Presentation on trends in base and incentive compensation for Iowa employers. Covers actual findings from 2009 and projections for 2010.

1. 1
COMPENSATION TRENDS
FINANCIAL EXECUTIVES ROUNDTABLE
RSM McGladrey, Inc. is a member firm of RSM International – an affiliation of separate and independent legal entities.

2. Today s
Today’s Presenter
2
Kevin Paulsen
Director i
Di t in RSM M Gl d ’ H
McGladrey’s Human C it l consulting practice iin th G t Pl i region
Capital lti ti the Great Plains i
20 years of Human Capital experience
Specializing in:
Compensation & P f
C ti Performance Management
M t
Wage & Salary Structure
Incentive Compensation
Performance Management/Review Systems
High Performance Workplace design
Open Book Management & Gainsharing
Team Development
Participative Management Training
Organizational Planning
Management Team Roles & Responsibilities
Management Assessment & Development

3. Why is this topic important?
3
Economic recession has had - and continues to have – significant
g
impact on organizations and employees
Retaining (and attracting) skilled employees is STILL critical
Total compensation cost usually represent the greatest expense to
organizations
Emotional issue for employees

4. Agenda
4
Economic Outlook: The Current Reality
y
Trends
Total Rewards Philosophy
Variable Pay
The “New Normal”

5. 5 Economic O l k Th C
E i Outlook: The Current R li
Reality

6. Economic Outlook
6
October
O b ’09 unemployment rate - 10 2%
l 10.2%
Increase from 4.8% in early 2008
12
10.2
9.5 9.7 9.8
10 9.4 9.4
Unemployment Rate
8.9
8.5
8.1
7.6
8
t
7.2
6 6.2 6.2
6.6 6.8
5.5 5.6 5.8 2008
4 4.9 4.8 5.1 5
2009
2
0
st
pt
may
y
july
y
nov
v
dec
c
jan
n
march
h
june
e
april
ct
feb
b
augus
sep
oc
Bureau of Labor Statistics

7. Economic Outlook
7
Job losses continue in many major industry sectors but declines
y j y
have moderated in recent months
Annual CPI rate (August ‘09) was -1.6%
March 2009 was first time since 1955 the rate of inflation for a 12-
month period was negative
No consensus among economists whether near term will be
inflationary or deflationary period.

8. Economic Conditions and Employee Costs
8
“Employees aren’t g g anywhere in this economy”
p y going y y
Benefit costs are still rising, particularly healthcare
Retirement plan costs being examined or changed
Some organizations not worried about compensation in 2010:
Frozen salary increase budgets in 2009 or reduced to almost
nothing
thi
Reduction in pay levels, typically a ‘targeted action’

9. Factors Impacting Comp Planning
p g p g
9
•Business conditions and their influence
Economic Factors
Industry Conditions
Costs/Ex penses Costs/Ex penses Industry Conditions
n Stagnating or
Rising Falling Improv ing
Deteriorating
Cedar Falls/Wat 11 6 1 2 8
Cedar R id
C d Rapids 46 30 0 6 29
Des Moines 7 6 1 0 4
Dubuque 7 4 0 0 6
Iowa City 12 8 0 2 4
Quad Cities 9 5 0 0 7
All 92 59 2 10 58
% impacted 64.1% 2.2% 10.9% 63.0%
*RSM McGladrey 2009 Compensation & Benefits Trends Survey

10. Factors Impacting Comp Planning
p g p g
10
•Employment conditions and th i i fl
E l t diti d their influence
Employment Factors
Retaining Key
g y Attracting
g Motiv ating
g Benefit Costs
n Benefit C t Rising
B fit Costs Ri i
Employ ees Employ ees Performance Stabilizing or Falling
Cedar Falls/Wat 11 6 1 3 6 0
Cedar Rapids 46 18 5 7 25 0
Des Moines 7 3 0 0 2 0
Dubuque 7 4 2 3 5 0
Iowa City 12 5 4 3 6 0
Quad Cities 9 2 1 1 5 1
All 92 38 13 17 49 1
% impacted 41.3% 14.1% 18.5% 53.3% 1.1%
*RSM McGladrey 2009 Compensation & Benefits Trends Survey

11. Current Environment on Exec Pay
11
Economic Organization
Recession Scandals
Reforms
R f
Improved Governance New Compensation and
(Executive Compensation Practices) Benefit Environment
Reforms
Business
Congress & Stakeholder
Leadership
Regulators Groups
Groups

12. Total Reward Trends
12
Reviewing and acting on trend information involves critical q
g g questions:
What do we want to accomplish?
What can we afford to do?
What’s i
Wh ’ going on iin the market?
h k ?
Given the above, what actions should we take?

13. 13 Trends
T d

14. 2009 Salary Increases
Increases*
14
National Data
Nonexempt Exempt Executive
All Industries 2.3% 2.2% 2.0%
Not-for-Profit 2.4% 2.3% 2.1%
Health Care 2.9% 2.8% 2.5%
Utilities 3.2% 3.1% 2.7%
Finance/Insurance 2.6% 2.5% 2.1%
Retail/Wholesale
R t il/Wh l l 1.8%
1 8% 1.7%
1 7% 1.4%
1 4%
*Zero increases included
Depending on the source, industry and employee g p, anywhere from 30% -
p g , y p y group, y
40% of employers froze salaries in 2009.
*World at Work 2009-2010 Salary Budget Reports

15. 2009 Salary Structure Adjustments*
Adjustments
15
National Data
Nonexempt Exempt Executive
All Industries 1.5% 1.5% 1.4%
Not-for-Profit 1.3% 1.3% 1.4%
Health Care 1.5% 1.5% 1.3%
Utilities 2.2% 2.2% 2.0%
Finance/Insurance 1.6% 1.6% 1.6%
Retail/Wholesale 0.9% 0.9% 0.9%
*Zero increases included
Approximately half of respondents reported no salary structure movement in 2009
*World at Work 2009-2010 Salary Budget Report

16. 2010 Projected Salary Increases
Increases*
16
National Data
Nonexempt Exempt Executive
All Industries 2.8% 2.8% 2.8%
Not-for-Profit 2.4% 2.4% 2.3%
Health Care 2.8% 2.8% 2.8%
Utilities 3.3% 3.2% 3.3%
Finance/Insurance
*Zero increases included 2.9% 2.9% 2.8%
Retail/Wholesale 2.9% 2.9% 2.8%
*Zero increases included
*World at Work 2009-2010 Salary Budget Report

17. 2010 Projected Salary Increases*
j y
17
State Data
Projected Base Pay Adjustment (overall)
Average Change
n Hourly Salaried Executive Last Year - All Groups
< 50 FTE 28 1.6% 1.4% -0.1% 2.5%
50-200 FTE 41 2.2% 2.0% 1.6% 2.2%
201-500 FTE 11 2.5% 2.7% 2.8% 3.6%
> 500 FTE 12 1.3% 1.3% 1.2% 2.1%
All 92 1.9% 1.8% 1.2% 2.4%
*RSM McGladrey 2009 Compensation & Benefits Trends Survey
*Zero increases included

18. 2010 Projected Salary Increases*
j y
18
State Data
Projected Base Pay Adjustment (overall)
Average Change
n Hourly Salaried Executive Last Year - All Groups
Cedar Falls/Wat 11 2.5% 2.3% 1.9% nd
Cedar Rapids 46 1.9% 2.0% 1.1% nd
Des Moines 7 0.7% 1.1% -0.9% nd
Dubuque 7 2.4% 2.2% 2.0% nd
Iowa City
y 12 1.9% 1.1% 1.2% nd
Quad Cities 9 2.1% 1.9% 1.7% nd
All 92 1.9% 1.8% 1.2% 2.4%
*Zero increases included
Zero
*RSM McGladrey 2009 Compensation & Benefits Trends Survey

19. 2010 Projected Salary Increases*
j y
19
State Data
Hourly Base Pay Adjustment Compared to Last Year
Change from previous year
Higher
Hi h or more Same
S Lower or lless
L
< 50 FTE 4 12 12
50-200 FTE 12 15 14
201-500
201 500 FTE 1 5 5
> 500 FTE 1 4 6
All 18 36 37
% of participants 19.8% 39.6% 40.7%
*RSM McGladrey 2009 Compensation & Benefits Trends Survey

20. Trends in the Market
20
Merit pay still the most p
p y prevalent form of increase
Nearly five times more common than other forms such as cost
of living or lump sums.
In some cases, organizations are extending the time between
increases (averaging approximately 12.5 months)
While a number of organizations are freezing salary budgets, most
budgets
are finding money – even if not budgeted – to fund at least some
pay increases
Rewarding those who drive results is key
Nearly 80% of survey respondents use some form of variable
pay (incentives/bonuses)

21. Trends in the Market – Aligning Pay and
Performance Rating
21
Rewarding high p
g g performers and key employees is more important that
y p y p
ever. Employers are doing a better job of differentiating increases, but
have room to improve.
Average Increase by Performance Category
6
5.2
4.9
5 4.4
4.2
4
% Increase
e
3.4 3.5
3
Mgmt/Exempt
2 1.7 1.8
Nonexempt
1
0
Highest Above Average Below
Rating Average Rating Average
Watson Wyatt 2009-2010 Salary Budget Report

22. Trends in the Market – Controlling
Employee Costs
22
Cost Containment/Reduction Attraction/Retention Practices
Wage freeze/no increases Sign-on/hiring bonus
Pay reduction Employee referral bonus
Reduction in hours Flexible work schedules
Hiring freeze Spot bonus
Limit/eliminate overtime
Reduction in force
Early retirement
Increase employee share
of health care premiums
p

23. 23 Total R
T t l Rewards Phil
d Philosophy
h

24. Importance of Establishing a Total Rewards Philosophy
24
Aligns business strategy with rewards
Establishes performance/position expectations
Establishes a clear employee value proposition
Sets direction for program design
S o g y encouraged
Strongly e cou aged by the IRS for de e d g po e a
e S o defending potential
excessive compensation issues

25. Total Rewards Package Example
Organization “X” vs Market
X vs.
25
Organization X Market
40K
Variable
a ab e
Variable
V i bl
35K
Pay *
Pay *
30K * Variable Pay =
Benefits Benefits Bonus/Incentive
25K
20K
Base Pay
15K Base Pay
10K

26. Total Reward Philosophy
26
Identified by senior leadership
y p
Elements of the total reward philosophy:
Reward components and objectives
Basis f b l (internall vs. external)
B i of jjob value (i t t l)
Reward focus
Structure
Administration
Outcome is written document
Can b h d ith
C be shared with current and prospective employees
t d ti l
Articulates your ‘value proposition’ as an employer

27. Total Rewards Philosophy
27
Sample questions for senior leadership:
What components will make up our total rewards package? What is
the purpose/objective of each component offered?
What
Wh t results/outcomes will b connected with what reward system?
lt / t ill be t d ith h t d t ?
Which is more important – how jobs compare to one another
internally or how they compare to the external market?
y y p
Who are our labor market competitors? How should our rewards
compare to the market – overall and for each component? Does this
differ by employee group?
What should be the basis for making adjustments to wages?

28. Total Rewards Statement
28
TOTAL REWARDS STATEMENT – example verbiage
Example Company recognizes that our employees are the key to our success as a community bank, and retaining
and attracting employees is critical to achieving our goals and objectives.
…
Our
O totall rewards program supports an organization that continues to experience iindustry change and significant
d i i h i i d h d i ifi
market competition.
…
To meet our partnership commitments Example Company will:
• Establish a market driven, flexible total rewards program. At the same time, internal relationships between
driven program time
jobs will be monitored for equity. Progress toward market rates will always depend upon the Bank’s overall
financial performance.
• Maintain a total rewards program that is competitive with financial institutions for jobs requiring financial
and/or banking backgrounds, and all industries for staff and support jobs. Local and/or regional data will be
backgrounds jobs
considered depending upon the position.
• Encourage high performance and reward employees on the basis of individual and/or bank-wide results.
• Consider adjustments to wages on the basis of individual performance and labor market conditions.

29. 29 Variable Pay
V i bl P

30. Performance Criteria vs. Reward Vehicles
30 Performance Criteria Reward Vehicles
Job
Responsibilities Base
Pay
Behavioral
Competencies
Variable Pay
Standard (Incentives or
Objectives Bonuses)
Atypical Results
Recognition
Value Creation
Special Goals
or Projects 30

31. Variable Pay Definitions
31
Bonuses (usually “after the fact )
after fact”)
Recognition
Project completion
Sign-on/hiring
Retention
Spot awards
Discretionary
Short-term incentives (“before the fact”)
( )
Formula driven
May consider balanced scorecard metrics

32. Variable Pay Definitions
32
Long-term
Long term incentives (usually three to five years)
Typically provided only at executive or upper
management levels
g
Encourages key stakeholder thinking
Balances short- and long-term decision making
Retention
In non-profit organizations, typically used to supplement
retirement benefits

33. Prevalence of Variable Pay
33
Nearly 80% of organizations have at least one variable p y p for
y g pay plan
at least some segment of their employee base
Most prevalent in retail/wholesale, manufacturing and
banking/finance (84% - 89%)
b ki /fi
Least prevalent in not-for profit and healthcare (53% - 55%)
80% of organizations reported that variable pay has no impact on
base salary budgets for nonexempt workers, while more
organizations take it into consideration for exempt and
executive/management employees ( 0% & 66% respectively)
i / l (70% i l )
*World at Work 2009-2010 & Watson Wyatt 2009-2010 Salary Budget Reports

34. Rewards – Holiday Bonus
y
34
State Data
Holiday Bonus - by Employment
Current Practice
Less than More than Varies on tenure or
None offered $200/person for all $200/person for all performance
< 50 FTE 14 4 4 6
50-200 FTE 22 9 3 7
201-500 FTE 5 4 0 2
> 500 FTE 9 3 0 0
All 50 20 7 15
% of participants 54.3% 21.7% 7.6% 16.3%
*RSM McGladrey 2009 Compensation & Benefits Trends Survey

35. Rewards – Targeted Incentive
35
Amount
State Data
Targeted Incentive - by Employment
Incentive - Targeted Amount
Hourly Supervisory Management Executive
< 50 FTE 3.2% 4.5% 10.7% 10.5%
50-200 FTE 1.8%
1 8% 3.6%
3 6% 5.8%
5 8% 10.9%
10 9%
201-500 FTE 1.7% 3.3% 6.8% 11.1%
> 500 FTE 2.3% 5.8% 5.0% 32.8%
All 2.2% 3.9% 7.5% 12.7%
*RSM McGladrey 2009 Compensation & Benefits Trends Survey

36. Rewards – Incentive Planning
g
36
Salaried Incentive Opportunity Compared to Last Year
Change from previous year
Increased Stayed the Same Decreased
< 50 FTE 5 16 6
50-200 FTE 1 23 11
201-500
201 500 FTE 2 5 2
> 500 FTE 1 4 1
All 9 48 20
% of participants 11.7% 62.3% 26.0%
*RSM McGladrey 2009 Compensation & Benefits Trends Survey

37. Prevalence of Variable Pay
37
Despite the economy, variable pay budgets have stayed steady.
p y, p y g y y
35 31.4 30 30.7
30 7
30
25
% Budgeted
20
15 11 10 11
10 5 4.7 5
5
0
2008 2009 2010
p
Nonexempt p
Exempt g
Exec/Mgmt
Watson Wyatt 2009-2010 Salary Budget Reports

38. Opportunities and Cautions With
38
Variable Pay
Opportunities Cautions
Increased compensation Can become and “entitlement”
expense iis a variable cost
i bl t if not properly communicated
t l i t d
Depending on plan design, Discretionary bonus typically
can reward individuals, teams
individuals do not reinforce “pay for
pay
and/or organization-wide performance”
performance FLSA provisions complicate
Allows targeted distribution of incentive payouts for non-
limited compensation dollars exempt employees who work
overtime

39. Key Design Steps
39

40. 40 The “New N
Th “N Normal”
l”

41. The “Old Normal
Old Normal”
41
Inherent assumptions:
p
Expected and appropriate to increase salary levels every year.
Salary increase budgets been averaging between 3.5%-4% for
llast fi years
t five
Employees see a minimal difference between an average salary
increase that is 1-2% above or below the “average” increase
1 2% average
Incentive compensation is most appropriate for higher level
positions

42. The “New Normal
New Normal”
42
Treats investment in people with same importance as other critical strategic
investments
Working to ‘re-engage’ employees (especially high performers) as the
economy recovers.
y
Recent survey from Watson Wyatt reports employee engagement levels have
decreased 10% overall since last year, 23% for top performers.
Salary adjustments linked to significant growth in competency,
y j g g p y
performance, promotion, or labor market movement
Reduced frequency and greater differentiation in salary increases based
on performance
p
Replacement of annual salary increase opportunities with incentive
compensation eligibility
Transparency and work force involvement

43. Opportunities With the “New Normal
New Normal”
43
Challenge y underlying assumptions considering economic
g your y g p g
conditions that existed when practices were adopted
Eliminate certain programs/practices that do not support the culture
and direction of your organization, and don’t make sense iin t d ’
d di ti f i ti d d ’t k today’s
economy
Create the future you would like to see