Pay Days: Rewards Consultants in Spotlight

Getting it right has become a more difficult and demanding endeavor at most companies thanks to a combination of shorter-term factors (e.g., a tight labor market) and longer-term drivers of change related to technology and policy shifts.

A Dilemma and a Paradox The difficulty of aligning human capital strategy and business strategy has increased as the U.S. unemployment rate continues to drop. "CEOs and CHROs are caught in a rewards dilemma these days," notes Deloitte Principal Melanie Langsett, the firm's human capital rewards and wellbeing market offering leader. "On the one hand, they must serve the dueling masters of compliance and cost control but, on the other hand, they know they need to evolve their total rewards offerings to remain a destination for talent in an increasingly tight labor market."

The current labor market has resulted in "fierce competition in attracting and retaining top talent" reports Korn Ferry Senior Client Partner Cory Morrow. This "top talent" exists across numerous areas and levels of organizations as well as across numerous professional areas, notes Mercer Partner and North America Workforce Rewards Practice Leader Mary Ann Sardone. Yes, data scientists and artificial intelligence experts currently command jaw-dropping salaries, but the competition for drivers of all kinds, social media marketers, entry level service-industry employees and numerous forms of healthcare expertise is also furious.

Sardone also reports that a wide range of mid-level professionals across most industries and many job types now have more opportunity to increase their salaries by 15 to 20 percent or more by taking similar jobs at other companies. Part of the reason this opportunity exists relates to a surprising compensation paradox. "Base salaries are barely keeping up with inflation," reports Morrow.

New Mercer research confirms that "employers are not budging on salary budgets" at a time when 89 percent of executives expect increasing competition for talent in the coming year. Salary increase budgets for 2018 are flat at 2.8 percent, according to Mercer, and projected to rise, barely, to 2.9 percent in 2019. Employee perception of fair pay has dropped from 57 percent to 52 percent during the past five years, and employees' perception that pay is linked to performance has declined from 55 percent to 47 percent, according to Mercer Sirota analysis.

So what gives? Sardone suggests that that current compensations systems, after years of dispensing small salary increase budgets, have "made differentiation difficult and has caused pay raises to be less a reflection of performance and more about maintaining at least a minimum level of competitiveness." Another possibility exists: HR executives are waiting for artificial technology and its variants, like robotic process automation (RPA), to take on significantly more work and significantly reduce the number of new hires their companies need.

This reasoning is riskier for companies to embrace. While it seems certain that RPA and AI will dramatically reshape a large number of professional duties, it remains uncertain when this will occur, how long it will take to play out and how evenly it will play out across different functions, companies and industries.

The World Economic Forum's new Future of Jobs report projects that intelligent automation will create 58 million more new jobs than the number of jobs it eliminates by 2022. Kai-Fu Lee, the founding director of Microsoft research, former president of Google China and author of the new book: AI Superpowers: China, Silicon Valley and the New World Order, argues that AI's impact will lack the apocalyptic drama of a blockbuster disaster flick that Elon Musk and others warn of. Yet, Lee also writes in The Wall Street Journal that the new technology will wipe out a huge portion of work as we've known it…" He foresees a decades-long "AI-driven crisis of jobs, inequality and meaning."

As HR leaders address historic technological changes and thorny dilemmas, they're also contending with other technological and behavioral changes that generate more transparency concerning organizational compensation practices as well as individual compensation packages. "The confluence of shareholder activism and social media trends," notes EY Americas Leader of People Advisory Services George Brooks, "have placed heightened [public relations] pressures on companies to promote total reward fairness and transparency across a rapidly evolving workforce."

Eight Rewards Questions HR Faces As HR functions strive to keep rewards strategies and practices aligned with their rapidly evolving workforces they encounter numerous, interrelated challenges. The duration of these issues should extend beyond the current labor market cycle. Rewards practice leaders say they frequently field the following questions from CEOs and senior HR executives:

How can we create and sustain a differentiated employee experience? "Talent attraction and retention is no longer about simply rewards—it's about improving experience," asserts PwC Workforce of the Future Partner Bhushan Sethi. Doing so, Brooks explains, requires HR functions to develop more, and more individualized compensation and benefits packages that address the unique expectations of differing employee "segments" or "personas." Deloitte's Langsett says that an employee-centric approach involves "valuing [employees], caring about their experience doing business with the organization and asking workers what matters to them, instead of assuming the workforce is just like the competition's … or that leadership knows what is best for them."

What is our role in helping employees manage healthcare cost and coverage issues? This is not a new challenge, but it remains a pervasive one, especially among lower compensation tiers and among certain professionals and employee segments. Consider the entry-level service workers whose annual salary increases are surpassed by their portion of healthcare premium increases for health insurance products with higher out-of-pocket costs and shrinking coverage. Analytics-driven solutions, such as the pinpointing of diseases that consume disproportionate amounts of all healthcare spending, are emerging. That said far more innovation and practical progress remains an acute need and one that few rewards consultants appear as eager to discuss as many other current rewards issues.

How can we address the multidimensional challenge of pay equity? Transparency is exposing how much companies reward employees and the degree to which compensation policies are impartial, fair, unbiased and unprejudiced—terms that Sibson consultants use to distinguish pay equality from pay equity. "The issue of pay equity is an increasingly important challenge," asserts Matt Campbell, advisory managing director at KPMG's people & change service. A dozen years ago, challenges related to internal perceptions of pay fairness among different employees in similar roles basically required an effective policy and consistent communications from HR functions to counter water-cooler chatter. Thanks to the rise of Glassdoor and other workplace information-sharing platforms, far more detailed information on individual rewards packages are available with a few phone swipes. In the past two years, gender pay equity has begun flashing brightly on the radar screens of CHROs, CEOs and boards, Sejen says, noting that the issue "is part of an organization's broader inclusion and diversity agenda."

How can we expand benefits offerings while making them more individualized and flexible?   Rewards consultants say that HR leaders want to deliver more benefits and more tailored programs—what EY's Brooks describes as "agile, persona-based programs. In addition to a range of wellbeing offerings, expanded benefits menus include paid time off to part-time employees, student debt assistance programs, more flexible workday (time and location) arrangements, and significantly more voluntary benefits, such as identity theft protection, childcare and eldercare discounts, critical illness insurance and more. These voluntary benefits often cost employers little or nothing, besides their administration, while giving employees access to attractive group discounts. By grouping these expanded benefits offerings to different employee segments based on their unique preferences and characteristics (e.g., elder care for employees with elderly parents), Fries says, HR functions are taking a page from individualized medicine.

How do we design, manage and measure well-being benefits? Wellbeing benefits feature prominently in more benefits-planning activities today, notes Boro, who points to programs that help employees manage stress, lower debts, save for future college tuition payments, plan for retirement or even search for a job at another company. "Two to three years ago we were talking about physical wellness or financial wellness," Sejen says. "Today, wellness also includes thinking about social and emotional well-being." Fresh research suggests that A) these investments pay dividends; and B) successful organizations deploy them more frequently than other companies. Willis Towers Watson research indicates "higher levels of employee well-being again correlate with better business outcomes," says Sejen, who notes that an organizational culture needs to support well-being programs for them to thrive. "We are witnessing an evolution from narrow physical wellness to broader whole-person "Wellbeing," asserts Langsett. Deloitte's "unified wellbeing model" features four pillars of holistic wellbeing: body, mind, wealth, and purpose. And research by the firm's Bersin business finds that high-performing organizations are 11 times more likely than their low-performing counterparts to have a "broad and holistic worker wellbeing strategy" in place.

How do we keep up with new laws and policies? Contentious legislative gridlock at the federal level can mask the fact that state and local-level lawmakers and regulators at all levels remain highly active, especially on compensation-related matters. States such as California, Massachusetts, and Oregon among others and a number of cities have instituted salary history bans. New pay equity and living wage laws also have HR and legal departments scrambling to keep pace.  "In many parts of the country there have been increases to minimum wage," notes Korn Ferry Senior Principal Malinda Riley. "This is hitting the retail industry significantly." While the U.S. Tax Cut and Jobs Act lowered the corporate rate, it also repealed the performance-based exemption and imposed new limits on deductions for meals, entertainment and transportation. The repeal of the exemption "means that executive incentive plans with a performance component such as total shareholder return may no longer receive a tax deduction on such wages," KPMG's Campbell explains. "The new deduction limitations… may also impact how companies chose to spend and as well as how certain benefits are offered." State and municipal legislative changes also create a stream of new payroll compliance challenges, Boro adds. Langsett notes that the impact of public policy, within the US and globally, on compensation requirements is increasing as "certain municipalities and countries begin to lead the way on issues such as pay transparency, pay equity, paid leave, and so on."

How will data analytics strengthen our compensation structures? As HR functions advance on their digital transformations, they can learn from how marketing functions leveraged data analytics to undergo a similar shift. Marketing deploys advanced data analytics to improve the customer experience, and HR functions need to do the same to strengthen the employee value proposition. This work involves collecting and analyzing data on employee preferences and performance and then using those insights to tailor and optimize rewards programs. "Data can be a powerful tool," Brooks explains. "Through the use of analytics, many companies are leveraging existing company data to improve the alignment between employee preferences, compensation and reward offerings, and employee retention and performance."

How should we redesign our overall compensation structure and performance review approach? HR leaders are asking consultants for help with fundamental overhauls of their workforce compensation structures as well as with developing innovative performance review approaches. Ten to 15 years ago, HR functions began creating broader roles and pay bands while decreasing the number of hierarchical levels in the organizations. Today, the opposite is occurring. "Many organizations are creating differentiated career ladders," explains Sibson Senior Vice President and Consultant Jason Adwin, who leads his firm's performance and rewards practice. An organization that had 10 different categories of job classifications and compensation structures now might have 15 or 20 groupings. "More organizations are creating additional levels in organizational hierarchies so that promotions can happen more frequently," Adwin notes. "This is something that the millennial generation is generally clamoring for. Job design, job hierarchies, and compensation levels are becoming more vertical then they were in the past." Performance reviews and raises are also increasing in frequency in many companies (multiple times each year), notes Brooks, who describes a growing desire for "compensation agility" among HR functions.

HR leaders also need to much more agility within the compensation systems they rely on to attract and retain talent. These compensation systems and practices need to adapt more effectively to changing external market conditions over the short term while also enabling the organization to respond effectively once those massive workforce AI-driven disruptions looming on the horizon reach their industries and companies.

Executive Compensation: Is 'Pay for Innovation' Next?

While Dodd-Frank's say-on-pay and CEO/employee pay ratio provisions have not generated the uproar some predicted, both requirements remain key considerations within many public companies, according to Deloitte Principal Melanie Langsett, the firm's human capital rewards and wellbeing market offering leader. Both requirements, she says, continue to influence how HR functions and organizations communicate their executive compensation "philosophies and decisions—especially around matters of pay for performance – to employees, shareholders, and large investors alike."

These refinements are also occurring because HR leaders, their C-suite colleagues and directors expect transparency of executive compensation practices to intensify. However, as Langsett notes many companies are also being judged by stakeholders based on their relationships with employees, customers and communities as well as on their societal impacts. These types of appraisals, she adds, have "profound implications for how the individuals entrusted with the stewardship of these organizations are assessed and rewarded."

One implication relates to how executives and directors are measured beyond traditional performance metrics. EY Americas Leader of People Advisory Services George Brooks sees signs that executive and director compensation metrics "may evolve to include non-traditional metrics to determine incentive award payments." These measures could include forms of Net Promoter Score (used to gauge employee experience or customer experience); environmental, social and governance (ESG) metrics; and/or innovation-related metrics (e.g., number of patents obtained).

Q&A with KPMG'S Matt Campbell

Employee retention. Tax reform. Pay equity. Enhancing the employee value proposition. At a time when talent management represents a top CEO concern, senior human resources (HR) executives are grappling with a growing number of compensation and benefits challenges. Matt Campbell, advisory managing director at KPMG's people & change service, recently shed light on the nature of some of these rewards-related challenges while sharing how he and his colleagues are helping client companies address them.

Consulting: Describe one compensation and benefits concern that CEOs and chief human resources officers (CHRO) have right now?

Campbell: There are multiple issues currently facing senior management across virtually all industry sectors. These issues reflect a combination of financial, employee and disclosure requirements.  One of these issues relates to pay equity, which is an increasingly important challenge. The question that companies are asking is whether there is a material difference in compensation levels between men and women. While federal legislation or regulation does not seem likely, there is on-going legislation at the state level requiring companies to understand if differences exist. While some states are addressing the issue more aggressively than others — California and New York, for example – most states are only requiring companies to assess whether statistically valid differences exist and less emphasis on remediation – for now.

Consulting:  What is one area of workforce compensation that organizations are trying to improve?

Campbell: Companies are increasingly focusing on understanding levels of employee capability across the organization. Historically, a company organized roles around specific jobs without a cross-firm comparison of the type of work that each role provides. Many companies are now examining jobs by focusing on similar levels of responsibility, leadership/influence, impact and knowledge/experience. Once these levels are understood, compensation levels are commonly set across the organization based on those levels. In effect, workforce compensation is increasingly based on how work is completed as opposed to the traditional approach to compensation that was tied to a narrow definition of a job.

Consulting: Can you share some aspects of recent client work that illustrate a current rewards priority?

Campbell: Retention is increasingly a critical issue for companies. One recent client in the energy sector recognized that there was significant cost associated with employee retention in its IT function. Given labor market scarcity and the ramp-up costs once the right employee was found, the decision was made to assess the reasons why employees might leave the company. KPMG worked with the client using a proprietary methodology that examined the characteristics of voluntary terminations. That analysis put us in a position to help our client consider how such gaps would be closed.

Consulting:  What are some current challenges related to executive and director compensation?

Campbell: Executive compensation continues to be focused on the alignment between performance and compensation. Since incentive compensation continues to be the most prominent element of compensation, companies are consistently working to ensure pay has a clear relationship with business outcomes—specifically, by demonstrating how executive compensation aligns with measures that drive business profitability, growth and value appreciation.

Consulting:  How has your firm's rewards consulting evolved in recent years?

Campbell: There has been a clear shift in focusing on data-driven decision making across our client engagements. While the term data & analytics (D&A) is often used for general assessment of issues, KPMG finds there are some very specific D&A issues that drive many of our engagements. For example, we work with clients to understand the reasons employees may voluntarily terminate or to comprehend incentive measures that are most directly linked to value creation of the business that are then applied in incentive plans. In addition, employers are paying greater attention to tax compliance. The new deduction limits related to meals, entertainment, and transportation are impacting employer policy considerations and many employers are minimizing associated compliance risk as well as identifying opportunities with statistical sampling of these expenses.