How to Determine The Right Employee Pay in a K-Shaped Recovery
The COVID-19 virus may not discriminate when it comes to victims, but its impact on the economy has certainly been dramatically uneven. In fact, we regularly hear we’re experiencing a “K-Shaped Recovery,” in which some industries — particularly tourism, hospitality, entertainment, healthcare and transportation — are suffering mightily, while others, like construction, home delivery, residential real estate, and finance, are firing on all cylinders.
Because of historically low interest rates, real estate lending, especially real estate refinancing, is enjoying boom times. (The only similar environments I can recall in recent decades are the mid 1980’s and the “bubble” of the early 2000s, although today’s fundamentals are quite different.) In fact, demand is so high I have several clients in the field that have actually raised their lending rates just to stem the flow of new applications. Others are staffing up to take full advantage of the super-heated lending environment.
These developments raise a key business issue: How does a company properly design signing and retention bonuses to attract and keep top talent while maintaining maximum profitability for itself? Today, this is a particularly formidable challenge in the real estate business where people skilled in processing and underwriting loans are in historically high demand. This is the delicate issue that I, a veteran compensation specialist, am frequently asked to address.
Still, generating hard numbers is not as easy as one might imagine. There are really two sets of formulas: one for new hires, the other for existing employees. Let’s look at these one at a time. When considering signing bonuses to attract new recruits, crucial questions to consider include:
What kind of signing bonuses, if any, are local competitors offering?
Should a signing bonus be paid upfront or in steps (e.g., 50 percent at the outset and the other half after 90 days)?
What performance metrics, if any, should be linked to bonus payouts?
As for retaining existing employees and keeping them away from the siren song of local competitors, questions to consider include:
How long have they been on staff?
How long should new employees work before qualifying for a retention bonus?
Should the bonus be paid in full upon signing or over time to incentivize retention?
Again, what performance metrics, if any, should be linked to the bonus?
These key considerations aside, it is important to note that in California, all variable pay plans must be in writing. As a result, one has to be very careful to think through all possible contingencies and make sure they are properly documented before making an offer. For example, what do you do if an employee decides to leave before fulfilling the agreed-upon commitment or before hitting specific pay milestones? Do bonuses need to be returned? If they are required, should repayments be prorated? Codifying such details in advance can save everyone the headaches of litigation and any attendant legal fees in the event of a breach.
Then there is the issue of base pay to consider. Returning to the lending sector, right now, demand for refinancing services is red hot. Likewise, profits are up, and many companies can afford to pay highly competitive remuneration. Yet, like many verticals, the real estate financing industry is notoriously cyclical. High demand for loans will not continue indefinitely. At some point, the pendulum will swing in the opposite direction. Right now, underwriting and processing skills are intensely coveted, but organizations must find ways to variably pay employees possessing them while not being stuck with overly high base pay once the market returns to historical averages.
These types of compensation issues are not just unique to real estate and real estate financing, either. Other skillsets, such as IT and accounting, to name just two, tend to follow similar cycles. This is why, regardless of industry, it is important to retain the services of a skilled and experienced compensation specialist when fashioning employee compensation agreements.
To learn more about my thoughts on determining correct pay in the ongoing war for top talent, you can read about me in Forbes. Also, if your company is benefitting from the K-Shaped Recovery, yet needs to skillfully attract and retain quality personnel, it’s time to talk. I can be reached at laura@conoverconsulting.com. Email me now…before your competition does!