Practices
The primary reason companies care about their compensation investment is to ensure that they attract and retain the right talent. Talent shortages in the plumbing and heating industry are intensifying – putting more and more pressure on making the right compensation investment decisions.

The 2014 Payscale Best Practices Compensation Survey highlights the following trends:

  • Retention continues to be a top concern for 2014 – doubling in importance from 2009.
  • Salaries will go up. For 2014, 88 percent of companies say they plan to give pay raises, with the average raise expected to be 4.5 percent.
  • Optimism is high. Companies are generally optimistic about their financial performance, with 72 percent expecting improvements for 2014.
  • Companies are growing. More than 54 percent of respondents are expecting to increase in size in 2014.
  • Companies plan to recruit and retain high-performing employees with performance-based pay plans and additional learning and development opportunities.

Forward thinking companies are:

  • Rendering equivalent pay increases to all employees to an obsolete practice. Across the board salary increases, in the one percent to five percent range, sent the wrong message to underperformers. They left organizations with too small of a budget to adequately reward their top performers.
  • Offering a variable pay rate of seven to eight percent, in addition to their base pay.
  • Migrating to a system that increasingly puts less emphasis on base pay and more emphasis on variable pay.
  • Looking at other incentives to retain top performers – grants of stock options and full value shares, education and other development activities, and spot bonuses.
  • Reserving more and more of their compensation budgets to reward top performers.  A recent “War for Talent” survey crystalized the business impact of high performers.  They outperform average performers by a wide margin – 50 percent or more that leads to increases in productivity, profits, and revenue.  Top performers are absolutely more valuable and should be compensated accordingly.

Different Types of Compensation and Laws Affecting Them

Base Pay

  • A fixed amount of money paid to an employee by an employer in return for work performed.
  • Does not include benefits, bonuses or any other potential compensation from an employer.
  • Applies to an employee who is expected to complete a whole job in return for the base salary – different from a non-exempt employee who is paid an hourly rate or by the piece produced. This employee is generally eligible to collect overtime.
  • Is determined by market pay rates for people doing similar work in similar industries in the same region and by the pay rates and base salary ranges established by an individual employer.

Variable Pay

  • Is also known as performance pay, is used to recognize and reward employee contributions above and beyond their normal job requirements – towards company productivity, profitability, and results.
  • Is becoming more popular in the increasingly competitive business environment – companies are looking to reduce their investment in fixed costs and increase the use of variable costs, since the latter is paid out only depending on the achievement of certain results.
  • Is a key retention strategy for high performers.
  • Is often based on two main factors: individual performance and company performance – most schemes evolved by companies have a target-setting and actual payout based on that combination.
  • Is usually a percentage of base pay ranging from 5-10 percent for junior levels to 15-30 percent for senior levels.

Overtime Pay

  • Is regulated by the U.S. Department of Labor, through the Fair Labor Standards Act. In addition to overtime provisions, the Act regulates child labor and minimum wage activities of U.S. employers.
  • Is the additional amount paid to hourly employees who work more than 40 hours in a workweek. Note: some states or localities require overtime based on hours worked per day.  Federal law requires that hourly employees who work more than 40 hours in a workweek must be paid at a higher rate for the overtime hours, at a minimum of 1.5 times the employee’s regular pay rate.
  • May be paid at a higher rate or it may be paid before 40 hours (at 35 hours a week, for example), but the minimum is 1.5 times regular pay after 40 hours in a workweek, again subject also to state and local requirements.
  • Is not required for night, holiday, or weekend work; these rates are determined by the employer or by union contracts.

Commissions

  • Is a sum of money that is paid to an employee upon completion of a task, usually selling a certain amount of goods or services.
  • May be paid as percentage of the sale or as a flat dollar amount based on sales volume.

Bonus

  • Additional compensation given to an employee above his/her normal wage – exempt or non-exempt.
  • Used as a reward for achieving specific goals set by the company, or for dedication to the company.
  • Is typically paid in a lump sum.

Profit Sharing

  • Various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company’s profitability – in addition to employees’ regular salary and bonuses.
  • Typically amounts to allocation of shares to employees in publicly traded companies.

Employee Stock Options

  • Granted to specified employees of a company.
  • Carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price.
  • Is slightly different from a regular exchange-traded option because it is not generally traded on an exchange, and there is no put component.
  • Employees typically must wait a specified vesting period before being allowed to exercise the option.

Other Forms of Compensation

  • Travel/Meal/Housing Allowance
  • Benefits including: dental, insurance, medical, vacation, leaves, retirement, etc.

Final Compensation Perspective

Knowing that paying your people is likely your single largest business expense, be sure to put some effort into researching the cost and benefit associated with your investment. While it’s always important to evaluate how much you pay, it’s even more important to create an effective strategy that addresses “how” you pay as illustrated above.  The key is to align your compensation strategy with your overall business and people strategy – core values too.

The benefits of developing a compensation approach based on company strategy and values include:

  • Reduced chance of failure due to aspects of a “standard” compensation plan that don’t take into account unique aspects of your company.
  • Opportunity to ensure that compensation philosophy adjusts with changes in strategic direction and market conditions.
  • Ability to identify the features of your compensation strategy that have the greatest impact on value-creation for your people and your business.
  • Opportunity to create a competitive advantage in the marketplace and in recruiting.

An effective compensation strategy can attract and retain the best talent and encourage work behavior that differentiates a company from its competitors.

  • Choosing carefully those employees who will have access to confidential information.
  • Keeping hard copies of the information you wish to protect in locked cabinets and offices, clearly marked as confidential.
  • Keeping electronic confidential information in password-protected databases.
  • Training employees on how to recognize confidential information.
  • Routinely reminding employees that confidential documents should never be left on desks and that restricted information should never be discussed where it could be overheard by unauthorized individuals within the company (such as in office hallways or common areas) or outside the company (such as in elevators, trains or other public places).

As a business owner, you have complete control over how you handle the personal and confidential information of your employees.  You have less control over how your employees maintain the confidentiality of your company information, but your rigorous adherence to confidentiality standards will set the stage for a healthy and ethical work environment.

_____________________________________________________________________________This content was developed for the PHCC Educational Foundation by TPO, Inc. (www.tpo-inc.com). Please consult your HR professional or attorney for further advice, as laws may differ in each state. Laws continue to evolve; the information presented is as of October 2014. Any omission or inclusion of incorrect data is unintentional. Please note this article is not intended to provide legal advice or to substitute for supervisor employment law training.

The PHCC Educational Foundation, a partnership of contractors, manufacturers and wholesalers was founded in 1987 to serve the plumbing-heating-cooling industry by preparing contractors and their employees to meet the challenges of a constantly changing marketplace. If you found this article helpful, please consider supporting the Foundation by making a contribution at http://www.phccfoundation.org.

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