HumanMarkets

Source: online.wsj.com

  The past two summers I have written posts about compensation managers providing finance a planning number for next year’s budget.  So What’s The Number – Year II - last year’s offering encouraged compensation departments to be very conservative and help their organizations to preserve assets in order to be sustainable.  The specific suggestion was to start at 0% and then build based on facts about the competitive environment.  Amen brother.  Sing it again this year – loud and clear.

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The July Jobs report just came out.  There is a lot of press coverage (The Wall Street Journal has a nice review.)  The short version is that unemployment remains hig at 9.5%; discouraged and unemployment remains high at 16.5% ; long-term unemployment is still at the highest levels in the country’s history.  On the good news side, payrolls and hours worked are up about 0.2% (i.e., people with jobs are working a bit more).  Temporary employment however, is down – hard.  Temporary employment is typically seen as a precursor to “real hiring.”  Bottom-line – the employment market continues to be really bad and there are essentially no signs that it is going to improve.

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We could stop here and just say – keep the merit budget as low as possible and your CFO, CEO and CHRO (if that isn’t you) happy.  World at Work and other surveys are suggesting that the 2011 merit budget increases are going to be higher than last year.  See the good article on WorldAtWork.org  I continue to think those surveys are wrong.  They are based more on the conjecture of Compensation Mgrs. than real budgeting.  Most organizations are only now looking at real 2011 financials. 

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Regardless – let’s take a quick look at other considerations.  American companies are holding more cash on hand than any other time in history.  Check out the article linked to the graphic to the right.  The common interpretation is that companies are concerned about where revenues will be and the extent to which they will be able to access the credit markets for liquidity.  For most companies – big and small – it’s not the earnings that get you, its the lack of cash.

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Base salary is cash.  When it goes out the door it goes.  When you talk about a merit budget, understand what the cash position of the company is.  If you talk to the C-suite demonstrating that you have a feel for liquidity issues and the reliance of the organization on credit to finance its operations, your opinion about merit increase budgets will carry more weight – I guarantee it. 

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Human Markets has written before about the role of productivity in the current labor market – its impact on unemployment.  (Workers are working more; they are absorbing new work.) The simple fact is that virtually no organization in this climate can blithely accept making their workforce less productive (from the sense of reward spend relative to profit).  Before suggesting a merit budget – look at what it will do to productivity year over year.  The fact is that your workforce, may be more productive than they have been.  Investments are still being made and tools may have come online this year, or will next year, that will make the group more productive.  Sadly, one aspect of this analysis might be to consider, have positions been eliminated that free up money to spread to others.

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One final consideration – pricing.  There is talk of deflation in the air.  Is that happening in your world?  Are prices stagnant?  Rising? Falling?  A quick look at your market power to maintain or increase price is a great shorthand to include in the analysis of what the number should be for 2011. 

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Finance will very frequently take a simplistic view that we should have as low a budget as possible.  The more you are knowledgeable and using the metrics that they use and understand to create context for your recommendations, the more you can pull them up to a level of sophistication about this decision.  If you fall into the trap of X% of increase is Y$’s and that’s it – you have lost the game already.  You look like you a 12 year old going to Mom and Dad for an allowance.  We can do better.

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At the same time, if you go and say our budget should be X% because SHRM survey says so, or worse, the Quad County SHRM Chapter survey says so – you are going right to the “I need the allowance because everyone is going to see Killer Zombie Babes” so let me go too!  Surveys are for followers – analysis is for leaders.

2 Comments | In: Compensation, How to do HR, Multiple Markets | tags: Merit Increase, Productivity, Surveys. | #

What makes someone competent to be an executive compensation consultant? 

Everyone from   Henry Waxman (D – Cal), Chairman of the House Oversight Committee, to the SEC, academics and the media have had their say on what they think the appropriate relationship is between executive compensation consultants and public companies.  Unless I have missed it however, one of the most troubling questions to me about EC consulting has never been asked.  Who are these people and what credentials them as expert consultants?

Maybe we are relying on the market to self-regulate.  Incompetent people just don’t get hired and go off to do other things.  Competent consultants get more referral business and prosper.

Those of you that follow the thrill a minute world of executive compensation consulting know that change is in the air.  The SEC is demanding new disclosure of the relationship between public companies and their compensation consultants.  Different, but related, compensation consultants have for a few years now been blamed for “spiraling executive compensation” and the so-called “ratcheting” effect of peer group benchmarking.  More and more scrutiny is being applied to consulting. I am not  particularly critical of executive compensation consulting; I spent 10 proud years being one.  This is not consultant bashing.

Here is the point – at some point, some of the being executive compensation practices of the big consultancies, or some boutique is going to be asked about the backgrounds of people who are functioning as consultants to the boards and or management of publicly traded companies.  Some of the academic and professional credentials are going to sound thin.  There is essentially an apprentice system in place.  Someone is a executive compensation consultant, because someone more experienced in calling themselves an executive compensation consultant has hired them.  It is a self-perpetuating credential.

Those of you familar with the Christian church concept of “Apostolic Succession” – essentially how the Pope gets to be Pope and the Archbishop of Canterbury gets to be the Archbishop – will recognize this system.  I am the Pope because bishops who can trace their bishopric back to Peter, say I’m the Pope.  Here if Pearl, Peter, Ira, Fred, or the other Apostles of Executive Compensation appointed me, or if I was appointed by someone appointed by them, I am in.

The system has worked reasonably well – again, I generally support the quality of consulting that exists in the market.  However, as the environment gets more complex and more adversarial, the consultants involved would be well served to formalize their credentials.   Like ir or not, Executive Compensation consultants are moving closer in the regulatory mind to auditors and accountants.  There is a growing appetite for accountability.  (Not surprisingly when the Executive Compensation consultant charges the same hourly rate as an Audit partner.)

If World at Work, or SHRM was smart, they would get agreement among the big guns that a form of an “advanced CCP” or its equivalent would be created that the consultants would all recognize as a required credential to consult to a public company.  This would create minimum standards for methods, ethics, and other professional standards.  This is more important now because many of the big consulting houses have either voluntarily or involuntarily shed executive compensation consultants who specialize in Board clients.  Many small shops are springing up.  Hiring and development of people in the ranks is going to get more diffuse.  It would be good to know that certain minimum skills and training is in place across the Board.

To date there have been more executives in front of Congress than individual, practicing consultants.  If you have been in consulting for 30 years already, that is your credential.  Some day there is going to be a report or a body of work linked to some situation in a public company that is going to be used by a Congressional committee in a hearing.  Someone more junior than the 30 year consultant is going to sit at the table with the green felt.  Their credentials and background is going to be used to batter the whole profession.  Let’s try to avoid that day from coming to pass.

2 Comments | In: Compensation, Ethics | tags: Executive Compensation Consultants. | #

A few weeks ago, I participated in a panel at a Conference Board program in New York on executive compensation. Our panel addressed the issue of adding value through staying informed, legal and relevant.

Here are my notes that I spoke from:

How to Add Value by Staying Informed and Legal and Being Relevant

What is the value added by the Compensation Function?

• Remember that you are a competitor – you compete for labor, for customers, for capital and for the passion of your employees while they are working – you are not a compliance manager, nor are you the safety manager.  You must play to win.

• More than any other constituent, it should be the compensation function who is marrying up the needs of the business with rewards.

• Compensation is the group that can say, all things considered we should…

• Profiles in Courage

• Accountable for unintended consequences, front page of the WSJ, and POTUS.

• Internal knowledge is harder to come by than external knowledge

In times of budget constraints, how do compensation leaders sell their business proposition?

• The same way they always did in that company just more of it and better, unless the company is in crisis, then, it is in a manner consistent with the crisis.

• Providing the broadest context for risk, measurement and process

• Have up-to-date data pertaining to the portfolio of talent management needs in the company.  How sticky do we need to make our current group of managers.

• Understand the nature of the budget constraint – capital? revenue? Profitability? Dying markets, new competitors, tired consumer – have a better tie and understanding that simply saying not much money in the cigar box.

• Can you tell the economic story of the company in a few minutes or sentences?  Tell the story and why your proposition is the next logical extension of the story.

How are compensation professionals responding to management requests for forward looking compensation planning?

• Humility

• Taking the stance of a learner

• Comfortable with the “I don’t know”

• Taking a risk management approach to advising the Board, that is acknowledging that there is not perfect information; identifying the pros and cons of each choice; making it clear however not just what the list is, or even the probability, but framing up what the key issues are and then suggesting that based upon the answers that the Committee provides one or the other approach might be better.

• Example: Should we pull back on our use of stock options and if so, should the value be replaced and with what type of devise…

• Pro and Cons – options pay off when, RSUs pay off when, Cash LTIP more controllable, Equity Compensation – capital market risk; Pie charts will move, alignment with shareholders.

• Real value is in saying, at the end of the day, which risk are we more living to live with than another risk?  Risk that executives we want to stay leave, or risk that we provide some windfall payment?  Because…

Working with the Compensation Committee and the Board

• Don’t practice defensive compensation – be careful of the documents you produce; SWAGs can kill

• Know your Committee and their tolerance for information and analysis; don’t give them less than they will digest but don’t create it just for the sake of having something to say

How to deal with the Committee’s advisors

• With a big stick.

• Separating their agenda from your agenda.  They are playing for safety – you are playing to win.  This is a competitive endeavor

• Preview their work for relevance and make sure that they do all of the work, but only the work, that you ask for.

• Don’t be afraid to separate journalism from editorial writing from Dear Abby

2 Comments | In: Compensation, Professional Development | tags: Compensation Committees, Conference Board, Relevance. | #

Thursday, January 7th’s Wall Street Journal has a great piece on tax law changes regarding ‘carried interest plans” in its “Deals & Deal Makers column.  All HR people should have some knowledge of this powerful compensation structure.  Compensation people in particular should be able to talk through at least the basics of operation and taxation.  Even if your industry or organization is not a candidate for this type of plan, you should be able to say why it is not.

The article is a great quick overview read of the concept and the current debate. 

The House of Representatives voted last month to treat a large chunk of private-equity and hedge-fund managers’ income as regular salary rather than more lightly taxed capital gains. The measure would increase taxes on carried interest—the 20% cut of a fund’s profits to which these managers are often entitled. Currently, that income is taxed at a capital-gains rate of 15%, a figure well below the 35% tax on ordinary income.

Imagine that we have a fund with which we make investments that has $100 in it.  The money in the fund could come from individual investors, if for example, you are a private equity fund.  However, the money could also come from say a single corporate entity.  Many companies will make investments in smaller companies in order to be connected to talent, technology, customers, innovation, etc… in the market.  Think of this as a distributed incubation model.

Regardless of where the $100 came from, someone is runnng the fund – making the decisions about what organizations to buy into.  In a carried interest plan, that manager shares in the ROI on the $100.  In its simpliest form, if the fund is worth $110 at the end of the period, the manager gets $2.

There are variations.  Maybe the manager shares in the first dollar of return – fund is worth $101 – manger gets 20 cents.  Maybe the manager shares in the return AFTER the investor gets a minimum ROI – say 15%.  In our example then, the fund is worth $116.  The investor gets the first $10 over the $100 and the manager gets – 20 cents.  Last variation (for our purposes, because the actual variations are infinite) the investor gets the first 15% and the manager gets the next 20% then they share.  So, if there fund is worth $200, the investor gets $15, then the manager gets the next $20 and the last $65 is split – 80% to the investor ($52 = 80% X $65) and the manger gets $13 (20% of $65).  More or less, the more negotiating power the manager has, the sooner her return kicks in.

Because this is a return on an equity instruement, the taxation on carried interest is like the taxation on the appreciation on any other capital gain.  This is one of the reasons that people like being in a carried interest plan.  Because – it really doesn’t matter how much you make, it only matters how much you keep after taxes.  So let’s return to the Journal article.

 

University of Colorado tax law professor Victor Fleischer, whose views caught the attention of Congress two years ago, agrees with this approach. He notes that profits earned by managers from their own money invested in their funds—typically a small percentage of the total fund size—are appropriately taxed at capital-gains rates. But he said the portion of pay managers get for investing other people’s money should be taxed at ordinary income rates, just like other forms of salary.

Long story short – the professor is right.  This change in tax law is good and fair.  That works for our country, it makes for confidence in our markets.

No Comments | In: Compensation | tags: Carried Interest Plans, Tax. | #

For many people who work within the world of compensation, the first few years included a good deal of market pricing.  Market pricing is frequently viewed as the introduction to the skills of compensation.  Part of this is absolutely right.  Having to work through surveys, position matching and evaluation is great training for a career in compensation.  In addition, part of these early market pricing assignment is economic.  Both consulting firms and corporate compensation departments typically like to pay as little as possible for market pricing.  Essentially, the lowest paid compensation people do the work because it is seen as easy, low-risk, boring and all-too-frequently, low-value.

From time to time, I guess I have fallen into some of those traps myself.  Truth is, I love market pricing.  I think that it is fascinating.  Like many things in life it is easy to do, but hard to do well.

As labor markets evolve in the next few year, I anticipate that there will be fundamental changes to the American labor markets.  We can anticipate greater federal government involvement in the work place; EFCA or whatever comes from EFCA’s origins will likely change the market place for representation; technology, China and changes in benefit regimes will matter.  I also believe that we are accelerating to a period of more of a two-tiered economic life (rich and poor) and less of middle class / blue collar tier.  All of these things along with Baby Boomers, globalization and the rest will change labor markets and the fundamental perception of work, especially for the youngest and the oldest workers.

These changes create the need for more and better market pricing.  There is great value in distinguishing between executives versus managers; top sales person vs sales management; technical versus commercial; and the scope and character of risk managed.

One thing I know.  This is not a year to take last year’s work and “update it”.  Take a fresh look; engage with the line; set in place great market pricing to set the organization on a path for success in the economy that will come out of the recession.

2 Comments | In: Compensation, Multiple Markets, Professional Development | tags: Market Pricing. | #

This past week, and recently, some really important economic data were released.  Here are the head lines as reported by the Bureau of Labor Statistics on productivity:

Productivity increased 6.6 percent in the nonfarm business sector during the second quarter of 2009 as unit labor costs fell 5.9 percent (seasonally adjusted annual rates). In manufacturing, productivity increased 4.9 percent while unit labor costs rose 0.2 percent. (Source BLS.com 2 Sept. 2009)

Productivity is measured by BLS roughly as the ratio of two indices – one measures how much workers were paid (real earning, not annual base, not target bonus but cash money) the other is the value of output – how much stuff was sold.

Unemployment just ticked worse – at 8:30 Friday morning the BLS released unemployment figures for August.  (You knew that right?) The fact is that unemployment is worse than it has been for more than a quarter of a century.  There are about 15 million people out of work in the country and 216,000 people lost a non-farm job in August resulting in an unemployment rate of 9.7%.  That is a 26-year high.  Temporary unemployment, which is considered a more sensitive gauge of the health of the labor market, shed 6,500 jobs in August compared to about 50,000/month earlier in the year.  Better, but still bad.

At the same time corporate earnings are up and the stock market is stable to growing.  The market is stong enough that some are asking if the recession is over and they look to recovery around the corner.

How do these things fit together and what do they mean for HR?  The stock market and corporate earnings are up because although many companies are not selling more stuff, they have radically cut expenses.  The increase in productivity is a reflection of current worker getting squeezed hard.  Although unemployment did slow in July, it is back up in August and most importantly, jobs continue to be eliminated.  For a great over view of the economic issues and for its impact on organizations generally see the Wall Street Journal from Wednesday August 12, 2009 – Tom Barkely wrote a great article.

You may have heard the phrase already of a jobless recovery.  So far that seems about right.  Corporate profits are being built on reducing expense more than growing revenue.  That can only go so far.  As some point there will likely be a second wave of a turn-down and even more job loss, if the productivity gains can’t be made permanent and become a base for growth.

So HR people need to understand the “quality” of the earnings of their organizations.  Are earnings coming from growth or from expense cuts?  Do you have a feel for what the changes are in productivity at your company?  There is a planning opportunity here for HR professionals to do two things – one is unlikely, one is a necessity.  Unlikely but possible – can you become someone in the company who is expert in how employment in this country works and what that might mean for you organization?  Necessity is planning compensation, benefit and performance expectations not in light of history, or out-of-date benchmarks, but with the knowledge of how the economy is moving today.  And finally, do you have a way to educate employees as to realistic expectations about compensation and benefit increases or decreases in light of real economic conditions.

HR strategy is not just a concept in a book or a SHRM training course.  It can’t be unconnected to real world, current time, issues.  The labor market data, in combination with how corporate earnings are being created through expense management, would seem to offer opportunities for thought HR groups to plan ahead for the company and industry specific challenges that may lie ahead through 2010.

Hint: there is no market for HR people who’s explanation is saying “the economy is bad.”  My fifth grader can explain that.  There is a market for HR people who have a feel for the relationship of the statistics at www.bls.gov and things like merit increase budgets, compensation expense and worker productivity.  There is a market for HR people who can read the numbers today and make assessments about strategy for tomorrow.

No Comments | In: Compensation, Multiple Markets | tags: Corporate Earnings, Productivity, Unemployment, Wages. | #

Is the Middle Class dying?  This recession may be increasing the possibility of that being true.

Here is may concern – we are in what others have called a “jobless recovery”.  Estimates of unemployment are commonly pegged, even two years out at 8% or more.  While we may be soon technically out of a recession because macroeconomic indicators are showing signs of growth, there is not enough confidence in the near term future to see employment levels increase enough to substantially knock down unemployment. 

My fear is that through the recession, many people have been living off of non-wage resources.  Extended unemployment benefits and the stimulus have produced some floor of economic activity.  I have to think that 401(k) balances and other savings are being depleted.  

Coming out of the recession truly, when employment does pick up again, what might we see?  I wonder if it will be more families living paycheck to paycheck, with no savings and with material debt.  At the same time, the people at the top of the corporate heap are already seeing signs of relief.  With a macro level recovery, they can expect to seen gains in bonus compensation and gains in equity awards.

We will also be down the line a bit more with the aging workforce and population.  More people in a more fragile economic situation relative to there earning potential and health.

In a nutshell, I am thinking a lot about whether the rich will get richer and the poor will get poorer.  What does that mean for HR in your organization?  What does that mean for talent?  What does that say about your customer base for your organization’s goods or services.  I think that forward leaning HR people need to consider that labor and customer markets could look very different in a few years. 

What do you think?

1 Comment | In: Compensation, HR Strategy, Labor, Multiple Markets, Recruiting | tags: Middle Class, Rich Get Richer. | #

Here is my crazy ass idea of the day.  Help America get out of the recession by tipping “more bigger”.  There is a couple of under-pinnings to our thinking here.  First off, support the working poor.  Yep, I am one of those people who don’t do a lot of hand outs on the streets.  I would rather write a big check to a social services agency and hope for sustainable change than meet an intense need in the moment.  Even better however, is helping to make working for a living in a sustainable, market-created job, easier.

You can support that market solution both by helping the small business owner (or a big one for that matter) while having a direct impact on the life of a person working hard at a hard working job.  If you tip a full 20% for reasonable service; maybe if you do 20% and then round up to a nice number, you are making an impact on people who need the money.  They get the satisfaction of work and reward.  They become more optimistic.  They then spend that money elsewhere.  The become more a market player. 

This is not just a restaurant thing.  Tip a paper delivery service; tip a service technician in your home; tip the lady who shows you to your seat at the ball park; tip a maid.  The point is – tip service people in low paid jobs more and the ripple through will be good for our country.  It is a better mechanism and better incentives than handout.  It builds self-esteem through working.

Why you?  Because you can.  You know it and I know it. People reading this blog are generally more affluent than average.   You probably have a college education, if not more.  You spend money on discretionary items.  You can find a way to share your success in the market with those that are still reaching for something you have already passed by.  Also, you will have the satisfaction of knowing that you are helping others, helping the country and contributing to a more sustainable market-based society for everyone.

4 Comments | In: Compensation, Ethics, Labor | tags: Market Solutions, Stimulis, Sustatinablity, Tipping. | #

Last year at about this time, Human Markets wrote about the question that is typically asked of Compensation Departments within organizations.  Namely, ” so what’s the number?”  If you want a bit more background on our thinking about setting merit increase budgets look there first.  Today we are really just updating since then.

The sad fact is that the economy is dramatically weaker than it was even a year ago.  Unemployment is very bad and, just like last year, is much worse than the main stream media seem to appreciate.  This fine post at the Freakonomics blogs sponsored by the New York Times, lays out the case well for how, under employment combined with outright unemployment is weakening the average American household.

The truth is that just about every organization in the country should be thinking about conserving resources – preserving assets.  Great employees are an asset.  Preservation of those employees, this year, may mean more about keeping expenses and capital low to make the whole operation more robustly sustainable.  If you ever thought that your job in HR or Compensation was to negotiate for the highest number that Finance would acquess to when they ask, “so what’s the number?”, that has never been more wrong than this year.

The right analysis balances what your customers are able and willing to pay (relative to any increase in your operating expenses) and, what is happening in the relevant labor markets for your organization.  Unions are blind advocates for more; my job is to be the best market player available.  Great HR can provide the analysis of where the organization sits relative to multiple markets.  They can argure the impact of EFCA but do so relative to the income statement of their employer.

This year, think 0%.  Build from there based on the full picture.  Remember however, that many people, people who are your customers, are losing some, if not all, of their income.  They will be spending less.  Your health care costs may well be going up.  Energy prices are increasing – again.  Credit is expensive.  All of these must be understood relative to what your customers are willing to pay.  Be a fact-based competitor when you get asked the big compensation question this year.  It may be what makes it possible for you to be there to answer it again next year.

No Comments | In: Compensation, HR Strategy, Multiple Markets | tags: Merit Increases. | #

  I am thinking a lot about unemployment.  How will it impact our business?  How will it impact wages and benefit expense.

It is easy for me, and I have from time to time, fall into the trap of thinking exclusively about national unemployment numbers.  My organization has locations around the country.  The “national labor market” is a mistaken focus for me.  I need to reorient my head to multiple local markets. 

This graphical display on NYTimes.com is a great start to thinking the right way about the issue and making sure that I am a sharp competitor where my hourly workforce labor market matters – locally.

2 Comments | In: Compensation, How to do HR, Multiple Markets, Recruiting | tags: Labor, markets, NY Times, relocation; how to do HR. | #