Author: ERI

When was the Last Time You Adjusted Your Salary Structures for Compensation Planning?

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Get ready for 2011 merit increases and compensation planning. Historically, at this time of the year, most compensation professionals on a fiscal calendar planning cycle begin “kicking off” their communications and planning calendars. Many anticipate this year to have the highest merit increases since the 2007 financial crisis, after “tightening the belts” the past few years.

Two things will be required to have an effective compensation planning cycle for 2011: Job Evaluations and Salary Structure Adjustments. Since workers are doing more with less, their jobs have likely changed, creating new hybrid jobs. Job evaluations to re-validate core benchmark jobs serve as a foundation for determining the salary structure adjustments. Unfortunately, there are no shortcuts here. Let’s take, for example, a retail organization in West Lafayette, Indiana, named Jenny Jeans. Two benchmark jobs, Warehouse Worker and Merchandise Marker, are representative of 15% of the company’s workforce and are in the same salary grade. The Compensation Analyst conducts a job analysis doing an on-site visit and concludes these two jobs have melded together to become a hybrid job subsequent to job losses experienced at the organization and is now titled Warehouse Merchandise Specialist. The new hybrid job responsibilities are weighted 40% Merchandise Marker and 60% Warehouse Worker.

Now, we want to market-price the core benchmark jobs (Cashier, Packer, and Warehouse Merchandise Specialist) in this salary grade and determine the adjustment to this grade within Jenny Jeans’ overall salary structure. To do this you will need to have access to recent salary survey data. Once you have the external data, market-price the benchmark jobs, calculate the differential between the market data and the actual internal pay rates and determine the adjustment to the midpoint or control point of the salary grade that is aligned with overall business objective and strategy. (Note, the market data has been adjusted to the January 2, 2012, effective planning date for the merit increases.) The minimum and maximum of the grade should be adjusted keeping the current spread (unless you are considering redesigning the overall structure, which is beyond the scope of this blog).

This process will need to be repeated for each salary grade in your salary structure. If you have any questions about the tools used in these explanations, please contact ERI at 800.627.3697.

New York State to Review Nonprofit Executive Salaries

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New York Governor Andrew M. Cuomo recently announced the creation of a task force to investigate executive compensation of nonprofit organizations that receive taxpayer subsidies from the state.  An article in The New York Times triggered interest from the state, highlighting salaries at nonprofit organizations that provide Medicaid-financed services to developmentally disabled New Yorkers. Using comparable salary data from ERI Economic Research Institute, research found that the Young Adult Institute was paying the two brothers, who led the organization since the 1970s, far in excess of what other similar nonprofits paid.  In fact, Philip and Joel Levy each received close to $1 million a year at the peak of their earnings.

The Times article included a list of executives of other providers of Medicaid-financed services to developmentally disabled people who were paid more than $500,000, most considerably above the average chief executive salary for similarly-sized nonprofit groups in the state.

While there are no state rules governing executive or administrative compensation at groups that receive state subsidies, the task force will focus on auditing current compensation levels and recommending rules to ensure that money is not wasted on excessive salaries and compensation. Some states, like New Jersey, New Hampshire, and Vermont, have considered salary limits and even caps – say, $250,000 – for nonprofit contractors, but that does not take into account what is reasonable pay for similar jobs in similar organizations in similar locations.  One size does not fit all, and it is important to look at comparable data to really determine what is reasonable compensation.  That is what the IRS expects a nonprofit to do when setting executive compensation. See the IRS Form 990 instructions for more information on what IRS wants.

Doug Sauer, chief executive of the New York Council of Nonprofits, raised a valid point in response.  He suggested that the governor’s task force should also examine the compensation of executives at for-profit companies working under state contracts in other areas of government.

One nearby state – Pennsylvania – has taken an interesting approach that perhaps New York State should consider.  Before a state grant is given by the Pennsylvania Department of Transportation, documentation of comparative executive salaries is required to ensure that the compensation is not excessive.  The state actually requires the use of ERI’s Executive Compensation Assessor to create an analysis that is submitted as a part of the grant application to document that executive salaries are justified by comparable data.

Requiring the submission of comparable salary data for both nonprofit and for-profit government contractors before the contracts are awarded could help ensure that tax dollars are spent to provide services rather than enrich the executives from either sector.  Let’s see if the New York State task force comes up with such a sensible and practical recommendation!

New ERI White Paper

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ERI Economic Research Institute’s recent white paper, “Cost-of-Living Data and Models: Credible? Defensible? Robust?” by Marillyn Tefft, ERI Relocation Assessor Product Manager, is available for download.

Tefft explores “What matters in a cost-of-living model?” using various examples, complete with actual Relocation Assessor reports.

“It is not uncommon for mobility professionals to struggle with justifying the cost-of-livingadjustments/payments offered to a transferee in a relocation package,” writes Tefft. “Each part of the modeling process should be based on sound economic theory and use widely-accepted estimating techniques.”

Can the Creativity of Financial Disclosures be Applied to Executive Compensation Disclosures?

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As part of ERI’s on-going data collection efforts for executive compensation, we came across the annual report filed by a company in the United Kingdom, Land Securities. While reviewing the filing for compensation data, the data researchers felt as though they were reading someone’s personal copy of the annual report with “hand-written” comments. The summary pages of the annual reports are mocked up almost like a white board, helping the readers “connect the dots” easily through the presentation.

Is it possible to be more creative with how executive compensation is disclosed? An argument can be made that if CFOs can simplify the “line of sight” to the business results in their disclosures, the compensation committee should be able to do so as well. What if Land Securities’ example was applied to executive compensation disclosures? Would it help the Board explain to shareholders the recommendations they put forward for their top executives?

Proxy disclosures report the required tabular information, yet much of the critical information is footnoted to explain the data. More footnotes do not necessarily equal transparency. An obstacle may historically have been the complexity of the executive compensation programs; however, we are seeing fundamental changes in executive pay packages to improve line-of-sight by replacing discretionary plans with pay-for-performance plans. With the increased rules and regulations governing proxy disclosures, compensation committees and their resources (consultants and internal functional staff members) are rethinking how they convey their recommendations.

For more information regarding Land Securities’ annual report, click here. Visit www.erieri.com to learn more about our executive compensation analytics and tools.

ERI Salary Surveys Rolls Out 2011 Collection

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ERI Salary Surveys has released its largest collection of industry-specific and job function surveys, more than 170 in all, for organizations researching market-based compensation data. Each survey reports employer-provided data derived from survey participants, digitized public records, and ERI Economic Research Institute’s patented online, interactive salary surveys and Assessor Series databases.

Salary information for each job title represents actual data points—no attempt is made to alter the data as collected, reported, and graphically displayed other than to normalize collected compensation amounts to a common date.

ERI Salary Surveys, which has been conducting surveys since 1967, offers electronic and hardcopy versions of its reports. Organizations seeking benchmark job comparisons have the opportunity to choose surveys by the size of their organization (large and small) and by location (state or national basis). In addition to reporting total annual direct compensation for each benchmark job, each survey identifies means, medians, and percentiles, as well as incentive and variable pay, and provides full job descriptions.

From All Manufacturing and Food and Beverage to the newest addition, Aerospace, ERI Salary Surveys covers a wide range of industries and job functions, starting at $244.50 per survey.

Surveys are available for online purchase at www.salary-surveys.eri.com. Participation in 2012 surveys opens October 1, 2011. Organizations that contribute information receive a 50 percent discount on the survey purchased and a complimentary copy of the Executive Summary. Participation is not required to purchase surveys.

ERI Salary Surveys also offers two surveys exclusively detailing employee benefits. The first, 2011 Benefits in Nonprofit Organizations identifies trends in nonprofit medical and dental coverage, as well as retirement plans and paid-leave options, among other benefits. The second, 2011 Health Care Benefits Benchmarking Surveycompares health care benefits among the nonprofit, for-profit, and government sectors.

Nonprofit Executive Compensation Under Scrutiny

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With increased scrutiny from the IRS, various state regulators, the media, and even donors and funders, nonprofits need to be able to show that their executive compensation is reasonable. The newly-released 2011 All Nonprofits Salary Survey published by ERI Salary Surveys provides reliable comparable data for 20 executive positions, as well as 151 non-management benchmark jobs, accompanied by verifying source comparisons used by the IRS, courts, and thousands of ERI Economic Research Institute Assessor Series subscribers.

The survey reports market-based pay data covering approximately 12,000 incumbents in nonprofit organizations across the United States. Unique participant data is complemented by two of four distinct salary survey data collections for either management or non-management families. The result is a comprehensive analysis of up to three verified sources for a particular benchmark job. Sources include ERI’s exclusively licensed Executive Compensation Assessor and Salary Assessor (both with for-profit data), along with ERI’s Nonprofit Comparables Assessor and Tax-Exempt Survey databases.

The 2011 All Nonprofits Salary Survey affords tax-exempt organizations comparable data to aid compliance with reporting executive salaries on IRS Form 990. Information for each job title includes a job description and data for total compensation, averages, percentile ranges, variable pay, and more. Breakouts of the survey are available by the size of the organization, as well as by state. ERI Salary Surveys also provides sector-specific nonprofit surveys ranging from arts, culture and humanities, to social science services and research, for organizations both large and small.

In addition to compensation data, ERI Salary Surveys offers two surveys exclusively detailing employee benefits. The first, 2011 Benefits in Nonprofit Organizations identifies trends in nonprofit medical and dental coverage, as well as retirement plans and paid-leave options, among other benefits. The second, 2011 Health Care Benefits Benchmarking Survey compares health care benefits among the nonprofit, for-profit, and government sectors.

Nonprofit surveys are available for online purchase at www.salary-surveys.eri.com. Participation in 2012 surveys opens October 1, 2011. Organizations that contribute information receive a 50 percent discount on the survey purchased and a complimentary copy of the Executive Summary. Participation is not required to purchase surveys.

New ERI White Paper

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ERI Economic Research Institute’s recent white paper, “Five Technical Aspects of Compensation Data” by Jonas Johnson, Senior Researcher, is available for download via www.erieri.com.

In this white paper, Johnson explores the curvilinear nature of data, outliers, wage fluctuation, accurately aging data, and heteroscedasticity.

“Compensation professionals should consider these factors prior to setting pay practices,” writes Johnson. “Ignoring them could result in less than optimal data analyses, potentially resulting in a loss of talent or overpayment for labor.”

How is LinkedIn’s CEO, Executive Compensation Impacted by the IPO?

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The business-to-business (B2B) social media networking site, LinkedIn, had its initial public offering on May 19, 2011. There has been much media coverage of LinkedIn’s IPO, and we thought it would be of interest to understand the executive compensation package of LinkedIn’s CEO, Jeff Weiner.

Annual Cash Compensation:

According to the Prospectus filed May 18, 2011, by Linkedin, prior to its IPO, Jeff Weiner’s salary in 2010 was $250,000, and in April 2011, it was increased to $480,000. This represents a 92% increase. For 2010 business results, a 140.7% cash incentive multiplier was achieved, and Weiner’s non-equity incentive payout was $290,194 in 2011. This payout represents 116% of his $250,000 base salary where the target payout was set at 60%. If they achieve the same or better results for 2011, Weiner can expect a total annualized cash compensation of $1,036,800.

Equity Compensation:

Upon being hired, Jeff Weiner was granted 3,844,512 shares at an exercise price per share of $2.32, which have a monthly vesting schedule over a 4-year period. As of December 31, 2010, he had 3,521,237 outstanding shares, of which 1,598,982 were vested. Subsequent to the IPO, Weiner sold 115,335 shares at $41.85 per share on May 24, 2011, netting him over $3.7 million. (See Form-4 filing for details http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=7639933.)

Unless Jeff Weiner cashes in more options, he will realize over $4.7M of compensation income in the 12-month period since the IPO. Given the current stock price $103.87, as of this posting, and depending on whether LinkedIn institutes stock ownership guidelines for their named executive officer, we can anticipate Mr. Weiner’s compensation income to increase significantly.  Let’s take a scenario where remaining stock options vest and are exercised. The possible gain would potentially calculated as follows:

  •   (Current stock price MINUS Exercise price) TIMES # of stock option = Net Gain
  •   ($103.87-$2.32) * 3,521,237 = $357.6M

When executive compensation packages are reviewed for competitiveness or within context of relative comparison, business practitioners will often review the tenure of the incumbent (i.e., recent hires, long tenured etc.)  LinkedIn’s CEO start-up/pre-IPO compensation package was highly leveraged, comprised mostly of equity, which is typical given the business cycle of the organization as they tend to be “cash strapped”.  In an IPO environment, the true compensation value the equity components are more ascertainable as illustrated in our example.

For more information on executive compensation analytics and tools, visit www.erieri.com.

Geographic Pay for Executives

Geographic Pay for Executives

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Pay varies by geographic location for most jobs. Executive positions, however, tend to be treated differently for a variety of reasons.

Salaries for the same job have different competitive levels from one city to the next. The magnitude of the differential from a national norm also varies by income level, with entry-level positions showing the greatest sensitivity to local practices, particularly in places that override the federal minimum wage. Low-income workers are typically tied to jobs close to their homes. Professionals and managers tend to be paid on a regional basis since they are more apt to commute farther or to be recruited away by nearby rival employers; that drives up the area rate to a higher, more stable equilibrium point for their jobs. Directors and top executives operate in a national (if not international) job market for their talents. Local competitive market conditions for jobs tend to create pressures for companies to pay whatever is right for that particular place, but many employers hold their executives to a different (usually national) common standard rate.

Location does make a difference, even in top executive compensation. Researchers who have studied this for over forty years (1) see geographic pay differentials continue up into top executive levels. All else being equal, executive pay still varies by geographic location. Chief executive officers at same-sized hospitals in California earned 25% more than their peers in Indiana, for example.

Nevertheless, there are many reasons why employers don’t pay all jobs according to the local pay pattern.

In the federal government, jobs paid according to the General Schedule can earn localized pay, but the geographic variances stop at the Senior Executive Service and the Executive Schedule levels. Private employers do much of the same. If a company has separate pay by location, then the geographic pay differences are usually greatest at the lowest levels where the entry level jobs are affected by the minimum market-clearing wage rate. Employer pay practice variances tend to change at different job levels, and typically the differentials taper off and stop at some level.

The rationale is, if recruiting targets the national labor market for a particular job level, then national pay scales should be used. If recruiting is from local or regional labor markets for a particular job level, then local or regional pay scales should be used. Also, the total rewards offering for executives tend to make up for these geographic differentials with another form of long-term focused programs.

Even though the actual proofs of geographic pay differentials extending through CEO levels beyond $500,000 are indisputable (2), most employers don’t choose to capture the reality with a separate offset to their top executive salary structures as they do for lower levels. Executive compensation packages are so large and complex that the influence of any one component variable can be hidden or overshadowed by many others. Nevertheless, the reality remains true even at firms of identical size in the same industry (e.g., executives working in Manhattan earn a lot more than they do in central Kansas).  Most organizations find it more appropriate to exclude senior executive jobs from geographical pay differential programs than to call attention to an additional premium added to jobs already paid premium rates.

1 D. Thomsen, “Geographic Differentials in Salaries in the United States,” Personnel Journal (Sept. 1974): 670

2 D. Thomsen, ERI Update, (Vol. 76, Oct 2006): pg. 3, bottom

Earnings Quality and Executive Compensation, Any Correlation?

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Every year industry market analysts evaluate earnings quality. Let’s review what it means to conduct a financial assessment for quality earnings in the context of executive compensation disclosures. Earnings quality is the degree of reliability in reported earnings to reflect a company’s true earnings and to help predict future earnings. What analysts and investors are trying to ascertain from reviewing earnings quality is the company’s sustainable revenues, which is critical input in determining a company’s market valuation and overall long-term organization effectiveness.

Some variables companies use to measure earning quality are:

  • Margins, gross or net.
  • Capital expenditures and R&D relative to industry/peer group.
  • Sales and administrative expenses relative to sales.
  • Significant change in effective tax rate.
  • Cost structure relative to industry/peer group.
  • Change in labor force.

The underlying framework to assess earnings quality is demarcating the earnings capabilities of the company as an ongoing business concern from outliers like one-time charges and acquisition/divestiture issues. For companies that tend to use conservative accounting practices, there’s a bias toward higher earnings quality. Whirlpool and GE beat market expectations for revenue growth this year. When you take a closer look as to how this growth was achieved, it is attributed to energy tax credits, not organic growth in operating profit or a basis in a sustainable revenue stream.

In addition to analysts that give “high” or “low” assessments of companies’ earnings, there are companies such as Starmine (a division of Thomson Reuters) and Standard & Poors that evaluate companies’ earning quality and issue ranking or scores. Starmine’s recent newsletter highlights Three D Systems as a high earnings quality company with a score of 96 (scale of 1 to 100, 100 being the highest) primarily due to Free Cash Flow (FCF), Net Operating Margin, and Return on Net Operating Assets (RONOA). In reviewing Three D Systems proxy disclosures related to executive compensation, the overall level of transparency is excellent. Here are some supporting observations in the proxy:

  • In addition to NEOs’ compensation, the compensation committee reviews all compensation requests for employees earning 200K or more in base salary.
  • Executives’ and employees’ compensation strategy/philosophy is aligned, one in the same.
  • Comprehensive explanation of compensation risk and oversight (could be used for SOX audit).
  • Clawback and hedging policies “proactively” disclosed in proxy; currently, they are recommended, not required disclosures.
  • Specifically mentioned formal succession planning process; knowing they are “on-top” of the leadership pipeline is key to sustainability of the organization’s effectiveness.

To read Starmine’s newsletter and Three-D’s proxy, see http://www.starmine.com/newsletters/index.phtml?newsletter=eqa and http://www.3dsystems.com/investors/datafiles/3DSystems-2011-Proxy-Statement.pdf.