Business Acumen for Compensation Professionals

What are the Key Competencies for Compensation Professionals? - ANSWER Financial Management, HR Management & Resource Management Which of the following is a compensation competency for financial management? - ANSWER Manages procurement and contracting Which of the following is a compensation competency for financial management? - ANSWER Demonstrates broad understanding of principles of financial management and business expertise necessary to endure appropriate funding levels Which of the following is a compensation competency for financial management? - ANSWER Understands ROI of programs and initiatives Which of the following is a compensation competency for financial management? - ANSWER Prepares, justifies and/or administers the budget for the program area Which of the following is a compensation competency for financial management? - ANSWER Uses cost-benefits thinking to set priorities Which of the following is a compensation competency for financial management? - ANSWER Monitors expenditures in support of programs and policies Which of the following is a compensation competency for financial management? - ANSWER Identifies cost-effective approaches Which of the following is a compensation competency for financial management? - ANSWER Assesses performance plans based on stated objectives Which of the following is a compensation competency for HR management? - ANSWER Assesses current and future staffing needs based on organizational goals and budget realities Which of the following is a compensation competency for HR management? - ANSWER Ensures staff are appropriately selected, developed, appraised and rewarded Which of the following is a compensation competency for HR management? - ANSWER Takes corrective action Which of the following is a compensation competency for HR management? - ANSWER Understands basic organization design principles Which of the following is a compensation competency for resource management? - ANSWER Determines, sources and collects appropriate data to facilitate fact-based decisions Which of the following is a compensation competency for resource management? - ANSWER Effectively partners with internal staff and external consultants or vendors Which of the following is a compensation competency for resource management? - ANSWER Uses efficient and cost-effective approaches to integrate technology into the workplace and improve program efficacy What sets apart top performers? - ANSWER The ability to tie together all the competencies for compensation professionals, distill key messages and make impactful decisions Business Acumen skills and behaviors - ANSWER Understanding the Mission, vision, values; Business strategy; Organizational culture; HR strategy; Reward strategy... The compensation professional with business acumen can: - ANSWER Demonstrate strong influencing and negotiation skills in order to navigate the approval process with stakeholders who have conflicting requirements. The compensation professional with business acumen can: - ANSWER Be prepared to develop and facilitate agreement for the rewards philosophy, principles, strategies and programs. The compensation professional with business acumen can: - ANSWER Focus on data and be an expert on the numbers. Compensation and rewards are emotional issues within organizations and stakeholders have many vested interests. The compensation professional with business acumen can: - ANSWER Representing the compensation point of view with data and relating that compensation to business results helps other leaders look at facts as they relate to the organization's bottom line. The compensation professional with business acumen can: - ANSWER Understand and navigate regulatory challenges in the application of rewards programs globally. The compensation professional with business acumen can: - ANSWER The compensation professional has a fiduciary responsibility to their organization to ensure that the financial resources of their organization are spent in a prudent manner. The Importance of Business Acumen - ANSWER Able to contribute to the organizational success by being able to understand the financial and strategic context of the organization. The compensation professional with business acumen can: - ANSWER Able to explain the ROI of initiatives and the value to the business. The Importance of Business Acumen - ANSWER Engage with executive leadership by being able to represent the perspective area of expertise and articulate its role in business outcomes. The Importance of Business Acumen - ANSWER Able to appreciate the connections between your activities (self-improvement and career development) and the success of the wider organization. The Importance of Business Acumen (self-improvement and career development) - ANSWER Ability to display confidence and decisiveness in your plan design and your analysis of metrics. Ability to inspire and excite others to achieve their potential. Why are organizations in business? - ANSWER Profit-based organizations are in business to maximize shareholders' long-term wealth. Why are organizations in business? - ANSWER Non-Profit organizations require funds in order to provide a service. Mission - ANSWER The intention or purpose of the business. Also answers the question "Why are we in business?" Vision - ANSWER What the organization wants for the future. Describes who we are and where we are heading. Values - ANSWER Guiding principles and beliefs shared by stakeholders; How we work and who we are; What kind of organization we want to create in pursuit of our vision. Strategy - ANSWER Goals, directions to achieve those goals and policies to support those efforts. How we are going to compete and achieve our mission and what makes us different. Profit Model - ANSWER Plan for how the organization generates revenue and make money. Why customers are willing to pay for our goods and services. Competitive Strategy - ANSWER The broad framework of principles and approaches that guide day-to-day decisions affecting the business, including how a company positions itself in the market. What are the 3 areas in competitive strategy - ANSWER Operational excellence, Product/service leadership and Customer intimacy. Operational excellence - ANSWER Price/cost-based strategy that can include a combination of price, quality, dependability and ease of purchase, minimizing waste and rewarding efficiency. Product/service leadership - ANSWER Innovation-based strategy that focuses on product development and market exploitation, creating the best products, generating more/better ideas and commercializing them faster than their competitors. Customer intimacy - ANSWER Solutions-based strategy that focuses on creating results for carefully selected customers by building bonds to meet or exceed customer needs in order to build loyalty. What are the different kind of market positions? - ANSWER Star, Question mark, Dog and Cash cow Star - ANSWER Businesses in markets with high market share and high growth potential. What business segment uses cash because of need to sustain growth but can also result in high profits. - ANSWER Star Question Mark - ANSWER Businesses in markets with low market share and high growth potential. What business segment uses cash because of the need to sustain growth. - ANSWER Question Mark Question Mark - ANSWER The ability to generate profits is unknown because of low market share position. Dog - ANSWER Businesses in markets with low market share and low growth potential. This segment typically uses cash from other segments. - ANSWER Dog Cash Cow - ANSWER Businesses in markets with high market share but low growth potential. Cash from these businesses should be used to develop businesses in other segments, such as question marks. - ANSWER Cash Cow What are the business Lifecycle - ANSWER Start-up; Growth; Mature and Decline Start-up - ANSWER The organization is new with little or no formal policies or procedures. The organization's focus is on obtaining capital, marketing products or services, initial sales growth and cash conservation. - ANSWER Start-up Growth - ANSWER In this stage, the organization is highly focused on growing sales, increasing distribution capability and determining how to efficiently produce products or services to meet growing demand. What business lifecycle typically generates the need to begin standardizing procedures through policy creation - ANSWER Growth Mature - ANSWER Focuses on maintaining/increasing market share, improving productivity and otherwise reducing cost of sales. Improvements to products are more evolutionary than revolutionary. - ANSWER Mature The organization typically has higher levels of bureaucracy and greater amounts of cash on hand than at other stages. - ANSWER Mature Decline - ANSWER It must decide whether to reinvest in current products, create new products or maximize profits with current products as long as possible. What 4 components make up the business and compensation strategy? - ANSWER Business, HR, Rewards and Compensation The overall business strategies, including its rewards, HR and business strategy should be aligned to what? - ANSWER The organization's compensation strategy Compensation is often a large percentage of what? - ANSWER The overall operating cost of a business. Compensation professionals should understand that the total reward costs of their organization is a percent of what? - ANSWER Total operating costs What elements of the compensation plan are directly influenced by the organization's business strategy? - ANSWER Investment in resources; Fixed and variable compensation; Market competitive posture. Investment in resources - ANSWER An organization's bottom line is directly related to how much it is willing to invest in HR resources, including compensation resources. Fixed and variable compensation - ANSWER If employees have a significant impact on the bottom line, an organization is more likely to incent those employees whose achievable goals will push the overall profit Market competitive posture - ANSWER The bottom line of an organization impacts how aggressive a stance an organization takes in terms of where it positions itself against the market, such as market median or market upper quartile. Market competitive posture - ANSWER Lead, lag or lead-lag Financial Reports - ANSWER Standardize data across companies and industries, allowing comparisons to be made between companies on a reasonably "apples to apples" basis Promote consistency of communication regarding company performance and value - ANSWER Financial Reports Financial Reports - ANSWER Provide objective information to key constituents Types of Financial Reports - ANSWER Annual and quarterly reports Annual Reports - ANSWER Shows the results for a full 12-month period compared to previous years This time period is called the fiscal year and often, but not always, matches the calendar year of January 1 - December 31 - ANSWER Annual Reports Annual Reports - ANSWER Some companies have a fiscal year that is different than the calendar year, for example July 1 - June 30 Quarterly Reports - ANSWER Shows basic financial results for each 3-month period during the fiscal year. Reports that are not as detailed and might not match with the full 12-month period due to changing accounting estimates over the year - ANSWER Quarterly Reports Types of financial statements - ANSWER Balance sheet, Income statement and Cash flow statement Balance sheet - ANSWER Shows statement of financial position as a specific date. Balance sheet - ANSWER Lists what is owned, what is owed and the equity of an entity Balance sheet - ANSWER Shows the book value of a company Balance sheet - ANSWER Represents the financial health of a company Income statement - ANSWER Covers a period of time. Income statement - ANSWER Shows revenues earned and expenses incurred over a period of time. Income statement - ANSWER Shows the profitability of a company Cash flow statement - ANSWER Explains the change during the period in cash and cash equivalents Cash flow statement, balance sheet & income statement - ANSWER Provides a comprehensive view of the company's financial situation Sources of capital - ANSWER Profits, Equity & Debt Profits - ANSWER Money that comes in from sales Equity - ANSWER Money that investors pay to own a share of the business Debt - ANSWER Money that is borrowed, usually in the form of loans or notes Profit Measures - ANSWER Revenue, Gross Profit, EBIT, EBITDA, Net Income & EPS Revenue - ANSWER The top line or starting point of an organization's income Gross Profit - ANSWER How much the organization earns from each unit (product sold, service delivered) EBIT - ANSWER Also called Operating Profit; how much the organization earns before financing the business EBIT - ANSWER Earnings before interest and taxes EBITDA - ANSWER Earnings before interest, taxes, depreciation and amortization EBITDA - ANSWER Often the largest non-cash expense EBITDA - ANSWER Might be more indicative of real cash generated by the business Net Income - ANSWER Earnings available to equity owners after paying debt and taxes EPS - ANSWER Earnings attributed to each share of stock Growth Rate - ANSWER Looks at how fast the organization is growing Margins - ANSWER Looks at how much the organization earns per dollar of revenue, how efficiently the organization is operating and what the operating leverage is for the organization Gross Margins - ANSWER Looks at how efficiently the organization is operationg Net Margins - ANSWER The addition of such costs as taxes and loan interest Market Metrics - ANSWER Measure the potential gap between shareholder and management expectations for the future Price to Earnings Ratio - ANSWER Stock price/net earnings per share Price to EBIT/EBITDA Ratio - ANSWER Stock price/EBIT or EBITDA per share Price to Revenue Ratio - ANSWER Stock price/Net Sales per share Market-to-Book - ANSWER Stock price/book value per share TSR (total shareholder return) - ANSWER Measures the total return shareholders have earned on their investment Total Shareholder Return - ANSWER Increased market value and reinvested dividends paid Working Capital Efficiency - ANSWER Describes how quickly the organization is converting short-term capital into cash. It also aids in forecasting future working capital requirements. Examples of Working Capital Efficiency - ANSWER Accounts receivable turnover/days receivable; Inventory turnover/days inventory; Payable turnover/days outstanding Return on Capital - ANSWER Describes how effectively the organization is investing capital. Return on Capital - ANSWER Higher rates of return on investments create more value, whereas investments below the cost of capital destroy value. Return on Equity - ANSWER Net earnings/shareholder equity Return on Assets - ANSWER Net earnings/total assets Return on Capital/Invested Capital - ANSWER Net operating profit after tax/invested capital Economic Value Added - ANSWER Net operating profit after taxes - (capital x cost of capital) Time Value of Money - ANSWER Present value (PV) will increase to a future value (FV) with the inclusion of time (N) and interest rete (%i) Future Value - ANSWER Looks at current holding and determines how much the investment will grow over time. Present Value - ANSWER Looks at the desired value in the future and determines how much needs to be invested today to realize that amount Accrual Accounting - ANSWER Revenues and expenses are recorded when they occur, regardless of when the cash flows. Accrual Accounting - ANSWER The most common type of accounting for publicly held and privately owned companies Accrued Revenue - ANSWER When a company ships an order to the customer with the appropriate invoice, it is recorded as a sale, even though the customer's payment will not be received until sometime in the future. Accrued Expenses - ANSWER Payday is January 8th for the prior two weeks; accrued costs for two weeks are recorded in the prior year's income statement, including base salary and related benefits (e.g., payroll taxes, health welfare and retirement benefits) A Forecast - ANSWER A best guess of what the future holds for the organization Forecasting - ANSWER Relies on internal factors, such as historical accounting and sales data. Forecasting - ANSWER Looks at external factors such as market conditions and economic indicators Forecasting - ANSWER Determines what the future holds based on historical data and external factors Growth Question - ANSWER Division or product line? Growth Question - ANSWER Profits (bottom line) Investment Question - ANSWER What is our maintenance capital expenditure (fixing what we already have)? Business Analytics - ANSWER The skills, technologies, applications and practices of continuous iterative exploration and investigation of past business performance to gain insight and drive business planning. Business Analytics - ANSWER Makes extensive use of data, statistical and quantitative analysis, explanatory and predictive modeling, and fact-based management to drive decision making. Strategic Analysis - ANSWER Evaluating the industry and the market economics Strategic Analysis - ANSWER Understanding your business and its competitive strengths and weeknesses Strategic Analysis - ANSWER Determining possible future changes Data Analysis - ANSWER Identify missing data; Recognize inefficient use of data; Identify trends and key messages emerging over time Key Performance Indicators (KPIs) - ANSWER Cost Analysis; Cost Leverage; Operating Profit and Marginal Cost Cost Analysis - ANSWER Fixed and variable cost Fixed costs - ANSWER Do not vary for each dollar of revenue; The organization will pay the same regardless of how much it makes by selling its product Examples of Fixed cost - ANSWER Corporate staff; Audit fees; Basic repair and maintenance costs; Rent Variable costs - ANSWER Very from each dollar of revenue, often at a relatively consistent rate Examples of Variable cost - ANSWER Hourly wages of production/staff services; Sales compensation; Costs of running machines; Raw materials cost; Shipping expenses Cost Leverage - ANSWER If an organization grows its revenue faster than its cost, the profit growth will accelerate. Operating Profit - ANSWER Profits accelerate when you sell more than the same level of fixed costs; When variable costs do not increase at the same rate as sales Marginal Cost - ANSWER If revenue accelerates faster than costs and/or if you have high fixed costs, then the cost per unit sold will decrease as you produce and sell more. Example of Marginal Cost - ANSWER Professional services businesses tend to have low leverage as each incremental dollar generally translates into more people and more pay (low fixed costs) Other Performance Metrics - ANSWER Balanced Scorecard Balanced Scorecard - ANSWER Seeks to use multiple metrics to capture tradeoffs in decision-making and investements Financial Metrics - ANSWER Revenues, earnings, return on capital, cash flow Customer Metrics - ANSWER Market share Internal Processes Metrics - ANSWER Productivity, quality and deadlines Internal Processes - ANSWER Tell how well the business is running and meeting customer requirements Internal Processes - ANSWER Align processes, reduces duplication , improves productivity Innovation and Learning Metrics - ANSWER Employee satisfaction/engagement, turnover, employee value proposition Innovation and Learning Metrics - ANSWER Essential in knowledge-based industries where the employees are the primary resource Budgeting - ANSWER A process driven by forecasting and then setting finances in stone based on the organization's expectations. Budgeting - ANSWER Its about making choices regarding where money is spent and what must be left for another time The Budget - ANSWER Annual operating plan (AOP) The budget is based on the best estimates of - ANSWER Amount of revenue that will be generated; How much it will cost to generate that revenue; Other expenses, such as debt repayment Compensation Strategy - ANSWER Should be aligned with its total rewards strategy, the overall HR strategy and the business strategy. Qualitative Data - ANSWER Talking to key stakeholders and employees in order to understand the sentiments and concerns of the workforce and be prepared to act on their feedback Quantitative Data - ANSWER Compensation is traditionally all about the numbers. Business acumen calls for - ANSWER Knowing how to interpret qualitative into quantitative information tailored to stakeholders at different levels 5 Multiple Perspectives - ANSWER Operating Departments, Human Resources, Legal, Finance and Investors Operating Departments - ANSWER Tends to have a narrow view of compensation, seeing only what applies to them. They want to spend what is necessary to attract, retain and motivate employees. Human Resources - ANSWER Is based on the need to spend a certain amount of money in order to attract, retain and motivate the best talent available across the entire organization and discern if the compensation program complements strategies. Legal - ANSWER Must follow local, regional and national laws and regulations Finance - ANSWER Wants to see spending allocated wisely to increase margins and maximize profitability, with a heavy focus on variable costs over fixed costs. Investor - ANSWER They want to see money spent wisely, recognizing the need for some expenses to ultimately generate cash flow, while limiting excess in others such as general and administrative expenses. Investor - ANSWER They want to see long-term success and viability and growth in stock price and or book value. Effective Communication - ANSWER Understand your audience; understand what level of technical information is required; avoid getting caught-up in your own depth of expertise. Collaborate - ANSWER Contribute to organizational goals; Identify key influencers and decision makers; Consider ho to help them achieve their objectives; Give special consideration to partnerships with finance How to Connect with Other Business Units - ANSWER Keep up to date on organizational challenges; Volunteer to work on key initiatives; Find out challenges of line managers; Identify and develop proactive measures Types Employee Connections - ANSWER Executive, Individual Contributors and Managers Individual Contributors - ANSWER Focus is on their own compensation. The employee is concerned about the paycheck. Want to know how the organization determines pay decisions that affect them. Primary communication should be around major program changes Individual Contributors Communication Position - ANSWER Me Managers - ANSWER Need to understand how general compensation levels are set; Need guidance in setting and adjusting staff pay; Need guidance in communication pay-related issues Managers Communication Position - ANSWER Me and my staff Executive - ANSWER Need to understand the compensation structure for group of employees. Also need to know overall program objectives as they make decisions and have persuasive influence on total rewards proposals. Executive Communication Position - ANSWER Me, my staff and the organization What to do when presenting to executives - ANSWER Articulate the problem; Provide relevant facts and data; Recommend a solution; Keep it brief