Compensation: Total Reward Plans that Attract, Retain and Motivate

With an increasing number of baby boomers retiring over the next five to seven years and a “birth dearth” of sixteen to twenty-four year olds, the coming workforce crisis will present challenging times and will demand that organizations actively take steps to ensure they have the right talent in place.

In order for organizations to remain competitive, companies must aggressively pursue talent to increase productivity and profitability, leveraging human capital to maintain a competitive advantage.To meet this challenge, companies, regardless of industry and size, must craft a clear and compelling strategy for implementing a well thought-out total reward/compensation plan to attract, retain and motivate key talent. This total reward strategy should integrate key components including:

1. Total compensation
2. Benefits
3. Work-life balance
4. Training, career and personal growth opportunities (World at Work Model)

These core components are critical for an organization to survive and thrive into today’s complex and challenging business climate.

Total Compensation Component

Total Compensation is the primary component in a total rewards model. Essentially, total compensation is made up of two primary parts, base pay and incentives.

Base Pay

Base pay is the first and most important component of a total rewards strategy.  Most would agree that a person’s lifestyle revolves around his/her paycheck. The “after-tax” amount of a paycheck determines the kind and quality of food, housing, clothing and transportation a worker can afford; therefore, it will clearly be an important area for consideration. Base pay is a fixed cost, so it is important that jobs are evaluated accurately with due consideration given to both internal and external equity. In addition, organizations should move their employees to a pay-for-performance environment to further justify potential increases.

As part of wages, it is often necessary to include overtime pay, shift differentials, premium pay for working weekends and holidays and other add-ons for being on call for other demands not normally required. Companies are always concerned with overtime, as it can add 25 to 40 percent to an employee’s base pay. Employers must be very cautious regarding these add-ons as they are practically permanent, and employees depend on them being realized with a high degree of certainty. After a while, they become known as an “entitlement.”

How does an employer determine which employee will be paid $30,000 and which will be paid $40,000? Naturally, there are sound reasons that mark differences in pay and compensation packages. There are a variety of factors that should be considered when establishing a compensation philosophy:

• Level of requisite knowledge and skill
• Industry and market
• Union vs. non-union status
• Capital intensive vs. labor intensive
• Size of business
• Philosophy of management
• Profitability of the organization
• Employment stability
• Employee tenure and performance

The stage an organization is in its life cycle (start-up, growth, maturing, declining or renewal) may dictate which factors it focuses on most intensely. For organizations in the construction industry to remain competitive from a talent perspective, certain key factors require priority consideration.

Level of Requisite Knowledge and Skill

The most direct factor influencing an employee’s rate of pay is the job that the person performs. When we classify or differentiate jobs for pay purposes, no single factor carries greater influence than the knowledge and skills required by the jobholder. The highest paid workers have strength in two key competencies: (1) the ability to work in a flexible, team-based environment, and (2) the technical skills allowing them to reach high levels of performance and productivity.

Industry and Market

Even in times of high unemployment, individuals with certain skill sets or abilities are in demand. When construction is booming in a region, and strong able-bodied workers are in short supply, hourly wages can escalate to attract labor from other locations. To attract and retain individuals with appropriate skills/competencies, organizations must be willing to pay competitive compensation rates based on their targeted labor markets (local, regional and national). It’s the law of supply and demand.

Profitability of the Organization

Employees working for a profitable company have a greater likelihood of receiving higher wages than those working for a less profitable one. Organizations that sincerely believe human capital is their competitive advantage typically hire and retain the best workers by paying above the going rate in their markets. Statistics show that by attracting and retaining employees through higher wages, organizations actually reduce costs through decreased turnover, lower absenteeism rates and increased productivity and profitability.

Incentives

The second part of total cash compensation is incentive payments. Workers, particularly in construction and manufacturing industries, often receive a specific amount of money for a prescribed output. Individual activities could be precisely defined, daily output could be measured and pay could be tied directly to the measured output.

As service jobs have expanded in the second half of the 20th century, including the work of clerks, secretaries, repair and service technicians, administrators, professionals, scientists and managers, employers have crafted incentive programs based on an incentive model grouped into three categories:

1. Organization Wide—These incentives use financial-based measurements (e.g., ROE (Return on Equity), ROA (Return on Assets), EBIT (Earnings Before Interest and Tax, etc.). 
2. Department/Team Based—These incentives require operational measures (e.g., reduced cycle time, reducing costs by x percent, increasing market share by x percent, etc.). 
3. Individual Measurements—These measurements make use of an identified behavioral level of achievement or development (e.g., improving project management skills, honing effective presentation skills, etc.).

Depending upon the job level (e.g., VP, director, manager, non-management exempt, non-exempt, etc.), a targeted payout is identified based on market data for total cash compensation (e.g., base pay of $35,000 for an electronics technician with a targeted bonus level of 5 percent). Then a weighting of incentive payouts based on job level within the organization is calculated (i.e., technician—20 percent weight based on an organization-wide measure, 50 percent based on team/department-based measures and 30 percent based on individual measures). In addition, through incentive programs organizations provide opportunities for employees to earn an upside leverage incentive payout for exceeding goals (e.g., 120 percent payout).      

Total rewards strategy encourages organizations to move toward a pay-for-performance philosophy providing opportunities for top performers to earn higher base salaries through a well-defined performance evaluation program embracing a meritocracy culture. In order for continuous improvement to occur, supervisors must provide ongoing coaching and feedback as part of the performance evaluation process.

 Benefits Component

Benefits are the second component of the total rewards model. Over 80 percent of companies include employee benefits as a part of their total rewards package to attract, retain and motivate key talent. Benefits now constitute approximately 40.7 percent of wages and salaries based on U.S. Chamber of Commerce, Employee Benefits. The following benefits are typically provided to employees:

• Medical benefits
• Dental plan
• Paid time off
• Holidays
• Short-term disability
• Long-term disability
• Worker’s compensation
• Social Security
• Travel Accident Insurance
• Supplementary Disability Insurance
• Retirement plans (i.e., defined benefit—pension or defined contribution—401k)

It is often highly recommended that organizations look at implementing a strategic cafeteria style plan which will do the following: (1) contain costs of the benefits package; (2) provide benefits desired by the employee on a more tax-effective basis, and (3) give employees a choice as to the benefits they receive. This strategy becomes a win-win for the organization as well as the employee.

An organization can achieve four goals as a key attraction and motivational strategy by including benefits as part of their overall package: (1) appreciation for the interest and desire of the employer to improve each employee’s quality of life; (2) loyalty and motivation, which translates into increased productivity and profitability; (3) understanding the value and cost of each benefit and service component; and (4) understanding the value and cost of the total benefits program. The number of employers offering this option continues to rise in order to attract, retain and motivate key performers.

Work-Life Balance Component

The third component of the total rewards model is work-life balance and growth. This component provides an organization with tremendous flexibility and only modest indirect costs to the organization. We acknowledge that many organizations may not be able to pay base salaries at or above market level or be able to provide a comprehensive benefits package. If this is the case, through a total rewards model, organizations still have a unique opportunity to provide flexibility, enabling employees to do their jobs effectively.  Some opportunities to consider include:

• Flexible scheduling
• Telecommuting
• Job sharing
• Child-care and elder care
• Fitness center
• Tuition reimbursement
• Sabbaticals

Training, Career and Personal Growth Component

The final component of the total rewards model focuses on training and development. As organizations struggle to ensure that they have the right number of people with the right skills in their organizations, they must continuously reevaluate career growth and Training and Development (T&D) programs.

It is imperative that companies create opportunities for employees to learn and grow in order to develop requisite skills needed to survive and thrive in today’s competitive environment, as well as to add value to the organization’s overall success. All career growth and development plans should be integrated into the organization’s performance evaluation process to ensure appropriate alignment with the organization’s strategic goals. This becomes a key vehicle in the replacement and succession planning process. T&D is key, as a significant number of management positions will be opening up over the next five to seven years as baby boomers retire.

An Engaged Organization Is a Focused Organization

We all need to acknowledge the importance of an engaged organization in accomplishing organizational, team/departmental and individual goals to achieve the mission, vision, values and strategic goals. Challenge your organization, either internally or with the help of a qualified human resources professional, to craft a total rewards strategy that is aligned with your industry, organizational life cycle, and cost considerations. This will ensure the design and deployment of the right program to drive appropriate behaviors needed to achieve desired business results. Time is of the essence, so take steps now to start building a total rewards strategy, and continue your journey toward becoming a “best in class” organization.

Construction Business Owner, June 2007