It goes without saying that recession taught everyone some valuable lessons about making every penny count and that the employment and financial landscape likely are forever changed.
As such, employers can't just go back to business as usual when it comes to their total compensation strategy, affirms Elliot Dinkin, President/CEO at Cowden Associates, Inc., a Pittsburgh-based consulting and actuarial firm. Rather, as the economic recovery continues to make baby steps forward, Dinkin suggests employers take an innovative approach to total compensation, incorporating the lessons learned during the downturn.
Dinkin recently wrote a paper on this topic, "Aligning Compensation with Business Objectives and People Costs" (available at cowdenassociates.com), and EBN sat down with Dinkin to discuss some of his advice for employers.
EBN: You've suggested that post-recession, employers need to take inventory before implementing a new total compensation strategy. What do you mean by that?
Dinkin: As we came through the recession, employers may have reduced headcount, and the first thing is to make sure you understand who you have working for your company today, if you have the right people in place to do the job that you need, what kind of future talent you may need.
Maybe your business model has changed [post-recession], so look at what areas that drive profitability that aren't staffed properly and make sure you have the talent to meet the current needs of your customers and their future expectations. It's not just the headcount, but the makeup of the headcount that's important.
EBN: You also advise employers to eliminate cost-of-living pay increases during good economic times, as well as avoid salary freezes when times get difficult. Both of those suggestions seem counterintuitive. What is your reasoning behind those recommendations?
Dinkin: Historically what companies did was every year they sat down with a budget and said, "I have to give raises to everybody and allow employees' [salaries] to keep up with inflation." They didn't have a true merit program.
If I had a cost-of-living allowance of, say, 4%, and margins were tight, I wasn't distinguishing enough between a top performer and an average performer. If I gave everybody 4% and top performers 6%, the top performers may take that negatively.
So, I'm better off getting out of this pattern of giving cost-of-living increases to everybody, which builds in fixed costs and rewards mediocre performers who shouldn't be rewarded. With a limited budget and limited resources, you should be rewarding the top performers of the company. Repeating the old mistake of giving everyone a cost-of-living increase with limited resources is a bad idea.
Coming out of a recession and not having granted any wage increases for some time, you have to look at every job within the company and figure out where to use those limited resources to drive profitability.
And then when times get tough, you still have to retain good people because they can help you get out of it. You have to keep that in mind; you can't make [salary freezes] an all-or-nothing type of deal.
EBN: Without COLA increases, employee pay raises would be solely based on merit. Talk about how employers can effectively transition from an entitlement pay strategy to a merit-based strategy. What role do incentives play in that transition?
Dinkin: The merit system requires a clear performance evaluation system - each employee understanding what he or she has to accomplish in a particular cycle and what the goals and objectives are. To the extent that they meet those goals they can receive a merit increase.
In addition, if your culture and business model support it, move toward a more variable compensation package where you have annual incentives and long-term incentives that are based on company and individual performance. A company would say, "Here are the overall corporate goals, and [meeting] a threshold level of performance would mean paying a certain amount in incentive compensation. At that level, I'm willing to pay a certain level in incentive compensation. Below that [threshold], I'd pay nothing and above it I'd pay more."
Then, combine that with individual performance objectives [tied to incentives] and say, "Based on company and individual performance goals, here is what you can earn or can't earn."
EBN: Obviously, benefits play a large part in total compensation strategy. In a post-recession era, how can employers balance focusing on cost containment while also meeting employee recruitment and retention goals?
Dinkin: This is where the philosophy of total compensation is really important. I can't simply say, "I'm looking at health benefits alone," because you can't [try to save in one area] that's going to cost you someplace else.
If you sit down and analyze your benefits packages, decide they're costing too much and say you're going to change [your health benefits] strategy to require a larger increase in employee contributions, someone you're trying to recruit might say, "This is an attractive place to work, but the contribution for benefits is too high." So, the immediate reaction is to increase pay, which throws off balance everything you're trying to do [to cut costs].
It's got to be a balanced scorecard. You can't look at benefits by themselves; you have to look at them in relation to an overall corporate strategy.
EBN: In terms of health benefits, you've said it's important for employers to maintain both active and retiree coverage. However, many employers are shifting toward major reductions or altogether eliminating retiree programs due to cost. How do you make the case for maintaining retiree health benefits?
Dinkin: There's a couple things pertaining to retiree health benefits that a company can look at. If you don't want to go with the draconian measure of altogether cancelling retiree medical, there are ways to manage the programs the same way you manage active health benefit programs.
For example, you can get out of the defined benefit business with retiree medical and get into the defined contribution approach. Give stipends and other amounts to supplement medical coverage. That's just one of the things you can do to get you out of sponsoring the program, but also hopefully keep you out of court.
EBN: On the retirement side, you advise sponsors to manage plans as though they are separate lines of business. Why?
Dinkin: If you look at a defined benefit pension plan in particular, it can have an impact on cash, accounting, the balance sheet [and so on]. If you don't plan out the budget and future of your defined benefit plan, at the wrong time in the business cycle you're in for a bad surprise.
If the market drops like it did a few years ago, the value of the investments goes down at the same time obligations go up - all during a time when business is bad. If you're not planning, budgeting and forecasting along the way, you can't be prepared for it.
You need to do an annual cashflow forecast, expense forecast and balance sheet forecast. It's managing a retiree payroll; and if you don't run it like you do every one of your other divisions, you're in for a big problem.
And now, employees sue employers for issues with their 401(k) plan. If you're a fiduciary, you can't offload the oversight, and you can't put the plan on autopilot. Do the investments line up properly? Are you doing things as a prudent person would do?
If you have a DB and DC plan, you need to have an overall umbrella policy from a funding and operational perspective on how to manage them.
EBN: Lastly, communication is an often neglected piece of the puzzle, but is crucial to a program's success. What tips do you have for employers when communicating a post-recession total compensation strategy?
Dinkin: It's not just communicating during open enrollment when [employees] are electing benefits; it's an ongoing discussion about, "Here's how our pay system works, here are your opportunities to advance in the future, here are the criteria for you to get those opportunities to advance and, if you advance, here's how much money you'll make."
If you communicate to people openly and ongoing, they can't say they didn't know or didn't understand. In this environment, people don't want to change jobs if they don't have to. So, communicate that they have a career track that gives them opportunities for advancement and what the pay structure looks like if they do.
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