Category Archives: compensation

Employers Worry About Pay-Ratio Perceptions

Results of a recent poll by New York-based Towers Watson show it’s not the mechanics of complying with the new CEO pay-ratio-101366398 -- money on scaledisclosure rule — such as data gathering, getting the right sampling, identifying the median employee and the like — that worries employers the most.

It’s how they’re going to explain the pay-setting process to their employees and how their pay ratio will look compared to other companies’ ratios. This according to the almost 600 corporate compensation professionals who weighed in on the Towers Watson Webcast Poll on CEO Pay Ratio Disclosure Rule.

The communication issues loom especially large. Half the respondents cite that issue among their top concerns. Also, how employees will react when they start comparing their compensation to their CEO’s and to the median employees’ is keeping many a top business leader up at night.

For a refresher, this New York Times piece offers some pretty complete details, history and analysis of the 3-to-2 vote on Aug. 5 by the Securities and Exchange Commission that will require most public companies, starting in 2017, to regularly reveal the ratio of their chief executive’s pay to that of employees.

Some of the controversy is also spelled out in the piece:

“Representatives of corporations were quick to assail the new rule … saying that it was misleading, costly to put into practice and intended to shame companies into paying executives less.

“But the ratio, cropping up every year in audited financial statements, could stoke and perhaps even inform a debate over income inequality that has intensified in recent years as the wages of top earners have grown far more quickly than anyone else’s.”

What’s disconcerting at this point isn’t just how this ratio will be perceived, but how few employers really know what they need to do to comply. In the poll mentioned above, only 17 percent of employers agree they understand all of the costs, effort and data that will be needed while almost two-thirds (65 percent) disagree.

In an earlier Towers Watson survey of 170 U.S. compensation professionals, Towers Watson Talent Management and Rewards Pulse Survey, only 48 percent agree that their companies had identified the data they’ll need and know how they will capture it to calculate the pay ratio, while even fewer (41 percent) say they’re prepared for how the disclosure will affect employee perceptions of their pay.

And if you think time is on your side and you’ll get it right with many months to spare, think again, says Steve Seelig, senior regulatory adviser for executive compensation at Towers Watson.

It’s “not too early for HR to begin thinking about how well its company communicates with employees, and to then set a strategy for improving its message,” he says, adding to:

“Keep in mind that, when the disclosure comes out, workers below the median will [immediately start to] wonder what it takes to get them to that level, and why their company is not paying them more. Those employees at or above the median will naturally wonder whether their pay levels are determined fairly, or how the level of CEO pay might be hindering their pay increases. Workers also will be looking at companies across the street and pondering if their median pay is higher, and whether it might be a good idea to look around.

“Human resource executives should [be proactive and] view the pay ratio disclosure as a chance to make sure their employees understand [their company’s] pay-value proposition. Companies that get this communication effort right will find they actually have strengthened their relationship with the workforce, with better productivity and reduced turnover as likely outcomes.”

Those that don’t get it right shouldn’t be surprised when the opposite occurs.

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Pushing to Repeal the CEO Pay-Ratio Rule

WorldatWork is the latest organization to voice its objection to the Securities and Exchange Commission’s CEO pay-ratio rule.

Cara Woodson Welch, vice president of external affairs and practice leadership forWorldatWork, a nonprofit human resources association and compensation authority issued the following statement today encouraging House Financial Services Committee members to pass H.R. 414 the Burdensome Data Collection Relief Act which repeals the recently finalized U.S. Securities and Exchange Commission’s rules implementing the CEO pay-ratio requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank):

“Advancing this legislation and relieving companies from the disclosure requirements which have now been finalized by the SEC is sorely needed,” she said.

“Now that the rules are final, compensation and executive compensation practitioners are faced with the daunting task of trying to identify their median employee in order to comply with the CEO pay-ratio rules.

This process, she says, will be extraordinarily expensive, time consuming and burdensome for companies and will fail to result in any meaningful benefit for shareholders and potential investors.

“Once published, the ratio itself will require significant explanation to truly understand and it’s unlikely that shareholders, potential investors, members of the public or the media will take the time necessary to fully comprehend the methodology used by each company to reach their median employee calculation.

“The best solution for avoiding this ill-conceived requirement is full repeal. WorldatWork strongly supports H.R. 414 and respectfully asks members of the committee to pass this legislation and move it forward to the full House for consideration.”

WorldatWork submitted formal comments in 2013 and on July 6, to the SEC on the agency’s proposed regulations implementing the CEO pay-ratio requirement of Dodd-Frank.

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Bonuses for Low Performers

“So, Mr. Employee, your performance this year has failed to meet expectations. And … here’s your bonus.”

bonus failThat’s right — about three in 10 (30 percent) of U.S. employers plan to give bonuses to employees who fail to meet expectations (the lowest performance ranking possible) this year, according to Towers Watson’s just-released Talent Management and Rewards Pulse Survey.  Meanwhile, these companies are once again failing to fully fund their employee bonus pools and say they continue to struggle to attract and retain “critical skill” employees.

“The fact that some companies continue to deliver substantial bonuses to weak performers raises questions as to whether they are investing their bonus dollars as effectively as possible or truly holding workers accountable for performance,” says Laura Sejen, managing director at TW.

It should be noted, however, that the poor performers don’t necessarily get the same bonuses as the  high performers. While some of the companies give payouts to all employees regardless of performance, others give their lowest-ranking employees only 65 percent of their target payout, while the high performers tend to receive bonuses of about 19 percent above target, according to the survey, which queried 170 large and mid-sized companies from various industries.

The companies’ average projected bonus funding for the current year is only 89 percent of target — this marks the fifth year in a row that U.S. employers have not fully funded their bonus pools, according to TW.

More than half the companies (52 percent) say they’re having trouble holding on to critical-skill employees, compared to 41 percent in 2013. Meanwhile, 66 percent report problems attracting critical-skill employees.

“With hiring activity on the increase and employees more receptive to changing jobs, there is greater competition for talent, making it more difficult for companies to keep their most-valued employees,” says Sejen.

Employers also appear to be daunted by President Obama’s recent proposed changes to the Fair Labor Standards Act’s overtime rules, with 50 percent saying the changes will have a significant impact on their organizations and only 47 percent prepared to make the changes.

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DOL Mandates Pay Transparency

moneyOn the heels of President Obama’s recent executive order requiring federal contractors to provide at least seven days of paid sick leave, the Department of Labor’s Office of Federal Contract Compliance Programs today issued a final rule banning federal contractors from having policies that discourage their employees from discussing, disclosing or inquiring about their own pay or that of their co-workers.

The final rule implements Executive Order 13665, signed by the president last year, which stems from the Lily Ledbetter Fair Pay Act.

“It is a basic tenet of workplace justice that people be able to exchange information, share concerns and stand up together for their rights,” said DOL Secretary Thomas Perez in a statement. “But too many women across the country are in the same situation: They don’t know how much they make compared to their male counterparts, and they are afraid to ask.”

A “culture of secrecy” around pay keeps women from knowing they are underpaid and makes it difficult to enforce equal pay laws, according to the DOL. Women still earn only 23 cents for every dollar earned by male employees, the agency says.

The rule allows job applicants and employees of federal contractors and subcontractors to file a discrimination complaint with the OFCCP if they believe that their employer fired or otherwise discriminated against them for discussing, inquiring about or disclosing their own compensation or that of others.

Pay transparency benefits companies as well as employees, said OFCCP Director Patricia Shiu.

“Indeed, forward-thinking companies that have embraced greater transparency find that it benefits them and their workforce by helping them attract and retain talented workers,” she said.

The rule will go into effect 120 days after its publication in the Federal Register.

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CEO Generously Delivers to Workers

Why not end the week with a brief but upbeat story about a CEO who isn’t reluctant to share …

ThinkstockPhotos-480903116Stories appearing on CNN Money and Entrepreneur websites this week reported that Nevzat Aydin, co-founder and CEO of Yemeksepeti, a Turkish food delivery company he helped launch 15 years ago, recently decided to share a huge chunk of the proceeds generated from his company’s $589 million sale to Germany’s Delivery Hero with 114 of his employees. (The firm employs a total 370 employees.)

CNN Money reported the employees received an impressive $237 million from the sale. According to the story, “Aydin’s employees are paid between $1,000 and $2,000 a month. That means the average payout is worth roughly 150 times their monthly wage, and tops the average Wall Street bonus for 2014 by $65,000.”

Aydin told CNN Money that “Yemeksepeti’s success story did not happen overnight and many people participated in this journey with their hard work and talent. I believe in teamwork and I believe success is much more enjoyable and glorious when shared with the rest of the team.”

In deciding how to allocate the bonuses,” the Entreprenuer website reported, “Aydin factored in how long they’d worked for the company (requiring two years, minimum) along with the individual’s job performance and their ‘future potential in the company.’ ”

The story was first reported by Turkish newspaper Hurriet.

CNN Money noted that the bonus plan was decided upon prior to the sale, but that the acquirer, Delivery Hero, supported the move.


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HR, Training and the ‘Gig’ Economy

New survey data finds few organizations are investing in their employees’ training and development these days, and I’m beginning to think the “gig economy” may have something to do with it.

Saba, a global provider of talent management solutions, just released additional findings from its spring Global Leadership Survey, in which it found that a mere 13 percent of companies worldwide invest in talent-management programs to further employees’ growth and career path.

For those companies that are providing training, only 35 percent are offering career development opportunities online. And, according Saba, the majority of employees (57 percent) are simply getting their training from “on the job” experience.

“Understandably, companies are focused on bottom line growth and results,” said Emily He, Chief Marketing Officer at Saba. “Unfortunately, many organizations don’t consider the career development of their employees a part of that growth equation — but they should. ”

However, a piece in today’s New York Times titled “Rising Economic Insecurity Tied to Decades-Long Trend in Employment Practices,” shows how the rise of the “gig economy”  (think Uber or Lyft, for examples) is changing all sorts of expectations — including compensation and training — on both the employers’ and workers’ sides.

According to the NYT piece, tens of millions of Americans are now involved in some form of freelancing, contracting, temping or outsourcing work:

The number for the category of jobs mostly performed by part-time freelancers or part-time independent contractors, according to Economic Modeling Specialists Intl., a labor market analytics firm, grew to 32 million from just over 20 million between 2001 and 2014, rising to almost 18 percent of all jobs. Surveys, including one by the advisory firm Staffing Industry Analysts of nearly 200 large companies, point to similar changes.

So perhaps it’s no wonder that companies are devoting less time to training programs when they only expect to use such workers for short-term projects:

Since the early 1990s, as technology has made it far easier for companies to outsource work, that trend has evolved beyond what anyone imagined: Companies began to see themselves as thin, Uber-like slivers standing between customers on one side and their work forces on the other.

The piece also includes David Weil’s — who runs the Wage and Hour Division of the United States Labor Department — description from his recent book, The Fissured Workplace, of how investors and management gurus began insisting that companies pare down and focus on what came to be known as their “core competencies,” such as developing new goods and services and marketing them.

Far-flung business units were sold off. Many other activities — beginning with human resources and then spreading to customer service and information technology — could be outsourced. The corporate headquarters would coordinate among the outsourced workers and monitor their performance.

“In the past, firms overstaffed and offered workers stable hours,” said Susan N. Houseman, a labor economist at the W. E. Upjohn Institute for Employment Research. “All of these new staffing models mean shifting risk onto workers, making work less secure.”

The NYT piece notes that, while only representing a limited corner of the nation’s approximately $17.5 trillion economy, other types of workers are watching with trepidation how organizations are moving toward the “gig economy” model.


…[E]ven many full-time employees share an underlying anxiety that is a result, according to the sociologist Arne L. Kalleberg, author of Good Jobs, Bad Jobs, of the severing of the “psychological contract between employers and employees in which stability and security were exchanged for loyalty and hard work.”

While outsourcing and “gigging” jobs may cut organizations’ short-term costs in some areas (such as training and development efforts)  Saba’s He nonetheless emphasizes the need for companies to invest in training their workforce if they expect to succeed in the long run:

“Not only is talent management and training an integral part of workforce development, it’s proven to be a driving factor in the long-term growth and success of an organization.”

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Explaining the Unpaid Internship Enigma

judgeIf an intern is for all intents and purposes a regular employee, then should he or she still be considered an intern?

The U.S. Court of Appeals for the Second Circuit recently attempted to answer this existential question, or at least help clear up the confusion over whether interns should be treated as employees—and paid as such.

On July 2, the aforementioned appeals court—which covers New York, Connecticut and Vermont—ruled in the case of Glatt v. Fox Searchlight Pictures Inc., in which plaintiffs Eric Glatt and Alexander Footman claimed that Fox Searchlight and Fox Entertainment Group violated the Fair Labor Standards Act and New York Labor Law by failing to pay them as employees during their internships, as required by FLSA and NYLL minimum wage and overtime provisions.

In June 2013, Glatt and Footman—who interned on the set of the 2010 Fox Searchlight film Black Swan—were granted partial summary judgment by the U.S. District Court for the Southern District of New York, which found that Glatt and Footman were indeed employees under the Fair Labor Standards Act and New York Labor Law.

In reaching its decision, the court relied on a version of the Labor Department’s six-factor test to conclude the interns had been improperly classified as unpaid interns as opposed to employees. At the time, the DOL filed an amicus brief imploring the appeals court to adhere to the department’s test requirement that each of these factors—the internship is similar to training that would be received in an educational environment and the intern does not displace regular employees, for instance—is met before considering an internship unpaid.

The Second Circuit Appeals Court, however, recently opted to “decline [the] DOL’s invitation,” according to court documents, in which the appeals court described the test as “too rigid for our precedent to withstand.”

Rather, the court agreed with the defendants’ assertion that “the proper question is whether the intern or the employer is the primary beneficiary of the relationship.” To conduct the “primary beneficiary” test, the court focused on two issues—what the intern receives in exchange for his or her work and “the economic reality as it exists between the intern and the employer.”

In sending the case back to district court for further proceedings, the appeals court decision “delineates when and under what circumstances an intern must be treated—and more importantly, paid—like a regular employee,” says Mark Goldstein, a New York-based attorney and member of Reed Smith’s labor and employment group.

By making this distinction, the Second Circuit addressed an issue that “had been a thorn in employers’ sides for the past several years,” says Goldstein.

The test used by the Second Circuit Appeals Court differs from the DOL’s “all-or-nothing” approach, which essentially required that an intern be treated as an employee “every time the employer derived a benefit from the intern’s work,” Goldstein told HRE.

Under this new standard, an intern is not categorized as an employee “simply because he or she performs work for the company, or because the company derives a benefit from the intern’s work, as the DOL had attempted to argue,” he says.

Moreover, the Second Circuit “appears to have made it much more difficult for the plaintiff’s bar to obtain class and collective action certification in lawsuits brought by former interns,” in ruling that the question of an intern’s employment status is a “highly individualized inquiry,” says Goldstein.

“This alone may spell the end of the recent barrage of unpaid intern lawsuits.”

Even in light of the court’s employer-friendly decision, though, now would be a good time to assess internship programs “to ensure that such programs satisfy all applicable judicial and regulatory guidance,” says Goldstein.

“Unpaid internship programs still pose risks—including not only potential liability for wage and hour violations, but also potential tax- and benefits-related penalties—that must be weighed before an internship program is implemented.”

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Clawback Provisions Getting Sharper

That’s the latest headline to emerge from Mercer’s most recent Financial Services Executive Compensation Snapshot Survey, which shows that 78 percent of companies are making changes to their executive pay programs as a result of difficult market conditions.

According to Mercer, the most popular changes planned are the strengthening of clawback conditions (47 percent), strengthening the link between performance management and compensation (44 percent) and increasing the use of non-financial measures (31 percent) in reviewing performance.

The survey reviewed the pay practices of 55 global financial services companies — banks, insurers and other financial services companies — based in 15 major countries in Europe, North America and Asia.

The report is intended to provide an update on key global changes and practices in financial services compensation programs, according to Mercer, and is designed to capture the latest changes or anticipated changes to compensation programs among major financial services companies.

According to Vicki Elliott, a senior partner at Mercer:

“Financial services HR teams and remuneration committees are being challenged to find ways to structure pay to engage, motivate and retain high-performing staff while being mindful of regulatory requirements and public pressure.

“Since 2008,” she says, “we’ve seen a steady change in approach as companies actively tie rewards more closely to risk and multi-year performance.”

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Female Managers: Change Agents or Just Cogs?

Do female managers act in ways that narrow, preserve or even widen the gender wage gap?

That was the essential question for Sameer B. Srivastava, an assistant professor,  and Eliot L. Sherman, a doctoral student, both of the Haas School of Business at the University of California, Berkeley, and their answer might just surprise you:

“We find conditional support for the cogs-in-the-machine perspective: In the subsample of high performing supervisors and low performing employees, women who switched from a male to a female supervisor had a lower salary in the following year than men who made the same switch. “

Their research, “Agents of Change or Cogs in the Machine? Re-examining the Influence of Female Managers on the Gender Wage Gap,” is featured in the latest issue of the American Journal of Sociology.

The study examined how the salaries of both male and female employees changed when they switched from reporting to a male manager to reporting to a female manager (and vice versa).

Previous research suggested that female managers can be “agents of change” who act in ways that reduce the gender wage gap, but this study didn’t support that supposition.

In fact, a subset of switchers—low-performing women who switched to working for a high-performing female supervisor—fared worse financially, not better, than their male colleagues making a comparable switch.

“A high-performing woman might, for example, worry about being devalued because of her association with a low-performing female subordinate,” says Srivastava. “This effect can occur when people see themselves as part of a valuable group but worry that others won’t see them that way. This might lead her to undervalue the subordinate’s contributions.”

Srivastava and Sherman analyzed 1,701 full-time employees in the U.S. who worked for a leading firm in the information services industry between 2005 and 2009. The researchers had access to complete employment data: salary, reporting structure, annual performance evaluations, and demographic information. For example, the average age of employees was 43; average length of employment was 8.85 years; and merit increases ranged from 3 percent to 5 percent.

The authors conclude that it may be wishful thinking to assume that the gender wage gap will automatically close as more and more women take management positions.

For fundamental change to actually occur, the authors say, the increasing number of women managers must be matched by an organizational culture that is committed to gender equality, fostering initiatives to reduce tokenism, and encouraging women to positively identify with their gender in the workplace.

So, HR leaders, I pose this question to you: Is your organization training its female managers to become agents of change or just cogs in the machine?

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Are ‘Significant’ Changes to Comp Disclosures Coming?

If you believe the good folks over at Towers Watson, then the answer to that question in the headline is a yes. (A qualified yes, but, a yes nonetheless.)

One in three U.S. public companies expect to significantly change their approach to disclosing information on how they reward their executives in the wake of the Securities and Exchange Commission’s proposed pay-for-performance disclosure rules, according to a poll by global professional services company Towers Watson.

The poll also found that a majority of companies are likely to provide additional information and analysis that go beyond what the proposed rules will require.

In case you forgot, back in April, the SEC issued proposed rules to implement the Dodd-Frank provisions that require companies to disclose the relationship between executive compensation actually paid and the company’s financial performance.

The proposal would require company proxy statements to include a pay-versus-performance table and an explanation of the relationship between pay and performance. The Towers Watson poll of 453 corporate executives and compensation professionals was conducted June 4, during Towers Watson’s national webcast on the proposed rules.

According to the poll, 33 percent of respondents expect the pay-for-performance disclosure rule will fundamentally change their approach to executive pay disclosure. More than half of the respondents (55 percent) expect to do more than the minimum that would be required under the SEC proposal: 37 percent plan to disclose additional information and analyses to help tell their pay-for-performance story, while 18 percent will perform and may disclose additional pay-for-performance analyses.

“With the SEC rules on the table, companies can carefully evaluate how they tell their pay-for-performance story to shareholders,” said Steve Kline, a director in Towers Watson’s Executive Compensation consulting group and the practice’s pay-for-performance analytics team leader. “The fact that many companies expect to provide more information than the rules require is encouraging, although for many, the real challenge will be deciding the best way to present this information in their proxies.”

The poll also found that nearly half of the companies (46%) have been waiting for the rules to be issued and now expect to make some changes to their Compensation Discussion and Analysis (CD&A), while one in 10 view this as an opportunity to revamp their CD&A significantly. Additionally, roughly half of respondents (51%) anticipate using the same peer group for their pay-versus-performance disclosure that they use for benchmarking their total compensation.

“While not surprising given the language of the Dodd-Frank requirement, the fact that the SEC proposal defines performance in this disclosure as total shareholder return will put even more shareholder focus on this measure,” Kline said. “However, TSR is only a part of the pay-for-performance story. Companies will want to think carefully about the broader performance picture and how best to help shareholders understand how the pay programs support long-term value creation.”

Indeed, HR leaders will need to be a big part of that thought process around the “broader performance picture” in order to set the right framework to ensure compliance with these proposed changes.

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