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Practical Guidance for Comp Professionals |
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Fall Quarter 2012 |
In This Issue
SILENCE YOUR CRITICS: The Bulletproof Merit Budget
BEWARE OF "VENDOR BENDERS"
TIPS FOR THE NEW COMP ANALYST
COMP QUIZ
WHAT WAS I THINKING
BLOGS WE LIKE
WHAT THE EXPERTS ARE SAYING
Dear Reader,
This month's feature article talks about the often-vilified Merit Increase Budget, and why it tends to throw so much suspicion and discontent onto the innocent HR staffer who presents it. We give you the principles and formulas you need to back up your recommendations with confidence. There's a lot of red meat to this article, so we broke down some of it to create related items in our Tips and Comp Quiz sections.
We've also got a mini preview of our upcoming White Paper on avoiding "Vendor Benders" when choosing the right automated compensation solutions. We give you the hard questions to ask of any vendor before you buy.
Sincerely,
Harriet Stewart,
Executive Editor
800.990.7611
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SILENCE YOUR CRITICS: |
| The Bulletproof Merit Budget |
 There are few compensation communications that will have more impact on your organization or be questioned more pointedly or relentlessly than your presentation of a merit budget. Top executives, finance professionals and managers will all quiz you on how you derived the number and how it supports the company’s compensation strategy. To help you both develop and defend your calculations, here is some guidance on all the ins and outs.
WHAT IT IS: Typically, the merit budget is a tiny subset of the salary budget. It represents planned growth in average salaries for the people you have on board at one snapshot in time.
WHAT IT’S NOT: A merit budget is different from the Finance department’s expected salary expense budget. It is not the cost of the actual salary expense increase, but rather an estimate of the growth in your current average salary.
What Should You Look At First?
Your organization’s position to market should be a key factor in creating a merit budget.
To know what market data to consider, you must understand your company’s compensation philosophy. Ensure that you know the answers to these questions:
• Do we age market data to the beginning, end or middle (lead/lag) of the planning year?
• Are we shooting for the average, 50th percentile or some other percentile of market?
• Have we compared to the right market rates, especially in international locations (e.g., base salary, guaranteed pay, total cash, etc.)?
For further discussion of “Position to market”, see the Term of the Day section in this issue.
Consider Your Organization’s Financial Strength
Like a gate objective in your incentive plan, your organization’s financial strength will determine or modify your merit budget. (After all, it doesn’t matter that you’re five percent below the market if you can’t afford a five percent merit budget!)
But can you afford it even if your company is suffering financial problems? Maybe. To know that, you really need to know how many layoffs and new hires, if any, are planned. It could be that the merit budget is such a small part of the overall salary expense budget that you can be more generous than you think. Also consider that your employee population is going to be jittery during these times and may need the encouragement brought with a healthy merit budget.
Promotions and Adjustments…Do They Matter?
You may be asked to carve out a portion of your budget for promotions and adjustments. Regardless of whether these factors are in or out, you still need to know how they affect your budgeting. Look at your organization’s history in this regard. What percentage of people got promotions and adjustments in the past few years? Did managers stay within guidelines in giving them?
What is Everyone Else Planning?
Find out what other companies are doing through the myriad of surveys on the topic. WorldatWork, Culpepper, ERI and many others provide their survey results on this subject in late summer.
Coming Up with the Final Budget
Based on the factors discussed above, decide on an overall merit budget for your organization. Be sure that you’ve considered special groups and locations that require larger or smaller budgets, particularly if you have international locations.
See our Comp Quiz section In this issue for some right and wrong examples of merit budget formulas.
Getting final approval
Before offering the final numbers, prepare yourself to present information covering the company’s past trends, what you know about your competitors’ merit budget projections for next year and your organization’s position to market.
Success Tip: Senior management wants you to make the decision easy for them, so show them how the merit budget you’re projecting will actually affect the organization’s bottom line, for both the upcoming fiscal year and the one after that.
This thorough review will show management and the finance group that you considered the nuances, and evaluated the critical factors.
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BEWARE OF "VENDOR BENDERS": |
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A Checklist of What to Look For – and What to Avoid –
When Selecting Compensation Software
Introduction
Picture this scenario:
Your company has recently invested in new software for handling payroll or compensation, and your department has just completed the months-long process of configuration, testing, and training. A month into deployment, the company’s business rules change in a way that will require major changes to your specifications document. That’s when you discover that the vendor can’t accommodate your changes. Like a minor car crash, it frustrates your ability to keep moving – and you’re suddenly dealing with a “Vendor Bender”.
This is only one example of a software “solution” that creates a problem. Vendor Benders can happen in many situations, and that’s why it’s always a good idea to know the potential areas of shortfall before you commit your company to an automated compensation system. (Especially since any problems you encounter will raise questions about the competency of your department; it’s usually the people who take the blame, not the software!)
To help you avoid being trapped by a Vendor Bender, Stewart Daly’s experienced team has collaborated on the following checklist of questions. The list is based on a number of common workflow situations that a good software system should be able to address.
The Checklist
1. How often do your processes, business rules or workflows change, and can you or the vendor re-configure parts of the system to change with them?
This is probably the most critical question to ask up front. If you have situations unique to your organization, you want a product that can accommodate those special cases. The best systems will have the built-in flexibility to allow your application administrator to update eligibility requirements, guidelines, recommendation stages, and other critical settings. But at the very least, you will want to know if this is a “one size fits all” application that can’t be changed by either you or the vendor. If it is, avoid the trap.
2. Is the vendor HR-focused or strictly an IT company?
There are plenty of common errors that occur during the typical compensation planning process. Many of the calculations are tricky and highly interdependent, so that a small error can have rippling effects on an entire employee group. Does the vendor understand the politics and nuances of compensation planning or are they focused only on the IT impact?
3. Does the vendor’s planning tool allow you to communicate the compensation program effectively?
If you’re looking at new compensation software, ask whether it includes features like help screens, on-screen guidelines and warning messages for incorrect data entry. Best-of-breed comp software will include both soft and hard stops, giving the user opportunities to comment upon and explain variant answers.
4. What is the customer support process and turnaround time?
Is there a project manager assigned to your account who’s available by phone any time there’s a problem? Or will you have to log a ticket and wait for a response? Smaller vendors tend to be more available and responsive; the larger the vendor, the longer the queue for technical assistance.
5. How often will there be new versions or releases of the software, and how will those be priced for existing customers?
We’ve heard of cases where a new planning tool is released less than a year after an organization implements the earlier version. They’re faced with the choice of having some parts of the system go unsupported, or paying for an upgrade. Ensure through your license agreement that you will have the support you need through any transition, and that it won’t cost you a full year’s budget.
6. What is the vendor’s employee turnover, especially among those who deal directly with clients?
If your customer service requests or technical assistance issues are being handed from one agent to another, it can be extraordinarily annoying. Knowledgeable help is a must. Ask about the experience level of the vendor’s project managers. If they haven’t actually worked in the trenches of HR, their understanding of your issues – and knowledge of what questions to ask – may be limited.
7. Is the vendor in the midst of a merger or acquisition?
In the HR information systems industry, it often seems that mergers and acquisitions are being announced every week. If the vendor you’re considering is one of these, it could impact everything from product configuration to client support capabilities. While this may turn out to be a good thing, often it is not and you’ll have lost the comfortable working relationships you started with.
Conclusion
Whenever you’re in a product demonstration session, refer to this checklist and don’t be afraid to ask the hard questions. Listen for complete and honest responses, and take note if it’s a topic they seem to dance around. Remember this is not just a major purchase, but a long-term relationship with a company and its staff. Make sure they’re a responsible driver who won’t trap you in a Vendor Bender.
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TIPS FOR THE NEW COMP ANALYST |
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Term of the Day: Position to Market A term used throughout the compensation community. Unfortunately, many don't understand what that means. If you're a mathematician, you'll assume that position to market means the difference between your salaries and those in the market, divided by the market. In HR though, you should use your salaries in the denominator because your merit budget will be a percentage of YOUR salaries.
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COMP QUIZ
If you consider only position to market and competitor merit budgets, how would you calculate your merit budget?
Your Position to Market: -2.5% (below market)
Projected Competitor Merit Budgets: 3.0%
Merit Budget:
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A. 5.5%
B. 5.575%
C. .475%
D. 3.25%
Answer: (b) You increase your current salaries by 2.5% to match market, then another 3.0% to ensure that you meet market after your competitors have completed their increases.
Calculation: ((1.00 X 1.025 X 1.03) =1.05575 or 5.5575%.
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 One day recently a thirty-something guy swooped into my workplace wearing a leather jacket, shades and torn jeans, and claimed to be our new boss. To me, he just looked stoned. At the urging of co-workers, I called security to have him thrown him out, at which point he produced his iD and let us know that employee review sessions would be happening next week.
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BLOGS WE LIKE
Andrea Ozias
Andrea Ozias of WorldatWork blogs from the HR specialist's perspective.
Claudine Kapel
Claudine Kapel on Compensation - the view from our neighbors to the north.
Ryan Johnson
Ryan Johnson of WorldatWork blogs on perversities in the HR world.
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WHAT THE EXPERTS ARE SAYING
Margaret O'Hanlon is a regular contributor to Compensation Cafe. She writes on the subject of communication effectiveness for HR professionals, and is principal owner of ReThink Consulting.
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Questions? Comments? Email us at cnotes@stewartdaly.com
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