Category Archives: Compensation
Here’s the Best Compensation Maximization Tip I Know of – Start Saving Early

Last week I had the opportunity to speak to some students about the value of saving early. After the presentation, I started to think about it and realized that saving early is the single most important component to generating wealth.

Today we are going to talk about the time value of money: Image credit:

As I’ve talked about before, companies will only pay you what they have to in order to maintain internal equity. As such, I’ve advocated maximizing your earnings as early as you possibly can (this is easier said than done, but if1. I believe there are situations where it makes sense to leave money on the table, but as you’ll see in the charts below it’s *critical* to step into a role where you can make up the money *very* quickly… you’d better be sure you can recoup the earnings or it will be the most expensive choice you ever make.you understand your market value it *is* possible). 1

With that said, even if you don’t make a lot of money, it’s possible to generate substantially more wealth over the course of your lifetime than someone that significantly out earns you assuming you have strong investing habits (and they don’t).

Let me give you an example. Let’s look at a hypothetical experienced compensation analyst job.

The chart above is taken from Payscale.

According to Payscale, the pay range for an experienced Compensation Analyst nationally is between $75,019 (at 10th percentile) and $105,930 (at 90th percentile).

Let’s assume for our purposes that there are two hypothetical 25 year old Compensation Analysts with similar experience, and that one makes $75k while the other is paid at the other end of the spectrum at $105k (we’ll ignore inflation, and assume neither promotes into a larger job over the course of their careers to keep this *super* simple).

The first Compensation Analyst, having earnings at the bottom of her pay2. Heh, pun. ^_^grade realizes that she must start saving early to compensate 2 for her relatively low earnings. The second Comp Analyst – flush with cash – doesn’t save anything her first six years in her new role, and only begins to save once she realizes she’s in her 30s and needs to start putting money away.

The below chart shows their outcomes assuming both contribute $10,000 a year into an investment account yielding an annual 8% compounding return on investment:

As you can see, the lower-paid Analyst has dramatically higher savings at retirement as a consequence of beginning to save early.

But this isn’t really realistic, is it? After all, the second Analyst earns nearly 30% more per year. She has the capacity to save more than her lower earning counterpart, right?

Let’s instead assume in our example that the Compensation Analyst making 105k saves 30% more money annually than the Analyst making 75k once she3. In keeping with the marginal propensity to consume, we won’t assume that she saves any more than this. As people earn more they tend to spend more (and there is nothing about this hypothetical analyst that suggests she is thriftier than her lower earning counterpart).finally begins saving:  In keeping with the marginal propensity to consume, we won’t assume that she saves any more than this. As people earn more they tend to spend more (and there is nothing about this hypothetical analyst that suggests she is thriftier than her lower earning counterpart

Wow! Even saving 30% more than her counterpart annually through retirement, at 65 years old the higher earning Compensation Analyst is more than a half million dollars behind in savings. And take a look at the earnings from interest:

That six year, $60,000 initial head-start investment has turned into an additional $600,000+ in interest earnings for the 75k earner.

In fact, the Comp Analyst earning 105k would have to invest 63% more annually than the Comp Analyst earning 75k for the next 34 years to retire with the same amount of savings.

Of course, the big message here is to get to the top of your pay grade and save as much as you possibly can as early as you possibly can.

…But with that said, if it takes you a while to find the 90th+ percentile of earnings you will still be okay (provided you live like a Spartan and save all that you can).

Categories: Compensation
You’re Probably Better Off Than You Think – Fifty Percent of Americans Earn $35,000 a Year or Less

A couple of days ago I had the opportunity to listen to Kevin Hallock, Professor of Economics at Cornell University talk about international differences in pay. It was a great presentation, but today I want to share with you some interesting statistics he presented on U.S. income distribution.

Credit: Kevin Hallock, Professor of Economics at Cornell University

Credit: Kevin Hallock, Professor of Economics at Cornell University

As a comp guy I see different cuts of wages all the time, but rarely presented quite like this. I have to admit – it was a little jarring to see most people in the U.S. earn so little money.

To get another cut of wage data, let’s look at personal income by educational attainment:

 

Source: US Census Bureau, 2006; income statistics for the year 2005

The above US Census data is old (2005), so let’s look at another cut of the data below. We’ll assume 3% annual merit increases over 8 years to generate some rough 2013 data. I don’t know if the 3% annual number is a valid data point (these numbers look a bit high to me so perhaps not), but it’s consistent1. Pro tip – A simple way to calculate this in excel is =FV(0.03,8,0,-20321) where 0.03 is the merit increase percentage, 8 is the number of years, 0 is the number of additional payments, and -20321 is salary (you need to make it a negative number).with what we’ve seen in the market the last couple of years.

First – the most interesting fact (to me): Going to college has a high2. I’ve talked about this before.correlation with higher earnings. For all the talk about college grad underemployment, for those able to get a job the ROIC is pretty high. 2 Yet only 30% of the population has a college degree.

At the HR masters program where I went to school, the average private-sector salary out of school was around $70,577 (range $48,200-$93,000), the average age at graduation was 25, and 65% of the students in the population had less than one year of work experience.

Credit – 2011/12 LER Placement Report

Takeaways:

1. All things considered, going to college is probably a good idea (a masters degree is even better assuming you select the right degree/school)

2. If you are a college graduate, there is a good chance that even in today’s economic environment you’re doing a lot better than the average person, financially speaking.

Categories: Compensation
What You See Versus What You Get – You’re More Expensive Than You Think

Today I want to talk very briefly about the cost of an employee to the company versus take-home pay.

The average worker costs roughly 30% more annually to his/her organization than the flat value of his/her wage and salary (this includes time off, pension, insurance, supplemental pay, and other legally required benefits).

As you can see from analyzing the chart below, it’s possible for an employee to become much more expensive to his or her organization in a given year without seeing any change in take-home pay.

When I look at this chart I immediately think about the sometimes crippling costs of defined benefit pension schemes to employers. For years now there has been a move in the private sector towards defined contribution schemes – a move that makes many employees irate once it happens. On the other hand, employees aren’t willing to pay for the rising cost of the benefit plan (much of which is driven by longer lifespans), becoming upset when1. There are many reasons beyond cost savings that lump sums are given out, including the need to preserve the integrity of pay ranges when employees reach the top of their grade.lump-sum payments are given out on occasion in the lie of merit increases.

For the record, I understand the anger – everyone wants to make as much as they can. With that said, however, there is a fundamental misunderstanding by most employees of just how much they cost to their employer.

This is something that I really think employers need to provide more education to their employees around, both as a retention tool and an engagement tool.

 

Categories: Compensation
The Competitive Counter Offer

I recently had the opportunity to read a fantastic article from HR columnist Suzanne Lucas on competitive counter offers – and why companies shouldn’t make them.

The wisdom goes that if an employee has reached the point where they have a counteroffer from another company, that said employee is already as good as gone (he/she has likely spent months going through the job search process to get that offer – think about that). As such, rather than making a counteroffer a company in this situation might as well instead cut its losses.

The data shows that this is overwhelmingly true. A commonly cited statistic in HR is that depending on the industry and economy; between 2/3rds and 80% of employees still leave their organization within 6 months of accepting a counteroffer (this number climbs to 85 to 90 percent within 12 months). Knowing this statistic, companies make counter offers mostly to protect themselves from the large cost of suddenly and unexpectedly losing a valuable employee (while they prepare for the likely eventuality that he/she will leave).

That said, as a Compensation Specialist (who is friends with lots of Compensation Specialists), I want to talk a little bit about the exceptions to this rule as I understand them…

1. Tangent coming.…So when I was in my very early 20s 1, I met the woman with whom I would have my first “meaningful” relationship (I was aware that everything before was going to end almost as soon as it began). I saw her while heading to meet up with someone else for a 1st date (we can’t choose when this things2. I subsequently tested and confirmed my hypothesis by going over and saying hello. Thus (for me at least) our first encounter literally and figuratively met the criteria for the romantic clichés “love at first sight” and “she had me at hello”.happen), and I immediately hypothesized that I might be in love. 

I got her phone number and we began dating less than a week later. 3 Over the subsequent years, she turned out to be for me all of the things that a man’s partner often is to him – smart, interesting, attractive etc.

I felt lucky.

3. Things obviously didn’t work out with my actual date that night.By the 4th year of the relationship, however, we were beginning to have problems. By the summer we’d broken up. We got back together. We broke up again (and got back together again).

The third time we broke up we didn’t get back together.

For a time after the last breakup she wanted to try to make things work again, and, I suppose (honestly) that at times I did too. Yet after some careful consideration, I made the decision to shut the door on us. The decision really didn’t have anything to do with my feelings for her so much as it did the way we’d handled our problems to that point (and what this might foreshadow about a hypothetical future together). A quote from the 2001 movie4. I’ve actually never seen this movie (or the book by the same name), but I am a huge fan of well written prose. This quote has been floating around for a while and caught my attention. If anyone has seen the movie and would recommend it please let me know.“Captain Corelli’s Mandolin” 4 makes the point more eloquently than I ever could, so I’m including said quote below:

“Love is a temporary madness. It erupts like an earthquake and then subsides. And when it subsides you have to make a decision. You have to work out whether your roots have become so entwined together that it is inconceivable that you should ever part. Because this is what love is. Love is not breathlessness, it is not excitement, it is not the promulgation of promises of eternal passion. That is just being “in love” which any of us can convince ourselves we are. Love itself is what is left over when being in love has burned away, and this is both an art and a fortunate accident. Your mother and I had it, we had roots that grew towards each other underground, and when all the pretty blossoms had fallen from our branches we found that we were one tree and not two.”

By the time of our 3rd breakup, I realized that my partner and I had made the decision that our problems were bigger than our desire to be together. We were – in the words of the author above – not one tree, but two.

In life, there is always adversity (sometimes minor and others major) right around the corner. A couple’s decision to face those challenges together – without splintering apart – is the difference between partnerships that last and partnerships that don’t…

5. Sometimes it takes me a while to get to the point.  …Which brings me to the competitive counter offer 5

Theoretically, I’m a huge fan of the competitive counter offer. If a company is a6. At least amongst the non-executive population. For executive populations there are some good reasons why you want to pay at median even if you have world class talent (I’ll talk more about this in a later article).pay leader in its industry (which it should be for key positions 6), offer matching is something an organization can and should do to retain top talent (at effectively market value).  

Furthermore, I strongly believe a company’s top performer(s) should be near or at the top of their position’s pay range anyway (regardless of years in the job), and if they aren’t paid at that level and get another (better) offer, the employer should just think of this as a market correction and respond7. Responding accordingly would be matching the offer in case you’re wondering… for the record though, I also strongly believe that your median employee in a population should be closer to a 100% comparative ratio than the top of the pay range.accordingly. 7

…At least in theory. Unfortunately, once an employee has looked externally and accepted an outside offer, the employer/employee relationship is often too badly damaged to return to business as usual even in instances where the employer improves upon the external offer and manages to (temporarily) retain the employee.

With the trust in the relationship shattered (and an expectation that they’ve merely temporarily staved off the employee’s inevitable departure by offering more money), post counter offer the management team often creates a self-fulfilling prophecy by changing the nature of the relationship with the employee from strategic to technical/transactional (further alienating the very employee they wish to retain).

And so while I remain a fan of the counter offer in theory, I am only a proponent of it in practice when all of the below conditions are met:

1. The reason the employee elected to look externally is primarily tied to monetary reward and *not* intrinsic compensation:

This has to be the starting point. If an employee is looking externally because he or she doesn’t like their work/boss/co-workers/wants a promotion the employer can’t give/etc. then offering more money to said employee to stay on (without addressing his/her other underlying concerns) is not a long term solution.

Monetary reward alone will not solve this man’s problems.

2. If the employee looked externally for both extrinsic and intrinsic reward reasons, all of these issues need to be negotiated as part of the counter offer process:

If you extend a monetary counter offer without addressing the non-monetary concerns, at best it will buy you some time until the employee finds an even more attractive opportunity than the last (by leveraging his/her newly increased salary during his/her next job search).

At worst, the employee’s performance will decline post counter offer (once he/she comes to regret staying or the changed office environment becomes too tense).The employee will still likely leave (or be terminated for poor performance), and you won’t have gotten the productivity you needed to justify extending the counter offer to begin with.

It’s critical to really hear the employee out at this point. Money alone may not solve the problem.

If an employee’s non-monetary complaints aren’t fixable (or the employer doesn’t want to address them) *never* improve the monetary reward package to retain him/her – it won’t last.

If the employee’s manager really does need the employee to stay on for the time being in order to prepare for life after the time he/she leaves then a counter offer is of course fine, but extend it understanding this is a short term fix (it may even be a good idea to discuss this with the employee – in which case you may just be looking at an extended notice period assuming he/she can negotiate it with his/her new employer).

3. Assuming that monetary reward is the primary reason the employee looked externally, after extending the counter offer the employer (and employee) need to legitimately forgive and forget any issues and perceived slights.

If a counter offer is extended and accepted, both parties really need to start fresh.

Anytime an employee looks externally, the trust in the employer/employee relationship is damaged. In order to re-establish that trust, both parties need to reset the relationship once they’ve agreed on a new compensation package and the employee accepts.

If both parties can’t do this the new relationship is doomed to fail. An office environment where the employee is bitter that he/she had to go externally to be paid market value (and/or an environment where the employer is perpetually worried the employee will leave and treats them this way) is too poisonous for the business relationship to survive.

Ultimately, when an employer and disgruntled employee face challenging times together, they have to make a decision to either work together to address their issue(s), or else part ways. Depending on the history between the parties, it may or may not make sense to continue the business relationship (sometimes an amicable split really does make the most sense).

Regardless, a continued healthy business relationship is much like a romantic8. while probably not being similar in any other ways. -_-relationship in at least one respect, with that respect being that it requires both parties to stay engaged and committed, even when times are tough. Everything is great when a new hire first joins a company, but once the bloom is off the rose, the choice to make things continue to work is a decision both parties have to make together (and in earnest).

Employers/Employees: If times are tough and you’re thinking of breaking up… before making any rash moves take a look at your relationship and ask: Are we one tree, or two?

Categories: Compensation
Competitive Pay Ranges

Competitive offer matching is something a company can and should do to retain top talent.

With all that said, if a competitor really wants to hire an employee away from a company, then there is probably nothing said company can do to stop it. Even if a company has an equity hold over an employee, a competitor can either front load the equity in their own competitive offer, or else give a large upfront contingent (on continued employment) signing bonus that largely1. Even if the signing bonus offered is less in value than the unvested equity with the parent company, from a time value of money perspective an upfront bonus can be equally or even more lucrative than unvested equity.offsets whatever the employee has to leave behind to take the new position. 1

Counter offering up to the top of the pay range (while targeting a 100% compa ratio within the position/job family) is a good tool that allows a company to keep its top talent, but at the same time I think it’s important to establish ranges and stick to them… even if a competitor offers something to a key talent that exceeds the internal pay range for the position…

…And even if a company is a pay leader in its industry this will occasionally happen.

Why you ask?

It’s important to realize that even if two incumbents (at different companies) are doing the same work that said work may have different value depending on the business model of the company each incumbent works for.

As an example, let’s compare a hypothetical compensation analyst at a compensation consulting firm to a hypothetical compensation analyst at a manufacturing company.

Both employees’ primary job duties may require the same technical knowledge (and both employees may do similar work), but the comp analyst at the consulting firm may be a key revenue generator for the business (consulting firms often derive much of their revenue from client fees). Conversely, in the case of the manufacturing organization he / she may be part of a support function (and as such represent overhead). Ergo, while the employees in these cases have similar primary job duties and responsibilities, the value their work adds to each respective organization is different.

Even in instances where two jobs are both support (and represent overhead) there can be a difference in the value each adds to their respective business.

Sticking with comp, let’s compare a compensation analyst at a commercial/sales organization made up primarily of commissioned sales people to an analyst working at a widget production company whose primary work force is made up of unskilled labor. Comparing the workforce at the widget production company to the sales organization, the widget production company’s workforce is much less highly skilled. Consequently, the labor pool they can select from is larger (and as such is much less sensitive to market prices).

Further, as the commercial/sales organization’s labor population are salespeople paid mostly off of commission, managing the comp program required to retain key talent may require comparatively more skilled/experienced comp analysts. On balance, this means that although the comp analysts are doing similar work, in our hypothetical commercial organization the comp analyst is more valuable to his/her company.

This situation plays itself out in jobs across many functions and2. As another example we can look at when an in-house recruiting team can’t fill a position and reaches out to a 3rd party vendor to assist. The external vendor and recruiter may both be doing the same job, but the nature of the work is fundamentally different, as is its value. Consequently, the pay is different as well.industries. 2 The jobs change but the fundamental principle still applies. 3

It’s important to understand that being a pay leader for a position in your industry means just that. Competing for a talent in situations where said coveted talent contributes substantially more value to the rival firm than your own (as a product of its business model or some other variable) makes little sense. You’ll be overpaying talent to do work that frankly isn’t as valuable to your organization as it would be to the company making the (in this case justifiably) higher offer.
3. I don’t mean to oversimplify the market for any particular job here. There are a host of factors to consider in how someone is paid beyond just what they know, what they do with what they know, and how their work impacts the business. Location, job safety, hours, the scarcity of a skillset and dozens of other factors all play a role in pay (looking at commission based jobs and how/why pay differs by firm should be its on post). Breaking down exactly how people are paid and why across a comprehensive list of scenarios is simply outside the scope of this article.
If a company finds itself in a situation where for competitive pay related reasons it is suffering high turnover (or matching offers outside the pay range) then perhaps it needs to review how it is evaluating the work its employees are doing (or work on developing a stronger bench to replace key talent if it leaves).

Ultimately establishing competitive pay ranges that adequately capture the value of the work employees do within an organization should be a critical component of any company’s business practices as it relates to pay.

Categories: Compensation
How to Make More Money

Really short post today as I’m really short on time.

With that said, I want to briefly share with you my thoughts on money (and how to make more of it).

So when most people think of compensable factors they think of degrees, work experience, and finally some vague concept of “networking”.

None of these are wrong per se, but I want to elaborate a bit on the realities of what really makes these things compensable. I also want to share with you a few compensable factors you probably aren’t aware of, namely:

Location

Mobility

Job Safety / Risk

Personal Brand

Tackling all of this would be outside the scope of today’s post, however, so let’s break it up into a two-parter.

Today I want to talk about the value of a degree.

Many people think of a college education as their ticket to dramatically increased lifetime earnings. But with the economy down and (a record number of people earning college degrees), there are also a record number of people that are underemployed – that is – people doing work that their degree makes them overqualified for.

This is not a trend that will reverse itself anytime soon.

The law of supply and demand dictates that as college becomes more accessible to the average person (which is a good thing because having an educated workforce is ideal in today’s world) that the wage premium a person receives for having a degree will also go down.

Going to school and getting an education is a great investment because it helps you learn how to learn. Think of it as helping you to define your cultural legacy. It would be a mistake, however, to assume that you will get a higher paying job simply because you have a college education. Not every employer pays a wage premium just because you have one (many don’t even pay a wage premium for advanced degrees like MBAs & PhDs).

If you really want to make a lot of money, look at gaining in demand skills that1. The term “water level” was – as near as I can tell – coined by American statistician and writer Nate Silver. The idea behind a “water level” is that in every competitive arena there is a certain level of competition (ex. in the food and beverages industry there is Coca Cola, PepsiCo, General Mills etc.). Some of these levels of competition are higher than others. As such if you have a relatively rare skill you want to find an arena to utilize that skill where this is a market opportunity (but relatively few experts). Citing an example from Silver’s book, when poker first became huge in 2003 there were very few great statistician’s playing the game (but lots of poor players). This meant that a great statistician could make a lot of money playing the game by using a key skill that most competitors lacked. Conversely, when the water level rose a few years later the competition became so fierce that only the best players could continue to make money. The water level had risen, and being a great statistician was no longer a competitive advantage.there is a shortage of and where the water level 1 is low. Math is a good foundational skill in this respect as most American’s are bad at it, but there are tons of other great foundational and advanced skills that will put you in high demand (and let you name the price of your labor).

Literally out of time, but this is a good topic. I’ll look to elaborate on what we’ve talked about today over the course of the rest of the week.

Categories: Compensation
How to Make More Money (Part II): Networking, Personal Brand, and Mobility

Specifically, I talked about the role that having a college degree plays in increasing one’s earnings.

There is a lot of evidence that going to school is a good idea if you want to make more money, and the primary reason for this is that college is where you learn how to learn – and learning a lot (and often) is a critical component to maximizing your earnings.

Today I want to talk a little about the role of networking in making more money. Most people don’t really understand what networking is. For many the term conjures up images of good ol’ boys clubs, glad-handing, politicking and you-scratch-my-back-I’ll-scratch-yours behaviors designed to gain an edge in the workplace. This sort of behavior lacks authenticity and in some cases ethicality. I am here today to tell you that this is not what networking is.

In point of fact networking is exactly the opposite of the above things. Networking is about:

1. Sharing ideas, knowledge and resources with others who have a passion for learning and;

2. It’s about giving to others not with an expectation that they will do something for you, but with the expectation that they will pay it forward and do something for someone else.

If you only do things for others (be it giving your knowledge, time or resources) with the expectation they will “return the favor” you may or may not get something out of it, but you are not networking.

And honestly, you’re better off doing it my way.

Why, you ask?

1. The most valuable asset you have as far as it concerns improving your earnings potential is knowledge. As I talked about in part I, possessing scarce, in demand skills increases the demand for your labor in the marketplace – this in a very literal sense is worth lots of money.

Share freely of ideas and knowledge with other like-mind people, and you will1. And don’t hoard knowledge in instances where the other person doesn’t have as much to offer you as you do to them, either. As I stated above networking is about paying it forward. Society moves forward by the last generation giving to the new. Think about that. Sometimes you will gain something from sharing what you know and others you won’t, but always share what you can. You’ll be on the greater receiving end of the exchange one day as well..both lift one another to higher places. 1

 

2. The other reason you should do it my way – giving without the expectation of receiving something in return – is because the most valuable people in any organization are people you can trust. By behaving in a transparent way and earnestly helping people you’ll develop a personal brand of integrity and forthrightness that will pay dividends for you down the road.

People want to work with those who are honest. They bring out the best in others and inspire a sense of wellness in teams that encourage collaboration.

Show me someone who is intellectually curious, hard-working, coachable, self-aware, and honest and I will show you a person with a strong personal brand.

Your brand is the most valuable thing you have as far as it concerns your ability to increase earnings. In the same way that people will pay $2,000+ for a laptop if the brand is compelling enough, companies will pay a significant wage premium for a new employee (or to retain an existing one) if he or she has a strong brand.

There are a number of great ways to build your personal brand (doing quality  2. Blogs are free. ~_^work on the job, advertisements 2, recommendations from customers etc.), but there is nothing that will go quite so far towards improving your brand as will a genuine reputation for helping others and being someone others want to work with.

A senior executive at a big cap company shared some great advice with me when I was just getting started in my career. He said:

“I’ve seen some people not make it at this company who got the business side of things but didn’t get the people side, and I’ve seen some people go very far at this company by getting the people side even if they didn’t get the business side. Understanding both the people side and the business side are important components of being a professional, but I’ll tell you what – if you don’t get anything else get people.”

Be someone who gets the people side. Network – the right way.

Categories: Compensation

Previous Page · Next Page