Employee Pay in Focus: Transactional vs Strategic Pay Practices
Differences abound between transactional and strategic human resources, but even if the distinctions are clear to HR generalists, these terms get a little fuzzy when it comes to employee pay matters. Nonetheless, it’s important to understand the distinctions as these can be important to establishing the right pay practices and policies to keep your organization market-competitive. Let’s look at some critical differences between transactional and strategic approaches to employee pay, and answer some frequently asked questions that can help bring this subject into focus: Characteristics of Transactional Employee Pay Transactional employee pay practices tend to be short-term (or, for that matter, often shortsighted). They address situations but don’t address the “big picture.” They tend to be stop-gap in nature; interim solutions that might still need permanent strategic solutions down the road. Here are some common employee pay situations that are short-term and transactional in nature, rather than long-term and strategic: Hiring new employees at just above what they are being paid with their current employer Bringing new employees into the organization at a pay rate above existing employees to make sure the position gets filled Awarding merit increases without performing any proactive analysis just because they fit in budget Utilizing loose descriptions of job functions Using free salary data or letting employees drive the pay narrative with potentially misleading or inaccurate data from the internet Characteristics of Strategic Employee Pay Strategic employee pay practices tend to be longer-term solutions. They take the big picture into account and take the long view toward continuing marketplace competitiveness. Here are some common employee pay situations that are longer-term and strategic in nature, rather than short-term and transactional: Placing new employees in a market-validated pay range and comparing their history to others in the same or similar position for proper pay placement Evaluating and adjusting pay for current employees as needed when new hires must be brought in at higher rates Conducting a discrimination analysis before approving merit increases and address related issues proactively Utilizing job descriptions with clear responsibilities and standards for minimum as well as desired experience levels and education requirements Securing third-party published and scrubbed employer data or using a compensation consultant to secure salary data Answering Frequently Asked Questions to Clarify Transactional vs Strategic Employee Pay Practices Question: How can we bring new hires in using the prevailing market range when current employees are below market? Answer: First, think of your pay range in thirds: The lowest third of the pay range would apply to new and untested employees with little to no experience. The middle level would apply to fully proficient employees with several years of experience. The upper third is for seasoned employees with sustained performance over many years as well as a lot of experience. Obviously, you’ll need to have key information to properly place new employees into the appropriate pay range. For example, how much relevant experience will they bring to the job? Three years of experience? Four? None? You’ll then need to consider your current employees and align the new employee’s pay with other similarly situated employees. For instance, if a current employee has been in the job 4 years and came to you with no previous experience and the new employee brings 4 years of prior experience, you should pay these employees approximately the same. If you need to bring that new employee in higher than the existing employee because the market demands it, keep in mind when your merit awards will occur. If they are just a few months away, the current employee’s pay may exceed the new employee’s pay with their merit increase. If you just awarded merit increases, you may need to increase the existing employee’s pay to avoid creating discriminatory pay practices. You may also have to budget an increase for current employees and then execute the pay increases as soon as possible. You could also offer the new employee a sign-on bonus payable in various payments to keep the regular rates of current and new employees aligned. This leads us to the next question: Question: How can we realign existing compensation to market levels with minimal impact to financials? Answer: Tough question. It helps to budget for market-related increases each year. If that hasn’t been your practice and the pay ranges have fallen behind, you might provide increases every six months until you can get employee pay where needed. For employees below pay-range minimums, you can give merit increases first and then make a market adjustment if needed to help them reach the new minimum. Finally, you can use bonus programs, known as “variable pay,” in addition to base pay. Variable pay benchmarks must be re-earned each measurement period based on results. This enables you to hold merit increases in check; this can be important because merit increases permanently increase salary levels as well as benefits associated with base pay, such as life insurance, short-term disability, long-term disability, and sometimes retirement plans. Bonuses, on the other hand, are single pay-outs that do not normally increase base pay levels and related benefit costs for benefits (unless otherwise included per your benefit plan documents). Be sure to check your plan documents to clearly understand the definition of compensation before using bonus plans. Which naturally begs this question: Question: Why is a properly designed strategic pay program important to an organization? Answer: Among the many reasons are that a well-designed strategic employee pay program: Provides appropriate pay ranges for recruitment Promotes accurate job descriptions Provides a basis for determining the external value of jobs to market Provides baselines for reviewing employee performance and rewarding desired behaviors Ensures costs are maintained and managed appropriately Helps reduce turnover through improved employee morale and engagement when pay is not a dissatisfier and there are no pay equity issues The Bottom Line: It’s important to strategically plan your employee pay programs so you can attract and retain your top talent. Recognize that your employees are an investment and not an expense. The time and money it takes
Rethinking Age in Hiring
We recently sent an email to our BEST BRIEFS newsletter subscribers on the topic of ageism, and it definitely touched a nerve. Here is the original email content, followed by some of the comments we received on the subject. Our Original Message On January 20th, President Biden was sworn in and is now officially the oldest President the U.S. has ever had at 78 years old. A few weeks later, a 43-year-old Quarterback, with a 68-year-old Head Coach, and an 82-year-old Offensive Consultant, won the Super Bowl. These events alone should have us rethink ageism, but unfortunately, it is alive and well, and COVID has made matters worse. Studies show that workers ages 55 and older have experienced increased ageism from employers, particularly amid the pandemic. As people start to enter their 50s, they are more attuned to discrimination in the workplace. So much so that 58% of workers aged 50 or older have noticed age discrimination firsthand. Yet they’re known as being the most engaged in the workplace, not to mention the most experienced. Though our article on the topic of ageism (“Focusing on Youth in Hiring is Hurting Your Organizational Health”) was published before COVID, the point remains – it is time to rethink age in hiring, especially in industries (i.e., horticulture) where experience and qualified talent is increasingly becoming difficult to secure. After all, where are the Mentors and Coaches badly needed by younger generations to be found? Comments We heard from several business leaders on this topic, and here are a few of their comments. • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Personally, I achieved the most in my 50’s and 60’s: I wrote two of my three books, spoke 22 times across Canada and the U.S. won an award for Best U.S. Speaker in Canada from TEC, a Canadian CEO peer group, won five Best Place to Work and two diversity awards for United Way. I believe that individuals have to shake off society’s negative messages about getting older. We have to create our own “the best is yet to come mindset.” Oh, and my last book was all about companies that have strategies to maximize the creativity, productivity, and value of 50+ and previously retired employees. We make our own luck—and that applies to the organizations that don’t waste this valuable resource! • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • You are spot-on for highlighting ageism! It is the 60-year-old elephant in the room. I have been in meetings where it was disguised as “he/she probably isn’t up to date with technology as a reason for not considering an otherwise qualified candidate.” The older generation invented the computer. We darn sure have the intellectual capacity to learn some of the updates. Also, was there when the “Are you sure he/she will fit in with the younger members of our team?” Ageism comes in many flavors and is very active in today’s job market. Employers are crying for skilled workers who show up on time and give their best but overlook an audience right before them, ready and willing to contribute. Ageism is a cancer in the workplace. My new mantra is: I N D Y stands for “I’m Not Done Yet!” • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Special thanks to those who commented on our piece. Please complete the form below if you wish to subscribe to future BEST BRIEFS newsletters. In this unprecedented business environment and labor market, it may also be time to shift your thinking on recruiting and make an investment to bring on an experienced partner. One that can help you acquire the right talent and put your company in a position to grow. We can help. If your company is ready to strategically address, improve, and invest in the hiring of the most important part of any company – its people — contact us today!
Internal Leaders Affect the Value of Your Business
Internal leaders may not be obvious. They may not even have a “leadership” title. Make no mistake, however; internal leaders are critical to value and attractiveness when it comes to selling your business. In Super Bowl 55 we saw the impact of an internal leader. Tom Brady has the highest winning percentage of any single athlete in major professional sports. The Tampa Bay Buccaneers have (or at least did up until this season) the worst win/loss record over their entire existence of any major professional sports team. Yet one man changed the culture of the organization almost overnight. Remember, for all the accolades being heaped on Brady, he is an employee. He doesn’t own the Buccaneer enterprise or negotiate any contracts other than his own. He didn’t choose the team’s logo, uniforms, location, or coaches. Tom Brady is paid to fill only one of 53 player positions in the organization. There are also 31 coaches on the team, whose jobs are to teach and give direction to those 53 players. Although every player will acknowledge that winning is a team effort, none will argue the impact of one strong internal leader on his 83 coworkers. Internal leaders can be good or bad When I was a very young business owner, I hired an experienced salesman. He was an alcoholic and began inviting other employees to his house for a cocktail after work. It took me some time (too long) to realize that he was plying his coworkers with free booze while he ranted daily about how poorly the company was being run. I couldn’t understand why there was so much resentment among my team. They seemed to resist any direction I gave them. Finally, one person was kind enough to explain to me what was happening. Because this salesman was my top producer, I was afraid of the impact on revenues if I fired him. He didn’t want my job. In fact, he didn’t want any of the responsibility that should go with leading. He had merely discovered one of the biggest truths about leadership. It’s easier to tear something down than build it up. People love to hear that things could be better. It’s making them better that is the tough part. Tom Brady made the Tampa Bay Buccaneers better. Like any good internal leader, he didn’t limit his contribution to his job description as Quarterback. He helped recruit and train the people around him to build a better team. Identify your internal leaders An army dispatches its troops under the leadership of its lieutenants, but it succeeds on the ability of its sergeants. As a business owner, you can inspire with core values and set great goals. Whether you reach them, however, will be determined by your internal leaders. When it comes time for your transition, they are more important than ever. If you are selling to family or employees, they may not expect to be included in equity, but they will determine the acceptance of those who are. If you are selling to a third party, his or her achievements following the sale are conditional on the support of your internal leaders. They can prop up an inexperienced owner, or sink him without a trace. If any part of your proceeds from exiting depend on the continued success of the business, you would be wise to identify your internal leaders and make some provision for their continued loyalty after you are gone. If they don’t buy-in, you could see the value of your enterprise (and your payout) decline substantially. John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio, Texas. He is the publisher of Awake at 2 o’clock and has authored three books on business ownership. The single largest transaction and transition of your life deserves special attention. Are you planning to exit and sell your business? Business Exit planning is quickly becoming a buzzword in the legal and financial communities. Your professional advisors position themselves to provide tax, risk management, wealth management, and contract preparation services. BEST Exit Plan Advisor has been trained to manage your team of tax, legal, business, and financial planners to navigate your exit strategy. Click here for more details on how to get started. If you want to see how prepared you are for transition, take the 15-minute Assessment at no charge: There is one indisputable fact – 100% of owners will eventually exit their business. The Assessment is a multiple-choice questionnaire that does not ask for confidential or financial information. Nevertheless, it is a critical first step in starting the discussion and planning process. Click here for more information concerning our free, no-obligation exit planning assessment.
To Be Strategic or Transactional? That is the Question
The Case for Human Resources in Strategic Planning Ask most business leaders and professionals, and they will describe human resources in transactional terms. “They are the department that hires people, fires people, manages our benefit plans, and tells us how much we can pay people.” A lot to unpack there for sure, but that perception misses the mark entirely. While it is true that human resources has a lot of transactional components, it is no different from any other department or function within a business. For example, consider your Accounting Department. Arguably it is one of the most critical roles within the business as it has the power of the purse. Its transactional tasks include logging debits and credits into the general ledger, the monthly close process, development of quarterly and annual statements, or logging receipts and outflows through the AR/AP departments. Human Resources also has its share of transactional components. Someone has to enter payroll weekly or biweekly, manage open enrollment, conduct onboarding, or even manage recruitment requisitions. If that is the extent of the value leadership perceives human resources brings to the table, there is a lot they are missing. We would argue that perception is precisely what is holding a business back from achieving its fullest potential. At its core, a business is its people. Try starting a business without any people at all? You can’t do it. You know why? You are a person. If you start a business, even a company of one, say a single shingle consulting business, then a human is part of that business. Humans are the brainchild of every initiative and action internally and externally to the company. Even with all the automation being implemented today, from software to robots, people must maintain, repair, and monitor them to ensure they continue to perform as intended. There is a strategic component that is often overlooked, and it begins with strategic workforce planning. When your business develops its strategic plan, you look at a 3-to-5-year horizon. With the fast pace of change in business today, it is almost always the case that many of the roles, skills, and competencies needed to fulfill that strategic vision do not currently exist. Absent strategic workforce planning, that vision is doomed to fail from the start. Strategic HR professionals can work closely with executive management to flesh out a human capital plan according to organizational goals. Such a plan may include developing career pathing to move key talent from current roles that will be going away and into the new positions that will be created. It may also have a compensation analysis and benchmarking strategy to determine what to pay roles that don’t yet exist in your business (or even, possibly, anywhere). Plus, learning development programs to teach existing employees the very knowledge and skills they need to succeed in roles they don’t even know are coming, employee relations strategies that will drive engagement and retain key talent, and manage the impact on your people as the organization marches towards that strategic vision. None of this is transactional. All of it requires a very strategic and planned approach aligned with the organization’s strategic plan, outcomes, and goals. As with many areas of your business, there are laws and regulations involved. The EPA places restrictions on the output of carcinogens that can be expelled by smokestacks of factories or waste that can be dumped into rivers and streams. The SEC restricts actions they consider insider trading. Even your sales teams have restrictions to protect consumers from “bait-and-switch” tactics. Human resources is no different— well, maybe a little different. Employment law is a fickle beast, constantly weaving and bobbing, changing all the time. A great example is a recent court case in Minnesota (Hill v. City of Plainview) that appears to have upended decades of legal precedent about the use of disclaimer statements that prevent an Employee Handbook from being interpreted as an employment contract. To the untrained and uninitiated in the ways of human resources, it can seem that the application of employment law bends with the proverbial wind. Though it is rare when significant landmark laws are passed (i.e., Affordable Care Act, Health Insurance Portability and Accountability Act, or even the Civil Rights Act), the way many of the laws are interpreted by the courts is what drives the most significant adjustments by businesses to comply with employment law. With the right strategic HR leadership in place, appropriate plans for implementing changes to employment law can be made that will protect the organization from costly fees, fines, and government-imposed remedies. Strategic human resources leadership can also guide your business by executing transactional HR tasks and even positively impacting the bottom line. For example, there is a time in the business lifecycle when outsourcing transactional HR tasks are more cost-effective. That does not mean every aspect of human resources should get outsourced. That would be a huge mistake. It means that a strategic HR leader should guide or even lead the research, selection, and implementation of an appropriate Administrative Service Organization (ASO) or Preferred Employer Organization (PEO) to handle these transactions. That strategic HR leader should lead the selection and implementation of appropriate Learning and Development (L&D) programs, develop and direct a total rewards strategy, and even the selection and relationship management of the suitable recruiting partners to align human capital needs with the strategic workforce plan. As an economy of scale is reached internally due to headcount and revenue size, it becomes more economically feasible to bring back the human resource tasks formerly outsourced to an ASO or PEO. The organization will further benefit from greater command and control over transactional HR tasks and align better with corporate strategy. There is no magic universal breakpoint to determine when to do this. You will have to look at your business’s demands, nature of employment, industry, and geographic reach as each impacts a company differently. However, the right strategic HR leader will make the correct business case, leading to the most beneficial outcomes. It’s a new year. We have
Exit Planning: Attracting Buyers and Investors
Is it time to sell? Use this checklist to see if you’re ready to put your nursery on the market. Uncertain economic conditions in the past several months have created new opportunities for owners of businesses who are able to produce cash flow. They can cash out now. The time has not been this pregnant with opportunity for years. Why? It’s all about rates and returns. A key number considered when placing a value on a business is the interest rates available in the open market. Many times, the Treasury Bill, or T-Bill rate, is referenced. The lower the interest rate, the higher the value of a business. For some time to come, it will be hard to achieve more than 1% return from interest even in the long term. The Federal Reserve has telegraphed that for the next two years, they will keep interest rates near zero. Investors are seeking better and more reliable returns on their money. They are dissatisfied, keeping it on the sideline, earning almost nothing in interest. Right now, there is enormous liquidity in bank accounts looking for a home. Warren Buffet is reported to have two major holdings — one is Apple, and the other is cash. This legendary investor can’t seem to find a suitable place to park his money for a return. Many horticultural businesses have reliably generated predictable positive cash flow over the years. The ability to generate significant repeatable positive cash flow year in and year out is highly desired when looking at any business to buy or invest in. If you own one of these companies, it might be high time to sell. For many, it has been a great year, while others have suffered losses. In horticulture, there is a skill level a buyer or investor must have to own and operate a green-industry business, or at least be able to hire qualified expertise. That is also true in pharmacology, technology, and finance. All those hot categories are driven by superior expertise and innovation. Good people are like gold in this market. Some company owners have visions of their children taking over. Historically, it is unusual for a second generation and even less for a third generation to do as well as the founder did. The old adage “rags to riches to rags in three generations” is still true in many cases. It might be better to find a buyer and leave your grandchildren with cash and not a business to run. There are exceptions, but few. See How You Measure Up Deciding you want to sell your business or attract an investor is the first step. Once that decision is made, you need to get the company ready for a sale. A careful evaluation of the things that add or subtract from/to your business value will need review. Investors know what they are looking for in buying a business. BUSINESS CHECKLIST On a scale of 1-10, these are the key issues an investor considers in buying or putting money into a horticultural business. How does your company measure up? Score yourself: A: Size of business (compared to others in the space): 1 – Small, not a big player in the market. 10 – We are one of the largest and most successful in our space. B. Quality of the financial records: 1 – Pretty scattered and fragmented, a bit better than a shoebox full of receipt slips. 10 – All our records are computerized, complete, and reviewed; our CFO keeps us well informed. C. Positive cash flow and potential increases: 1 – Not generating significant cash flow or profit. 10 – We are a cash cow; lots of room to grow and even double our net revenues. D. Need for capital investment: 1 – Will need significant upgrades; will need capital soon. 10 – All our equipment and infrastructure are up to date and paid off; no needs on the horizon. E. Credit line requirements: 1 – We use a large credit line and sometimes have difficulty paying it back sometimes. 10 – We don’t need a credit line, and have significant cash resources to back up. F. Owner centric – management team: 1 – This company can’t exist without me there every day; only I know how it works. I don’t have anyone to back me up when I am sick. If I died, this company would die. 10 – If I never showed up again, it will work just fine. This is nearly a passive investment. I have great people. If I retired tomorrow, I have a team who can pick up where I left off and maybe make it better. G. Workforce quality and access to labor as needed: 1 – We just can’t find anyone who wants to work anymore. 10 – There are a lot of good people in our area. Hiring is easy because people want to work for a company like ours. H. Customer concentration and loyalty: 1 – The bulk of our business comes from a handful of steady customers. There are a few that buy once and never come back again. 10 – Our top 10 customers only make upon 5% of our total revenue. Losing a customer is not a death sentence. Our customers see us as an essential primary vendor. They come back again and again. I. Competition in the market for the dollar: 1 – Lots of aggressive competition; we have to discount deep to make deals. 10 – We are the competition. In our space, we make the rules. J. Compliance with environmental, labor, immigration, OSHA, and EPA regulations: 1 – We fly under the radar and keep the feds at bay. 10 – We try to make sure we are never vulnerable to the violation of any regulations that could shut us down. Obviously, no company on the planet can score a 10 in every category, but the closer to 100% in each of these important areas, the more valuable your company will be in the eyes of a buyer. You
