Incentive Pay Fuels HR Salaries

Incentive compensation beyond base pay is growing more prevalent for human resource professionals, according to a recent survey of HR practitioners. The trend indicates that organizations increasingly value the knowledge, skills and abilities that HR employees contribute to overall business success.

Substantial rises in the percentages of HR executives and HR managers eligible to receive incentive compensation number among many findings documented in this year's survey of HR compensation conducted by the global consulting firm Watson Wyatt in collaboration with the Society for Human Resource Management (SHRM). The results are contained in the 2007/2008 Survey Report on Human Resources Personnel Compensation.

Among the challenges confronting HR lately has been high workforce turnover, coupled with the need to fill open positions quickly. Organizations have lost nearly 30 percent of their human capital in the past two years, according to the 2007 SHRM Human Capital Benchmarking Study: Executive Summary, and in many instances employees with several years of company experience were leaving just as their employers were scrambling for talent to meet increasing customer needs and business commitments.

In addition, organizations in general have done well financially during 2007. Revenue per full-time equivalent (FTE) and net income per FTE skyrocketed more than 41 percent and 86 percent, respectively, over the previous year, according to the executive summary, and therefore business leaders were willing to invest heavily in their human capital and in HR professionals to manage it.

Although prospects for a continuation of U.S. economic growth into 2008 have become less certain, there is no indication that there would be any decline in the strategic value that organizations have come to place in HR.

Pay Tied to Performance

Variable pay can be in the form of short-term incentives (STIs), usually cash bonuses for results achieved during the fiscal year, and long-term incentives (LTIs), often consisting of nonqualified stock options, incentive stock options or restricted stock.

Variable pay enables companies to recognize and reward strong performers and to sustain high performance without investing as heavily in base pay gains that add to fixed costs.

As organizations realize that human resource practices impact long-term organizational results, more HR executives see their compensation tied to LTIs such as stock appreciation plans and restricted stock plans. (See Table 1: Top HR Executives' Eligibility for Incentives)

What's more, the use of LTIs appears to be spreading from the top. Although LTIs have been incorporated routinely in executives' total rewards packages, they have not been as prevalent in managers' compensation arrangements. That may be changing. Survey results show that eligibility for LTIs increased for 19 of the 25 manager positions this year. (See Table 2: HR Managers' Eligibility for Incentives)

The use of LTIs increased for all executive HR positions, particularly executives in international HR and in compensation and benefits. This paralleled the finding that top corporate benefits executives and top corporate compensation executives also received high increases in median total cash compensation, which includes annual base salary plus bonus and any other cash compensation. (See Table 3: 20 HR Positions with the Highest Percentage Increases in Median Total Cash Compensation over 2006)

STIs are used more often than LTIs for variable pay - for HR executives as well as HR managers - doubtless because they are easier to devise and less complicated to implement. In addition, executives were more likely than managers to receive them. STIs were given to half or more of the respondents in 13 of the 15 HR executive positions surveyed. But among HR manager positions, STIs were awarded to half or more respondents in only 13 of the 25 categories.

The Skills in Demand

This year, the highest percentage increases in median total cash compensation were posted for HR professionals with strong knowledge of compensation, benefits, international HR and diversity.

Not surprising, says Bob Cartwright, SPHR, president and chief executive officer of Intelligent Compensation LLC, a compensation and HR management consulting firm near Austin, Texas, and a member of SHRM's Total Rewards/Compensation and Benefits Special Expertise Panel.

"These same expertise areas have been in the news and at the forefront of strategic business initiatives for the last few years and will continue to be so for years to come," Cartwright continues. "This clearly reflects the demand for strategic human resource leadership, and the compensation increases reflected in these data reflect the increased level of strategic impact and accountability of these positions."

Below, more details about specific skill categories:

Compensation and benefits. It's worth noting that almost one-third of the top 20 HR positions with the highest percentage increases in median total cash compensation were positions where knowledge of compensation or benefits was a primary skill. Peter Ronza, SPHR, compensation and benefits manager at the University of St. Thomas in St. Paul, Minn., and a member of SHRM's Total Rewards panel, says that pay increases in these specialties can be attributed to increased focus on the return on investment of compensation and its link to organizational success. He also sees a supply-and-demand influence - increased demand for experienced practitioners at the same time that many with such skills are about to exit the workforce and retire.

There is a shortage, in general, of compensation professionals," says Jennifer C. Loftus, SPHR. Loftus, national director at Astron Solutions, an HR consulting firm in New York, and a member of the Total Rewards panel, says, "Finding and retaining qualified compensation specialists with experience in executive compensation in general, and in legal issues such as Sarbanes-Oxley and board compliance in particular, has proved rather difficult for many firms.

"Legal and ethical executive compensation issues have come to the forefront only in the past handful of years," Loftus continues. "There are relatively few compensation professionals with extensive experience in these matters. While it is possible to find compensation professionals with 10 or 20 years of experience in the traditional aspects of the field, legal executive compensation specialists typically have shorter lengths of experience with the topic, and may have gathered that experience at one or perhaps two different organizations. In addition, not all organizations are subject to these laws and guidelines, further shrinking the pool of experienced compensation talent."

Positions requiring knowledge of compensation also did well because business leaders sought help after the talent wars of 2005 and 2006 to better align their internal salaries to the external market. The multiyear recruiting frenzy left many compensation programs in tatters because salaries of many new hires came in higher than those of existing employees with similar skills, creating pay disparities and employee relations issues for many organizations.

As companies rebuild their compensation programs to achieve internal and external equity, senior executives look to compensation professionals to better align and reinforce employee performance and attain organizational goals. Devising reward strategies that drive employee performance in support of business objectives is complex, and business leaders are willing to pay for such skills. In fact, executive-compensation managers had a 28 percent increase in median total cash compensation - the largest rate of increase among all positions surveyed.

The demand for executive-compensation managers may also be the result of increased executive hiring during 2005 and 2006. As organizations increase their pool of executive talent, the need to better manage executive compensation increases.

Benefits expertise is becoming more important for employers as well. According to SHRM's 2007 Job Satisfaction Survey Report, 60 percent of employees and 64 percent of HR professionals regard health care benefits as one of the most important issues relating to satisfaction with an employer. While an attractive health plan is important for employee satisfaction, it's essential that a plan be affordable for the employer. The rising cost of health care has a negative impact on U.S. competitiveness in global markets. Some organizations are moving jobs to countries where employers do not have to bear the costs of providing employee health care to attract and retain workers.

Because the drive to reduce health care costs is so compelling, HR professionals who have a strong background in health benefits are in continual demand. Nonetheless, while skilled benefits professionals must be well-versed in traditional and emerging health care options such as consumer-driven health plans, they also must know how to implement various benefits programs apart from health coverage, such as telecommuting, child care options and retirement planning.

Employee benefits professionals must design benefits plans that are cost-effective yet can still attract and retain employees in high demand.

International HR. As companies compete in global markets by lowering production costs through offshoring product development and service activities, business leaders seek professionals with international human resource skills. These professionals are responsible for helping to build global workforces that exhibit organizational cultures across national boundaries and for working through the labyrinth of legal and procedural entanglements when hiring for non-U.S. employment markets.

Two of the highest percentage increases in median total cash compensation from 2006 to 2007 were for international HR associates and international HR managers, up 25 percent and 13 percent, respectively. The fact that organizations seek to compensate managerial-level international HR professionals means that employers expect growth in overseas markets to be significant enough to require such HR support. In addition, the total compensation increases for international HR associates may signal that existing HR departments are expanding in size and their managers demand people with global HR skills early in their careers.

Diversity. Among the highest-paid HR executive positions in the survey, that of top diversity executive had the highest rate of increase in median total cash compensation in 2007, possibly reflecting awareness that well-crafted diversity initiatives can play vital roles in recruiting and retaining talent. (See Table 4: 10 of the Highest-Paid Top HR Executives)

Diversity as a strategic business tool became more relevant during the past two years of high turnover and intensive recruiting. Organizations with strong diversity initiatives appear to be more attractive to top candidates. According to SHRM's latest research, 2007 State of Workplace Diversity Management, 84 percent of diversity practitioners in 2007 said that it was extremely important to leverage differences and similarities in the workforce for the strategic advantage of their organizations.

Mixed Results

A few HR positions posted small percentage gains at best in compensation this year. For example, the median total cash compensation for human resource generalists and employee training specialists rose only 1 percent from last year. (See Table 5: Median Total Cash Compensation for Common HR Positions) Moreover, HR managers and top human resource executives (without labor relations) saw a decrease in compensation from the previous year.

Those results are particularly striking because they are below the 3 percent to 4 percent increase in the cost of living during the same period and the 3.9 percent increase in the overall average total cash compensation for all HR functions combined for 2007. Yet experts caution that compensation declines may simply reflect staffing anomalies at some respondents' companies rather than significant compensation trends in the marketplace.

Among the highest-paid HR executives, top diversity executives saw the greatest gains in median total cash compensation - up 17 percent from 2006, to $158,100. Top corporate benefits executives also had a double-digit increase - 11 percent, to $152,900 - followed by top corporate compensation executives, who saw a 9 percent increase, to $152,600.

In addition, even among the highest-paid HR executives, there were some declines. Top international HR executives' median total cash compensation dropped 18 percent from 2006. Top HR executives (without labor relations) saw a 7 percent decline, and the median total cash compensation for top division or subsidiary HR executives (with labor relations) went down 5 percent. (See Table 4)

With their 28 percent compensation increase this year, to $130,100, executive compensation managers led 10 other selected HR manager positions in median total cash compensation. (See Table 6: Median Total Cash Compensation for Select HR Manager Positions) In second place was the post of international HR manager, at $120,400, a 13 percent increase. Third this year was compensation manager, at $98,600, up 6 percent.

"I am surprised to see the decline in total cash data for international executives [Table 4]," says Rajiv Burman, SPHR, vice president for human resources in the United States and Canada for Griffith Laboratories, a global food-products manufacturer based in Alsip, Ill. Burman, also a member of SHRM's Total Rewards panel, adds that "on the other hand, the 13 percent increase for international HR managers [Table 6] is typical of the demand for managers with global experience and mobility. Given the continued importance of a global mind-set and expertise, having international experience is critical for HR professionals in multinational organizations."

Various Perspectives

Geography matters. The highest pay levels for select HR positions were seen on the West Coast, with the exception of the pay levels for compensation and benefits managers. For example, median total cash compensation for a human resource manager on the West Coast was $88,800, compared with $86,200 in the South Central region, $85,300 in the Northeast, $80,500 in the Southeast and $79,300 in the North Central region. (See Table 7: Regional Differences in Median Total Cash Compensation)

Median total cash compensation also differs by industry and by organizational staff size.

For-profit companies generally pay more than nonprofit, governmental and educational organizations. Within the higher-paying private sector, moreover, there are wide variations in pay by industry. For example, median total cash compensation for a compensation and benefits manager in the utilities and energy industry is $119,700, compared with $117,600 in the insurance industry, $109,200 in retail and wholesale trade, $108,400 in banking and finance, and $84,200 in nondurable goods manufacturing. (See Table 8: 2007 Median Total Cash Compensation for Select HR Positions by Industry)

Numerous factors can account for such differences among industries. For example, organizations in banking and finance may have more variable pay plans for their employees because they have more difficulty attracting talent, while a manufacturer of nondurable goods may have a greater proportion of lower-skilled employees without variable pay plans.

Three of the five HR positions with the lowest median total cash compensation were in health care. "This may be because health care has traditionally stayed away from the use of variable compensation, or used variable compensation more sparingly than other industries," says Loftus. "While more and more health care organizations are moving toward variable compensation, the sizes of the awards are typically lower than those of other industries, particularly those in the for-profit arena."

Organizational staff size also impacts compensation. As organizations' workforces expand, human capital issues generally become more complex. Implementing a change-management initiative in an organization of 200 employees, for example, will typically be less difficult than implementing it for an organization of 10,000 employees. As a general trend, the larger the organization's staff size, the higher the median total cash compensation. (See Table 9: 2007 Median Total Cash Compensation for Select HR Positions by Organization Staff Size)

Loftus is "not surprised to see that organizations with fewer than 500 employees have the lowest median total cash compensation for four of the five positions. Smaller organizations typically cannot compete dollar-for-dollar against companies of a larger size in the same industry or geographic region. These smaller organizations look for other ways to attract, retain and motivate their employees that go beyond base pay and incentives."

The Bottom Line

As HR professionals continue to build a lasting impact on organizational strategies that add value to the business environment by bringing in and keeping human capital, the data indicate that they are being compensated accordingly.

The future will be particularly bright for HR professionals specializing in compensation and benefits and for those with experience managing global and diverse workforces.

Furthermore, the survey demonstrates that business leaders are starting to recognize the necessity of having highly skilled HR professionals to oversee an increasingly complex and evolving workforce.

John Dooney is manager of strategic research at SHRM, and Evren Esen is manager of SHRM's survey program.