Compensation Efficiency in a Tight Labor Market

In a job market where there are currently more job openings than job seekers, it is increasingly important for organizations to make efficient compensation decisions. This means not paying your workforce too much, but also not paying uncompetitive wages that cause key employees to look elsewhere.

Since labor is generally a company’s largest expense, higher-than-necessary wages could affect company profitability or result in higher prices for customers.  In fact, labor typically represents greater than 60% of total costs.  Even overpaying by a few percentage points could represent thousands of dollars in increased expense. The chart to the right illustrates labor as a percentage of total costs in the U.S. over approximately the last five decades.

At the opposite end of the spectrum, paying wages that are below market can result in high turnover. In our experience, it is often the top talent that leaves, since those workers will likely have an easier time landing a new job. Conversely, lower performers tend to remain, since their external job prospects are not as good. Recruiting and training new employees can be very costly, not to mention the loss of knowledge that occurs with the departure of experienced and/or high-performing workers. No company wants to become a training ground for its competitors.

Since there can be significant costs associated with paying too high or too low, organizations should take appropriate steps to benchmark their pay systems to the external market. Using valid compensation data and having a well-designed framework to manage pay are the best ways to ensure that your company can manage labor costs efficiently. We would recommend that you review your pay system annually, especially during times when the labor market is tightening, and wages may be increasing faster than historical averages.

Dan Steele, Consultant at the POE Group

U.S. Has More Jobs Than Jobless Workers

Perhaps we are about to see an uptick in pay increases across the labor market.  The Department of Labor reported last week that the number of open positions exceeded the number of job seekers for the first time since such record keeping began in 2000.   U.S. job openings rose to an adjusted 6.7 million, while 6.3 million Americans were unemployed for the month.  The data is the latest sign that the U.S. is facing a historically tight labor market.While the labor market has tightened, especially in urban markets, there are still a considerable number of workers saying they are stuck in part-time jobs or working below their skill level.  The total unemployment rate (U-6 rate), which includes these workers, has just reached the levels before the recession.  In May 2018, the non-seasonally adjusted U-6 rate was reported at 7.3%, compared to the official unemployment rate (U-3 rate) of 3.6%.

There still may be workers available for full-time employment, as shown in the U-6 unemployment rate, before wages begin to increase.  Employers in urban markets are already experiencing an increase in wages compared to recent years.  Ensuring competitive pay levels will become increasingly important to businesses needing to attract new hires and retain their current employees.  Employers should consider ensuring their pay systems are up to date with the market.

Joe Kager, Managing ConsultantPOE GroupJune 14th, 2018

CEOs don't want this released': US study lays bare extreme pay-ratio problem

The first comprehensive study of the massive pay gap between the US executive suite and average workers has found that the average CEO-to-worker pay ratio has now reached 339 to 1, with the highest gap approaching 5,000 to 1.

The study, titled Rewarding Or Hoarding?, was published on Wednesday by Minnesota’s Democratic US congressman Keith Ellison, and includes data on almost 14 million workers at 225 US companies with total annual revenues of $6.3tn.

Just the summary makes for sober reading.

In 188 of the 225 companies in the report’s database, a single chief executive’s pay could be used to pay more than 100 workers; the average worker at 219 of the 225 companies studied would need to work at least 45 years to earn what their CEO makes in one.

The Guardian

Read more here.

Say on pay 2.0: Investors at Tampa Bay area public companies scrutinize new pay disclosures

As public companies in Tampa Bay and elsewhere hold their annual shareholder meetings in the coming weeks, investors are keeping their eyes on a newly disclosed measure: how the CEO’s pay compares to the pay of the median worker at the company.

The new measure gives shareholders more information to consider as they cast “say on pay” advisory votes on executive compensation, which generally has been growing at a faster pace than rank-and-file employee pay. Most companies say increased executive pay results from improved corporate performance. 

Critics say it is an indication of widening income inequality in the United States.

The CEO-to-worker pay ratio is raising questions about recruiting and retaining talent in a highly competitive workforce environment, and boards of directors are monitoring it as they think about pay packages going forward. Their decisions ultimately could impact the broader economy. Public companies often are large employers and hikes in employee pay designed to lower the gap between CEO and worker pay would give workers more discretionary income to spend, but also could raise the cost of goods sold. Privately owned companies are exempt from disclosure but might feel pressured to follow their public counterparts.

Margie Manning

Finance Editor

Tampa Bay Business Journal

Read more here.

Duke Officials Defend CEO's Higher Pay At Annual Meeting

Duke Energy officials defended last year's big pay package for CEO Lynn Good during the company's online-only annual meeting Thursday afternoon.  Good got $21.4 million dollars in salary, bonuses, stock and other compensation - nearly double her pay two years before.

During a question-and-answer session, Duke investor relations chief Michael Callahan read this question from a shareholder:

“Why is compensation so over the top for executives, while customers are getting rate increases? Their pay and benefits are outrageous, while many struggle just to pay their bill.”

WFAE, By DAVID BORAKS • MAY 3, 2018 

Read more here.