Gathering Information For the New Age of Compensation
By Donald G. McDermott
President, D.G. McDermott Associates, LLC
Two case studies illustrate how to meet top management's demand for more and more relevant compensation information.
The rules of the compensation game are changing and so are its information needs as companies introduce new compensation approaches, such as broad banding, skill-based pay, and broad-based incentives that are more closely tied to business needs. As a result, many compensation executives are questioning the relevance of traditional compensation surveys and other information-gathering tools. After all, innovative compensation approaches demand more than simply slotting jobs according to the latest survey of thousands of companies in many industries. Employees are fulfilling broad roles rather than narrow jobs in the organization and are increasingly being paid for the skills and competencies they bring to those roles. But neither of these new approaches to compensation is neatly contained within the confines of traditional salary surveys.
Compensation data is still as important as ever. Top management still seeks to manage compensation costs and make appropriate business-based compensation decisions by demanding more-and more relevant-compensation information and data than ever before. What is changing is what kind of data is needed and how it should be gathered. Unfortunately, this is happening at the same time as the quality and relevance of compensation and salary surveys-the traditional means of obtaining this information-are becoming more difficult to discern.
What all this means is that companies seeking to gather and use relevant compensation information are facing a more difficult task than ever before. But make no mistake about it; this change in information needs does not merely represent a transition from one widely used means of information gathering (broad-based salary surveys) to another. Instead, finding and using relevant compensation information requires a different set of skills that encompass problem solving, researching, and statistical analysis.
While there are no universal answers to the new task of compensation information gathering, companies can learn some important lessons from the experiences of others. This article presents two case studies for just that purpose. The first case study illustrates how a specified business unit of an insurance company overcame its difficulty in finding and gathering very specific compensation information from nontraditional peers. The second case study illus trates how one information services company utilized some new compensation tools designed to facilitate this new approach to information gathering and analysis.
The New Age of Information Gathering
For many companies, broad-based surveys with data from hundreds if not thousands of companies remain a good starting point for compensation information gathering. But the additional specific information and data a company will need beyond that depends largely on its business needs. Drawing from a smaller, more focused sample of comparative companies, it is possible to glean data and information that is well beyond the usual salary data and includes information on things like the skills and abilities required in a certain job or the measures used to gauge performance in a particular position.
It is this type of qualitative information that facilitates the close-up analysis necessary to match compensation levels to broad roles rather than simply to specific jobs. For example, companies using or developing broad-based variable pay plans are going beyond gathering data on pay levels and are now seeking information on the criteria for determining that level of pay-performance measures or competencies.
Case 1: The Customized Approach
A specialty business unit of a large insurance company wanted to develop a new compensation approach designed to create total reward opportunities tied to the fortunes of the business unit, its long-term growth, and the creation of value within the business unit. At the same time, the parent company wanted to adhere to its widely known practice of remaining competitive relative to the market.
From a strategic standpoint, the business unit management was planning to move the business unit out of the initial start-up phase and into the growth mode with expected increases in staff and organization restructuring. Yet, to obtain corporate approval for its compensation strategy, management also needed to demonstrate the differences in each component of compensation based pay, annual incentive, and long-term incentive between its current corporate-performance driven plan and its proposed plan to be driven by business unit performance.
The unit's management determined that the answer was to develop and conduct a customized survey of the types of companies that best modeled the environment it wanted to create and that had a reputation for having high performance and, therefore, high payouts under their compensation programs.
To identify a controlled comparative group of organizations for sharing and exchanging compensation data, companies need to determine their unique requirements for creating a baseline of information about job design, performance measures, revenue, product line, pay levels, incentive targets, salaries, and so on. However, finding and obtaining this type of information is an important and increasingly difficult part of information gathering. What kind of information the company will require to meet its business needs will have a great deal of influence over which group of companies it will choose to draw this information from. Product line competitors or competitors for certain skilled employees can be good candidates for the comparative group. And when assembling this group, it is important to keep in mind that, given the time investment required and the likelihood of staff shortages in comparative companies, only 50% to 75% of the companies are likely to actually share data. Compensation professionals and line managers may be looking for a specific niche of information but must ensure that the resulting database is rich enough to meet the company's needs or find ways to overcome obstacles in the resulting data.
With those criteria set, the problems began. The business unit management chose to survey jobs in boutique asset management firms charged with managing financial products centered on traditional financial vehicles, such as stocks, bonds, and mutual funds-jobs that tended to adhere to short-term payout formulas under incentive plans.
The main advantage of this approach was the fact that both the business unit's jobs and the comparative companies' jobs required similar skill sets. The trouble was the business unit's jobs, by nature, required long-term payout opportunities rather than the short-term payouts favored by the comparative companies. Therefore, the business unit management had to determine whether these obstacles would jeopardize the quality and usefulness of any data collected.
As an alternative, the business unit management considered surveying real estate investment jobs and jobs in venture capital firms with a long-term capital appreciation objective that better matched the investment and performance time horizon of the business unit jobs. In the end, however, business unit management opted for its original choice of boutique asset management firms for surveying purposes, largely because those firms better reflected the overall compensation approach the business unit was trying to develop-a mix of long-term incentives for managers coupled with strong short-term incentive opportunities for all employees, both exempt and nonexempt. The venture capital firms did not appear to provide enough relevant information on this latter part of the compensation mix.
Next, because the boutique asset management firms were "nontraditional" peers-in other words, they had never before been part of the insurance company's or the business unit's peer group-the business unit had difficulty convincing these firms of the value that could be derived through sharing compensation information. Not only were the firms unconvinced of the value of the exercise and unwilling to invest time in the survey, they did not consider the business unit a true competitor or peer and, overall, did not want to share anything considered competitive information, including compensation information.
Because of these difficulties, the company's line managers became an important resource. In addition to having unique insight into peers in its line of the business, the line managers also had contacts within many of the companies and, to an extent, facilitated the data gathering process. By being involved in the process, line managers were also in a better position to convince their colleagues of the value of exchanging compensation information and had more buy-in to the final data collected than they otherwise would have.
Putting the Data to Work
Once the survey was complete, the business unit had collected information from six companies - the bare minimum. Therefore, to counteract any weakness in the data itself, the business unit spent a great deal of time and resources to ensure that the analysis and interpolation of the data was done appropriately. In fact, as the business unit compensation professionals discovered, to add the most value-really began with the analysis and interpretation of the data.
Regardless of the number of companies involved, it would be a mistake to take even customized compensation information at face value. This is even truer when working with a relatively small sample of companies, as the business unit was forced to do. For example, when analyzing data for a product manager position, the business unit discovered that there was no comparable position available in the data because of the small sample. To deal with this situation, the business unit used a similar but lower level position as a base line for pay levels and then increased the value of the position based on the role the job played in the organization, the skills required, and the level of responsibility.
In the case of the business unit, management tried to minimize the impact of the small survey grouping by using the resulting indicators as guideposts, rather than as absolute answers. This way, management was able to make its own judgments as to whether certain compensation decisions made sense for the business. In fact, this part of the process is where compensation professionals rely on their knowledge of the business as they argue and challenge line managers on their findings and analysis. At the same time, compensation professionals should also be prepared to present their own findings of the data for discussion, rather than simply presenting raw numbers for the line to sift through.
For the business unit, the end result of this survey approach revealed short-term pay levels that were so high that to pay at those levels while also increasing shareholder value-a stated goal within the company-the business unit would have had to require performance levels far above the existing capabilities of the employee group. In the end, the business unit was forced to modify compensation levels until its organizational capabilities could catch up to its peers.
This is not an isolated case. Similar situations can arise when dealing with other compensation approaches. For example, a company undertaking a competency-based pay approach would have to make a similar call if an analysis for a competency-based pay system revealed that a company needed to increase pay significantly to be competitive. In this situation, it is up to compensation professionals to conduct a business analysis to determine what level of revenue growth must be created through increased employee competency before a pay increase is warranted. To do this effectively, compensation professionals must know enough about the business to make realistic assumptions about each position surveyed and then translate the data gathered from other companies into information that will be useful to the company's own business. Assumptions about a positions focus, product line served, revenue responsibility, number of employees managed, cost of production, distribution channels (national, international, geographic scope), and and so on are necessary to create a realistic information model that will be useful to line managers.
Case 2: Tools of the Trade
Knowing what kind of information they need and from which companies to get it is just one aspect of this information gathering challenge. Another is developing tools that can help uncover that information within the chosen companies. An information services company needed to do just that as it changed its compensation information gathering approach in response to a strategic shift within the company.
A new management team and a new strategic direction had rendered existing compensation information obsolete. The company was demanding new and different skills and capabilities from its new and potential employees. For example, because of changing technology and an expanding product line, the role of the company's sales people was changing from that of order takers to positions built around a more consultative selling approach. As a result, the skill requirements for these positions changed markedly, and the company needed to gather information on the prevalence of these skills in the marketplace as well as at what level and how companies compensated these skills.
To meet these needs, the company developed a job comparability index to determine whether and how it needed to modify short-term incentive opportunities as a result of its changing strategic focus (see Exhibit 1).
The comparability index can be broken down into three basic parts:
- Part I provides basic information about the position in question, including formal title or position number, the organizational level for the position, and a brief summary of the main responsibilities for the job. Some companies use a position number in addition to or in place of a formal title to facilitate survey identification and database management. The organizational level is used to identify the number of organizational levels from a particular position, usually the CEO. Each level represents a distinct management layer of review and control for decision making-the lower the number for the organizational level, the closer that position is to the top of the organization and the greater its level of decision making authority; the higher the number, the farther it is from the top of the organization and the less its decision making authority.
- Part 2 of the comparability index lists the position's principal accountabilities, against which comparative companies are to rate their own jobs according to similarity of accountabilit ies. The rating scale ranges from 0 to 3, with 0 indicating no similarity and 3 indicating great similarity. Once filled in, these ratings are averaged to produce an overall rating for the entire position.
- Part 3 of the comparability index illustrates other data that a company uses to identify the comparability between positions-the titles used for comparable positions, the range and average in the number of subordinates for comparable positions, the various products comparable positions are responsible for, and the range and average number of years of experience required for comparable positions. This information is designed to help in refining the match between positions. This comparability index was designed not onlyto measure pay levels but also to help the company determine what accountabilities and skills were required for each job and each pay level. This way, it would be able not only to gauge how to pay a certain position but also to compare the requirements for its jobs against those of comparable companies. In general, the comparability index is designed to highlight the following:
- Organizational level can help determine the degree of decision making involved.
- Accountabilities can help identify differences in job emphasis.
- Scope can help determine reporting relationships and the kinds of titles utilized by the comparative companies. Scope also encompass es head count managed to ascertain the degree of management complexity within the comparative companies; product responsibility to indicate the breadth of responsibility; and typical experience required to determine how level of experience influences organizational levels.
Comparability Index Factors
Position Survey of Five Incumbents
Position: Senior Vice President, Sales and Marketing
Organization Level: 3 incumbents at level 3; 1 at level 4; 1 at level 5 (the lower the level number, the higher the position is in the organization
Position Summary: Top sales and marketing position accountable for providing overall direction and control of the field sales, national accounts sales and marketing for a multi product group. Provides direction for advertising and direct marketing of new products.
(rank by importance- 3,2,1,0-for each incumbent) Principal Accountabilities
1. Develops and implements long- and short-term sales, marketing, and promotional strategies in order to protect maximize, and enhance the market share, revenue, and profits.
2. Spearheads the marketing efforts in international marketplaces, ensuring product penetration and growth.
3. Directs the activities of assigned functions to ensure the achievement of corporate goals and integration of all sales functions.
4. Oversees the development, implementation, and monitoring of sales incentive compensation, hiring, succession planning, training, and development to ensure the continued motivation and performance of group personnel.
5. Identifies, evaluates, and recommends and negotiates with third-party vendors, sales agents, and joint ventures to ensure market coverage in areas less accessible by traditional marketing methods.
6. Functions as an advisor to senior management regarding competitive strategies, pricing, and sales and marketing plans for both subsidiary and parent company.
7. Represents the group in final stages of negotiations with significant, multi year agreements with company's largest customers.
Total: Scope Data
Position Titles of Incumbents: Reports to:
SVP, Sales and Marketing Group VP
VP, Sales and Marketing President
Deputy Managing Director Managing Director
Vice President Executive Vice President
SVP, Sales and Marketing President
Number of Subordinates: Direct Indirect Exempt Nonexempt
Range 6-12 6-"3 9-160 1-72
Average 9 104 68 31
Product Responsibilities. (Number and typesof products, domestic and/or international)
Years of Experience of Incumbent in Sales/Marketing Function(s): Range 10-15 years
For example, using this comparability index, the information services company was able to determine to what degree other companies relied on their senior vice president of marketing to head up international sales. In this case, the comparability index revealed that, for the most part, the comparative companies did not place inter- national sales within the realm of the SVP of sales and marketing. Based on this and other findings from the comparability index, the information services company modified not only its pay levels and opportunities for that position, but also its recruitment and career development processes.
Overall, the company found that, with a few exceptions, it was competitive with prevailing market practices. Those differences discovered during this process centered around the degree of emphasis on certain accountabilities and led to changes in total current cash compensation for those positions.
To develop a similar comparability index for their own companies, compensation professionals should be prepared to provide more or ask for more organizational matching information and detailed job accountability matching to ensure good job matches. However, because the management of companies in the comparative group may not want to take the time to complete a full scale job compatibility analysis, compensation professionals should limit their queries to the most central three to five factors. The information services company, unlike the specialized insurance business unit discussed earlier, ended up approaching comparative companies that were as interested in compiling this type of information as it was.
At the same time, a tool as detailed as the comparability index is not necessary for every company. In fact, a company with fairly generic skill sets commonly identified within an industry can probably continue to use most standard surveys. However, if a company is transitioning to a new style of management, as the information services company was, the unique features of that style will not be apparent in broad-based surveys. In today's environment of reengineered, refocused, broad banded companies, job structures often have characteristics tailored to a given company's needs and wants. This uniqueness may be caused by a shift in emphasis on certain job accountabilities as compared to the rest of the comparative group, and companies often view such a shift as making their jobs different from those in other companies. It is in these types of situations that the comparability index is most valuable.
Companies embarking on a customized survey would do well to keep some guidelines in mind to ease the way. In today's time-pressed environment, for example, keeping the survey simple is critical to its success. The entire survey should be as short as possible, well thought out, and easy to complete. This can mean developing a check-off or easy fill-in-the-blank format.
In addition, if some area of the survey will require additional research or information that is not available on a standard HRIS, specifically state that so that respondents can save time by focusing on what may be difficult aspects and so that they will allow themselves sufficient time to complete the survey.
For companies looking to compile a great deal of raw compensation data to supplement the comparability index, it is helpful to provide comparative companies with an exact description and format for providing compensation information, whether downloaded directly from the HRIS or provided by hand. Overall, the key is to obtain as much information as possible, including competitive information regarding total compensation, salary budget and increase trends, recruiting practices, organizational structures, and special pay programs, to build an overall picture of the competitive landscape.
Before venturing forth into this information gathering process, many companies also decide to hire a third party to conduct these customized surveys. The reasons for this are many and increasingly common:
- First, much of the specific information today's companies are seeking is likely to be considered proprietary and confidential. By using a third party, all companies involved can be assured of confidentiality in the gathering and presentation of the data collected.
- Second, few companies' compensation departments have the time or resources to design and conduct customized surveys.
- Third, many companies have difficulty stepping back far enough to recognize the best way to approach information gathering.
- Finally, having a third party conduct these surveys provides some protection against charges of "price fixing.'
Regardless of who does the actual information gathering for an organization, it is certain that the issues the two companies described in these case studies worked through are much like the issues facing thousands of companies across all industries. Rather than relying on a single, static method, information gathering has become much more complex and customized to each company's needs. To respond to these changes, compensation professionals can take a page from their peers on the line and begin to gather and share best practices in compensation information gathering.
In the meantime, finding new and better ways to obtain the data that fit with their companies' compensation approaches remains one of the biggest challenges for today's compensation professionals. For many, this means relying less on broad-based annual surveys in favor of industry-specific surveys and customized surveys geared toward a company's specific needs. For all, it means that, as generic jobs evolve into customized roles, the nature of compensation data gathering and analysis also must evolve.
Donald G. McDermott is President of D.G. McDermott Associates, LLC, founded in 1985, a Red Bank, N.J. -based management consulting firm specializing in the integration of human resources and compensation programs with business strategy. The Information Services unit of the firm provides annual, industry specific compensation surveys, customized compensation surveys, and employee attitude surveys.