Economy sets changes in compensation packages

Economy Sets Changes in Compensation Packages

In the arena of employee compensation there have been significant changes over the past 10 years throughout most industries. These changes have impacted all levels within retail organizations from individuals working in sales capacities to those in warehouse environments to those in senior level positions. The changes have been accelerated in part by employee awareness of the competitive factors that impact an organization's approach to compensation. Organizations have responded to such awareness by making their compensation structures sufficiently competitive to attract and retain qualified personnel.

The early years of this decade brought the most dramatic changes in the compensation field over the past half century. Prior to the 1980's, compensation programs, particularly those related to nonexempt staff, were rather conventional in content, and usually were sufficient to provide the employee with the monetary incentive necessary to motivate him or her. As industries became more competitive, however, it became more difficult to attract and retain qualified personnel. A company could no longer approach compensation administration in a perfunctory fashion, but rather had to develop a degree of precision in determining how employees would be paid.

Compensation Components

Compensation is composed of four components: base compensation, incentives, noncash compensation and perquisites.

Base compensation is traditionally recognized as the weekly, biweekly or monthly straight salary an individual earns. Base compensation also refers to salary plus commission, or to straight commission programs. All three programs are prominent within the retail industry.

Incentive compensation represents extra pay that an employee receives to reward extra results achieved. Incentive compensation can be applicable to all employees from hourly workers and sales personnel to executive personnel. Incentive compensation can be short term, earned within a 12-month period, or long term, usually earned over a three-to-five year period.

The third compensation component involves such noncash compensation vehicles as social security, benefits and programs encompassing time off with pay. These programs do not necessarily represent immediate cash to an employee but have a cash value. In most organizations, the benefits programs alone represent in value 20% to 30% of an individual's base compensation.

Perquisites are the fourth component. Normally, perquisites are made available to senior level employees, and take the form of company vehicles, financial counseling services, supplemental life insurance, supplemental retirement benefits, club memberships, etc. In recent years, however, more members of middle management have been receiving perquisites such as additional benefits programs and luncheon club memberships.

Nonexempt positions within the retail industry are being viewed differently today than they have been in the past. For instance, in efforts to link compensation to performance, the employee and management often decide on goals and objectives for the employee to accomplish in a given time period. Today there is increased emphasis on rewarding the employee for profit generation and not just volume increase. The more sophisticated retail environments are determining the degree of productivity per square foot as a means of determining compensation awards for the nonexempt employee. In many organizations there is also a desire to create career options and upward mobility opportunities to enhance the employee's job satisfaction.

At the exempt level, greater emphasis is being placed on the competitiveness of the individual's compensation in the marketplace. Efforts are also made to position an individual's compensation in the marketplace. Efforts are also made to position an individual's compensation level within a salary range to guarantee the ability to grow monetarily. And organizations are working to ensure that middle management employees are exposed to some of the more esoteric benefits of management, such as perquisites and incentive compensation vehicles.

At the executive level, the "total compensation package" has become a primary concern. Many of these packages add specialized long-term incentives, perquisites and other benefits to base compensation and annual bonuses. The incentives may come in the form of cash or stock. Perquisites may include club memberships, financial and legal counseling services and income tax preparation services. Executive benefits are elements such as supplemental life and medical insurance and supplemental retirement programs. Compensation administrators have been very creative in ensuring that executive management is well compensated in all respects.

Therefore, we see today the following trends in compensation.

Base compensation adjustments for nonexempt employees will average between 5% and 7% in 1986. Unless there are significant increases in the consumer price index over the next several years, it is anticipated that increases in base compensation throughout the remainder of hte 1980's will also approximate 5% to 7%.

Base compensation adjustments for exempt employees below the executive levels will average 6% to 8% throughout this decade.

Executive level positions are expected to realize base compensation adjustments between 8% and 10% over the next few years. The differences in the percentage of increases among the three levels reflect the value of these positions to the organization.

Besides base compensation, all employees will have greater opportunities over the next few years to enjoy incentive compensation. Nonexempt positions will enjoy monetary incentives for achieving predetermined goals and objectives either on an individual or group basis. Such programs as gain-sharing and productivity-sharing provide an opportunity for a nonexempt employee to increase his or her income through an increase in productivity. Such incentives for nonexempt employees are now uncommon in the retail industry, but it is anticipated that the next few years will bring a greater utilization of such programs.

More and more organizations both in and outside of the retail field are providing short-term monetary incentives to middle management personnel. These incentives usually come in the form of cash compensation distributed at the end of a final year. In many programs the incentive amount represents a predetermined percentage of base compensation, and may or may not be related to the achievement of individual goals and objectives.

At the executive level, short- and long-term incentive programs, designed to compensate the employee who performs well, are well entrenched within the retail industry. Competition is forcing organizations to face the challenge of properly balancing the executives' monetary needs, marketplace considerations and critical assessments of existing compensation practices.

Various surveys indicate that more than 80% of organizations offer some form of short-term incentive plan and more than 40% offer long-term plans. Bonus payouts range from 30% to 50% of base compensation for top executive positions. Many organizations offer significantly more, based on the achievement of corporate and individual goals and objectives. The criteria for incentive plan eligibility are generally either the position title or the grade level within the organization.

Long-term incentive plans usually encompass some form of cash or non-cash compensation over a three-to-ten year period. Vehicles such as stock options, stock appreciation rights, performance units, phantom stock, restricted stock and cash payout are popular. There is clearly a strong interest in developing long-term incentive programs to get away from focusing too much on short-term incentive programs to get away from focusing too much on short-term results. Therefore, corporations are developing long-term incentive approaches that evaluate performance over an extended period of time.

Changes in Benefits

There have been some dramatic changes in the use and administration of benefits programs by organizations. In the past, benefits programs were considered to be a right for every employee. The decade of the 1970's saw many companies expanding the scope of their benefits programs at increased cost to the company and reduced cost to the employees. Through the early 1980's, however, it became evident to organizations that the costs for benefits programs were escalating at an alarming rate and that steps had to be taken to bring these costs under control without compromising the quality of the benefits available to their employees. Because of this, the employee contribution to the cost of these benefits programs is icnreasing. Increased employee premium payments, higher deductibles and the requirement for second opinions are methods now being used to reduce company cost while retaining the same benefits programs.

To remain competitive, though, employers must offer basic medical coverage and a major medical program, a life insurance program, short- and long-term disability programs, accidental death and dismemberment programs and a pension plan. Other benefits such as a 401-K program, profit-sharing programs and savings programs are also popular. In publicly-held companies stock purchase programs are rather commonplace. It has not become a practice to drop benefits programs for employees, but rather, to find a way for the employees to share in the expense of the programs.

What is expected in the future, however, is a reduced interest on the part of companies to expand the scope of the benefits programs offered to employees. Employers are less interested in providing dental plans, optical care services, prescription services and other programs which just four or five years ago appeared to be the trend of the future. There are a few other programs, however, such as those for employee assistance and wellness, which many organizations are now providing.

With increased employee awareness of marketplace considerations, organizations have an obligation to position themselves appropriately within the marketplace.

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