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Feb 2, 2021
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11. Managing Director, Gallagher
11. Managing Director, Gallagher
On this episode, Jeff hosts Shari Dunn who is a Managing Director and National Practice Leader at Arthur J. Gallagher & Company. Shari specializes in compensation strategy & planning, performance-based incentive programs, and effective organizational design. Jeff and Shari discuss the key attributes of a successful compensation strategy, including competitiveness, internal pay equity, cost management, legality, and correlation to performance. Shari reveals how most employers don’t correctly distinguish between employee development, and measurements/outcomes related to pay. Jeff and Shari discuss problems with numerical ratings in performance reviews and how rater subjectivity creates issues when ratings are linked to compensation. In the complicated world of gender and pay inequity, Shari talks about the false assumptions made from inaccurate industry reports on pay equity, while sharing key strategies to help organizations be part of the solution.

Transcript

Intro: Duration: (01:43)

Opening music jingle & sound effects

Jeff Hunt:

This is Human Capital, a GoalSpan podcast, and I'm Jeff Hunt. Human Capital is where I interview business thought leaders to uncover the deeply human aspect of work. I feel so fortunate on my show because I get to interview a diversity of guests. And today it is no exception. I have the pleasure of interviewing Shari Dunn. Shari is the managing director and national practice leader at Arthur J. Gallagher and company.

And she specializes in compensation, strategy and planning, performance-based incentive programs, and effective organizational design. She previously owned her own firm CompAnalysis, but sold that to Gallagher several years ago. Most of you probably know who Gallagher is, but if not, they are an international insurance brokerage and risk management firm with this compensation arm.

And they have approximately 30,000 employees and are headquartered in Itasca, Illinois. Welcome

Shari Dunn:

Sherry. Thank you. Yeah. Pleasure to see you.

Jeff Hunt:

Well, it's great to have you. And I was excited at the opportunity to talk with you today because compensation and performance management, incentive plans are foreign to so many people.

There's so much mystery around this topic. And so I'm hoping that you can clear up some of the ambiguity that exists out there today.

Shari Dunn:

I'll do my best.

Topic 1. Compensation and psychology (01:44)

Jeff Hunt:

Start us out with your story about how you got into business in the beginning of your career, maybe, and specifically how you ended up in this compensation realm.

Shari Dunn:

Well, when I got out of Cal, I had no idea I wanted to do. I had made changed my major many times ended up in psychology. I went with my roommate to New York City because I couldn't think of anything else to do. And she wanted me to drive her car. She didn't like to drive.

So we went and, the first job I was able to find happened to me in what was then called the personnel department in a bank on wall street. So, in that I had an opportunity to be exposed to a number of what we now call, of course, HR practices, including testing, and statistical analysis and job descriptions and that sort of thing.

And so I really was fortunate that my first position ever was working in that environment and I really loved it. I especially loved it because as a single young woman coming right out of college, I had this opportunity to test all the MBAs that were coming out of the Ivy League schools into the management training program. What's not to like?

Shari Dunn:

And when I returned to California, I also was fortunate to find a position with McKinsey and Company in San Francisco, and my position there was really providing support to all the consulting engagements. And that's where I first had my exposure to compensation and the format of executive compensation.

So, I really loved doing that. I, you know, having a background in psychology, it really helps me because it merges the people part with a business part it's really the intersection. Or some people would say where the rubber meets the road when it comes to business.

Jeff Hunt:

Sure. And I would imagine that the psychology piece is especially helpful when it comes to things like organizational design and development.

Shari Dunn:

Yes, of course. So, and those are fundamental actually to me being able to pay employees correctly. So, it all ties together. I really liked the business part and I also like the emotional part, because pay let's face it. Pay is a very emotional topic, both for employees and for employers. So it's really where two sometimes competing priorities really clash. So that's what makes it so interesting.

Topic 2. The work of a compensation strategy and planning consultant (04:51)

Jeff Hunt:

Definitely. And I think, as I mentioned at the beginning of the show, there's so much mystery around it. I just am reflecting on how we have such a diversity of listeners on this show. And for those that are not necessarily well-versed in compensation. Give us a summary of what a compensation strategy and planning consultant does.

Shari Dunn:

Oh, wow. Okay. So, well, the first thing we do when our clients come to us is find out what they're really trying to achieve, and almost universally, what employers are trying to achieve is to be first of all, competitive meaning to pay what other employers are paying for comparable positions.

And then secondarily. Maybe not second yearly. Sometimes it's the first concern is also to be able to pay equitably, which is, you know, hugely important, especially in these days when we hear so much about social justice and so forth. So internal pay equity is clearly a key criteria and act. We have had clients come to us solely because they're interested in equity.

The third reason that employers come to us is for cost management. Because as you know, salaries are often the highest cost and a company's budget. So, managing it is important, not only in terms of keeping costs low, but also keeping them not too high. So both sides have consequences.

And then the fourth one, especially in California is legal compliance. So as you know, we have a number of regulations and laws that impact pay practices, including the most recent in California, which was the third pay act. Which became active in January of 2017. So as these laws go, it's fairly recent.

And I would say in my experience, very few employers are actually fully compliant with that. And part of what's happening is it's not being enforced. So, but we don't know how long that will last. So legal compliance is key. And then finally, and this touches on your business is the measurement of performance and using pay as an incentive to improve performance. So that's even, it's five, from goals and employers have. So it's quite a tall order

Topic 3. Transformational performance management model (07:34)

Jeff Hunt:

I've seen your performance management models in the past, and I really do believe they're transformational. And I think that it's so challenging for organizations to do that well, but I'm wondering if you can take a couple of minutes, just to talk about.

I mean, I would call it a transformational performance management model, the way you've structured it, but can you take a couple of minutes just to share with listeners what that looks like in terms of how it ties into compensation and incentive? And how that works.

Shari Dunn:

Oh, it's one of my favorite topics. Jeff, thank you for asking. Performance is a big word. And often when we speak with our clients about performance, they treated as a pretty narrow construct, if you will. And that focuses on the annual review, which most people really hate. So, but what I think is that performance is multifaceted.

And it's really two kinds of activities. If you will. The first one is employee development. So, this is where employers help employees by coaching counseling and training them, so that they can improve their behavioral and technical competencies. This one piece of it it's helping the employee and proven most employees really want their employers to help them.

Along that path. The other part is the linkage of performance outcomes to pay. Outcomes is the key word here. So, and in your parlance, it would be goals. So, we think that if you really want to link, pay to performance, whether it's ACE pay, or incentive pay you really need to measure results and they can mean measured at the organizational level.

They can mean measure at the team level, or at the individual level, or all of them. And the only way in my mind that you can really do this effectively is to have all that are measurable, not just smart goals. And they're important but goals that can be measured quantitatively, so they can be systematically linked to outcomes. And we think that's in terms of quantity, quality and timely.

Most employers, these days, aren't making this, the distinction between the employee development part and the measurement of the outcomes. And they're really two different things. Obviously. One is the means and the other is the, so they they're linked, but they're not the same thing.

Jeff Hunt:

So sometimes I would imagine employers and we've seen this as well. Managers will think of goals and they'll actually write activities instead of the results or outcomes. Isn't that correct?

Shari Dunn:

Yes. That's a big issue. Yeah. That's why goal setting requires training.

Jeff Hunt:

Got it. So I would imagine that must be a big component of what you do as well. Because first of all, there's a level of education that you have to provide your clients so that they can truly understand and then you can develop these models, correct?

Shari Dunn:

Yes. Well we just completed a compensation plan update for one of our clients in Southern California. And we made a decision not to link, pay adjustments to performance because they weren't confident in that their ratings from Mary annual review were objective.

And so we decided it's better not to link them to that, rather than to link them to subjective measures. But when we presented the plan to the board of directors, one of the board members was adamant that no estimate should be made without some linkage to performance. So we had this, we had a problem.

We didn't have outcomes measures. So, we ended up using a really simple interim one time only approach to actually link the adjustments to pay. But it wasn't really good. So this requires planning ahead

Jeff Hunt:

And with the outcomes that you would incentivize. Don't you actually provide a range for the employees. So they know very specifically what their incentive is going to be, whether they hit their target, their threshold, or they've exceeded their. Isn't that correct?

Shari Dunn:

Well, there's different approaches in that. And what you say is one. Where you create a plan where if you achieve a certain percentage of your goals, that your incentive, if it's a bonus will be such and so, or your pay level will be so-and-so. But the other approach is where the organization creates a pool of bonus school, for example, that is tied to the organizational results. So, you have a formula, you have a target bonus pool, and then you create the actual pool Mesa on results, and then that is allocated. So, the only disadvantage to that is you can't tell the employees ahead of time, specifically what the bonus will be if they, as individuals achieve the goal.

So, this is an issue between. can the company afford to pay bonuses if the company doesn't achieve its goals? So, there's a lot of planning and thinking that goes into this.

Topic 4. A case study (13:26)

Jeff Hunt:

Right Yeah. It's complicated. And so looking back on the work that you've done with your clients, can you share maybe a case study where you've really helped transform pay structures and achieve these objectives of the client? Tell us a little bit about something that went really well.

Shari Dunn:

Well, what comes to mind is a longstanding client of ours. It's a large nonprofit law firm. And they have had over the areas and we were working with them from when they had 50 employees to now over 500. So, as they grew, they started creating more and more positions.

And of course, all these new positions had new titles and eventually there were almost as many titles as people. This is a pretty common occurrence. And so then the more different titles you have, the more different analyses you have to do in terms of the market and how they compare internally. So it became quite a, quite a task.

And the outcome over the years was that we had many positions that were substantially similar, but with different titles and in some cases, different pay levels. So it became not only an unwieldy from an administrative standpoint, but it became unfair and hard to communicate to the employees. So, a few years ago, we transformed that system into more of a template.

And so instead of creating new job classifications, if you will, where every new position. We created standard sort of titles and career paths and then new positions were bearded fit into that. And also of course all the existing positions. So, it's still a work in progress, but it's much easier to communicate and manage.

So that's one example, you know, it's really initially in any of these plans, it's amount, determining how much a job is worth independent of the person, and then determining where the person should be paid relative to that.

Topic 5. Fixing pay gaps and uncovering problems with the data (15:42)

Jeff Hunt:

And speaking of that, you mentioned it earlier on, there's been so many issues with pay gaps around race and gender. Talk a little bit about how organizations can do their part to fix that pay gap.

Shari Dunn:

Yeah, there's a lot of publicity about us in the press. I'm not sure all of it is accurate. I was very interested in this gender equity issue because being a woman I would naturally pay attention to that. And over the years, I really had noticed employers, at least not intentionally discriminating against women.

At least not in recent times. So, I wondered where all the statistics were coming from. So we hired a Cal student as a summer intern a few years ago and her whole tasks was to find out where that number came from, which was variously 87%, 85% of what women are in relative to men. And so she did, she's been a lot of time researching it through the Bureau of labor statistics and what she learned was quite astonishing.

And that is, that statistic came from adding up all women's pay and dividing by the number of women. And adding up all man’s pay and dividing by the number of men to get a comparison of average pay, what was not taken into consideration was part-time. So, in other words. If you were a time person, your salary was really treated as though you were a full-time person.

And also not anything to do with the levels of positions that people held. So that tells me that's not a surprising number because more women work part-time than men. So I'm not sure that these statistics should be taken at face value. But the employers to answer your question, employers simply need to know how much jobs are worth.

Independent of the people who hold them. So, you're not looking at any protected class characteristics, such as gender, age, race, whatever. You're only looking at the position as though it were yet to be billed. Okay. Uh, duties, responsibilities, qualifications, and so forth. And once you know that, then you actually pay people relative to whatever criteria are important to the organization.

It could be tenure, it could be years of experience. It could be performance. But the important thing is not to let who the person is in terms of their personal characteristics, be in any way, shape or form of factor. And that's really where you get into performance. Cause most employers say they want to link, pay to performance.

And then the question is, is your performance measurement tool also non-discriminatory? I could go on, on that topic, but you probably don't want me to.

Jeff Hunt:

It’s very sensitive topic. And I think it's worthy of a significant discussion because of the emotions associated with it. And I appreciate you bringing up the fact that we may not be comparing apples to apples when looking at those statistics.

And so, it sounds like what you're saying is the most important element is actually, first of all, Knowing and understanding the value of the job or the, you know, that's not the exact words you used, but the job value. And then secondly, having the process set up internally to be able to essentially remove emotions from the decisions and that will allow organizations to achieve their objectives associated with compensation.

Shari Dunn:

Yeah. And it's also important, in that context for employers to not give overall blanket increases because if you have inequities and you give everyone a 3% increase, you're just perpetuating the any inequities you may have. And so that's one way you can create inequities.

And the other way is through hiring practices. So, if you negotiate, pay with a new hire and you end up paying your new employee, either much less or much more than existing employees who have that position, you create an immediate inequity, which is with you for years unless you correct it. So those are the two primary ways employers sort of unwittingly, create these inequities. And, you know, it really, it's not about the increase its amount of the actual pay.

Topic 6. Business effectiveness (20:53)

Jeff Hunt:

Well, so much of in business, so much of business is about business effectiveness is about being proactive and intentional and strategic in what we do. And it sounds like you're saying organizations that don't really follow those three elements in the areas of compensation, get into problems as a result.

Shari Dunn:

Yes. That's, that's why I don't think we'll ever have a shortage of business.

Jeff Hunt:

Exactly. And, and speaking to these businesses that really don't have a structured comp plan in place. You know they're not proactive. Maybe they're not strategic. They're not as intentional. They make emotion-based decisions around compensation. Perhaps they've done it for years. What would you say to those leaders? In terms of their best, first step in tackling, what can feel like an overwhelming project. So maybe they ignore it.

Shari Dunn:

Well, the first and most important step is to recognize that there's a need and to think through what you really are intending to do.

And then for any organization structuring positions in terms of reporting relationships, qualifications and functions is very important. So sometimes we go into a situation where we're going to create a pay plan. But then we find out there's not clarity on the jobs themselves. And the titles often are meaningless, are misleading, even worse.

And so, then we have to engage in an organizational design process where we say, what do we really need in terms of functions, levels, and accountabilities, and then remap all the employees over into that new structure before we can even figure out how much they should be paid.

Jeff Hunt:

But all that work in investments really pays off in the end, doesn't it?

Shari Dunn:

Well, sure. I mean, we bind is that employers who don't have a good pay structure. Usually, they are paying at least 25% of their employees too much. Another 25% do little and only half. We've looked at this across a number of organizations only half are paid plus or minus even 10% of where they should be paid.

That’s very significant, and so are the legal risks. And not only that but the risk of losing employees because of low pay or being unable to hire new employees. I mean there's huge risks to not paying correctly. And a lot of them are financial.

Topic 7. What to do when you don't have a well-thought-out compensation plan (23:36)

Jeff Hunt:

So Sherry, what advice do you have for employees that are in organizations that really don't have a well-thought-out compensation plan?

I mean, what are some of the ways that they can advocate for themselves? And maybe know that they're getting paid fairly or when do they know whether they should be really looking around and for other roles in other companies?

Shari Dunn:

Well as an employee, the first thing I would do is ask my supervisor what the pay grade is for my position and what their pay ranges, and so forth and where I stand in it, and also what my opportunities are for promotion.

And if the manager's unable to answer that question, then I would ask them to find out, or me three-way jarred. And if there is no plan, then as an employee, I think I would ask the employer to try to create some more, more structure, and better communications around pay so that an employee can do something.

But if the employer does tell them they have a structure and tells them where they're paid relative to that, then that should me. You know the worst they can say as well. I don't agree with that. And then that can be the start of another conversation.

Jeff Hunt:

At least it shows the employee that the employer does have it thought out. They've done some work in this area, so, yeah, that's helpful.

Shari Dunn:

So, a lot of employers have plans for their highly secret app. And, and they don't want, they don't want employees to know what they're doing because they can't really justify it sometimes. So, that's another issue. As an employer, you should be able to justify your payment plan to your employees.

Topic 8. Lighting round questions (25:33)

Jeff Hunt:

Let's switch to some lightning round questions. You okay with that? That is where I get to just ask you some top-of-mind questions and you give me top of mind answers, whatever comes to mind. And so, the first one I want to ask is to share with our listeners. One of the most valuable leadership lessons that you've learned you learned over your career.

Shari Dunn:

Oh, without question listen. Listen, listen, listen, don't talk. Listen. It's by far the best approach to managing people is if you don't know what they're thinking and you don't give them an opportunity to speak, you're lost before you start.

Jeff Hunt:

I heard a great acronym on that recently, Sherry, which is W.A.I.T. Why am I talking? Wait, why am I talking? So we need to ask ourselves that. And then I also heard. If you're still struggling after you wait, then it's W.A.I.S.T. Why am I still talking?

Shari Dunn:

That's a good one.

Jeff Hunt:

A profound bit of wisdom. He just gave us all to listen more.

Shari Dunn:

Oh, so important. Yes.

Jeff Hunt:

What are you most profoundly grateful for?

Shari Dunn:

Oh, well, I would say I'm most profoundly grateful to be healthy. Personally grateful to have a job for those two things. Compared to what, what to troubles. So many people have, I feel very fortunate.

Jeff Hunt:

So if you could interview one person who would it be? And it doesn't matter whether they're living or not.

Shari Dunn:

Mother Teresa.

Jeff Hunt:

Ah, that's great.

Shari Dunn:

My favorite. I feel as though I would like to do more in the way of helping others. I mean, I get satisfaction out of my career choice because I feel I'm doing some good in terms of helping employers to a better job of working with their employees. But Mother Theresa took it to another whole level way beyond that. And I admire that.

Jeff Hunt:

She changed the world in many ways. Didn't she? Yes. What's your top book recommendation?

Shari Dunn:

My favorite business book. I like to read novels, so I'm not going to recommend novels to anyone. But my favorite business book is called abolishing performance appraisals. It was written some time ago, but it was written by organizational development consultants. But their last name was Coen COEN. but it makes the case for the importance of separating the development part of performance from the actual pay part of performance which is kind of unusual for organizational development professionals.

Cause they usually think that development is far more important than pay. That's probably a stereotype, but that's been my experience. And this book is very ahead of its time. Shall we say?

Jeff Hunt:

Sounds interesting. And I think there's a misnomer with a lot of people around technology because technology can actually be the enabler to help replace the performance review, the broken performance review with a new model or method that works much more effectively. Can't it?

Shari Dunn:

Absolutely. And that's why I like your product. It's not so focused on. And if anybody's listening, he didn't ask me to say that.

Jeff Hunt:

Yeah, we don't do advertising on this program.

Shari Dunn:

The thing is that a lot of software is focused on what we call performance, appraisals, and performance reviews, and clearly on the development part. Which is fine, but in my view, you can't just take the mat, you know, assessment, which is often, a rating and apply it to pay. It doesn't work very well because it's a different thing. It's not the same thing as an outcome.

Jeff Hunt:

Yes. Very subjective. If you do that.

Shari Dunn:

Yes. And also, and also most people really don't like doing it.

You know, managers don't like sitting in judgment of their employees and employees don't like being judged. And the thing about employee development is it shouldn't be a positive experience for both parties. It's an opportunity for them and a helpful process. So, to rate them, just kind of defeats the purpose in my mind.

Jeff Hunt:

And if you have a rock star performer that exceeds quota every quarter, but nobody can get along with them. Are they really an average of a three or a four? Are they really? I don't think so.

Shari Dunn:

Really should be coaching coach either to stay in or coach out.

Jeff Hunt:

Exactly. What's the best piece of advice you've ever received?

Shari Dunn:

Oh boy. Can I go back to the third grade? I've always remembered this and it was Mrs. Cook in the third grade, and I remember asking her, it was like one of those things you remember, for whatever reason. I remember asking her, what I should be when I grew up. And she said you can be anything you want. And I don't know why that always stuck with me.

Jeff Hunt:

It’s a great piece of advice regardless of where we are in our careers. Isn't it?. We're always evolving humans, you know, are evolving. So, I like that. And just to wrap things up, Sherry, what is the single most important takeaway for our Human Capital listeners today?

Shari Dunn:

I'd say the most important is to take a holistic view of paying employees and don't think of it as just pay or pay increases, that think in the bigger picture. The contract you have with the employees in terms of what they do and what you do and what they achieve and what you achieve and how that all works together.

Think big picture. That's the one I would say because, without the big picture, you can't create effective plans.

Jeff Hunt:

Great advice, Sherry I've really appreciated our conversation. Thank you for sharing all your wisdom with our listeners today and for being part of the show.

Shari Dunn:

Well, thank you. I appreciate it. It was fun.

Outro (32:28)

Closing music jingle/sound effects

Jeff Hunt:

Thanks for listening to the show this week. we release a new episode of Human Capital on the first and third Tuesday of each month, I would really like to know what you thought of this episode, send your comments to humancapital@goalspan.com. Human Capital is produced by GoalSpan, subscribe wherever you get your podcasts, and please share this podcast with your colleagues, team, or friends, thanks for being Human Kind.

Human Capital — 11. Managing Director, Gallagher
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