According to the U.S. Bureau of Labor Statistics (BLS), the manufacturing sector's employment has grown since 2010, rising to more than 12 million individuals. In fact, the BLS's key employment indicator recently increased to 65.4, its highest level since November 2014. Any value above 50 indicates net job gains.
As local and national economic conditions continue to improve and anticipated tax and regulatory reforms spur further economic growth, it is reasonable to expect that employee hiring and retention issues will be critical to the manufacturing industry in response to increased demand for skilled labor and executive talent. The 2017 National Manufacturing Outlook and Insights survey report, produced by EKS&H and the Leading Edge Alliance, indicated two-thirds of high growth manufacturers plan to increase hiring. Similarly, other recent surveys have shown employee retention is one of the top three concerns for companies.
Simply put, manufacturing employees will likely have abundant opportunities to move elsewhere because of the expected growth in the U.S. manufacturing sector and related labor demand exceeding supply. Therefore, it is essential that strategic manufacturers implement employee compensation and benefits policies to best attract, retain, and incentivize key employees.
Although most companies will agree that compensation and benefits are important, oftentimes company leaders will simply follow past practice or follow conventional wisdom without critically thinking about what works best for their companies. This can be a recipe for failure as other companies can poach the best employees by offering more attractive -- but not necessarily more expensive -- compensation and benefits packages.
Employee compensation is often the biggest investment a company makes each year. Consequently, management should always strive to achieve key goals and maximize return.
Compensation and benefit planning for manufacturers
An organized and diligent process will typically lead to greater effectiveness in compensation and benefit plans. A process we typically advocate includes the following steps:
Establish business goals
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Define the specific goals and/or behavior you are trying to encourage among key employees.
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Determine timing for desired results.
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Determine if the reward should be based only on future performance or include existing company value.
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Solicit feedback from key employees to ensure consistency between ownership goals and employee expectations and interests.
Select plan type
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What "currency" will the plan distribute? Cash or equity (or both)?
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Consider eligibility criteria. Will the plan cover a select few or a wide range of employees?
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How will employees earn the incentive? Over time or upon achieving certain metrics?
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What are the distribution triggers?
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If the employee leaves, how are the outstanding awards handled?
Model the financial impact
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Consider cash flow effect (for cash awards) or dilutive effect (for stock awards) of benefits to be paid by the company.
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What are the tax impacts on the company and employees?
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Consider bookkeeping effect for the company.
Implement
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Final approval by management and/or shareholders.
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Adjusted recordkeeping processes.
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How will implementation be presented and explained to plan participants?
Follow up
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Monitor effectiveness of the plan to encourage desired behavior and results, and adjust plan as necessary.
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Ensure compliance with plan terms and applicable law.
There are several types of plans that can be used to meet a manufacturer's goals. However, each plan has its own unique characteristics and pros and cons. As you analyze your needs based on the steps discussed above, you can select a plan that best meets those needs.
Proactive planning -- along with the advice of an industry experienced team of advisors -- can help avoid a wide range of problems associated with the failure to attract, retain, and incentivize your key employees.
EKS&H Senior Consulting Manager Edward Kim co-authored this column.
With more than 200 manufacturing clients, EKS&H offers compensation and benefits consulting solutions based on deep technical and industry expertise, diligent preparation, clear guidance, and singular focus on your needs. To learn more, please contact Edward Kim, JD, CECP, at ekim@eksh.com or 303/740-9400.
