EXECUTIVE COMPENSATION: BUILDING BLOCKS AND CURRENT … · Exec Mgmt Prof Exec Mgmt Prof Natural...
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EXECUTIVE COMPENSATION: BUILDING BLOCKS AND CURRENT TRENDS CSSEA AGM & FALL CONFERENCE 2 OCTOBER 2013 Ailsa Forsgren Partner Vancouver
Transcript of EXECUTIVE COMPENSATION: BUILDING BLOCKS AND CURRENT … · Exec Mgmt Prof Exec Mgmt Prof Natural...
EXECUTIVE COMPENSATION:BUILDING BLOCKS AND CURRENT TRENDSCSSEA AGM & FALL CONFERENCE2 OCTOBER 2013
Ailsa ForsgrenPartner
Vancouver
MERCER 2
Agenda Today
• About Mercer
• Compensation Trends
• Compensation Strategies and Governance– The Foundation of Successful Compensation Programs
• Applying the Compensation Strategy: Market Benchmarking
• Questions
MERCER
About Mercer
• We help clients around the world advance the health, wealth, and performance oftheir most vital asset – their people.
• We offer a comprehensive solution set of four business segments that are alignedto serve client needs.
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Benefit strategy and design
Specialty health and benefits
Individual and voluntary benefits
Benefits administration
Benefit plan management and brokerage
Benefit exchanges
High-performing defined contribution planIntegrated defined benefit risk management
Comprehensive plan managementand administration
Innovative plan design
Integrated defined benefitrisk management
Defined contributionplan investments
Endowments andfoundations
Wealth managers
Talent mobility
Workforce communicationand change
Executive andworkforce rewards
Information andtechnology solutions
Workforce analyticsand planning
Leadership andorganization performance
Diversity and inclusion
MERCER 4
About MercerThe Talent Business – What We Do
• We address client needs, from strategy creation aligned with business issuesthrough to lasting impact and measureable results.
COMPENSATION TRENDS
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MERCER 01/10/2013
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Compensation TrendsMercer’s What’s Working™ Survey
What we value most
2,000 Canadians
my companymy workmy paymy career
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Compensation TrendsWhat’s Inside Employees’ Minds? – Employees Are Not Happy!
Pay is #1 element ofthe employment deal,
half are satisfied.
Improvement inperformance
management, despitedisconnect between
performance and pay.
One in three workersconsidering leaving
their job.
Pay for performanceand bonus top
engagement drivers.
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Compensation TrendsEngagement Scores for Indifferent Employees (22% of the Total) are theLowest of All
49%
36%
44%
28%
59%
55%
52%
52%
76%
78%
66%
83%
0% 20% 40% 60% 80% 100%
I would recommend myorganization to others as a
good place to work.
I feel a strong sense ofcommitment to my
organization.
I believe that I have a long-term future with my
organization.
I believe my organization asa whole is well-managed.
Not considering leavingConsidering leavingNeither/indifferent
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Compensation TrendsHow Did We Get Here?
Old Deal Today’s Deal
• Career-long job security.
• Regular pay increases / promotions.
• Stable work environment.
• Work-life balance.
• Defined benefit pensions.
• Training and development.
• Pay for performance.
• Constant change.
• Flexible work.
• Decreased retirement, pensionpredictability.
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Age 16 to 24 Age 25 to 34 Age 35 to 44 Age 45 to 54 Age 55 to 64 Age 65+1. Base pay.
2. Careeradvancement.
3. Flexible workschedule.
4. Type of work.
5. Bonus.
1. Base pay.
2. Careeradvancement.
3. Type of work.
4. Retirementsavings.
5. Paid time off.
1. Base pay.
2. Type of work.
3. Retirementsavings.
4. Flexible workschedule.
5. Bonus.
1. Base pay.
2. Retirementsavings.
3. Type of work.
4. Bonus.
5. Working for arespectableorganization.
1. Base pay.
2. Retirementsavings.
3. Type of work.
4. Working for arespectableorganization.
5. Lowhealthcarecosts.
1. Base pay.
2. Retirementsavings.
3. Type of work.
4. Working forrespectableorganization.
5. Flexible workschedule.
Compensation TrendsImportance of Compensation Plans is Consistent Across Ages
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Compensation TrendsSalary Increase Budgets – Industry
• Despite the economic setbacks experienced in 2009, salary increase budgets havecontinued to grow at a consistent pace.
• Despite stakeholder pressure on salary increase budgets, the public sectorcontinues to move forward with increases.
Industry Actual Increases to Annual Salary Budgets2009 2010 2011 2012 2013 2014 Est.
General Industry 3.1% 2.9% 3.0% 3.3% 3.3% 3.3%Public Sector / Not-For-Profit 3.2% 3.2% 2.7% 3.1% 3.4% 3.2%
Reflects annual outcomes of the Mercer Canada Compensation Planning Survey considering mean values (excl. 0’s) for management level employees
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Compensation TrendsSalary Increase Budgets – Region
• Regionally, Alberta continues to lead the country in the size of salary budgetincreases.
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Compensation TrendsOther Important Trends
• Stakeholders in both the public and private sector continue to look to organizationsto demonstrate the link between executive pay and performance.– Introduction of variable compensation / incentive plans for senior executives in
the public sector.– In some cases, introduction of variable compensation / incentive plans for
managerial positions in the public sector.– Scrutiny of relative company performance and link to pay in the private sector.
• Wage restraint legislation in certain provinces has caused tension between publicsector organizations, their Boards, and stakeholders.
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COMPENSATION STRATEGIESAND GOVERNANCE
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Compensation Strategies and GovernanceCompensation philosophy should support business and talent strategies
TalentStrategyBusiness Strategy
What are we tryingto achieve?
CompensationStrategy
What compensationprograms are
needed to attract,retain, and motivatethe executive talent
we need?
What types ofexecutives
do we need to helpus achieve our
goals?
An appropriate compensation strategy is a critical starting pointas it serves as the over-arching policy that guides further decisions on:
How should an organization pay? differentiation, pay at risk, time horizonHow much should an organization pay? peer group and positioning
What should an organization pay for? performance measures and goals
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Cash Compensation
• Base pay / salaries.• Guaranteed “bonuses”.• Short-term incentives.• Allowances.• Financial recognition programs.
Development & Career
• Performance management.• Learning and development.• Career opportunity and pathing.• Tuition reimbursement.• Mobility opportunities.
Benefits & Pension
• Pension plan.• Savings and other wealth creation programs.• Medical / dental insurance.• Life insurance.• Short and long term disability.• Accident coverage.• Motor Vehicles.
Work/Lifestyle
• Time off.• Wellness programs.• Dependent care.• Workplace flexibility.• Commuter programs.• Workplace facilities and benefits.• Experiential rewards.• Non-financial and status recognition awards.
Compensation Strategies and GovernanceConsider how compensation fits within the Total Rewards picture
MERCER 17
The Elements of the Total Rewards Strategy
CashCompensation
Developmentand Career
Career &Work/Life Balance
Benefits &Pension
The Elements of the Compensation Strategy
ComparatorMarket(s)
CompetitivePositioning
PerformanceAlignment Pay MixInternal
Equity
Competitive pay to attract and retain.Link between pay and performance.
Defensible to stakeholders.
Fair and internally equitable.Supports the organization strategy.
Compensation Strategies and GovernanceWithin Total Rewards, the foundation is built upon cash compensation
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Compensation Strategies and GovernanceComparator Markets
• Comparator Market Determination:– From where do we recruit?– To whom do we lose talent?– With whom do we compete for business?
• Primary assessment criteria:
Criteria RationaleIndustry / BusinessCharacteristics
• Reflects the customer, labour and (if applicable)capital markets in which the company competes.
Geography • Reflects the region(s) or country(ies) where thecompany sources its executive talent.
Company Size • There tends to be a correlation between companysize and pay levels, especially for executives.
CapitalMarket
LabourMarket
CustomerMarket
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Compensation Strategies and GovernanceCompetitive Positioning
• How is the desired total positioning relative to the market defined?– Pay is typically set as a percentile target to the market (i.e., 50th percentile or
median).– Organizations may choose to lead or lag the market (higher or lower percentile
targets) depending on competitive positioning, strategy, affordability andstakeholder considerations.
• Companies may set pay positioning by compensation element (i.e., cashcompensation, non cash compensation, aggregate compensation).
• Companies may set different pay positioning depending on employee group orsegment (e.g., executives, technical specialists, trades, corporate services, etc.).
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50th Percentile
Example Market Distribution of Compensation
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Compensation Strategies and GovernanceInternal Equity
• Organizations need to be aware of the importance of the relative internal value ofwork and how that is compensated.– A structured approach to internal equity, such as job evaluation, may assist an
organization in developing appropriate compensation ranges for uniquepositions, managing talent and careers in an equitable way.
• The compensation strategy should outline how an organization will approachinternal equity and the instances or process for instituting it.
• Internal equity should be assessed in concert with external market data whenmaking compensation decisions (e.g., hiring rates, salary increases, etc.).– It may be appropriate to formally document organization processes to ensure
they are applied consistently.• For excluded employees, compression with the base earnings or base earnings
plus premiums / overtime for unionized employees can create internal equity issues.
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Compensation Strategies and GovernancePerformance Alignment
• Who will have their compensation tied to performance results?– Should it include executives? Managers? Everyone?
• What types of measures (operational, financial, etc.) will be used to determineperformance results for:– Executives?– Management?– Individual contributors?
• How will compensation be linked to performance results of the organization andto individual contributions?– Merit increases to salaries?– Annual incentives?– Will it change based on the level of the individual?
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Compensation Strategies and GovernancePay Mix
• Relative emphasis of fixed pay (salary) versus variable pay (incentives).
• In the private sector, top executives typically have the majority of theircompensation delivered as variable pay (short- and long-term incentives).
Industry
Target Short-TermIncentives
(Median % of Salary)
Prevalence of Short-TermIncentives
Exec Mgmt Prof Exec Mgmt ProfNatural Resources 50% 20% 15% 97% 89% 85%Finance / Banking 40% 16% 10% 96% 90% 75%Non-Durable Manuf. 30% 14% 10% 98% 84% 62%Public Sector /Not-For-Profit 20% 10% 9% 45% 22% 18%
In the public sector, fixed pay continues to be the primary emphasis,with both significantly lower short-term incentive awards,
and a lower prevalence of short-term incentives.
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Compensation Governance
• Compensation governance is a subset of corporate governance.• Good governance makes sense because it helps companies deliver long-term
shareholder value, and adhere to sound compensation principles and best practices.• Sounds governance requires a clearly documented policy / administration
procedures:• The Board and management have clearly defined authority and boundaries
around compensation for specific groups.• That there is a decision making structure in place for making compensation
decisions from the executive down to the clerical level.
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MERCER
APPLYING THECOMPENSATION STRATEGYMARKET BENCHMARKING
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MERCER 25
Market BenchmarkingBenchmarking applies the philosophy and determines competitiveness
Benchmarking requires that an organization:
• Develop a compensation strategy / philosophy.
• Identify market comparators or industries aligned with the compensation strategy.
• Determine what jobs will be included in the analysis – normally a “representativesampling” of jobs are benchmarked.
• Determine what elements will be included: Base salary? Incentive pay? Benefits?Pension? Perquisites? Time off practices?
• Review market data and compare current practices relative to target paypositioning.
• Identify the most appropriate mix of salary, incentives, and other elements in orderto achieve target pay positioning, considering both the compensation strategy andmarket practices.
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Market BenchmarkingBenchmarking requires market data and job matching
Market data may include:
• Identify publicly available disclosure (management information circulars, publicsector disclosure in BC and Ontario).– Widely available but requires significant discretion in use and valuation.
• Published general compensation surveys (e.g., Mercer Benchmark Database).– Gold standard for jobs that are common among general industry organizations.
• Industry and / or custom compensation surveys (e.g., focused survey of a specificindustry sponsored by an industry association).– Provide the best insights into how a specific industry or group of organizations
compensates.– May be the only source of information for certain specialist roles.
Jobs within an organization are matched to jobs with similar responsibilities andqualifications in the market, based on survey capsule descriptions or job titles.
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Market BenchmarkingMarket Data Sources: Surveys
27Source: 2012 Mercer Benchmark Database
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Market BenchmarkingMarket Competitiveness Analysis
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CSSEA’s SECTOR-WIDECOMPENSATION REVIEW
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MERCER 30
CSSEA’s Sector-Wide Compensation ReviewKey Decision Points
To undertake the sector-wide compensation review, the following decision pointsneed to be considered:
• Comparator organizations:– BC-based versus out of province.– Ownership structure – not-for-profit, for profit.
• Benchmark jobs:– A set of common jobs that are common within CSSEA’s members and likely to
be found in the comparator organizations.
• Survey elements:– Cash compensation.– Total compensation, including benefits, pension, time off, perquisites.
• Timing
• Input from CSSEA members
MERCER
Questions
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