Our recent webcast on technology pay trends covered a variety of issues impacting our clients, including what pay transparency looks like and how to address hot jobs.
During our annual technology compensation trends webcast in October 2019, we presented our latest compensation trends data as well as rewards best practices and strategies. With more than 750 of our technology survey clients registered, we had a number of questions from attendees that we didn’t have a chance to answer live. We’ve grouped these questions by topic and turned to our webcast hosts, John Radford and Tim Brown, for answers.
Compensation Strategies for Technology Companies
Are there any best practices for adapting to significant changes in stock price, especially reduction in price? I’m thinking specifically of recent San Francisco Bay Area technology IPOs.
When your company stock price is highly volatile or dramatically different compared to when guidelines were established, the actual value of new-hire stock grants to employees over a period of time can vary significantly. A best practice is to establish granting guidelines with the value (rather than the number of shares) in mind. If grants are awarded as a number of shares (determined as the target value divided by the share price when the guidelines were set), it makes sense to compare the delivered value at least quarterly, to ensure that some employees are not greatly advantaged or disadvantaged by share price volatility. If your share price recently doubled or halved, new hires may not be receiving the amount of value you intend to deliver. You’ll need to revisit guidelines more frequently if your share price is not trading within a narrow range. For strategies on how to respond to employee equity that has diminished in value, see our recent article, Tips for Addressing Underwater Equity During Market Volatility.
How do you go about tailoring rewards based on individual employee wants and needs?
A best practice for compensation design flexibility is to ask employees what they value. Designing consistent plan offerings can still reflect tailored solutions where you affirm risk tolerance (more variable pay) for junior level staff or conduct forced choice responses in conjoint studies.
It is not common to allow employees to choose between the receipt of options or restricted stock at the time grants are awarded. Some plans may not allow this, but even when they do, there are invariably winners and losers based on how the stock performs. Offering employees a choice may actual result in some regret, rather than outright appreciation for their equity award. For more information about the pros and cons of offering a choice in equity award mix, please see our article Equity Choice Programs: Making Your Incentives More Meaningful to Employees.
Do you see differences in the allocation of equity compensation among various U.S. states?
Market data does reflect larger equity grants in high cost markets such as the San Francisco Bay Area. There can be a number of explanations for this market data. Some companies may design equity guidelines that have regional differentials while other companies may target awards using a percent of salary approach resulting in differentiated grant sizes. Another explanation, or a contributing factor, could be that some higher paying companies may only have operations in the San Francisco Bay Area or may only grant equity awards for employees in functions primarily located in headquarters or higher cost areas. Whatever the reason or approach companies may be using, the result is clear: If you are looking to attract and retain key, in-demand talent in high-cost labor markets, you’ll likely need to set equity targets above the national average.
Rewarding for Hot Jobs
Do you see a lot of companies that reward hot jobs through a hot job "premium" instead of putting the premium into base salary?
We do not recommend paying a premium to base salary for individuals that possess hot job skills. That’s because the pay becomes locked in permanently while hot job skills can be temporary. Some companies offer temporary premiums to employees with key skills. These may include new-hire stock grants (of larger size than typical), cash sign-on bonus awards (where clawback provisions for early voluntary termination can provide retention leverage), and one-time project bonus plans (where achievement of goals requiring application of key skills proves rewarding for employees and employer alike). For more information on rewarding for hot skills, see our recent article Why More Companies are Turning to Skill-Based Compensation Programs.
How do you price new jobs to your organization? It takes at least two years to see data, even when they are added to the survey.
When a job you have is not available in survey results, some creative approaches may be needed. When the job is in the survey but without sufficient data for results to appear, use a “roll-up” job. The results will show incumbents in jobs at the same level that have similar characteristics. When pricing a job that is not a surveyed job, consider the value a candidate who might be promoted into the job and where they might go next after being in the given position. While this approach won’t give you a precise market value, it creates a “floor” (the market price of jobs where the candidate would be working prior to promotion into the open job) and a “ceiling” (the price of the job you’d expect an experienced employee to take after performing the open job for a period of time).
Putting Pay Transparency into Action
Do you see an issue with being too transparent with employees about compensation?
If you have a great story to tell about how your practices reflect living your compensation philosophy, shout it from the hill tops! If you can’t defend your practices easily, then too much transparency could create the need for some awkward conversations. All companies should be thinking about the best way to share information with employees that supports your objectives.
Do you think companies are going to reduce manager discretion in pay decisions and completely move to a defined logic as well as reimplement performance ratings (if they previously removed them)?
During the early 2000s it seemed that the pendulum swung away from strict compliance to pay increase matrices (linking performance ratings and position in pay range) toward a “pooled budget” approach. This gave managers more discretion in determining individual pay increases subject to overall budget compliance. As pay equity awareness has increased, we have heard that some companies are more actively proposing increases for employees in a systemic fashion. While a process for modifying recommended increases is needed, less flexibility offers some protection for highly risk-averse companies as well as businesses that want to ensure existing pay equity issues are addressed proactively.
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If you have questions about any of these topics for our experts or want to learn more about participating in a survey, please write to rewards-solutions@aon.com.
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