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Thursday, September 07, 2006

Second Compensation Topic: Basic Terminology

When we talk about compensation to each other we often get tangled in our terminology. What's the difference between a salary and being on salary? If the market pays "x" for my job, is that before or after bonus or commission? How does the cost of benefits figure into my compensation? What is equity, and how do I get some of it? What's the difference between an ESOP and a stock option? All these are fair questions aimed at answering the big question: when it all adds up, do the numbers add up to fair treatment? We'll get into some of these questions later on, but for now let's start with identifying the basic elements of typical employee compensation and what we call it.

The wages that you bring home every two weeks, whether earned by the hour or by the pay period, comprise your base pay. If you punch a time card, this is your hourly rate multiplied by the number of hours you work. If you work over 40 hours in a pay week, that rate is (1.5 x hourly rate) x hours worked over 40. If you want to annualize your hourly rate, multiply it by 2080, which is 40 hours per week x 52 weeks per year.

If you are a salaried employee, your base pay is your annualized salary ÷ 26 (the number of bi-weekly pay periods in a year). Salaried employees are not paid by the hour; neither do they receive overtime.

Bonuses, commissions, or spot awards (sometimes called "spiffs") make up your variable pay. The amount of variable compensation that a position is paid (notice I didn't say a person, but a position as jobs are priced based upon duties and not who performs them) is usually expressed as a percentage of base pay, with simpler jobs typically earning 5% or less in some form of group incentive like a bonus pool or profit sharing plan, and more difficult staff and low-to-mid-level managerial positions earning up to 30% of base in potential bonus. Typically 5% -20% of base pay is indicative of almost all bonus plans in most companies.

The sum of your base pay + variable pay = your Total Cash Compensation or TCC for short. This is the number we use when pricing jobs on the market and comparing individual employees' compensation to the market. TCC does not include any of the forms of compensation listed below.

Your group benefits are an important part of your total package. Typically, our company pays 70% of the cost of your benefits, and that cost is approximately 28% of our total payroll. So, if you're considering leaving the company for, say, life as an independent contractor or consultant, take your total W-2 wages from last year x 140% (your TCC plus the total cost of your benefits) and that's what you'll need to earn to be able to support yourself with the same standard of living after buying your own benefits.

Another fairly common form of compensation is equity in the company. This is an ownership stake in your employer and is most commonly granted to employees in a group plan such as an ESOP. Management employees may also receive stock options or stock grants as their decisions guide the health of the business and the theory is that you want them to treat the business as if it were their own.

When you total all forms of compensation together, TCC + benefits + equity (if applicable) = Total Rewards. This, other than job satisfaction or the occasional headache, is everything you get in return for working for someone else.

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I hope you find this helpful, and as always please feel free to post questions for everyone's benefit. Remember, we want this to be a community conversation and disagreement is okay, although lavish praise is always appreciated. :-) Our next topic will be in the next week or so on the subject of Determining Base Pay. In that, we'll discuss how jobs are priced and what elements of a job make it more or less valuable on the market.

Jim

11 comments:

Bob said...

Concerning the information about Group Benefits...I've actually been thinking about this off and on for a while. According to your formula to determine the amount of money needed to maintain the same standard of living while paying for our own benefits, we'd multiply our wages by 140%. Or, if I'm reading it right, our benefits account for 40% of our wages. If this is the case and I don't take any benefits through the company but rather through my wife's employer, does this mean I should be paid 40% more to maintain equality with other employees that have their benefits through Nelson? (yeah, I wish). I do have some life insurance, some of which I pay extra for, and vision insurance, and I'm sure there's other "hidden" items (workman's comp?)we all pay for to be a part of the company. But is it equitable to figure I'm getting the same 40% in benefits when I don't have my medical through the company?
I look forward to the rest of your series on compensation. I haven't worked anywhere before where HR has said anything other than "yeah, we've done a study and you're getting paid what your position is worth in the marketplace". Of course with nothing to back it up and no questions allowed. Thanks.

Jim Thomason said...

Thanks for your kind comments, Bob. As for your insurance question, there are some companies that pay employees not to take their coverage and thus force their group benefits costs onto the employers of their staff's spouses. Other than that, however, employers don't typically pay more to employees who don't take their coverage for the same reason that they don't charge more to employees with large medical claims. The insurnace policy for the employee group is written based in part upon actuarial assumptions on how many people take or waive coverage, and from what demographic. This helps keep the coverage affordable. If the employer paid employees more who didn't take the coverage, then that extra salary would have to be added to the cost of coverage and passed on as higher premiums to both the company and those who take their insurance. Its a reasonable question, but not economical if the goal is to keep a reasonably affordable health and dental plan available to the workforce.

Anonymous said...

You mentioned in your blog that "The amount of variable compensation that a position is paid (notice I didn't say a person, but a position as jobs are priced based upon duties and not who performs them) is usually expressed as a percentage of base pay..."

This seems related to your first blog on “Job vs. Personal Worth” where you admit that “Your compensation is a reflection of all those things that go into job pricing…, it is not a reflection of what you are worth as an individual." If I’m reading into these comments then forgive me. But, taking them at face value, I have an opinion to share:

I understand that as an HR manager you have to price jobs based on "position" not "person" because you are managing an entire workforce, not a department. In other words, you don’t know every person in the company but you do know every position. However, it seems only fair that an employee be paid a price based on a combination of "person" AND "position" because anyone who has been in the business world long enough should know that not everyone performs the same if given the same position. Some people exceed performance expectations, some people don't. So, shouldn't performance be factored into the price, not just the position? When you reward people for their work, not their position, they are more likely to be loyal to a company because they feel respected and valued. When you don’t, employees will start "looking" outside the company to prove their worth. I see this happen quite a bit at Thomas Nelson.

As I’ve heard someone say:

“if you work for a profit-seeking firm, there is an economic incentive for management to identify every source of profit, and then pay for it. If you are a source of profit, and you refuse to ask for a raise, then you are making management's task less costly. You are not only a profit center, you are a super center. You don't ask to be paid what you are worth."

This same person also said:

“If your work doesn't speak for itself, you must speak for it. You must do so in ways that are not visibly self- promotional, yet make you indispensable.”

So, it seems that if the company uses a structure that pays people for what the position is worth and not what they are worth as an individual then the company is ultimately driving people, in some cases indispensable people, to look elsewhere for work. Obviously, everyone is going to tend to think they are worth more than they are paid. Not everyone is worth more than their pay. Some people are. I'ts up to management to identify those people and reward them for it. If we stick to a "this position is only worth X dollars" mentality then we will continue to lose valuable and indispensable employees.

Just my opinion.

Jim Thomason said...

This is for Anonymous:

You are correct in that what a person is paid is a combination of the job worth and the individual's worth. Let me clear up any seemingly contradiction. The value that an employer places on a job is not a static figure, but a range; usually somewhere between 75-80% of the target price as a minimum and 110-125% of target as a maximum. The target price and the acceptable range around that target are what I refer to when I say that its the job, not the person, that determines that price. Now, within that range, where a person starts and how quickly they do or don't move up through it depends upon a whole lot of things, including performance. So, better performers move up faster through the range than do poorer performers, which is how you retain the best people.

Now, you intimate that Nelson loses some of its best people and with that I will take exception, respectfully. I like the overall quality of whose coming in and I believe the arc of our talent pool is upward. But even when we lose people, its often at that point in the career curve when they're fully qualified in their present job and ready for their next promotion, and one is not avaiable here. Or, and this is often the case being a larger competitor in our markets, people go to a smaller company where the scope of their job increases, thus making them worth more to that employer, even if doing the same duties. More as what makes a job worth more or less in an upcoming blog post.

Other than those points, I don't take exception to any of the rest of your comments and thank you for sharing them.

Anonymous said...

This comment is in response to the last piece of feedback regarding the reasons for employee turnover. I do not think it can be denied that turnover is unusually high here, particularly in some departments. Just look on the Nashville Chamber of Commerce website. We make up an unusually high percentage of the open positions on there. In fact, I was in a meeting where a show of hands was asked for by anyone who has been here over a year. An incredibly small percentage of the room raised their hands. I think we can all name companies both large and small that not only excel at retaining employees, but have fierce competition for open positions. I think it would be helpful to try to model these employers, whether it is in benefits, pay, or atmosphere, instead of just throwing our hands up and saying it is the natural course of business.

Jim Thomason said...

Anonymous,

Well, actually, I can dispute your high turnover opinion. While you are correct that we have pockets of higher than average turnover, our last three years' avoidable turnover as a corporation is less than 7%. Our total turnover during this period, which includes when an employee is fired, leaves to return to school, spouse relocates, etc.. averages about 12%. The average for corporations across industries is about double that number.

We have two divisions where turnover is much higher; perhaps you're in one of those. Both have action plans in place to address this. However, the "truth" that "everybody knows" regarding high turnover at Nelson is largely myth and the numbers bear that out.

Here, friend, we may just have to agree to disagree.

Jim

D said...

Could a possible reason for some turnover in "certain" departments be manager/employee related and not salary related?

It is always assumed that the reason a person is leaving the company is became Thomas Nelson doesn't pay enough. I would like to make note of a recent IT employee leaving the company who left not because he felt he wasn't getting paid enough. But because he felt the need for a change. And I hear the raise he got was an added bonus. Not the deciding factor.

I'm going to have to agree with Jim on this particular issue of pay.

Jim Thomason said...

This is for D who posted an inciteful comment but that I had to reject.

Your information about another employee made it too easy to identify that employee, so I rejected your comment. Please feel free to repost without mentioning the department of that employee and I will gladly post.

This is the only comment, by the way, that I have rejected; I only moderate comments for profanity, porn spam, and to protect the identity of employees.

Jim

Anonymous said...

"Our last three years' avoidable turnover as a corporation is less than 7%." I'm curious how that breaks down between salaried vs. hourly employees? It would seem that there would be higher turnover in areas of the company like the warehouse than there would be in areas like Sales, which would make an aggregate percentage an inaccurate reflection of either. I have worked for at least one company in the past that communicated its turnover percentage broken down this way, but maybe that was because they were Public.

I'll add my thanks for allowing this forum. It's healthy and welcomed.

Jim Thomason said...

Actually, we don't typically track turnover by hourly and salaried. I know that some companies do. Our experience has been that the hourly turnover is cyclical along fairly expected patterns due to season and workload so tracking it really doesn't render a meaningful number. We find that tracking by division, regardless or hourly or salaried, gives us a better look at what its like to work in different parts of the company, and where people are voting with their feet. Good observation, and thanks.

Scott Gibbs said...

This is in response to the above comment sighting a recent IT employee that left the company. Even though it may not have been the intent of the author, it reads as though I left because of bad manager/employee relations. That is not the case. I leave having only good things to say about the company, its management, and its mission. A good, challenging opportunity presented itself that I could not turn down.