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Alliance Compensation News & Events

Alliance Compensation News & Events

Sales Compensation Plan Renewal

Sales Compensation Plan Renewal

What else can we blame on COVID-19 this year?

Every year David Cichelli and The Alexander Group do a survey on sales trends and practices.  I’ve just looked back on the pre-Covid 19 2020 version. Lots of percentiles, averages, and all sorts of numbers that would satisfy even the most hardened statistician. But the most relevant data is on what likely didn’t happen as companies prepared plans for their newest Plan year.

This isn’t necessarily headline-making data, but it’s “attention-grabbing” if you are in a company that ignores this most basic principle of sales compensation planning and design, that being:

Sales Compensation Plans Are Annual Plans

That is a headline that should and must apply every year.  But as we all know, 2020 was not your average year.  Here is the context.

Practices for sales compensation plans begin with consideration of business conditions, individual markets, and growth projections.  So, when thinking about incentives for sales employees, it’s smart to first start with company opportunities and objectives, then begin the process of creating the desired alignment to sellers’ objectives through the use of monetary incentives.

Back to the forecasts.  Going into 2020, the companies that participated in Dave’s survey projected a median increase in revenue of 6%.  I’m going to go out on a limb here and say many won’t achieve that forecast.  Interestingly though, some did that and more.  For example:

Cleaning services

Grocery stores

Home exercise equipment

Mask makers (obviously)

And of course, Zoom

Chances are good that the salesforce for companies like these did very well in 2020.

On the other hand, the downside list (Hotels, Restaurants, Scenic Transportation/Vacations, Clothing) is a who’s-who of familiar brands as we’ve modified our plans and behaviors due to forced lockdowns.  If the salesforce is still employed in some of these industries, they might consider themselves fortunate.

Typically, over 90% of participating companies report that they plan to make changes to their sales plans in a new year.  That’s an excellent result in my opinion.  It doesn’t imply that 10% of companies have totally ignored the need to at least evaluate their plans, it could mean that they evaluated them and decided no change was needed.  And in 2020, some companies could’ve made multiple changes.

If you were in the original 90%, what sort of things might you consider for change?

  • Getting a better alignment to business strategy (#1 priority when I work with companies on their sales compensation plan designs is to make sure we have solid connection to the business strategy).
  • Changing the pay mix (base/incentive ratio), earnings caps, ramps/accelerators and performance measures are also frequently changed on an annual basis.

What about changes during the plan year?  Not something many sales people can get behind in my experience, but that doesn’t mean it wouldn’t be the right thing to do if need be (see lists of industries above, and any other company in 2020).  As a matter of fact, in a “normal year,” around 50% of companies make some sort of change, from minor tweak to total do-over!  What might be a good reason to make a change?  Here are a few that come to mind, in most cases clear as to why you wouldn’t “tough it out” until the end of the year:

  • Change in the business (new product/service, selling partner or channel, etc.) – i.e., new strategy
  • Significant upturn or downturn outside the rep’s control (again, 2020)
  • Inaccurate sales data so commission calculations are wrong or not trusted
  • Significant miscalculation of quotas
  • Lack of pay differentiation between low and high performers (is the plan attractive enough for your top performers?)
  • You can’t manage the plan – too administratively difficult
  • Your salespeople can’t understand the plan – too complex
  • Excessive costs, cost of sales well outside budget

And in some cases (a recent client comes to mind), there may be several items on the above list.  Again, with COVID as the reason, suddenly e-commerce became a more important channel and profitability projections changed, requiring different territory and customer classifications.  Product mixes changed.  Their customers went out of business… so many reasons to maintain awareness.

This year especially, we can see that selling has changed.  How companies can engage their customers and what influences the customer to buy must be considered when designing the sales incentive plan.  More data available to influence decisions to buy, less personal engagement, new roles providing specialized guidance and support – among many reasons to ask deeper questions about sales incentive plan designs and not just settle for a tweak.

Sales compensation plan change is a little more critical to most businesses, given the stakes involved.  I find it is also one of the most interesting parts of any compensation role I’ve ever had as the best way to keep a pulse on the organization’s driving business success factors.

—–

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com), a team of seasoned experts and a trusted solution for clients across the Western US in public and private companies. He has over 35 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR. 

What else can we blame on COVID-19 this year? Every year David Cichelli and The Alexander Group do a survey on sales trends and practices.  I’ve just looked back on the pre-Covid 19 2020 version. Lots of percentiles, averages, and all sorts of numbers that would satisfy even the most hardened statistician. But the most […]

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New Year’s Resolution (Early Edition)

New Year’s Resolution (Early Edition)

Is it ever too early to start thinking about the New Year?  Especially after the year we’ve had (2020!)??  In most cases, I’d probably say yes, September is way too early. But this time, I’m looking forward to a New Year.

And with the thought of a New Year, who doesn’t start thinking about New Year’s resolutions?  A resolution (loosely defined here for my purposes) is something we think could make change for the positive, something we’ve always been meaning to do but never quite got around to.  A report I read said these were the top 10 New Year’s resolutions for 2020:

  1. Actually doing my New Year’s resolution
  2. Trying something new
  3. Eat more of my favorite foods
  4. Lose weight/diet
  5. Go to the gym
  6. Be happier/better mental health
  7. Be more healthy
  8. Be a better person
  9. Upgrade my technology
  10. Staying motivated

It’s the same list most every year, although I’d hazard a guess that the list might look a little different after having survived 2020.  Might even mention toilet paper.

What about your work resolutions?  If you are a compensation professional, resolutions for work should always include basic yet important resolutions to continue to learn and grow in the profession.  And then there is the ongoing list (referring back to my definition of resolution) of things we’ve been meaning to do but just never got around to.

Here is my HR/Compensation New Year’s Resolution list for 2021, and just maybe a few things that might apply to the end of 2020 as well.

  1. Focus on ways to make good programs even better.

This may include short- and long-term incentive plan designs, but if your programs are already working as planned then consider how effectively are they communicated – are you getting credit with your employees for what you offer?

Secondly, can your average manager effectively communicate Total Rewards?  If they haven’t been trained, would you expect them to be able to just because they are good at engineering or marketing?

  1. Pay attention to the changing legal and social landscape.

Pay equity is an evolving topic and worthy of your time, attention and priority.  Although all states don’t have pay equity laws yet, all it would take would be a majority vote in your legislature and a like-thinking governor to get your attention.  I speak from experience.

  1. Benchmark something.

A pretty generic statement, but when was the last time you checked to see how competitive your shift-pay differential was?  What percentage of employees can be rated in the top category?  If your pay structures were competitive?  The list is long.

  1. Use Total Rewards statements.

Who of us hasn’t thought about trying to convince employees they are well-compensated, especially in the “hidden paycheck?”  Takes a pretty good data base and good internal and external partnerships though.  You’ll never get it done unless you start asking those partners what their capabilities might be.  And planning, planning, planning.

  1. Get more involved in sales compensation plans.

Sales compensation can be a mystery if you’ve never been involved or immersed in it before.  Might this be a good time – thinking about the new year – to offer to be involved?  If you aren’t confident to take it on you can at least offer market data and be a part of the team.  Sales executives actually value your market data, especially when trying to understand how to pay their best performers.

  1. Write Job Descriptions.

Really?  Job descriptions?  Isn’t that last on everyone’s list – ever?  Just because we don’t enjoy the work doesn’t mean there isn’t value in it though.  Ask anyone who has had to match jobs in salary surveys, write recruitment ads, defend lawsuits, etc. (Besides, it will improve your creative writing skills which you will use throughout your career.)

  1. Write or review policies and processes.

Policies don’t write themselves, unless there are no policies (wow, that was profound).  A policy should be a statement of your intent when it comes to something, plus some explanation.  For example, how do sales people get paid when they are on a LOA.  Usually involves some internal discussion/debate to figure it out, but then you can execute consistently.

Processes are a little different in my mind, generally speaking to benefit you or your team to be able to replicate an approach, an analysis or such.  For example, how is market pricing done – weighting of surveys, how to match blended jobs, etc. 

In my experience, larger companies can generally get these sorts of resolutions knocked out because they have larger staffs that might be able to team up and knock something out.  Medium and smaller companies may be not – maybe you need a hand to take that new ground this year, check that resolution off the list for good.  So try something new — we at Alliance Compensation can help with your list. We have the experience, expertise, and work with excellence to get you your desired results.

And best of all, you don’t have to diet OR go to the gym!

——————–

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and a trusted solution for clients across the Western US in public and private companies. He has over 35 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

Is it ever too early to start thinking about the New Year?  Especially after the year we’ve had (2020!)??  In most cases, I’d probably say yes, September is way too early. But this time, I’m looking forward to a New Year. And with the thought of a New Year, who doesn’t start thinking about New […]

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Big, Hairy, Audacious Compensation

Big, Hairy, Audacious Compensation

A while back (1994 to be exact) a term called a BHAG (Big, Hairy, Audacious Goal) was coined.  Think Boeing in Seattle getting into the jet airliner business as an example.

What do you think the compensation plan was like for Boeing executives and engineers?  Do you think it matched the size, scope and impact of their goal – and accomplishment?

Probably not.  And probably never really entered the mind of those, or most rewards designers since.  Isn’t it time to re-think what rewards should look like when someone really and truly “hits one out of the park?”  I’d say so.  It’s not going to be about what the surveys say, or what percentile you decide to pay at.  It should be differentiation on a scale beyond all those things.

Some might continue to point to their existing plans and programs and say, “That’s what our recognition plan is for,” or “That would be covered in our annual incentive plan,” or “But then they’d make more than the CEO,” or even “We’ve never done it that way before.”

(That last one makes me shudder.)

I recently worked with a client, a small but fast-growing software firm with offices in Silicon Valley and Portland that is making big inroads into data storage and management.  The path to success is clear – create growth and you create value, and being able to do that without outside financing creates exponential value.  Wouldn’t we all agree that creating exponential value would be worth exponential rewards?  Now not something unreasonable, but it has to be impactful.

In my client’s case (software as a service) we discussed the real drivers of value in that SaaS space where they play  – long-term contracts, pre-paid business and attracting logo business.  Other industries will of course have other value drivers that are specific to their type of business, competitiveness, and where they are on the business cycle (start-up, growth, maturity or decline).  Now here’s the thing about rewards under the BHAC thinking.  The amounts can’t scare you, no matter your industry or experience.  They are, by design, BIG AND SCARY (and of course, hairy but that’s not something I’m going to blog about)!

What might a $2M, 2-year contract be worth under a regular commission plan?  5%?  So $10,000, and if structured like most plans, pay that out over the life of the contract.  $416.67 a month – THAT’s exciting!!

This isn’t necessarily intended to just get you thinking about sales incentives though.  And as I said earlier, it isn’t going to help if you get caught up in percentiles.  A BHAC plan is about VALUE.  Who would look back 2 years after landing a logo client in Los Angeles that doubles your revenue and increases your market value by $5M and say, “Gee, it was probably a mistake to pay Colleen that $50,000 bonus, don’t you think?”

Let’s pivot to a favorite value creator, product designers.  Could be software engineers in Santa Clara or apparel designers in Beaverton.  I may be wrong, but from my experience, those roles typically come with a caveat on who owns what, i.e., intellectual property.  One company I worked for years ago had a very talented stable of design engineers who over the years created product after product that were patented.  Their reward?  A nice plaque, an original copy of the patent with their name, maybe a promotion, maybe a few percentage point increase in their merit increase that year.  If the company also did well that year, maybe a somewhat larger bonus (say 20% instead of 15%).  Again, how exciting is that?!

We do need to be a little careful though, BHAC isn’t necessarily for everyone.  Some occupations (engineering being one) attract the type of person who may get enormous satisfaction just from the accomplishment.  Some cultures (no matter what the occupation) have a much stronger aversion to individual recognition than others.  Still, it can’t hurt to think bigger than where the data usually lands, right?

——

Jim Harvey is a Managing Partner with Alliance Compensation LLC (www.alliancecompensation.com) , a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. He has over 35 years of experience in corporate leadership roles and consulting, and lives with his wife and three dogs in Sherwood, OR.

A while back (1994 to be exact) a term called a BHAG (Big, Hairy, Audacious Goal) was coined.  Think Boeing in Seattle getting into the jet airliner business as an example. What do you think the compensation plan was like for Boeing executives and engineers?  Do you think it matched the size, scope and impact […]

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Announcing Alliance Compensation

Announcing Alliance Compensation

On June 15, 2020, two great firms and three great consultants will be joining forces in a new business venture. Announcing Alliance Compensation!

Columbia Compensation Consulting Inc. and Compass Total Rewards LLC will be merging. Principals Jim Harvey and Nancy Ellington are being joined by David Adent, most recently of Cisco Systems. Jim, Nancy, and David all met while working together in senior compensation leadership roles at Cisco.

Columbia Compensation and Compass Total Rewards have served local, regional, national, and global clients across the spectrum of compensation and rewards strategy, design, and advisory services. They’ve built a reputation for experience, excellence, and expertise. David is a natural fit to the new firm with his extensive background in executive and board consultation and broad industry experience. Alliance Compensation already has clients in the Western United States including Washington, Oregon, California, Utah, and Arizona. They’ll also serve Idaho, Montana and Nevada.

As friends and colleagues, they believe now is the time to form their Alliance given their successes in their own businesses as well as combining their collective knowledge, experience, and expertise to serve their existing clients, and form new relationships. Most of their new business comes through their current client’s referrals, something they’ll continue to value and strive to live up to as they move forward.

There will not be any disruption in any services that clients have relied on; as a matter of fact, their Alliance should increase their availability. Their focus has been and remains serving the broad spectrum of compensation, rewards, and incentives from the basic blocking and tackling of market pricing and salary structures to the highly specialized and specific aspects of executive and sales compensation. And you’ll still be able to work with your existing partner, although you may want to meet the whole team along the way – they’re putting their heads together behind the scenes to make sure their products and services are everything you expect and more.

For existing clients, your continued support and partnership are greatly appreciated. For new clients, the Alliance Compensation team looks forward to meeting you and learning about your compensation needs.

For more details about the Alliance Compensation team and service offerings, visit their website or contact them directly at 425.836.0206 / 888.877.4746.

You may contact Nancy at nancy@alliancecompensation.com, Jim at jim@alliancecompensation.com or David at david@alliancecompensation.com.

Announcing Alliance Compensation! Columbia Compensation Consulting Inc. and Compass Total Rewards LLC will be merging

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Is Sales Compensation Coming From The Battery Drawer?

Is Sales Compensation Coming From The Battery Drawer?

My mouse started acting up the other day. That usually means the batteries are wearing out, so I headed over to the battery drawer for new batteries.

What a mess. Lots of batteries, finding a fit wasn’t the problem. I just had no idea if any of them were any good. So I did what was necessary, which was try all the various combinations of those batteries until I got something like the performance I needed to make the mouse run again. But at this rate I have no idea how long it’ll work because I somewhat randomized my chances for success by just taking what I could find. (If your battery drawer is better organized than mine, I salute you!)

When you start “going through the battery drawer” to design a sales compensation plan, you have just about as much chance to get it right as I did with my mouse. Problem is, the stakes are a lot higher for your company and the sales force. You might find a great combination that results in a super-charged field sales team, producing at unheard of performance levels. Winner winner, chicken dinner!! On the other hand, think of all the other possibilities, like great payouts but not so great results, or any combination that results in detrimental effects on the sales force or the company..

So randomizing the inputs probably isn’t how you’ll be successful in this particular compensation expertise. You need to be thoughtful with sales compensation plan design so unlike my experience with the battery drawer, you’ll produce the kind of excellence you can rely on. For example:

  1. Batteries might not be the problem. Sure, it’s easy to check the batteries first, but you should always start with the owner’s manual! Consider all the factors that influence the results your sales force are getting. Are they trained? What’s the status of your product or service, are you growing or falling behind the competition in features and benefits? Is marketing generating demand? Did the business strategy change and the sales plan didn’t? Are finance or other processes keeping the sales force from getting desired results?
  2. Use the right size batteries, put them in the right way and don’t mix sizes. I’ve opened up battery cases and found the wrong sized batteries even though almost every battery case made is pre-molded to the right size. But desperate times call for desperate measures, right? It can be so easy to just try something and hope it works and everyone can get back to work. But not having the right mix between base and incentive, unclear sales role definitions, having the wrong people on sales incentives or using any old performance measure mix may work for a while but will eventually short out.
  3. Some batteries aren’t accessible. Many newer electronic products use battery power, but you aren’t supposed to open the battery case. If you’re being told there’s nothing wrong with the sales plan, and you haven’t seen any supporting performance data, I’d suggest getting another opinion. Typically sales operations groups are rich with data, and with a little market data you can fairly quickly get an idea for just how effective your plans are, and whether getting at those batteries might just be a worthwhile project after all. For example, are top performers earning at the desired excellence levels? How much are underperforming reps earning? Did most of the sales force achieve quota last year? Were they supposed to?
  4. Don’t use used batteries, and safely dispose of the old ones. Chances are your business isn’t really exactly like the one your new sales VP came from, or where your HR/compensation peer works. You have so many options and alternatives when it comes to designing sales incentives; don’t give away your creativity to others. And after you’ve tried something and it didn’t work, make sure you’ve documented what the issue was. Chances are you are probably doing something right but could just use a fresh set of eyes (or new batteries?).
  5. Sometimes you have to go to Batteries+. Although batteries are available at most corner stores, sometimes you need an expert to help figure out what to do next. Over the years I’ve found that most people seem to think they are compensation experts. As a matter of fact, count the total employees in your company and subtract one and that is the number of people who seem to know as much (or more) about compensation as you do.  And you probably don’t need an external consulting expert for every single thing every single year. But if it’s been a while and you’re not sure you’re still getting the most out of sales compensation, there are folks like me who do this work, and by the way really enjoy it. I’ve found few places in a company where you can learn more about a company and what it takes to make them successful than in the process it takes to design sales compensation plans.

Last night we were going to sit down and binge on a show on one of the streaming services. I went to turn on the TV and a message came up, “No Source Identified” so I take the remote and start pushing buttons, nothing happens. I shout downstairs, “Bring up 2 AAA batteries for the remote!” One, I hadn’t opened the remote fully other than to see it had AAA batteries, and two, I hadn’t thought what else might be wrong. Turns out I was wrong on two counts (the wi-fi needed to be reset, and the remote required 4 AAA batteries). After I reset the wi-fi, everything worked and we happily binged away.

I’m happy again, and continue to learn about batteries.

So randomizing the inputs probably isn’t how you’ll be successful in this particular compensation expertise. You need to be thoughtful with sales compensation plan design

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I Could Tell You, But Then I’d Have To…

I Could Tell You, But Then I’d Have To…

I have enjoyed teaching a couple of compensation certification classes for WorldatWork, the association for total rewards professionals. I would get a lot of questions about a lot of topics, but one that frequently surfaced – whether in a module or not – is “this is great, but would you tell your employees that?” And this isn’t some super-secret recipe for the incentive plan funding that makes you an insider, this is some of the compensation basics like pay grade, pay range, that sort of thing.

So just to get it out of the way let me say that I am a believer in sharing more openly about compensation than most people I’ve met. That belief doesn’t come from a beating I took or something I learned when I was young, it comes after seeing what happens when you don’t share more openly. The best thought-out programs with the most strategic elements and execution can still fail when not properly communicated. As a matter of fact, I’d say the two things that most often are an anchor around the neck of an otherwise successful program are the lack of management training (related topic, different time) and the lack of effective communication.

Think of it another way. What if for one of the biggest investments most people ever make (like your house) all you were told was, “it has a total of 11 rooms. Sorry, I can’t be more specific.” Is that enough information for you to be all-in as a buyer? Should the seller, who really wants to unload the house reasonably expect to sell it?

Compensation is a huge investment your company makes, and if you are keeping secrets you probably aren’t getting the most from your money. Here are my Top 5 reasons you should communicate as much as possible about your compensation programs:

  1. Employees will make up the part they don’t know.
  2. Missing information is a constant negative and anxiety producing reference point.
  3. Most of your employees are adults and you expect them to act like adults in all other ways.
  4. Underlying problems don’t require secrecy, they require fixing.
  5. Put accountability where most of us want it anyway, in the hands of managers.

Making it up. This is a very real outcome of not communicating compensation. For example, a base pay program is typically the largest ongoing investment an employer will make, yet one of the areas that can be shrouded in greatest mystery when pay grades and ranges exist but are closely held secrets in HR. And the associated HR strategy implications in areas like succession planning and career development can’t be overstated if an employee doesn’t know what sort of pay opportunities you’ll offer them for their continued growth of skills and abilities. Without facts from you, other opportunities with known facts are certainly more realistic outcomes.

Negative reinforcement. Your employees make decisions every day about their engagement. The anxiety that can be produced in a person when managing critical aspects of life without sufficient information isn’t something that should come from something that represents a major part of someone’s life and livelihood. And even though it’s not really lying, you’ve got to dance your way out of it every time someone asks you a question your policy doesn’t allow you to answer, and that doesn’t leave a lasting positive impression either.

Maturity is a two-way street. Since most of your employees are adults and you expect them to act like adults, what makes you think they can’t handle the truth? The best example I’ve experienced of telling the truth about compensation was at a company I worked for during the first recession, when we knew we weren’t going to be able to give base salary increases that year. We told employees three months in advance of the usual date. Sure, there were a few rants, but by the time it came to execute the program, it was a non-event.

Fix the underlying problem. If you have something uncommunicated because it would cause unrest, fix the underlying problem – design, training, whatever, don’t mask it. Salary range spreads causing compression? New hires coming in above current employees? Neither a good reason to stop communicating about pay ranges, but good input for the next program design cycle. Segmenting your promotions budget so organizations with more entry-level employees get more funding? Explain how job families work and the concept of promotion velocity for early-career employees. These aren’t difficult problems to solve when you communicate openly.

Accountability in the hands of managers. Providing needed compensation information to those who make the day-to-day decisions about the base pay, promotions, classifications, bonuses, recognition, etc. only makes the most sense. One common issue with open compensation communications is who has control. After all as it is frequently said, information is power. Do you really need “Compensation Power?” or can you afford to let managers do what their job descriptions tell them they are supposed to be doing? Sure, there are some who abuse it, but realistically that is a small minority. Most management jobs come with some level of fiscal authority anyhow, and in most cases that is many multiples above what we’d ask of them in a compensation program.

I strongly encourage you if you see yourself somewhere on the secrecy side of the communications spectrum to re-evaluate your approach to compensation communications. At least start asking yourself whether the way it works now couldn’t be improved. Good communication won’t repair a flawed rewards program, but ineffective communication will cause a well-designed program to fall short of expectations.

So just to get it out of the way let me say that I am a believer in sharing more openly about compensation than most people I’ve met. That belief doesn’t come from a beating I took or something I learned when I was young, it comes after seeing what happens when you don’t share more openly.

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Think Outside the Box: Better Labor Cost Management

Think Outside the Box: Better Labor Cost Management

“What is our average compa-ratio, Jim?” asked the CEO as I sat down to report on our annual focal exercise.

Having been through enough of these meetings over the years, of course I had the answer; as a matter of fact, I had it calculated not only for the whole company but for each division, each country, and each corporate function. But I didn’t want to just spout off the answer, I wanted to educate him about how to think differently about his labor costs. Unfortunately, he had worked with enough compensation professionals over his storied career and had been taught by each and everyone that if he could just get the compa-ratio to 1.0, another year could be put in the books.

“We ended at 0.99,” I said, “but what I really wanted to review with you was…”

“That’s great Jim, and tell your team that Jerry thinks they did a grrreat job! Could you ask Kathy to come in here on your way out?”

I shook my head again as I headed for the door. Not only because he still referred to himself in the third person, but again I was not getting the sort of traction that would really make a difference in the company’s performance. I mumbled to myself, “Yes Jerry, it’s just wonderful to know that all your averages are aligned. In addition, do you know you have 20% more Senior Professionals than your competitors? Do you know that when it all adds up our labor costs are 4.5% more than your competitors, and on a $200M payroll, that’s $8M, or about $0.05 per share?”

As the aisle row occupants of cubeville stared at me talking to myself again, I decided I needed a better approach than expecting the CEO to just nod his head and hang on my every word. What I needed was a few more people with some time and some skin in the game in order to make the difference bottoms-up rather than top-down. I needed people with shortages of resources to get their jobs done. I needed Human Resources.

Even then it was a hard sell. I had a solution looking for a problem. I finally found an ally in the HR Director of the Technical Services organization, a group that was in the process of trying to manage global labor costs through a planned migration to lower cost-of-labor markets and away from some of our higher-cost US urban locations.

It didn’t take long for her to get it – it seemed she was “high-potential” after all! Her organization’s costs and associated factors looked something like this, with these assumptions:

  1. Our average wages were the same as the market at each job family level
  2. Our benefits were equal to the market, 35% of base pay
  3. Our incentive targets were competitive and identical to the market

The difference in how we’d looked at this in the past was taking off the “Jerry Glasses” and looking at the data in a whole different way – our total labor costs, not just our average labor costs… our “Portfolio” of employees. You see, you have choices in how you manage the decisions around factors and variables that make up your labor costs, even while maintaining the typical “50th percentile” strategies that so many companies employ.

So even though we’re matching the market in all the traditional senses we’ve become accustomed to, we’re still exceeding the overall market cost-of-labor by 4.5%, or with this example the sum of $13,000,000!! Would that make a difference anywhere in your business – hiring more skilled technicians, salespeople, funding a new product line, avoiding layoffs… you fill in an example.

How does this happen? Here are a few things to check for after you’ve done an analysis like this:

  1. What is your promotion policy and practice? At Our Co, we enabled a process that says that people can come to expect promotions when they are high performers. Nothing really wrong with that on the surface, but it got away from us, and we didn’t take into account how many people we already had doing work at senior levels. We probably should have thought about more rapid promotions for employees hired at lower levels and slower rates for higher leveled employees.
  2. We’ve had a few difficult years on the merit budget, so pay increases have been hard to come by. But when a new employee is hired, they can be hired at pretty much whatever level the manager wants. Our managers started over-hiring levels because they didn’t expect they’d be able to give pay increases. We’ve got a lot of competitively paid but under-skilled people as a result.
  3. We’ve ruled out the geographic labor cost issues – we know that the cost of labor is higher in places like the Bay Area, so that’s not a factor here.
  4. Obviously we also discovered a few more dollars hiding from us, since incentives and benefits are a factor of base. Never forget that, as a business it’s all about fully-loaded labor costs.
  5. One thing we did do right was we “gated” movement into the P5 or expert level of the job family. That means it requires additional approval to promote or hire someone there. It is more administration, but at that level the responsibilities are so much greater and implications of misplacement are of greater consequence so it’s worth it.

What can HR do with data like this? Thinking first of a popular topic, how about an element of workforce planning, as in an overlay around labor cost? How about coming to the table with a proposal to reduce labor costs over time by realigning skill requirements and leveling? Obviously, there are many other aspects of workforce planning to consider, but armed with cost-of-labor data, a smart HR Leader can create hiring plans around needed skills and determine whether training and development may enable business needs rather than taking an expensive hiring or replacement route.

Data can be intimidating, or at least that’s what people tell me when I ask why they never got into compensation. But almost anyone can see the clear benefits that present themselves when looking at data differently than the way we’ve been training everyone else to do so for so many years.

Data can be intimidating, or at least that’s what people tell me when I ask why they never got into compensation. But almost anyone can see the clear benefits that present themselves when looking at data differently than the way we've been training everyone else to do so for so many years.

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