Effective Salary Planning Isn’t Just About Budgeting for Raises. And It’s Not Too Early to Start Planning for 2011.

We have talked to lots of banks, credit unions and other organizations that chose to forgo or greatly reduce salary increases in 2009 and 2010 due to significantly lower company earnings.   While it’s only common sense that you can’t raise salaries if there isn’t the money to pay for them, the risk of your best talent seeking other jobs grows as time passes without seeing a raise.

To add to the challenge, data on actual raises in 2010 and early forecasts for 2011 paint a blurred picture at best.  So what do you do when there isn’t much useful market or competitor data to guide you?  The best approach in these trying times isn’t really different from what it’s always been – only more challenging.  Instead of thinking of your salary increase budget in a vacuum, think in terms of broad salary planning for your anticipated workforce.  For example, ask yourself the following questions:

  • Are you experiencing turnover in positions that you can afford not to fill?  Lower headcount could free up some salary expense that could fund raises for others.
  • If you are filling vacant positions, will you be able to recruit qualified candidates at salary levels below those paid to employees that left?  This may be especially true in cases where turnover was due to retirement of long service employees.
  • Do you expect revenue growth that can be generated without headcount increases?  Will this revenue growth be profitable growth evidenced by increased earnings?
  • Are there underperforming employees that should have raises postponed  while you work with them to improve performance?
  • Are there employees already paid well above market rates that might not qualify for a raise or might have their raise postponed?
  • And perhaps most importantly, how do your overall salary levels stack up against current market salaries?  If you haven’t checked the market lately (perhaps because you didn’t grant raises), then you lack important information on competitiveness that can tell you whether you are still paying competitive rates or that a gap has opened between your organization’s salary levels and the market.

Truly effective salary planning takes into account all relevant factors – only one component of which is the amount budgeted for raises.  And knowing how your salaries stack up against the market is a critical step which Matthews, Young can help with.

So, it’s not too early to start this review.  And as we gather more intelligence on projected raises for 2011, we will get back to you.

David Jones, Principal and Executive Compensation Practice Leader

Matthews, Young – Management Consulting

Incentive Compensation Needed More Than Ever

To be clear, I am not talking about discretionary bonus pay.  That is money wasted by managers who do not know what to expect of their business or their employees.  I am talking about a promise to pay a specific amount for a specific outcome, and the promise is made in advance of the performance period.  You know, the kind of incentive you used with your kids, or your parents used with you.  “Son, please give up the girl, sell the motorcycle, go back to school…..”  Sometimes an incentive can be a stick, but often a carrot is more effective.

When the economy and the effects of the bursting of the latest bubble are threatening your company, management teams need focus, and properly designed incentives create focus.  It’s not that good people need to be bribed.  Rather, when an incentive is properly designed it communicates a powerful message of what is expected from employees.  It focuses the team on exactly what you need.  Let’s face it, there is little less effective than a talented group of people all pulling in opposing directions.  When times get tough, the tough get going….but you better make sure they are going in the right direction.

One bank CEO told me recently, “I need the Incentive Plan now more than ever,” as he strategized how to reduce loan losses, raise capital and improve liquidity.  This team has a new set of metrics based on that strategy and a significant upside opportunity if they achieve the turnaround.  The shareholders and management team will win or lose together and there is no question what it will be worth.

It is true that incentive pay, if large enough to create the focus that is needed, can be dangerous.  You will get what you pay for, so you better make sure you want it.  I have seen companies driven over cliffs with poorly designed incentives.  In financial services, care must be taken to incent asset quality, risk management, controlled liquidity and interest sensitivity risk…..not just growth.

As the economy stumbles along through a slow recovery, unusual opportunities will become available.  Will your team be ready and focused?

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