The New COLA (Or Budgeting for Raises) — Comp + Coffee: Ep. 23

Raises. Your employees hope for them — sometimes they expect them.

But giving your talent that pay bump isn’t always as straightforward as you’d hope.

How can you plan for giving your employees their annual raises? Does everyone get one — and if so, how much does each person receive? And where does comp fit into all this?

On today’s episode, the hosts are joined by Mark Szypko, Compensation Director at Fresenius Medical.

They chat about how to budget for raises, including:

  • How to think differently about 3% raises
  • Making sure your raises are in line with your compensation philosophy
  • What other strategies you can use to shift the conversation
  • How to have transparent conversations with ALL your employees about this tricky topic

And if you like what you hear, be sure to subscribe and give us a 5-star rating!

For a full transcript of episode, see below.

 

[music]

Shawn: We’re live on a Friday. Bill, how are you feeling today?

Bill: I’m feeling fine and yourself, Shawn?

Shawn: I’m excellent, thank you. It’s two o’clock on a Friday afternoon. We normally record these much, much earlier in the week, however we had a guest today that was very flexible around a little stuff that came up earlier this week. We have Mark Szypko here with us today Bill. Mark, welcome to the show.

Mark: Thanks. Great to be here.

Bill: Welcome Mark.

Mark: Thanks Bill.

Shawn: For those of you who don’t know Mark, Mark is a frequent speaker at a lot of comp conferences, including our very own Comp Con last year. Mark has experience with magically running compensation and also with Avid Technologies – he was just telling us he’s now going to Fresenius.

Mark: Correct.

Shawn: Mark, thank you for joining us and sharing your knowledge today.

Mark: Great. Glad to be here. Thanks for having me.

Shawn: The thing that we wanted to talk about today was, we’ve said this before in previous podcasts which this goes into a lot of different areas, but one of the ways we talk about it is to stop giving the 3% raise every year. If you were looking at a budget for that, there is probably better ways to think about it. There’s the upper end, the upper threshold of people that you want to make sure are happy, your high performers. There’s the middle, and there’s the people that maybe you don’t worry about as much.

A lot of times we default to, I’m using 3% as the example, but typically that’s what it is, as the raise across the board. It’s easy to plan and easy to budget for. Your CFO says, “What do we need for that next year?” It is the easy thing to plan for, but might not be right.

Mark: It might not be right. The increased budgets have been 3% since about 2008/2009. I do remember the days though when I first started my career, which dates me, back in the early 80s, where we had increased budgets of about 18 and 20%. Oddly enough, that wasn’t enough then either. It doesn’t matter what you have, it’s just never quite enough. 3% certainly is the easy response for CFO nowadays, because again that’s primarily what the budgets have been. I think before you come up with what that increased budget is, I think you need to look at a couple of things.

I think first you need to make sure you understand what your comp philosophy is. In looking at that comp philosophy, where do we want to be in the market? We know where we want to be. Using tools such as Payfactors, you can figure out where you are actually in the market.

Shawn: Thanks for the shameless plug.

Mark: That’s quite right.

[laughter]

Mark: I’m all about shameless. Where do we want to be? Where are we? What’s the difference? What is it going to take to get there? I’m not going to lie to you and say, “Just walk in and tell your CFO that you’re 9% behind and you want to be 3% above, so give me 12%.” I think You need to certainly make sure you’re part of that conversation in determining what that increased budget is going to be, as opposed to just tossing the 3% over the wall.

Bill: Which means to have that conversation with the CFO well in advance of budgeting.

Mark: Absolutely.

Bill: Most people have this great idea when they get the budget that, “I should have asked for more.”

Mark: Absolutely right.

Bill: It’s a little late then.

Shawn: We even hear a lot of times it comes down from the board level like, this is what the board approved this year. To your point, you happen to have that conversation pretty early in the year, whatever early it is in that cycle that you’re planning for that.

Mark: Yes. Early and often. As a comp practitioner, I think one of the relationships you really have to nurture is with your CFO, is with your finance team, your FPNA team, your CFO, whatever the case may be. Have those conversations regularly, keeping them in mind. Again, it’s where do we want to be? Where are we? What is it going to take to get there? Then if you get stuck with the three, well then so be it. Then you have to just try to work with it as best you can. I think the challenge you then have with that is to try to differentially reward your top performers.

I heard you mentioned the whole cost of living thing. I’m not a big fan of Cola unless it’s a beverage, but as far as a comp philosophy or comp strategy, I think one of the things that most people would recognize is if you give everybody that 3%, then not everybody is going to be happy. What that is, is it will discourage, I believe, your top performers to continue to excel, because why bother? I’m still going to get the same 3%. It’s not going to encourage your lesser performers to continue to do anything because, “Hey, I did nothing, I skated by and I got my 3% just like everybody else.”

Bill: It’s actually going to probably encourage those bottom performers to not leave on their own.

Mark: Right. It’s going to encourage your bottom performers to stay and encourage your top performers to leave.

Bill: Which is exactly the opposite of what you want.

Mark: Exactly, right. You want the other way round.

Shawn: One of the reasons we talk about this here is that we say a lot of times, you should look to what is the market paying for the jobs that you’re looking at and where are your employees in relation to that? Some people might need a 10% raise, some people might not need it. Some people may be ahead of market. I hate using acronyms Mark, but if you rule out COLA, if you rule out the cost of living —

Mark: Are we talking beverages? Just to be clear.

Shawn: I don’t know. What did you give up for lent?

[laughter]

Bill: Was it diet cola?

[laughter]

Shawn: If you rule out the cost of living and you look at that and the market pricing as an alternative, do you need to be doing that as well, well in advance, so you can take that data to your CFO and then start having that conversation?

Mark: Yes. I think you need to be looking at all of the different jobs that you have and see where they all stand. It’s not to say that every job is going to get a 3% increase. There are some jobs that are more important than others. Obviously, in a technology company, it’s probably your engineering jobs and Human Resources jobs. Well, maybe not the HR

Bill: You had me for a second.

[laughter]

Shawn: There’s an argument for the recruiting side of it there, right?

Mark: The recruiters will certainly tell you that.

[laughter]

Mark: In any event, as compensation people, one of the things that we know is we always know what comp people stand. When that new survey comes in that’s always the first job we’re looking at. Anyway, recognizing that there are some jobs that drive more to the bottom line of the business, maybe we want to funnel monies towards different jobs. You and I could be in the same job and you could be paid very highly in your range and I could be paid very low in the range. If our performance level is the same some managers might say, “You’re both performing at the same level, you should both get that same increase.”

I would submit that that’s not a pay-for-performance methodology there, but that’s an increase for performance methodology. What that’s going to do is exacerbate the difference between your pay and my pay. What I would suggest is maybe you get nothing, because your pay is very high and you’re doing your job and my pay is low and I’m doing my job.

The reason you’re getting nothing is what I would refer to as a 0% merit increase. Your performance actually eclipses your pay level. Until such time that you either make yourself more valuable by acquiring additional skills or increase your performance, you might not see an increase for a while.

Shawn: Or if the market catches up.

Mark: Or the market catches up.

Bill: The key is it’s not that, in your scenario, Shawn is not performing well. It’s that Shawn can be performing fine, it’s just that his pay is out of sync with his performance.

Mark: Correct. Exactly right.

Bill: He’s got to catch up. It’s important to communicate that to the employee. It’s not a penalty.

Shawn: What you’re talking about there is having to have clear communication and understanding on the part of the manager, probably, and on the part of the employee, that they understand what is a band, what is the market, what does this mean. We’re talking about it now as comp people, but as an employee why am I not getting a raise?

Mark: Absolutely. One of the things that I’m a huge fan of is transparency. Employees can certainly dream up far more devious intent than we would ever consider implementing, let alone proposing, let alone implementing. Let’s share the salary ranges with the employees. Sharing the ranges with the employees tells them a few things. It tells them what their earnings potential is. It also provides them an opportunity to understand maybe what my career looks like. I’m a comp analyst, don’t just share me the comp analyst salary range. I want to know the salary ranges for all the jobs in that comp analyst hierarchy, so that I no longer have just a job here, but I’m actually looking at more like a career here.

I think transparency is absolutely important. “By the way, this is a conversation, if you’re not going to be getting that increase Shawn, this is the conversation that Bill should have been having with you maybe last year. Shawn, you’re getting close. Just as an FYI, you’re moving up in your salary range. We might not be able to give you an increase next year. “What do I got to do?” “Let’s look at helping you acquire additional skills. Let’s maybe talk about how you can increase your performance level.”

Shawn: Increase your skills and move into to a higher-level job. Those conversations should be happening all the time.

Mark: Absolutely.

Bill: All the time. I think that’s the key part. At the beginning of the year.

Mark: See, a lot of times organizations look at, and this all ties into your performance management cycle, but they look upon performance management like Christmas shopping. It’s a once a year thing. You plow through it and then, “We’re done.”

Shawn: It’s more like the dentist. It’s a once a year thing and you just don’t want to do it.

Mark: My wife is a dentist. That’s probably a bad analogy.

[laughter]

Bill: How does she perform compared to Shawn?

[laughter]

Shawn: Wait, I’m not getting a raise? I need to become a dentist and get a raise, I got it.

Mark: The thing is though, as far as this whole performance management thing, it shouldn’t be that event. It should be an ongoing process, an ongoing conversation, an ongoing discussion. What am I doing? How am I doing? How do I improve?

Shawn: I was going to say, back to the bands and structure discussion, I think that’s also good. This is going to sound bad to our audience, but it helps to show that the comp people are doing their job and they have a process and a methodology and approach, and it’s not this random, “Mark doesn’t like me, so he’s not giving me a raise.” That sort of thing, which, to your earlier point, the employees think things like that. It helps them to understand, “You are professional, you are doing something with rigor and with data behind it.”

Mark: Many years ago I had a friend of mine, Kevin. Kevin, when I first broke into compensation, he was trying to figure out exactly what it was we do in compensation. He said, “Mark, I finally it figured out. What you compensation people do is you sit around in your offices with your sweaty palms, thinking of ways to suppress the masses.” That’s what a lot of people think. Over the years, Kevin and I have had many a conversation. He doesn’t believe that any longer. I’ve fooled him.

[laughter]

Mark: Nobody thinks that we’re here to help anybody. I think providing those tools and helping managers use those tools, because that’s really what we’re doing, providing the tools to help managers manage their salaries.

Shawn: I think you’re hitting on something key there. What I would say, in a vacuum, people tend to assume the worst. If you’re not over communicating, they’re going to assume, “Mark’s sitting there with sweaty palms for some reason, trying to conspire against me.” Secondly, when you were talking earlier about sharing the possibilities, I think you said earnings potential early on. You’re sharing, “You’re comp analyst one now. We have four different levels of that, here’s the differences between each. You’re in the middle right now, you’re at the 50th percentile of the [unintelligible 00:12:58] one. The high performers tend to be up here.” If you want to have that kind of a conversation early on, who’s having that? Is it comp training managers to have that conversation?

Mark: Yes. Compensation or the HR business partners. There are fewer comp people in companies than there are HR business partners.

Bill: True.

Mark: Ultimately, it’s got to be the managers that need to have that knowledge, whether we, the comp team, impart that. HR business partners, organizations I’ve worked in before, I’ve spent a lot of time working with the training development organization in rolling out compensation training for performance management and making sure that that is incorporated in there. Working with your training people, working with your HRBPs or doing it yourselves-

Bill: That makes sense.

Mark: -by things such as podcasts.

Shawn: Somebody asked us about that recently. They were like, “We’re trying to better educate.” In this case was their employees. They were trying to educate their employees about all the value and mechanics of compensation of pay. They were like, “What if we would do a podcast.” I’m like, “Anything and everything, try it. See what works for your culture. It could be great.”

Mark: I think one of the things we have to be careful of though is don’t do a podcast and think you’re done. Different people learn different ways. My oldest son works for a podcast company. I’m still trying to explain to my 90-year-old mother what my son actually does for a living.

Bill: He’s in radio.

Mark: That’s exactly right.

Shawn: He doesn’t work for a podcast company. We have a podcast here. He works for Gimlet Media, right?

Mark: Gimlet, yes.

Shawn: That is the podcast company.

Mark: He’s happy to be there.

Bill: No need to be coy.

Mark: He’s cool. Podcasts might be one thing. There are other people are going to want the memo. There are other people that are going to want a face-to-face training session. Maybe recording session, record a video session. Making sure that you’re using leveraging, exploiting the technology to get that message out in many various ways.

Shawn: Many mediums. To be clear, when I say anything and everything, that’s what I was implying. A podcast is an interesting, potentially “new way” to get it out there, especially if you’re thinking about communicating internally, but that does not replace everything else. You should be holding lunch and learns. You should be training managers, you should be having webinars, you should be having on your intranet portal. All of that stuff also needs to happen.

Mark: Absolutely.

Shawn: Last comment for this. One of the things we also talk about is that we think, “What would happen if you flip this on its head? What if you asked managers what they would need?” We’re talking about getting out in front of this early and not just being responsive to either the board or the finance team saying, “Here’s your budget.” What if you asked managers? What if you said, “What do you think raises should be this year?” Before you even gave him a budget?

Mark: It’s an interesting question. We actually, in a training session I did at a company many, many years ago when we had the 18% increase cycles, we tried that. We said, “We’re not going to give you a budget, you just tell us what you need.” It was interesting. Half of the group came in lower than what we were going to be rolling out. The other half came in incredibly high. Doing something like that right now, I think, would be very challenging. I think to find people coming in less than 3%, is probably not going to happen.

Shawn: What do you caveat with right now?

Mark: Right now, because if you recognize that, we’ve been looking at 3% increase budgets for eight or nine years running. We’re looking at an economic picture that’s, theoretically anyway, turning around. Turnover is up. Voluntary turnover is really spiking.

Bill: Unemployment is low.

Mark: Unemployment is very low. It’s becoming a very difficult market out there for employers. Then you have things like the Mass Pay Equity Act, where you can’t even ask them what they’re getting paid. It’s not like I can say, “I’m making $30,000 right now, Bill. Hire me.” “I’ll bring you over for 33.” He doesn’t know, he can’t ask. I can just hypothesize something way out of the realm that I’m looking for and he might respond. It’s going to make it more difficult, I think, for employers to retain employees now. I don’t think they’re going to come in at less than 3%. I think that they’re going to be looking for more, for sure.

The other thing too, that I want to make sure. If we were to do that, if we were to roll out that, say, “Tell me what you need.” Then they come back and say, “I need 6.8%.” Then what happens? Then we, as the HR community, say, “Sorry, I can only give you 3.” Then what happens?

Shawn: Psych.

Mark Then what happens is that the manager then has the ability to then abdicate the responsibility. They can say, “Shawn, I wanted to give you a 5%, but Bill over there in HR told me I can’t.”

Shawn: Blame HR.

Bill: You also have that violating the first rule of communications. Don’t do an employee survey if you’re not going to respond to the results. Don’t ask managers what they want if you’re not going to at least make a strong gesture toward giving it to them.

Mark: Absolutely.

Bill: I thought you were going to step on my toes there. If you go to the managers and you ask them what they want, good managers are going to turn around and go, “Give me data.” I can’t tell you what I need to pay my people without-

Shawn: “If I don’t know what the market is.”

Bill: -without the market.” They would know anecdotally from recruiting activities what people who are coming in interviewing for jobs want. They would know what people who left are saying they’re getting, but they’re going to want more information. They’re going to want more transparency from HR and comp. Which is fine and good, but that’s another month’s worth of work you’ve got to do before you go and ask the question. I’m not disagreeing with anything Mark said. If you’re not going to be able to give them more budget, asking what they want is a challenge.

Shawn: If you can’t change the end result, you’re doing a lot of additional work to actually take the blame.

Mark: When you’re doing that though Shawn, what you’re really doing is saying, “I know I’ve got 3% and I hope they come back and say they only need 2.5.” That’s not the way it’s going to go.

Shawn: Nobody is ever going to say that. It’s always going to be above three, I’m sure.

Bill: I think there’s another thing, which just this topic brings to mind. This is me going off on my little tangent of things that drive me crazy about our world. A lot of these performance management compensation planning tools will take that 3% budget that we’ve been talking about for the last half hour and say, “Shawn, you’ve got a team of five people. They’re all making 100,000 a year and there’s a 3% budget. We have $30,000 to-

Shawn: You wouldn’t divide it amongst your team?

Bill: No. We’ll put 3,000 down for each person. Then the comp person says, “Shawn, tell me how you want to allocate it.” It’s already in your mind that each one of these people is getting three and so now you’ve got to take some away from Bill to give more to Mark. The amount people move that money around a small versus saying, “Shawn, here’s your,” I think I said 30 but it’s 15. “Here’s your $15,000 budget, how do you want to allocate it?” Were you to say, “Mark is a superstar and I need to keep him.” He’s going to get-

Shawn: 3.1 instead of 2.9. That’s what it winds up being.

Bill: What you really want it to be is somebody’s getting size five, six, seven. One is going to get zero and one is going to get 1% or a token amount. Then, the middle guys will get the three or maybe 2.5

Shawn: That sounds right. The time I’ve done that before, those were the instructions though. To allocate it on, effectively, based on performance, was the instructions. “Here’s your budget, you can go up to 10% but here’s what you got to work within.” It didn’t come with that preplanned-

Mark: That preplan, once you anchor people to it, they have a hard time moving away.

Shawn: It’s a huge concept, the anchoring conversation. It’s one of the first things you want to do in any negotiation is anchor it.

Mark: You’ve got to develop budgets to, though. As you’re rolling your budgets out, your comp planning tools, “I’ve got to allocate another 3% to the entire organization. How do I do that?” You just pre-populate that average increase for everybody in there. Make the point that you have got to rob from Peter to pay Paul. It’s not that everybody’s going to get 3% and then we differentially reward to our performers. It doesn’t happen that way. One of the things that I’ve mentioned before is, if you’ve got that 3% budget, don’t roll out 3. Roll out 2% and then hold back a percent. Then say, “Fine.”

I’m not talking about a beverage this time, if you want to give your Cola to everybody at 2%, go for it. Then take that 1% that you’ve saved, and maybe you allocate that to your top 10%. 1% of your payroll to 10% of your employees is a 10% increase. That provides you, really, that opportunity to differentially reward your top performers.

Bill: You could also do something like that and use it as a one-time bonus in lieu of a raise for the people that are at the top end of their range. Mark doesn’t like this. Go ahead.

Mark: I’m not a fan a lump sum bonuses because they’re already overpaid, though I’ve never run into anybody in my almost 40 years who feel as though they’re overpaid. They’re already overpaid. Why would we give them something? Number one. Number two, it’s still money that you’re depleting your merit pool with. It allows you to differentially reward less your top performers.

Bill: Although, I think from a management point of view, it allows you to save money next year [crosstalk] and to reward the people, back to our earlier Shawn example, doing a good job but at the top of the range. You don’t want them to feel bad.

Shawn: Without incurring the continuing-

Mark: It saves you money this year and next year too. It’s not going to affect your fringe rate because normally that wouldn’t be included in things like your life insurance and things like that.

Shawn: All these things are small though.

Mark: They’re small but they add up. Fringe benefits used to be called fringe benefits they were fringe. They’re not any more. They are not many fully loaded 36 to 42% of the payroll. In the US that’s a lot of money.

Shawn: Mark, thank you for stopping by today, sharing your knowledge. Always appreciate it.

Mark: The pleasure was all mine, thanks for having me.

Shawn: Good luck on Monday.

Mark: It’s April Fool’s, right? [crosstalk]

Bill: Was this all a joke?

Mark: Gee, I don’t know, I’ll find out on Monday.

[laughter]

Shawn: Always a pleasure, appreciate having you. Come back any time.

Mark: Will do. Appreciate it, thanks.

Shawn: Thanks Mark.

Mark: Take care.

[music]

[00:25:10] [END OF AUDIO]