Solving the Compensation Puzzle: Putting Together a Complete Pay and Performance System (Practical Hr Series)

Solving the Compensation Puzzle

i

Practical HR Series

Solving the Compensation Puzzle Putting Together a Complete Pay and Performance System

Sharon K. Koss, SPHR, CCP

Society for Human Resource Management Alexandria, Virginia USA www.shrm.org

This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is sold with the understanding that neither the publisher nor the author is engaged in rendering legal or other professional service. If legal advice or other expert assistance is required, the services of a competent, licensed professional should be sought. The federal and state laws discussed in this book are subject to frequent revision and interpretation by amendments or judicial revisions that may significantly affect employer or employee rights and obligations. Readers are encouraged to seek legal counsel regarding specific policies and practices in their organizations. This book is published by the Society for Human Resource Management (SHRM®). The interpretations, conclusions, and recommendations in this book are those of the authors and do not necessarily represent those of the publishers. Copyright © 2008 Society for Human Resource Management. All rights reserved. This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Society for Human Resource Management, 1800 Duke Street, Alexandria, VA 22314. The Society for Human Resource Management (SHRM) is the world’s largest professional association devoted to human resource management. Our mission is to serve the needs of HR professionals by providing the most current and comprehensive resources, and to advance the profession by promoting HR’s essential, strategic role. Founded in 1948, SHRM represents members in over 125 countries, and has a network of more than 575 affiliated chapters in the United States, as well as offices in China and India. Visit SHRM at www.shrm.org. Interior and Cover Design: Shirley E.M. Raybuck Library of Congress Cataloguing-in-Publication Data Koss, Sharon. Solving the compensation puzzle : putting together a complete pay and performance system / by Sharon Koss. p. cm. ISBN 978-1-58644-092-3 1. Compensation management. 2. Personnel management. I. Society for Human Resource Management (U.S.) II. Title. HF5549.5.C67K675 2007 658.3’2--dc22 2007041834 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 08-0643

Contents Preface and Acknowledgements

xi

Introduction: A Step-by-Step Guide to Designing a Pay-for-Performance System

1

What Is in This Book? What Is Not in This Book?

Chapter 1

A Historical Look at Pay for Performance Major Labor Market Trends Workforce Trends: Generations Working Side by Side Multicultural Issues No Middle Class—The Haves vs. The Have Nots Now What?

Chapter 2

Chapter 3

Is Pay for Performance Worth the Trouble?

2 3

5 5 7 9 9 10

11

Components of a Successful Pay-for-Performance System Organizational Metrics to Gauge Readiness for a Pay-for-Performance Plan Myths and Facts About Merit Pay Best Practices in Pay for Performance Public Sector and Non-Profit Organizations Real-Life Example: A Tale of Two Cities: The Importance of Top Management Support Compensation Boot Camp: Concepts and Definitions Sanity Suggestions

12

Compensation’s Role in Human Resource Strategy

21

Engaging Key Stakeholders to Support the Compensation Strategy The Payoff of a Pay-for-Performance Compensation Strategy Important Considerations in Designing a Compensation Strategy Goals for the Pay-for-Performance System 12 Steps for Designing a Pay-for-Performance System How to Conduct a Successful Employee Survey Real-Life Example: The Case Study of the Dog Shelter Where Its Bark Was Worse than Its Bite Compensation Boot Camp: Concepts and Definitions Sanity Suggestions

13 13 14 15 16 19 20

21 24 25 29 29 33 34 35 35

v

vi • Solving the Compensation Puzzle

Chapter 4

The Pay-for-Performance Foundation

37

The 500-Foot View: Where Are We Going? 37 Sticky Design Issues 41 What Are the Best Resources? 41 When Is an Employee Design Team Not Appropriate? 43 Compensation Policy Decisions 45 Pay Secrecy in Private-Sector Companies 47 The Case of Pay Secrecy: The Need-to-Know Theory 47 What Is Salary Compression? 48 Can Pay Compression Be Resolved? 48 Managing Pay for Performance in Financial Downturns 48 Create a Three-Year Strategic Plan for Compensation and Benefits 49 Transformational vs. Transactional Upgrades 50 Real-Life Example: Swimming with the Sharks 51 Compensation Boot Camp: Concepts and Definitions 51 Sanity Suggestions 52

Chapter 5

Chapter 6

How to Write a Job Description

53

Common Uses for a Job Description Simplifying the Process of Writing Job Descriptions Enhancing the Quality of Job Descriptions Gathering Job Description Information Tips for Writing Job Descriptions Suggestions for the Supervisor Review Process Common Issues that Arise During the Supervisor Review The Necessity of Management Approval Editing the Job Description: The Final Check The FLSA Puzzle: Is the Position Non-Exempt or Exempt? Job Descriptions and the Americans with Disabilities Act (ADA) How to Keep Job Descriptions Up-to-Date Employee Job Description Input Form Real-Life Example: The Case of the Fishing Company Managers Who Hated Paperwork Tips and Takeaways Compensation Boot Camp: Job Description Terms and Job Analysis Methods Sanity Suggestions

53 53 55 56 56 57 58 59 59 62 64 65 65

Make Sure Employees Are in the Right Salary Range

69

External Equity—The Market Study How to Prepare for a Market Study Major Sources of Salary Information How to Make the Salary Survey Decision How to Use Salary Survey Information

66 66 67 67

69 69 71 75 77

Contents • vii

How to Match the Organization’s Jobs to Its Pay Surveys Market Survey Tips Matching Jobs Like a Compensation Professional Example Quality Assurance: The Critical Last Step Make Sure the Salary Plan Fits the Organization Internal Equity Challenges Real-Life Examples: The Case of the Complex Collection The Case of the Difficult Blood Draw The Case of the Life-Saving Social Worker Steps for Completing an Internal Equity Review Job Ranking Real-Life Example Point-Factor Internal Equity System Point-Factor System Advantages and Disadvantages Steps for Designing a Point-Factor System How to Create Salary Grades Pay Range Widths: What Do You Need to Know? Progression Between Salary Grades Real Life-Examples: The Case of a Nice Title, But No Raise The Tale of the Housekeeper vs. Janitor Market Pay The Case of the Mysteriously Underpaid Tech Support Department Compensation Boot Camp: Terms: Market Study Sanity Suggestions

Chapter 7

Performance Appraisal: An Essential Step to Pay for Performance Where Do We Stand? What Is the Bottom Line? Coaching—A Unique Opportunity to Change an Employee’s Life Real-Life Examples: The Case of the 20-Something Employee The Case of the Drinking Employee Steps for Making the Final Link to Pay for Performance Real-Life Examples: The Case of the “Drive-thru Performance Appraisal” The Once-in-a-Lifetime Thank-You Sanity Suggestions

Chapter 8

How to Design, Update and Maintain the New Compensation System How to Update a Salary Plan for New Jobs Real-Life Example: The Case of the Manager’s Clever Work Around for More Employee Pay Salary and Benefit Information as Part of the Annual Budgeting Process

77 78 78 79 79 80 81 81 81 81 82 83 83 83 84 85 86 87 88 89 89 89 90 91

93 93 94 97 97 98 101 104 104 105

107 107 108 108

viii • Solving the Compensation Puzzle

Compa-ratio Examples 111 Administration of the New Compensation System 111 Promotional Adjustments 113 Approvals of Compensation Decisions 114 Maintaining the Pay-for-Performance Link in Hard Times 114 Real-Life Example: The Case of the Employees in the Wrong Place 115 Compensation Boot Camp: Compensation Administration Terms 117 Sanity Suggestions 118 Next Steps 118

End Notes

119

Index

149

About the Author

155

Figures Figure 1 Key Stakeholders of a Pay System Figure 2 Market Position Choices Figure 3 Pay Policies: Advantages and Disadvantages Figure 4 Roles for Employee Compensation Committee Figure 5 Work Plan for a Small Company in a Mid-size City Figure 6 Salary Survey Market Data Choices Figure 7 Relevant Labor Market Figure 8 Three Major Types of Salary Survey Choices Figure 9 Suggested Annual Salary Increase Guidelines for FY 2009 Figure 10 Compensation Forecasting & Budgeting Process

22 25 30 43 44 70 70 72 104 117

Tool 1 | Compensation Philosophy Questionnaire Tool 2 | E  mployee Guidelines for Writing Excellent Job Descriptions Tool 3 | Action Verb Examples Tool 4 | Job Description Questionnaire (Non-exempt) Tool 5 | Job Description Questionnaire (Exempt) Tool 6 | Completed Job Description Questionnaire (Exempt) Tool 7 | ABC Company Official Job Description (Exempt) Tool 8 | Job Description Resource List Tool 9 | Part A | Market Survey Summary Sample Tool 9 | Part B | ABC Company List of Exempt Jobs by Grade Tool 10 | Sample Salary Range Structures Tool 11 | ABC Company Salary Administration Manual

121 122 124 125 126 128 130 132 133 134 135 138

Tools

Contents • ix

CD-ROM Tools Tool 1 | Compensation Philosophy Questionnaire Tool 2 | E  mployee Guidelines for Writing Excellent Job Descriptions Tool 3 | Action Verb Examples Tool 4 | Job Description Questionnaire (Non-exempt) Tool 5 | Job Description Questionnaire (Exempt) Tool 6 | Completed Job Description Questionnaire (Exempt) Tool 7 | ABC Company Official Job Description (Exempt) Tool 8 | Job Description Resource List Tool 9 | Part A | Market Survey Summary Sample Tool 9 | Part B | ABC Company List of Exempt Jobs by Grade Tool 10 | Sample Salary Range Structures Tool 11 | ABC Company Salary Administration Manual Tool 12 | How to Achieve a Successful Employee Survey Tool 13 | Completed Job Description Questionnaire (Non-exempt) Tool 14 | ABC Company Official Job Description (Non-exempt) Tool 15 | Sample Point-Factor System Tool 16 | Sample Custom Salary Survey Tool 17 | Sample Performance Appraisal #1 Tool 18 | Sample Performance Appraisal #2 Tool 19 | How to Deliver Quality Performance Appraisals Tool 20 | Compensation Survey

Preface and Acknowledgements I believe that rarely is a person born as an author. Instead, it takes many years of both life experience and work experience. Along each step of the way I’ve been very fortunate to have wonderful people in my life. For a new author, all of the experiences and support bring you to a point where you have a book inside you waiting to be written. I think that many successful people have their foundation with their family. I’d like to name these people as a small way to thank them. So now I want to acknowledge my good fortune to have the world’s most wonderful parents—Don and Mary Ann Strong. They encouraged me when I didn’t want to budge and supported me when I needed it. I’m very lucky to have a sister, Karen Bekins, 14 months younger than me, that was my “twin” when I was young and now is a best friend. Next, I want to acknowledge Washington State University as a place where I was able to develop many of the skills that helped me enjoy a 30+ year career in human resources. It truly is a university that lives up to its motto, World Class Face to Face. One of my many lasting legacies of my school years is two best friends, June Erdman Bartell and Marcha Groot. My first mentors were also my supervisors before I went into consulting at the age of 29. I’m fortunate to have this group as good friends—almost 30 years later. A special thank you to Jack Martin, my first boss, Bill Scott, who helped develop me as a manager, and Bill Ellis, who supported me in starting my consulting business. Later on, as a brand new HR consultant, I had the support of Cathy Fyock, Wendy Bliss, Dale Cowles, Richard Denmark, Ray Weinberg, Dr. Hank Hennessey and Eric Peterson. xi

xii • Solving the Compensation Puzzle

I’m also proud to be a Past Chair of the Human Resource Certification Institute and on the faculty of the Society for Human Resource Management (SHRM). This would not have been possible without me meeting, almost by chance, the now retired former president of SHRM, Mike Losey. He always made me feel special—and encouraged me to do things that I would have never believed I was capable of. Next, I want to acknowledge someone who supported me on a personal and professional level and contributed directly to this book. Thank you Veronica Smolen—she started out as my next door neighbor growing up, was a client for many years and now a colleague who provided me with encouragement, editing and a reality check when I needed it. Finally, this book is dedicated to my husband and business partner, Doug Koss. Many young girls dream about finding their prince, yet it’s rare to marry a man who is so many wonderful things all merged together—closest friend, business partner and soul mate!

In t roduct io n

A Step-by-Step Guide to Designing a Pay-for-Performance System This book is written especially for human resource (HR) professionals who do not have the resources to take on the task of designing a pay-for-performance plan when their bosses are breathing down their necks and saying, “We needed this yesterday. How fast can you get it done?” It provides valuable information for laying a solid foundation for a pay-for-performance plan, which is a base compensation system with accurate job descriptions. When you start to develop and implement a pay-for-performance system in your organization, expect to experience some pain. Employees generally do not embrace change. Some employees feel they should be rewarded simply for showing up for their job each day and doing the bare minimum. The potential payoff of a pay-for-performance plan is its ability to attract, motivate and retain top performers. Because 20 percent of an organization’s workforce does 80 percent of the work, an organization should construct a plan that appeals to this valuable segment of employees. To fully engage employees to be creative and productive, the compensation system must match and encourage their efforts. One of the basic tenets of management is “Behavior follows the money.” A company’s largest expense is its compensation program, especially in today’s knowledge-based economy where attracting and retaining talent has a tremendous impact on organizational performance. Never in the history of the American workforce has compensation played as important a part. A company’s workforce can differentiate it from its competitors. The U.S. workforce continues to maintain a global advantage over other nations in productivity and creativity.

1

2 • Solving the Compensation Puzzle

An organization must make many design decisions in creating its total compensation program. If decisions are made correctly, there will be many benefits; however, poor decisions can result in serious consequences. This book uses a puzzle metaphor to explain a pay-for-performance system and guide HR professionals in making decisions for tailoring a system that meets their company’s needs. Many organizations already have parts of a pay-for-performance system in place, but feel that they are ineffective in rewarding star employees for their efforts. By sorting and interlocking parts of the pay-for-performance system like puzzle pieces, organizations can create a system that rewards and impacts an employee’s performance and contributes to the organization’s success. A missing piece, or one that is used incorrectly, can negatively affect an organization’s pay-for-performance model.

What Is in This Book? This book is a one-stop resource based on a practical, comprehensive approach to designing a competitive pay system that rewards employee performance. It explains the major components of a successful pay-for-performance system and includes background information, practical tips, real examples, detailed steps and sanity suggestions. It links pay and performance by reviewing the concept of total compensation, beginning with base pay as the all-important foundation, followed by benefits, incentives and work environment. This book is designed to help organizations no matter where they are in the process, whether they’re starting from scratch or looking to improve their current system. Designing a pay-for-performance system is a large and difficult undertaking, and organizations often need to change their system in the middle of the design process. This, of course, makes it that much more difficult for those in charge of designing the program. (This book makes it a point to cater to readers who need to jump in midway, as each chapter lays out the challenges and steps necessary to resolve major issues.) Tools are located at the back of the book and on the companion CD. These include checklists, steps, policies, communication, training materials and forms needed to design a pay-for-performance system. These compensation tools were developed over 25 years of working in the trenches, helping a wide variety of companies develop pay-for-performance systems.

Introduction • 3

What Is Not in This Book? Incentive pay is an important part of a well-rounded pay-for-performance system, but the subject is too complex to be effectively tackled in this book. Global compensation systems also are not addressed within this book’s pages. Although this book outlines many principles that can be used in pay systems outside the United States, specific laws for other countries are not addressed and need to be taken into account when designing a global system.

Ch a p t er

1

A Historical Look at Pay for Performance Job evaluation, compensation administration and pay for performance are not new concepts. From the beginning of time, there have been systems that reward different levels of performance. Historical evidence suggests the word “salary” is derived from the Latin word “salarium,” which means “salt money.” In Roman times, soldiers and workers were paid in part with salt, considered a precious commodity many centuries ago. The expression “worth his/her salt” comes from this Roman pay system where workers could earn approximately 10 times the salt for superior efforts. As the American workforce moved from the family farm economy into the factory setting, many employers were paid a piece rate for production. The union movement was built out of the piece-rate system, where employees were treated like machines and received no pay for retirement, illness and injury. Unions became active in the early 1900s as a way to force employers to treat employees more fairly. From the 1980s to present, pay for chief executive officers rose substantially over 200 percent, while the average factory worker’s pay increased about 50 percent.1 In today’s economy, the manufacturing sector is moving overseas, with knowledge-based services being the fastest-growing sector. In this sector, an organization’s employees are its competitive advantage and its largest expense. In fact, more than 80 percent of Fortune 1000 firms use some type of performance-based compensation plan.2

Major Labor Market Trends The fastest-growing sector is small businesses. Even larger organizations realize that they need to be nimble and think, move and act like a small business to remain competitive. Conversely, small businesses must be able to manage 5

6 • Solving the Compensation Puzzle

compensation issues successfully on their own, without heading to a large corporate headquarters for assistance. The nature of work has experienced many changes during the past decade, resulting in the largest changes in American history which uniquely support a compensation system that differentiates pay-for-performance levels. There have been noteworthy changes in the employment relationship; for example, employees no longer expect to be with one employer for life. In fact, an employee’s average tenure with an organization is less than three years, and the average 34-year-old has worked for nine organizations in his short career. This fact supports the case for employers receiving maximum performance from employees, and employees receiving maximum rewards from employers. Organizations must be open to changing their business strategy to maintain a competitive edge. Successful organizations have clear goal-setting processes and strict budgets, while employees must be inspired to change focus and efforts quickly to support the organization’s mission. There also have been changes in organizational structure. Organizations will continue to use employees, but will have a mix of employees—core full-timer workers, part-time, job share, temporaries/contractors and consultants. Some organizations will even take this a step further and contract with vendors’ entire departments of employees. Both the state of Florida and the state of Texas, for example, contract many HR functions, such as benefit administration, to an outside vendor. Job design and content continue to change rapidly. An employee’s job description can change overnight. The skills and talents employees bring to the table enable an organization to seize opportunities and go in directions they had not anticipated. Changes in organizational management, style, ownership structure and location may change significantly. It is not unusual for an employee to have several different bosses or change job locations. In addition, the company name on the front door may change if the business is bought, sold or merged with a new firm.

A Historical Look at Pay for Performance • 7

Workforce Trends: Generations Working Side by Side For the first time in history, the American workforce consists of four, and soon to be five, very distinct generations working together. This wide range of working generations creates a real challenge for an organization’s attempt to use compensation and benefits wisely. One of the first steps is to understand the motivations, values and goals of each generation so a compensation system can be tailored to fit each generation. The traditional family model consisting of a father working outside the home and a stay-at-home mother taking care of two children now comprises less than 7 percent of family units. First Generation: Depression Era and World War II This generation, born before 1946, is characterized by frugality, experience, emotional experience and employer loyalty. Employees in this generation generally do not question authority and will remain with an organization for life. This segment controls the majority of the nation’s wealth, but believes there will be little or no money for the next generation to inherit. This generation will continue to work for some extra money, flexibility and social interaction. Second Generation: Baby Boomers This generation, born between 1946 and 1964, comprises the most sophisticated and educated employees with the highest level of discretionary income in history. They are experienced, loyal and flexible employees with a strong work ethic and serve as great mentors for younger employees. This generation represents a huge segment of employees who, in general, have postponed planning for retirement. In addition, many organizations have done very little planning to close the gap with the retirement of millions of baby boomers. Baby boomers have worked long hours for many years, without long-term loyalty to one company. They can be enticed to stay with one employer, however, in exchange for work/life balance, interesting work and flexible schedules. Baby boomers also are exhibiting a strong pattern in retiring and coming back to work for the same employer or starting a new career in their 50s and 60s. Third Generation: Generation X Generation X employees, born between 1964 and 1978, can be loyal if they believe they are getting their money’s worth in terms of salary, promotional and educational opportunities. They want control over their careers and are

8 • Solving the Compensation Puzzle

willing to change their work situation when new opportunities arise. Generation Xers like to be treated as individuals, not as part of a group. They are high-tech savvy, motivated to achieve career goals and bring enthusiasm and creativity to the workplace. These individuals will question authority and push back if they perceive a policy as unfair. Their mantra could be a radio station, WIIFM (“What’s in it for me?”). The key to managing Generation Xers is to be up front, communicate often and see the work relationship as an equal deal for the employee and the employer. The most effective way to keep these employees happy is to assist them in developing career security. Ironically, if their demands are met, these employees will remain with one employer and not seek greener pastures. Fourth Generation: Generation Y This group, born between 1978 and 1994, is almost as large as the baby boomers and is referred to as the baby boomer echo. Generation Yers are extremely comfortable with technology because their baby boomer parents have spoiled them with computers, I-Pods, cars, cell phones, designer clothes and an expensive lifestyle, including luxury vacations. Because of these childhood privileges, many Generation Y employees expect their employers to spoil them in the same manner their parents did. They have been the center of their parents’ world and this carries over into the work environment. Many Generation Yers move home after graduating college because an entry-level job does not support their accustomed standard of living. If a job does not meet their requirements, they do not worry about rent. Mom and dad usually are willing to let them move back home and will absorb their living costs. This group is weighed down with debt, graduating with large student loans and credit card debt. With a high level of student loans due after graduation coupled with high real estate prices, owning a home is more a dream than a reality for Generation Y. Generation Yers want jobs that conform to their interests and will question the way things have been done in the past. As employees, they are loyal to managers they perceive as caring and trustworthy. They are willing to work hard as long as they are convinced that this will enhance their life and work

A Historical Look at Pay for Performance • 9

experience. This group is more social and willing to be part of a team. It is fairly common for Generation Yers to spend time with their co-workers after hours. Fifth Generation: The New I Generation Bill Gates coined this generation’s name, which encompasses individuals born after 1994. The “I” stands for the Internet because these individuals grew up with the Internet, instant messaging and the global workplace. This group will become the fifth generation of workers in the American workplace.

Multicultural Issues Language Organizations are going global to reach new customers. At the same time, their employee groups are becoming more diverse, requiring more employee communications, career paths, benefits and pay. Alaska Airlines, for example, pays an hourly bonus to English-speaking employees who are bilingual in Spanish. Basic Skills It is almost impossible for organizations to hire employees who meets all their skill sets and competency requirements. To close the skills gap, employers can partner with schools and educational institutions. Organizations also can provide more basic on-site literacy training.

No Middle Class—The Haves vs. The Have Nots According to Robert Reich, former U.S. Secretary of Labor, the American middle class is disappearing. In an “escalator up, escalator down analogy,” he described two classes. Members in “escalator up” receive private education, private lessons, attend a four-year university and often continue on to graduate school in a professional area such as science, math or business. After college, these individuals network professionally and receive financial support from their families. In contrast, the “escalator down” class is marked by large gaps in literacy. Many members of this group are high school dropouts, accept any job that pays well and have no career goals or aspirations. They live paycheck to paycheck and have no financial security.

10 • Solving the Compensation Puzzle

Now What? Armed with knowledge about the five generations of workers, language and skill set considerations, and an explanation about the two classes in the American workforce, HR professionals should now be ready to take the next step in designing a pay-for-performance plan. In many organizations, senior managers may have no experience—or a bad experience—with pay for performance. By leading senior management through the process, rather than dragging them through it, organizations will be more willing to make a longterm commitment to the program.

Ch a p t er

2

Is Pay for Performance Worth the Trouble? The phrase “Pay employees right!” is a good guide for assisting organizations in hiring employees at the right rate and promoting and rewarding employees fairly. Paying an employee too low can be just as devastating as paying too high. In today’s world, it is easy for employees to find out if they have been “low balled.” Two well-known websites provide this information in a matter of seconds. An employee who is poorly compensated will either leave—often at an inopportune time for the employer—or resent the fact that he is paid too low. It is not uncommon to see larger organizations struggle through the budget process to find extra money to help a great employee catch up to market. When payroll is one of the largest organizational expenses, overpaying can have disastrous consequences because many benefit and incentive plans are based on an employee’s compensation. This often makes overpayment even more significant. A well-defined pay policy focused on contemporary outside research and developed from an internal point of view allows an organization to administer their pay system accurately and fairly, thereby avoiding employee lawsuits. Employees will be less likely to sue their employer when the pay system is well communicated and consistently administered. Only 20 percent of an organization’s employees are fully engaged.3 Poor performers can seriously damage an organization’s reputation, alienate customers, decrease productivity, and thwart its ability to move forward. These things will never be recovered—time is one thing an organization cannot get back. Every day an employee is not fully engaged in his or her work, lost 11

12 • Solving the Compensation Puzzle

productivity will never be recovered. “Since World War II, the economy has grown eight-fold while the labor force has only grown two to two-and-a-half times. This means that the average worker is about four times as productive now as they were in 1946.”4 A pay-for-performance plan reduces employee turnover. The average employee remains at a job for just under three years. Employees cite pay, benefits, lack of appreciation, and no feedback or career path as reasons for leaving an organization.

Components of a Successful Pay-for-Performance System n Top

management support in management by employees n Job descriptions n Regular external market compensation survey using at least three surveys n Process for internal equity review n Performance appraisal system that is specific and measurable n Merit increase structure that rewards star employees and gives employees who do not perform a zero increase n Review of the system to make sure it is fair and equitable n Regular updating process for market rates and market pay n Trust

Get Top Management Support Obtaining management support is absolutely necessary for a pay-for-performance system. HR professionals cannot take on a project of this magnitude without management buy-in. Even a basic plan for the smallest employee group will take at least three to six months. For most organizations, a year is required before all the tasks are complete. Some senior managers and many business owners do not like to be put into a box, so they may balk at the idea of more structure. It is important to make senior management realize that this is a flexible plan that has no hard and fast rules. The best compensation plans with a pay-for-performance component are flexible. Emphasize that this is an important tool that will take the guesswork out of hiring, promoting and paying the organization’s most important asset—its employees. Employee issues often keep HR professionals awake at night, so think of pay for performance as a sleeping aid that prevents the organization from getting sued.

Is Pay for Performance Worth the Trouble? • 13

Organizational Metrics to Gauge Readiness for a Pay-for-Performance Plan Organizations with at least 25 employees will reap many benefits by instituting a pay-for-performance compensation system. Typically, unionized organizations and family businesses will wait until the company has more than 50 employees. Organizations that are heavily invested in intellectual capital and sell their employees’ talents often put in a pay-for-performance plan while the company is still small. Others that should consider a pay-forperformance plan include: n Organizations that are required to have an affirmative action plan. n Organizations that are billing employees’ time out. n Organizations that hire more than one employee per month. n Organizations whose competitive advantage is their people, such as government, non-profit, high-technology and biotechnology and service firms. n Organizations that must have the talents of hard-to-find, sophisticated employees, such as IT, engineering, computer, health care and other technology-based jobs. n Organizations that have been around for more than five years. Over time, one annual raise after another will put employees’ base pay considerably over the market rate.

Myths and Facts About Merit Pay Myth: Organizations have been eliminating their merit pay systems. Fact: Merit pay is the most popular compensation system with more than 80

percent of organizations using this method. Myth: Merit pay is more expensive than other methods and does not work. Fact: Merit pay is the most effective pay-delivery system. Top companies use

merit pay more than any other system. Myth: Employees do not trust that they will be dealt with fairly. Fact: One way to eliminate lack of trust is by action. Supervisors need to

deliver accurate and timely performance appraisals. Myth: Employees want awards based on team success. Fact: It is important to have a variety of reward systems, especially for Gen-

eration X employees who want to know what is in it for them.

14 • Solving the Compensation Puzzle

Best Practices in Pay for Performance Consistency in practice and action. Pay for performance is not a one-time, oneyear policy to embrace when times are good. Effective pay-for-performance systems reward employees, even when money is tight. Pay-for-performance plans cannot be executed effectively with cheap pay practices and low merit pay budgets. Employees need a consistent “value” message from the start. An organization must offer a fair pay rate to employees and not seek out to hire the cheapest employees at a rock-bottom rate. This daily consistency of decision making will go a long way in paving the road to a pay-for-performance system. Vision. An organization’s pay practices and work environment significantly impact its mission and culture. Because employees’ behavior “follows the money,” organizations need to define distinguished performance and its corresponding reward level. When an organization has a strong vision that permeates it, from strategic plans to daily employee actions, it is much easier to capture what it is paying for and why. Alignment. How is a pay system calibrated to reward the right behaviors at the right level? To understand an organization’s priorities, take a close look at how it spends its money. If a company pays lip service to pay for performance, but turns around and delivers 3 percent merit pay to everyone, its actions do not reflect its philosophy. Pay for performance takes effort and courage to pay more for stellar performance, and “zero” for poor performance, but it’s well worth it. Senior management support. A pay-for-performance system has a higher success rate when senior managers support it in not only words, but action plans. In other words, senior managers need to take the time and effort to do real performance appraisals and have the backbone to give a well-liked employee a lower raise because of lack of performance. Accountability. Nothing defines pay for performance like a performance evaluation system that holds all levels of employees accountable. Employees need to be accountable for achieving goals and managers need to be accountable to provide the support needed for their employees to succeed. Willingness to fund merit pools with real money. Your organization can’t have it both ways. Pay for performance will not work with an annual raise

Is Pay for Performance Worth the Trouble? • 15

budget (merit pool) of 2 percent. Pay for performance requires a budget that can award meaningful raises to stellar employees. This takes a leap of faith and a willingness to not cut financial corners. Progressive organizations have found that reduced turnover, higher morale and increased productivity make implementing a pay-for-performance system a decision that can have a longlasting positive impact.

Public Sector and Non-Profit Organizations Public sector and non-profit organizations are going through a revolution not only in pay practices but in management style, planning and recruiting. Many areas strongly impact creating a successful pay-for-performance system in these organizations. In many cases, for example, the public sector and non-profit organizations have been on pay systems that provide a cost-of-living adjustment (COLA) and a small adjustment based on where an employee is on the organization’s step system. These systems typically stop at step 7, approximately after the sixth year of employment. It is common to see almost half of the workforce at the final step. The problem is that the organization has no way to reward employees who have topped out. Another issue is that the system is set up to reward the entire workforce the same with no difference based on talent or performance. Pay for performance can be a very large stretch for an organization that has been functioning with a step system for a long time. A decision to change to a system with a totally different pay philosophy can spell disaster. With pay for performance, differential pay changes behavior—employees follow the money. Organizations need to look at who is going to help them successfully change the culture—and how, when and where. This can be done several ways, such as hiring an outside consultant, motivating your management team to drive this change, and having an open discussion with your unions. The next issue that needs serious consideration is that performance appraisals have a very different impact on and importance to your employees. Prior to installing a pay-for-performance system, a performance appraisal just goes through the motions and no additional pay is attached to it. By involving managers and employees, this tool can solicit feedback, enhance employee development and serve as a basis for merit pay. A good way to approach this

16 • Solving the Compensation Puzzle

might be to do a “dry run” with a performance appraisal as if there is money attached. Real-Life Example

A Tale of Two Cities: The Importance of Top Management Support With all the arguments to support merit pay, why would an organization settle for cost-of-living adjustments (COLAs) and a step system based on time on the job for base pay increases? The key difference between these two models is evident in the real-life story of the Tale of Two Cities. One city had top management support pay for performance, while the other city’s senior management was married to a more traditional step pay plan. City A Background Information City “A” is best described as a traditional mid-size city in a growing community with a mix of upscale residential, business, retail and small technology companies. City employees hold traditional roles and staffing levels are lean and mean. The city’s leadership includes an elected part-time mayor and professional full-time city manager. The city manager is fairly new in the position and transferred from out of state. Union relations are friendly with a traditional history of negotiations and pay adjustments. Compensation Plan Background City A had not completed a market study of its positions for more than five years and was behind compared to other cities in a very fast-growing regional labor market. For many years, the city used a very difficult and hard-to-understand point-factor system that weighed the internal value of its positions. Unfortunately, only one employee understood the system. Ironically, this person was out on a long-term medical leave. Additionally, the city council was made up of small-business owners who were very interested in keeping costs down. Compensation Plan Update The new city manager and the senior management team met to discuss compensation philosophy (what was done in the past and should be done in the future), the city’s readiness to replace traditional step increases based

Is Pay for Performance Worth the Trouble? • 17

on time on the job with pay for performance, and concerns regarding the outdated point system. Decision Steps After a survey with the union that covered more than 50 percent of the employees, there was no support to change the step increase pay system. Moreover, the new city manager was opposed to pay for performance based on his previous experience with this system. One of the biggest issues was the lack of labor market information and that employees were leaving not only for other cities in the area, but also for private‑sector organizations. Unanimous support for eliminating the old point-factor tool was lacking, which had not been updated for more than 15 years. Final Decision Steps 1. Set up a thorough market study with like cities and counties and compare the middle step of the City A’s salary structure to the market average. Also include other matches with private-sector organizations in the area. 2. Commit to at least an every three-year review of City A’s pay to the labor market. 3. Eliminate the point-factor system and use a more informal method to determine internal equity. 4. Keep the union leadership in the loop in order to start negotiations on a collaborative point, rather than surprise them. 5. Keep the step system where raises are determined by moving to the next step based on length of service. As a bridge to a possible pay-for-performance system, add two additional steps to the current eight-step system—the move to these two additional steps can only be made by stellar performance. Update Five-Plus Years Later Turnover has continued to be low—although the organization was able to buy some time over the last five years as the demand for employees has been moderate. By setting up a regular market study schedule, turnover was reduced and morale was increased. The real test will be in the next five years—will the organization be able to keep its step system during a major labor shortage? Stay tuned.

18 • Solving the Compensation Puzzle

City B Background Information City “B” is a rapidly growing city with several large high tech companies and a very large and growing housing market. This city is headed up with an elected mayor who is very popular, in addition to well-staffed, innovative HR professionals with a strong interest in designing a creative compensation system. The city is also highly unionized, but with senior union leadership interested in being innovative. Keeping employees and also keeping up with the rapid growth the city faces are bigger issues than the budget. Compensation Steps 1. Put together a cross-functional employee committee to gain input and support for a number of different compensation initiatives. Committee members who meet regularly include union leadership (inside and outside), senior managers, HR, city council and a good mix of employees from many of the city departments. 2. Decide to eliminate the step system where pay increases are based on length of service. Change it to a system where employees receive their raises based on a “merit increase.” Final Compensation Steps

1. Review pay of employees to market; additionally review benefits and other compensation (incentive pay) opportunities. Use market data from other like cities and also the private sector. 2. Create job families and job levels so that employees can get rewarded for taking on additional work. 3. Update the performance appraisal form and train managers. 4. Communicate with employees regarding the new pay-for-performance compensation system. 5. Set up pay-for-performance matrix. 6. Audit the performance merit scale rating to the performance appraisal— does this match up? Update Five-Plus Years Later The organization is still currently using their system. This system has made a real positive impact on union negotiations and dealing with a very tight job market in the technical areas. Turnover has been low—a real blessing in a

Is Pay for Performance Worth the Trouble? • 19

city organization that has grown more than 30 percent in the last five years. When asked if they would they do it all over again, the answer was “yes,” but not without a pause. Stay tuned.

Compensation Boot Camp

Concepts and Definitions n

Compensation: Compensation is not just an employee’s paycheck; total compensation is all of the compensation and benefits an employee receives in exchange for work performed for an organization. Compensation can be divided into two main categories—direct compensation (pay that can be cashed at a bank) and indirect compensation—benefits, both voluntary (such as medical insurance) and legally mandated benefits, such as Social Security and workers’ compensation. Additionally, the non-financial compensation that an employer provides an employee is increasingly important and valued. This includes work environment, type of supervision, job satisfaction, training and promotional opportunities. n Equity in Compensation: This is the key concept on accuracy and fairness in compensation design. Compensation should be looked at from two perspectives, external equity and internal equity. Each is equally important—unfortunately, many organizations cut corners and ignore internal equity. An imbalance in this area will come back to haunt you; most of the employee relations and morale issues around compensation stem from internal equity issues. n External Equity: External equity is comparing your employee pay against similar positions with the corresponding labor market rates. Typically, market pay for lower-level employees is the immediate area. As positions get more senior with skills more difficult to find, then the labor market can extend over several states to a global search. External equity is generally verified with salary surveys. n Internal Equity: Internal equity is often ignored, but is just as important in a dynamic, accurate and fair pay system. Internal equity is the organization’s look at its own jobs and how it pays for these jobs given the job’s relative importance amidst the organization’s own values and business models. Job evaluation is the process used to create internal equity. Internal equity can be looked at in a variety ways—from an informal look by using the whole job method to a formal look by using a point-factor method. A Watson Wyatt survey of 13,000 U.S. employees found that a majority of respon-

20 • Solving the Compensation Puzzle

dents were dissatisfied with their perception of both external equity (59 percent) and internal equity (52 percent).5 n Pay for Performance: Pay for performance, done correctly, is the marriage of an organization’s pay system to its performance appraisal system in order to reward and motivate employees to provide superior performance. To understand the whole concept, it is important to look at each separately, because without a solid, fair compensation plan and an accurate, believable performance appraisal system, pay for performance will not work.

Sanity Suggestions n

Don’t skip the stepping stones. Designing a pay-for-performance system— the compensation system, merit pay matrix and a performance appraisal system—is time consuming and hard. This is not an area to fake it—to lead a project of this caliber, it’s critical to know the steps and laws. Both the Society for Human Resource Management (SHRM) and WorldatWork have some great classes on compensation. n Get help and buy-in. Start with your boss and other senior managers. This means sharing the workload with meeting participation and the creation of job description processes—from the building of ranges to staff-wide communication. Another way to ensure your department heads are supporting the process is to have each department pay their own way (e.g., consulting and temporary help, meetings, salary surveys). n Sell the project. A pay-for-performance system is an important tool to help the manager staff, promote and retain the best employees. When you focus on the benefit of the management tool, rather than the perception of another piece of bureaucracy coming out of HR, you will get a lot more support. n Warn and educate your managers. Pay for performance is more than a change to your pay system; it’s a change to your organization’s culture. This issue has been studied for decades and this phenomenon can be summarized in one easy phrase, “What gets measured gets rewarded.”

Ch a p t er

3

Compensation’s Role in Human Resource Strategy Compensation is one of many human resource (HR) tools that organizations use to manage their employees. For an organization to receive its money’s worth and motivate and retain skilled employees, it needs to ensure that its compensation system is not an island by itself. Not only is it important for an organization to link compensation to its overall goals and strategies, it is important that its compensation system aligns with its HR strategy. Too many organizations plan and administer their pay systems by default; or worse, fall back on “the squeaky wheel gets the grease” practices. More than any other area in HR, ignoring pay and performance systems can be devastating. It is a very expensive and laborious process to hire new employees, buy back trust of current employees and renew the organization’s energy and motivation level. By ignoring this issue, it does not go away or get better with time. It will take extra money and valuable resources to fix the system. Smart, successful organizations do regular planning and evaluating of their compensation and performance appraisal systems. Because compensation is visible and important to employees, it is critical to consistently communicate a clear message regarding how pay decisions are made. In short, a solid pay-for-performance strategy requires that employee pay matches the organization’s message.

Engaging Key Stakeholders to Support the Compensation Strategy There are three levels of compensation strategy that exist within an HR department. The first level is a strategy that is only understood and supported by the HR department. The second is a strategy that is supported by the HR department and translated into practical solutions, policies and decisions 21

22 • Solving the Compensation Puzzle

that guide compensation decisions. The third level, which should be an organization’s ultimate goal, is the most difficult to achieve. It is a compensation strategy that supports a pay-for-performance system that transforms and permeates all levels of the organization. The sooner that these important stakeholders are involved in the pay-forperformance system, the more successful it will be. HR must do its homework and conduct primary and secondary research to obtain answers to the above questions. Primary research is conducted within an organization by obtaining feedback from employees, board members and other key parties (city councils, union leaders, board of directors). Secondary research is information about what other organizations have done. In fact, this book could be described as secondary research to set up a compensation and payfor-performance plan. Following is a suggested list of primary and secondary research resources for each of the three key stakeholders: employees, executive management/owners, and government. Employee Research Primary research. The most efficient and effective way to gather information

Figure 1 Key Stakeholders of a Pay System Key Stakeholders

Employees What is my employment deal?

Management/Owners How can I find and retain the best employees for the least amount of money?

Government How can we best balance competing interests? Minimum Wage vs. Living Wage Union vs. Non-Union American vs. Immigrant Workforce

Compensation’s Role in Human Resource Strategy • 23

directly from employees is to ask them. The newer generations of workers want and demand to be asked. An employee opinion survey is a quick and easy method to obtain information. (See tips on conducting an employee survey on p. 33.) Secondary research. There is abundant information available (in books, magazines and the Internet) about paying new-generation workers. Real-life stories, trends and new ideas can be collected from colleagues and is an important part of information gathering. For example, one colleague pointed out that some Generation Y employees are willing to quit a job and move home with their parents. Many parents of Generation Yers are extremely involved in their adult children’s lives—sharing even their first day of work like their first day of kindergarten. Executive Management/Owner Research Primary research. Like employees, the best way to gather feedback from executive management and owners is to ask them about compensation and pay for performance. In order for HR professionals to gather high-level support to write compensation strategies and policies, management needs to understand why the organization needs this information. They must understand compensation strategies, issues and policies, and have a basic grounding in terms. They should understand why the organization needs to have this information. The best approach is to provide them with some information about the basics of compensation, where the organization currently stands and the benefits of a pay-for-performance system. By holding a compensation philosophy meeting and offering a brief “mini training session” about compensation and pay for performance, HR professionals can motivate executive staff to complete a questionnaire. (For more information, see Tool 1.) This form can be e-mailed to attendees before or after the introductory meeting to solicit executives’ opinions on compensation topics. Secondary research. Many executives do not want to change their traditional way of paying employees without some detailed research about what similar companies are doing with pay for performance. This information should be researched before meeting with executive staff. By anticipating their questions

24 • Solving the Compensation Puzzle

and having some answers ready, HR professionals can raise their credibility with executive management and owners. Government/Other Stakeholders Primary research. In today’s security-conscious workplace, it is necessary to gather information regarding the types of government reporting and monitoring the organization may be under. In some cases, this may be only for the executive staff because of Sarbanes-Oxley. The government is playing a larger part in minimum wage issues, including the “living wage,” which promises to pay higher than the minimum wage to reflect on where the organization does business. Until recently, this was not an issue in the forefront. Over the last two years, two cases arose that dealt with this issue. In one case, a city wanted to build a new hospital. City management had promised the mayor that they would not pay a living wage less than $3 per hour over the minimum wage. In the second case, an internal executive team verbally stated that it would raise the pay rates of its lowest paid employee to at least $4 over the minimum wage. This promise came back to haunt the team. After a comprehensive market study, it looked like they were going to have to make good on the promise or delay some very important moves to the minimum of the salary range for key middle managers. Secondary research. Each state must follow federal guidelines for wages and hours, which vary from one state to another. For example, the state of California has so many unique employee-oriented laws that it has been dubbed, “The Republic of California.” As part of a project of this magnitude, HR professionals should be aware of the labor laws for all states where its organization conducts business.

The Payoff of a Pay-for-Performance Compensation Strategy The biggest mistake an organization makes in setting up a pay-for-performance compensation program is to rush into getting answers before carefully considering the issues. Next to an organization’s strategic planning efforts, dovetailing the compensation philosophy to support the organization’s goals is paramount to success. It is important to discuss basic strategic pay decisions with senior management to ensure the success of the pay-for-performance

Compensation’s Role in Human Resource Strategy • 25

compensation strategy and prevent serious consequences, such as employee turnover and lawsuits. Organizations that know how to manage their talent have the best results. This phenomenon has been studied continually with the same results. In his frequently cited paper on human resource management practices, Mark Huselid lists the following metrics associated with organization success and financial advantages: n A 7 percent decrease in turnover n An increase of $3,800 in profits per employee n Approximately $27,000 in additional sales per employee n An increase of $18,000 in market value per employee

Important Considerations in Designing a Compensation Strategy Does the compensation system match the organization’s overall objectives? In other words, how does the compensation strategy complement other HR initiatives? For example, if quality, experience and a sophisticated skill set are an organization’s strategic advantages, then it will not be successful hiring employees significantly below the market rate for that position. To answer this question, it is important to review the organization’s strategic plan (at least annually) and discuss whether the current HR and compensation systems are supporting these initiatives.

Figure 2 Market Position Choices Meet the Market

Lag the Market

Lead the Market

26 • Solving the Compensation Puzzle

Where does the organization want to be in terms of market competitiveness? In this competitive job market, it is important to be aware of the organization’s competing firms. An organization can lead, meet or lag the market. Lag the Market An organization may choose to offer a compensation package that is valued less than packages offered for a similar job in the labor market. An employer with a “lag the market” philosophy is likely to be at the back of the line when it comes to hiring and retaining employees, especially those with special skills. These problems are the direct result of below-market pay. With the Internet providing pay information with a click of a mouse, employees are less willing to stay and support an organization when they know they are underpaid. Good employees may leave, while less-skilled employees may stay with the organization. Turnover is very expensive. It is estimated to be at least six months’ pay for a non-exempt (hourly) employee and one years’ pay for an exempt (salaried) employee. No organization wants to be a training ground to groom employees for its competitors. Meet the Market This is the most common compensation strategy. This level of competitiveness occurs when an organization’s compensation strategy is equal to the labor market for the same position. This is the pay philosophy that makes the most sense for most organizations. By having a base pay strategy that meets the market, an employer can easily add or subtract variable pay and/ or fringe benefits. By selecting this level, employers can balance cost pressures and the need to attract and retain employees. Lead the Market The “lead the market” pay strategy can be defined as a total compensation package that is above the labor market for a similar position. This strategy may occur because an organization believes that by paying more, it will receive more experienced employees for the same position (although it has not been proven that a higher salary guarantees higher-quality employees). Organizations may select this market in good financial times, but leave them in a tight spot in a downturn.

Compensation’s Role in Human Resource Strategy • 27

Mixed Market Position This market position is becoming more common as employers are realizing that a one-size-fits-all strategy does not suit their workforce. The following are examples of a mixed market pay policy: n An organization that is several miles outside a major city may be able to pay lower for their lower-level hourly employees to match a lower cost of living, but may have to pay at market or above market to attract employees to a smaller, more remote city. n An organization has a mix of difficult-to-fill clinical positions and easier-to-fill administrative positions. To compete in a market with an extreme shortage, it may make business sense to pay the clinical positions at least at market or above market and pay the administrative positions closer to below market. What are the strengths and weaknesses of the organization’s current compensation system? An important component of market competitiveness is to find answers to the following questions: n Is the organization able to attract the appropriate skill sets and types of employees when needed? n Where is the organization hiring its best employees? n How long do most employees stay at the organization? n Where do employees go when they leave the organization? n What are the organization’s promotion policies? n Are employees frequently asked to take on new tasks without being rewarded for their efforts? n Do employees value the company’s benefit, incentive, work environment? What of these items should be changed or updated? n What is the employee morale? This information can be gathered from managers, exit interviews, employee surveys and other communication tools. Employee survey feedback, in particular, provides valuable information for moving forward. n What mix of base pay, incentive pay, work environment and benefit levels make the most sense for the organization when considering the competition, types of jobs, niche and labor market available? How is pay distributed? How does the organization’s current compensation plan link pay with performance on base pay? n Is there a pay matrix that rewards high-performing employees with a larger annual merit increase?

28 • Solving the Compensation Puzzle

n

How well does the organization’s performance appraisal process work? Are the organization’s promotional pay policies consistent? n Does the organization review where employees fall on the pay range according to experience, performance and longevity? n

How is the organization’s pay system administered? What are the strengths and weaknesses of the current system? How is your system structured and what do you want to change about the following: n Number of grades n Separate scales for different types of jobs such as non-exempt, exempt and executive n Size of jump between grade mid-points n Placing a newly created job in the pay range n Determining how and when a job gets reviewed due to changes in responsibilities What are some constraints? It is too easy for an employer to take a shortcut and not acknowledge that all organizations have to work within some important constraints when managing their pay-for-performance system. There are five major constraints: the organization’s ability to pay; legal constraints; union and non-union issues; the internal labor market and the external labor market. 1. Ability to pay. Fancy compensation programs are impressive, but the bottom line is that an organization must be able to afford its pay system. This is true in good and in bad financial times. It is critical that design decisions align with the organization’s financial ability to pay. By partnering with an organization’s chief financial offer, it will be easier to develop a plan that makes sense financially. 2. Legal constraints. In general, base pay plans are regulated by the Fair Labor Standards Act (FLSA), which regulates wages, hours and recordkeeping. 3. Union/non-union issues. For unionized organizations, pay issues are a mandatory bargaining issue that must be negotiated. Organizations must obtain buy in from union leadership early in the negotiation process to be successful in changing the way they pay their employees. 4. Internal labor market. This is where internal equity comes into play. Pay plans must motivate employees to want to stay with the organization and, hopefully, take on management roles or higher-level technical roles in the

Compensation’s Role in Human Resource Strategy • 29

future. To illustrate, an organization can structure a pay plan that will motivate high-level technical employees to move out of overtime eligible positions into first-line management positions that do not pay overtime. 5. External labor market. In today’s global market, organizations cannot operate their pay plan in a vacuum. Basic economics of supply and demand affect employee compensation. To illustrate, the amount of education required to become a pharmacist recently changed. To compound the problem, Medicare added a pharmacy plan for senior citizens. This resulted in a shortage in pharmacists and an increase in pay levels for the job. Collecting information regarding the above compensation questions and issues will give HR professionals a good start in developing a compensation philosophy. Many organizations now advertise their compensation philosophies internally to their employees and externally to the general public, customers and potential applicant pool. At this point, HR professionals should review opinions from their organization’s compensation stakeholders with the Compensation Philosophy Questionnaire. The final critical step is to merge all the opinions on the compensation philosophy questionnaire and other sources and then begin the first draft of the compensation and pay-for-performance strategy. This is too important of a document to sit on a shelf. HR professionals should enlist senior management to help champion it and complete it as a working document to set the stage for the design of the new compensation system.

Goals for the Pay-for-Performance System A compensation system should influence employees to make personal decisions which are congruent with the organization’s needs. Generally, this goal can be broken down into three parts: n Motivate people to join the organization. n Motivate employees to perform at the top of their skill set. n Motivate employees to stay.

12 Steps for Designing a Pay-for-Performance System Step 1: Determine the organization’s pay philosophy. After senior management has determined the organization’s pay philosophy, the next step is to summarize it and review it with middle management.

30 • Solving the Compensation Puzzle

Step 2: Determine the gaps. Where are the gaps between the compensation philosophy and what the organization is currently doing? Do not take on the world. Start with a long-term plan of approximately three years and prioritize what needs to be completed first. If this is a brand new compensation plan, or if it is a major remodel (nothing or very little has been done in three or more years), then start updating the base pay plan first. In this way, other plans that build on your base pay plan also will be done correctly. Step 3: Update job descriptions. Since jobs change so rapidly, it is important to update your job descriptions before working on any other part of the compensation system. Step 4: Decide what sources will be used for external market information. Use at least three salary survey sources for each job. Most surveys are published only once a year. This will save you money and make for a better survey to do some advance research in this area. By participating in a survey (usually requiring one short window of about six weeks per year), organizations can save almost 50 percent on the survey purchase price. Step 5: Plan on how the market survey will be completed. Does the HR department have enough time and expertise to accomplish this task without outside help? Matching jobs to accurate salaries is more difficult than it appears. It takes many years of experience to have the confidence and the credibility Figure 3 Pay Policies: Advantages and Disadvantages Compensation Policy

Advantages

Disadvantages

Lag – Pay lags the market

1. Lower costs – more competitive 2. Money can be used for benefits

1. Hard to attract employees 2. Train for your competitors 3. Dissatisfied employees

Match – Pay matches the market

1. Pay and cost matches competition 2. During good times, (financially) can easily share bonuses and short-term incentives

1. May not be able to keep stars 2. Organizations may not be able to attract stars when labor market is tight

Lead – Pay leads the market

1. Able to attract stars 2. Helps with long-term retention 3. Helps with perception of employer of choice

1. Must have profits or finances to be able to afford 2. During financial hard times, may not be able to change financial commitment quickly

Compensation’s Role in Human Resource Strategy • 31

with employee/management groups to do this task right. If this is a brand new salary plan, it may be a wise decision to work with an outside consultant who has experience in the process. Step 6: Review market data and slot into salary grades. Each set of market data points must be reviewed to ensure there is a pattern with no statistical outliers. When there is a good average for each job, the next step is slotting the jobs into salary grades based on this salary survey market average. Step 7: Review preliminary salary survey results with senior management. Senior management should be involved early in the salary matching process to obtain management buy-in at an early stage; identify and resolve problems before the project continues; and assess internal equity. Step 8: Match employee titles to the market study titles. This step is usually harder than it looks. For many organizations, it is not clear what employees match up to which job descriptions and then which employees match up to new titles now used in the new salary grades. In many organizations, there is one title in the HRIS, another on the job description, another on the organization’s chart and another used on the employee’s business card. Even understanding who does what, who belongs in which department, and which supervisors oversee jobs can be confusing even in a smaller organization. Step 9: Review financial impact of setting new salary ranges. In almost every case, there will be pay situations where the employee’s current salary is either above the new salary range (red circled) or below the new range (green circled). This is one of the few occasions in compensation where you need to be concerned with individual employee pay. First, take a look at all the employee pay that falls below the minimum. What is the financial impact of moving these employees up to the minimum? If cash flow and/or money are tight, get the chief financial officer involved in this process early because he or she will be crucial in deciding affordability and timing for all market adjustments. Step 10: Review and update the performance appraisal process. Does the performance system work well with the new pay-for-performance system? If the performance appraisal process is more than two years old and it has been at least that long for any management training, set aside time to drive

32 • Solving the Compensation Puzzle

this important piece of the project. A separate management committee should be assembled to assist with the performance appraisal’s design, process and delivery. This will take four to six months to complete. It may be a good idea to start this project right after the job descriptions are complete. Step 11: Design a pay-for-performance merit matrix. After the performance appraisal form is complete, it is time to match the performance levels to be achieved against a merit schedule that rewards raises based on an employee’s performance. In order not to overspend, it’s important to do a dry run using last year’s employee performance scores with the new corresponding merit pay number. If the final numbers from this exercise are too high, then trim the merit pay matrix or raise the merit budget allowance. Merit pay is the best pay system to use for a pay-for-performance base pay system for the following reasons: n Merit pay’s basic philosophy fits well with the American work culture which is surrounded by the ideals of overachievement, creativity, independence and individualism. n Merit pay systems manage an organization’s payroll wisely while rewarding high-performing employees. n Merit pay budgets can fluctuate to reflect the organization’s financial status. Employees will not see merit pay as an entitlement. n Merit pay is perceived as more fair because employees usually support pay systems that reward the stars. n Merit pay will help with employee retention by retaining stellar employees and motivating lower-performing employees to step up their performance or move to another company. Step 12: Review, audit and communicate. If done correctly, this important step will have a lasting positive effect on the organization. An integral part of each step in this entire process is a communication plan and a willingness to step back and audit the system. Before starting next year’s compensation, market study and communication process, gather specific information on what worked and what did not. Don’t Forget to Ask for Your Employees’ Opinions An employee attitude survey is one of the best ways to learn how employees view the organization’s HR programs. This tool collects data from an organi-

Compensation’s Role in Human Resource Strategy • 33

zation’s employees using written or electronic surveys. In particular, Generation X and Y employees want to have a “say” about their work environment. This survey data enables the senior management/HR team to improve HR programs and create a working environment that fosters better working relationships and increased productivity. With the Internet providing an easier way to gather information and keep it confidential, many organizations conduct annual surveys. An employee survey is a double-edged sword. If done right, it provides valuable information and is perceived by your employees as a benefit because it gives them an opportunity to express their opinions. A survey also can have disastrous results if confidentiality is breached or employees feel their feedback does not impact the organization.

How to Conduct a Successful Employee Survey The first step in conducting an employee survey is getting top management support. Management should take an active role in the survey’s design, delivery and action steps. Employees will wonder if the survey is worth their time and if their confidentiality will be guarded. To ensure a successful survey, top management will need to adhere to the following practices: n Deliver a summary of employee feedback within 45 days of the survey deadline. This does not mean that all of their suggestions will be implemented. Provide a listing of items that have already been addressed, items that will be addressed over future months, and explain why some suggestions cannot be considered. n Maintain strict survey confidentiality. If the survey is not completely confidential, it will affect the results of this survey and future surveys. n Design a survey format that appeals to a wide variety of employees. It may need to be translated into another language. Do not assume that all employees have access to or are comfortable with a computer-based survey. n Increase employee participation by implementing a few clever marketing approaches, including: setting aside a special room where employees can complete the survey while enjoying light refreshments during work hours; post a reminder list of the number of employees who have completed the survey; hold a drawing for a gift card for employees who participate in the survey; disseminate a letter from the company president explaining the importance of the survey and thanking employees in advance for their participation.

34 • Solving the Compensation Puzzle

How to Design the Survey The employee survey should pinpoint key issues and be designed to gather detailed feedback in a succinct manner. It should be a maximum of three to four pages, contain a variety of questions with numerical responses that can be calibrated, and have at least three or four open-ended questions to solicit feedback not covered in the numerical questions. Many resources are available online (free or for a nominal fee) to help design and administer an employee survey. (For more information, see CD-ROM Tool 12.) Do not make an employee survey a one-time event; rather, deliver a similar survey at the same time next year. Some responses may indicate serious HR issues that require further investigation and research by focus groups. Carefully summarize the survey results. The best way to manage this step successfully is to ask the vendor in charge of the survey to summarize the data. If money is tight, this task also can be outsourced to a temporary clerical outside resource and/or a student intern. The key is for HR to create a summary by subject and interpret what it means for the organization. Communicate survey results. The first step is to provide a rough draft of the summary to the senior management team and double check the action plan. The action plan needs to have the support of this senior group. Next, the results should be presented to the management team, and then the employee group. Real-Life Example

The Case Study of the Dog Shelter Where Its Bark Was Worse than Its Bite Most HR professionals have experienced a similar case to this—where a nonprofit has a lot of tough rules on the surface. The management chickens out, however, when asked to enforce the rules or ask employees to perform at even the most basic level. Non-profit management explains this behavior by stating that it cannot make demands on its employees because it assumes that their pay is too low. This is not based on hard facts, only assumptions and the rumor mill. This caused good employees to leave the organization because they were disgusted with their low pay. Even more compelling is that they were disgusted with management’s tolerance of poor performance.

Compensation’s Role in Human Resource Strategy • 35

What’s the Best Course of Action? This organization would benefit from an open discussion about its pay philosophy. It can set up policies to conduct a market study on a regular basis to squash rumors, implement a real performance appraisal system and then work on retaining good employees and moving out poor performing employees. This action requires courage; some managers may therefore leave. Compensation Boot Camp

Concepts and Definitions Market lag policy. This pay policy distinguishes companies from the competition by compensating employees lower than most competitors. This policy’s aim is to save money on payroll costs. In times of strong competition for employees, it may not save enough money to cover higher turnover and training costs. n Market lead policy. This pay policy distinguishes companies from the competition by compensating employees higher than most competitors. This policy’s aim is to maximize an organization’s ability to attract and retain quality employees and to minimize employee dissatisfaction. n Market match policy. This pay policy most closely follows the typical market pay rates. n Merit pay. Merit pay is a pay increase given to an employee based on his or her performance level reflected in the performance appraisal. This pay increase is added to the base pay, usually as a percentage of base pay. If the increase places the employee’s salary outside the salary range, then it might be given in a lump sum. n

Sanity Suggestions Communicate to executives, managers and employees that designing and installing a pay-for-performance compensation system are part of a long and difficult process. HR professionals should not box themselves into meeting arbitrary deadlines. They should make clear to senior managers, managers and employees what items are needed to meet project deadlines. For example, job descriptions must be compiled before performing a market study. n Set responsible expectations with a solid communication plan. Participating in a major compensation study may be novel for many of managers and employees. By setting reasonable expectations, employees will not be disappointed that this project does not mean huge raises for everyone. Genn

36 • Solving the Compensation Puzzle

erally, only a handful of employees—those whose current pay falls below the minimum of the new salary range—will receive an increase in the form of a market pay adjustment. n Take the time to obtain accurate information. A successful compensation system needs to take many external and internal factors into account. It is important to research compensation trends that relate to the organization’s job market for employees and what competing firms are doing. It also is important to incorporate trends that can put the organization on the cuttingedge rather than using a tool that is outdated and does not fit with today’s employee. For example, broadbanding, which has a 150 percent-wide salary range, was extremely popular 10 years ago. Today, almost all organizations stick to a more conservative 50 percent-wide range. n Conduct an employee survey at the onset of the project. Even if the organization has an ineffective, outdated or almost non-existent compensation and benefits program, it is prudent to know what works and what does not work. This information can help HR professionals prioritize compensationrelated matters. By accomplishing one task at a time and doing it well, they will have a process in place and the confidence to tackle additional tasks. n HR professionals should learn the basics of compensation. Even though this book focuses on many of the issues they will need to be aware of in building a new compensation system, it is important to understand as much as possible about the field of compensation. At the end of this book, there is a list of resources, including textbooks, websites and educational seminars. What is the bottom line? All compensation systems should have at least four main goals: 1. Internal equity: A clear definition of a job’s relative worth within a company. 2. External market: How competitive is the company compared to the outside labor market? 3. Individual contributions recognized: Does the compensation system pay employees fairly based on results, effort, education/experience, talent and overall job performance? 4. Legal: Does the compensation system adhere to major labor laws such as the Fair Labor Standards Act (FLSA), Americans with Disability Act (ADA) and other pay discrimination laws?

Ch a p t er

4

The Pay-for-Performance Foundation

A market-based salary structure needs to take an organization’s internal needs into account. This is a critical first step because a pay-for-performance system depends on a solid base-pay system. Many steps are needed to create this system, including: designing a pay philosophy, creating job descriptions, finding market matches, setting up ranges and placing job titles into these ranges. This chapter explains how to create a pay-for-performance system at the 500-foot level. By understanding the big picture, human resource (HR) professionals can champion this project more effectively and keep management focused on the end result.

The 500-Foot View: Where Are We Going? A project manager is a lot like a pilot. He or she must be clear about how to arrive at the planned destination. For example, a family arriving at a San Jose, Calif., airport was surprised to learn they were thousands of miles from their intended destination of San Jose, Costa Rica. A project plan with specified milestones and deliverables with dates can help keep everyone on track. Communicate the Project’s Benefits There are many reasons why an organization should have a strategy to study its jobs on a regular basis. Successful companies set up and execute a long-term plan in this area without fail. It is easy to keep a compensation plan up-to-date in good times. The plan also needs to be updated when times are bad. There are many reasons for an organization to continue regular salary studies during tight financial times. Consistent and honest messaging with employees is essential to employee retention, employee morale and attracting new 37

38 • Solving the Compensation Puzzle

employees. During tough financial periods, some companies do not conduct a market study. Often, management hopes no one will notice. This strategy usually backfires because employees with no current salary information will create their own message through the employee rumor mill. Generally, this rumor mill will convey a message that is much worse than if management had taken the time to be honest with employees. In some cases, the market pay for certain positions might even decline. If your organization does not do a market study of its jobs on a regular basis, it will not have the benefit of adjusting salary structures downward to reflect the new outside market pay for some positions. Here are some examples of when this situation might occur: n In the “dot.com” era, some positions received inflated increases. When many companies in this sector went out of business, employees had to take salary cuts in jobs at other organizations. n Some highly-skilled blue-collar employees held jobs that became automated. Because their skills were no longer required to accomplish their jobs, their pay was lowered. In more than 50 percent of companies, employee compensation and benefits are the largest expenses. Think of payroll this way: Would a successful company ignore a $100 million piece of production equipment and let it go without regular maintenance? A regular pay study linked to updating job descriptions also will keep an organization from experiencing “scope creep.” An organization needs to know what it’s paying employees for. If tasks are removed or outsourced, the job’s description and pay level should reflect this. The following situation is becoming increasingly common in organizations: Manager: “I know that her job has expanded outside the title and job description of administrative assistant, but she was always asking for more responsibility. We’re a small company with limited resources so it was easy to just keep loading her up with work.” Eventually, only 20 percent of this employee’s job met the original job description of an administrative assistant. The company fell behind in documenting the expansion of her duties, which resulted in a totally different job.

The Pay-for-Performance Foundation • 39

The employee sued the organization for sex discrimination. In a deposition, the manager responded: “I thought she was just a great sport about receiving a typical 2 to 3 percent pay increase each year. As her manager, I believed that she did not care about job titles, so I did not have her job studied to document substantial changes in her job duties. I was very surprised when we received a letter from her attorney suing us for pay discrimination.” Increase Knowledge About Compensation Before an organization embarks upon a major change to its compensation system, it needs to have a good handle on what body of knowledge encompasses compensation. The project’s success depends on research. HR professionals need to educate themselves on what needs to be done, who will do the work, what it will cost, when it will be done, and how it will be implemented. n Read up on theories and practices (one of this book’s main goals). n Take a course. The Society for Human Resource Management (SHRM) and WorldatWork have great educational offerings. n Talk to colleagues both internally and externally to get their input about successes or war stories regarding compensation and pay-for-performance systems. The next step is putting a draft project plan into place. Senior management will want to know why, when, who, and most important, what it is getting for its time and money. Today’s organizations usually manage a tight budget and will need to plan their budget for a project of this magnitude. Moreover, if it has been more than two to three years since the organization has conducted a salary study or it is its first formal look at salaries, the organization should budget for outside consulting costs and how much it can pay toward market adjustments—at least for the first year. The Best Time to Embark on This Project Many organizations do not plan when to maintain or update their compensation systems. An organization’s computer systems, office equipment, marketing materials and other business systems are updated regularly. An organization’s most expensive cost is compensation, yet most organizations do not have a set schedule for taking care of this valuable asset. HR professionals can champion this cause and make sure it does not get left on a back burner.

40 • Solving the Compensation Puzzle

Here are some common “excuses” for neglecting compensation systems: Excuse: “None of our employees are complaining about their salaries, so they

must be OK.” Answer: When people have a bad experience with a rental car, airplane trip or other types of business services, they often do not complain to the vendor. Instead, they complain to their friends, and simply select another vendor in the future. By the same token, employees complain to their colleagues about abysmal pay, causing long-lasting damage to the organization. Excuse: “Our employees do not leave the organization because of pay reasons.” Answer: Often, departing employees do not want to burn bridges or look greedy to their current employer. Instead, they will invent a more politically correct reason for leaving. A new trend is for employees to leave organizations in packs. One employee will accept with another employer and work hard to get others to follow suit and join him or her at the new firm. Many organizations encourage this behavior by offering hefty employee-referral award bonuses. The departing employee can be a hero in their new employer’s eyes by taking colleagues with them to the new organization. Excuse: “We are able to hire new employees with our current pay ranges, so our ranges must be satisfactory.” Answer: Many managers will fill an open slot at a higher scale within the current range, causing newly hired employees to make more money than current, loyal employees. They are well aware of this tactic, which erodes employee morale. It actually teaches employees to quit and come back. Excuse: “What’s wrong with hiring employees at the same rate their former employer paid them?” Answer: With today’s availability of salary information, most employees know what they should be making in the job market. Managers need to know what the accurate up-to-date market is for jobs and hire new employees in the right range. For example, an employer hired a recent college graduate at the right starting wage for her position, not just what they knew they could get her for. This impressed her and influenced her to stay at the organization for more than three years. Excuse: “We have no money for raises and/or market adjustments.”

The Pay-for-Performance Foundation • 41

Answer: Companies are vulnerable to good employees leaving for other com-

panies in an economic downturn. This is a time when an organization should know how its pay rates compare with the market and communicate that it will continue the same rates even during tight financial times. By using an outside compensation study, the information can be pro-rated over time. At least, the organization will know where it stands and can budget and plan for it. Some salary studies begin during tight times that continue to worsen. This may mean that increases need to be made over a long period of time. In this case, some companies will wait up to three years to fully install the market data. Most employees will stick it out if they know their employer is trying to do the right thing, even in bad times.

Sticky Design Issues An organization needs to decide where the salary plan will be administered. The physical location of the study is a major fact. If the organization is located in a small community and looking for high-level and/or technical employees, it may have to use data from the closest major city. For example, when a small Eastern Washington community needs to recruit very senior-level or technical employees, it recruits from Seattle or Portland to remain competitive. The salary market study, in this instance, would need to cover this entire region. Design Issues for Headquarters and Field Offices Should there be one salary plan for the home office and separate plans for the branch offices? The answer to this question depends on the type of business, how many employees are at each location, difficulty in recruiting employees, and if there is branch office staff available to administer separate salary plans. It is easier to have one plan that is based at the organization’s headquarters or at the location where a vast number of employees work. Employees who reside in different locations can have a cost-of-living adjustment (COLA) added or subtracted to their base wage rate that all similar employees are placed in.

What Are the Best Resources? In the past, employee salaries were kept secret and locked away in a drawer. So, it is not unusual for experienced HR professionals to have very little compensation background. This project can be disastrous if handled by someone

42 • Solving the Compensation Puzzle

with no compensation experience. There are options, however, for those who are embarking on a salary system or a major change in the organization’s current system: Option #1: Develop the entire compensation system in-house. The advan-

tages are two-fold: A) it is usually less expensive and B) the organization has intimate knowledge of its jobs. Option #2: The organization is involved in all the work but uses an outside

consultant for critical components. When a competent consultant teams up with an internal HR professional, the organization reaps the best of both worlds. Often, outside salary consultants have access to several salary surveys. When consultants provide expensive salary surveys at no cost to the organization, they can just about pay for themselves. The Case of the Green Paper In one organization, anything on green paper was bad. Why? Seven years ago, a 360-degree performance-appraisal process failed and employees were still angry about it. Ironically, some of these irate employees were not even at the organization when it happened. The Case of Winning the Lottery Be sure employee communication materials do not have hidden meanings within the organization. One organization wanted to ask employees to get into the mindset of “winning the lottery” by writing a job description for the skill sets required to replace them. Luckily, a design group member warned that the phrase “Pretend that you won the lottery” was a euphemism for “You’re about to be fired.”

Advantages of Using an Employee Design Team The most successful pay systems involve a team of employees, resulting in immediate employee buy-in for a new plan. A diverse and cross-functional employee design committee that represents all major departments, and includes both short-term and long-term employees who are well respected in the organization, will bring passion and energy to the project. Because the information can be sensitive in some private-sector companies, an organiza-

The Pay-for-Performance Foundation • 43

tion may want to appoint only senior employees to staff this committee. The group will assist with the employee communication materials and provide input about history and other relevant things. Executive Management Teams The more senior managers are involved, the better the project’s end result will be. Hopefully, you’ll have a good handle on how successful projects are completed in your organization. Some senior-level executives want to see the project after it is completed. Others will want to be involved in the minutiae of writing job descriptions. Find out how projects are completed in the organization in order to manage them successfully. Other Employee Resources It may be helpful to get the chief financial officer or the accounting department involved in the project’s design. A CFO who is invested in the project can be surprisingly helpful when it comes to finding money to make pay adjustments, even beyond HR’s request.

Figure 4 Roles for Employee Compensation Committee Leader

Member

Facilitator

Content Expert

Understand the whole process

Learn plan

Ask questions

Listen

Full participation

Train in terms, processes

Complete homework

Keep process moving

Express opinion

Keep notes

Keep group moving Encourage participation Encourage consensus

Try to get consensus

Advise Clarify Provide knowledge

Plan next meeting

When Is an Employee Design Team Not Appropriate? Understanding an organization’s culture is critical when designing a compensation project and figuring out who should be involved. In many familyowned companies or closely-held organizations, the culture may dictate that only a few key employees know the salaries of all employees. If this practice is part of an organization’s culture, it should be preserved, especially if it is its first formal compensation plan. As the company grows larger, and confidence in the compensation system increases, then it may be appropriate to share more information about employee pay.

44 • Solving the Compensation Puzzle

Figure 5 Work Plan for a Small Company in a Mid-size City Dates

Who

Description

Cost*

Step 1 Start: 1/8 Finish: 2/28

HR, senior staff, outside consultant

Update compensation philosophy. Interview employees—see actual work being performed and explain study process. Edit/review all job descriptions. Decide on market comparables for custom salary survey.

$3,000

Step 2 Start: 2/28 Finish: 3/16

HR and outside consultant

Design custom survey. Send out custom survey to similar municipalities. Use personal contacts, small treats and lots of appreciation to ensure excellent participation in the custom survey.

$4,000

Step 3 Start: 3/1 Finish: 4/1

HR and consultant

Augment custom salary survey with one or two published survey matches to cover jobs commonly found in private sector. Follow up on custom survey.

$5,000

Step 4 Complete by 4/14

HR and consultant

Draft completed market study information using published and custom survey data. Jobs are slotted into salary ranges using external market data. Internal equity process.

$8,000

Step 5 Complete by 4/27

HR, senior staff, consultant

Review current pay and benefits practices to identify issues and provide alternative solutions.

$2,000

Step 6 Start: 4/1 Finish: 5/1

HR, senior staff, consultant

Financial Impact Meeting: Provide alternatives on how to successfully merge the salary information with a reasonable financial plan, balancing fairness to employees with fiscal responsibility for citizens.

$2,000

Step 7 Start: 5/1 Finish: 5/25

HR, consultant, city

Draft report completed. Program finalized and final changes incorporated. Meet with City Council.

$3,000

Step 8 Start: 5/20 Finish: 7/30

HR, senior staff, consultant

Design management training, create employee communication plan and salary administration manual.

$5,000

Total

$32,000

*Costs are listed for sample purposes only. Outside consulting costs will vary depending on how many unique jobs must be studied, how much work the job descriptions entail, union or non-union, facility location(s) and the availability of HR to perform some of the work.

The Pay-for-Performance Foundation • 45

The following bulleted list identifies key areas of a project plan. Timeline: n Project start date n Project milestone meetings n Project approval meetings n Financial impact meetings n Employee communication meetings n New plan effective date Resources needed: Project manager n Administrative coordinator n Writer/editor n Trainer n Financial analyst n HR/compensation/benefits expert n

Project deliverables: Compensation strategy and policy n Job descriptions n Market study n Internal equity study n Jobs placed into salary grades n Financial impact of salary study determined n Performance appraisal system n Merit pay grid n Audit and maintenance process n

Compensation Policy Decisions Even a company that has a working pay-for-performance system needs to maintain it. As an organization’s major expense, salaries need to be carefully audited and planned for the future. Here are six tips for keeping a compensation system up-to-date and effective: 1. Management of labor costs. A compensation and pay-for-performance system should be flexible enough to support the business and include checks and balances to control costs.

46 • Solving the Compensation Puzzle

2. Internal controls. Cost containment is based on performing an audit for the prior year and providing spending guidelines for the future.

3. Forecasting and budgeting. Research will shed light on an organization’s history and experiences with some important metrics in the past three years, including merit increase and promotion budgets, in addition to turnover and recruiting concerns for jobs left open for more than 60 days.

4. Employee communication and pay secrecy. Is the organization’s pay system open or confidential? This important issue should not be left to chance. Typically, pay in the public sector is open, while pay in the private sector is confidential.

5. Open pay systems. Law requires public-sector pay to be open. On request, public-sector organizations must have job descriptions, pay structures, bonus and incentive plans available. This does not mean that individuals can access a public employee’s personal salary and corresponding performance evaluations. In addition, most unionized employees have similar salary plans. An open pay system can be difficult to administer because it is not possible to publish salary ranges without explaining how and why these ranges were established. What are the advantages and disadvantages of open pay systems? The advantages are that open systems are not cloaked in secrecy. When pay is not open, employees tend to think that their pay is low and all other employees are paid too high for their efforts. The disadvantage is low employee morale because most employees perceive their worth as higher than their co-workers. Many employees who have access to pay information generally say that this is a negative than rather than a positive.

6. Pay secrecy. Most profit and non-profit organizations outside the public sector prescribe to a pay confidentiality policy. Many organizations resort to extreme methods to keep pay a secret. One employer went to great lengths to keep pay confidential, even from employees in its HR department. The vice president of HR literally kept pay under lock and key in his desk. Some organizations take this one step further by prohibiting employees from discussing their own salary levels—often with a threat to terminate them if pay confidentiality is broken.

The Pay-for-Performance Foundation • 47

There is a danger in enforcing this practice as many court decisions have determined that firing employees for breaching pay confidentiality violates the National Labor Relations Act, which protects employees from termination for sharing their personal pay information. Organizations that terminate employees for sharing pay information may be liable for back pay, damages and consequences.

Pay Secrecy in Private-Sector Companies Pay often is a very sensitive issue in family-owned and closely-held private companies. In fact, most private-sector firms guard their pay information and go to great levels to keep this information confidential. Senior managers and business owners need to communicate how open they want the organization to be regarding its pay systems. Consider the following questions: n Are employees at a senior enough level to handle the information in a professional manner? n Are some employees already unionized with access to their salary range via the union contract? n Does the company have a policy for promoting from within and want to encourage employees to get the education and experience to go to this new level? n Is the organization’s culture an open one that shares other sensitive information with employees, such as budgets and profit sharing? n Are employee salaries billed out so that other employees can guess what co-workers make? n Is it a non-profit organization? Some non-profits may be in an area where most of the non-profits are open about pay, so it is important for the organization to stay in step with its peers.

The Case of Pay Secrecy: The Need-to-Know Theory In a for-profit organization, all managers should have access to salaries and pay ranges of their own employees. On the flip side, all employees should have access to the range and salary for their own jobs, and access to any other jobs within the organization that the employee is qualified and would like to apply for. For example, a licensed practical nurse (LPN) may wish to return to school at night to become a registered nurse (RN). This employee will need to know if the starting salary for a RN makes the decision worthwhile.

48 • Solving the Compensation Puzzle

Employees should not share their own salaries with other employees. If an organization gives employees the “rules of etiquette for sharing salaries,” they will do their best to follow the company’s suggestion. Employee salary information is like a tax return. The information is confidential and encouraged not be shared with co-workers.

What Is Salary Compression? Salary compression is one of the most complex and frustrating areas of compensation. Compression occurs when an organization’s current group of employees earns less than newly-hired employees. In order to attract new employees with the background and skill set the organization requires, the starting offers are above the current pay of similar employees already working for the organization. Some organizations may fall behind in maintaining compensation plans, resulting in compression. For example, compression may occur when salary ranges are not moved for several years. This gives employers a false impression about realistic competitive ranges. When an organization goes several years between market studies, it will recruit and pay employees based on old information.

Can Pay Compression Be Resolved? Monitor the salaries of new hires versus current employee salaries. If there is a pattern, the organization needs to plan to move current employee pay rates. This does not have to happen overnight. By communicating to employees that it is aware of this issue and wants to fix it, an organization will go a long way in retaining current employees. It is critical to keep the compensation plan up-to-date. Organizations must ascertain how much salary ranges should be adjusted each year. A good rule of thumb is to study the market position of jobs at least every two or three years.

Managing Pay for Performance in Financial Downturns Sometimes a hiring organization cannot “show them the money” when recruiting employees because of tight budgets or financial hardships. That is when having a working plan to handle a tight budget comes in handy. Too many organizations are faced with the reality of managing their pay-for-performance system when cost savings need to be designed, installed and reacted too quickly. Sadly enough, most organizations exhibit one of the following

The Pay-for-Performance Foundation • 49

two behaviors: They ignore the tight budget and continue business as usual, or they make the mistake of making a radical decision without thinking about the consequences. Fortunately, companies have other options. They can: Reallocate the merit pay plan. Continue to give highly-rated employees a competitive increase and give no (or lower) increases to a larger group of employees. Delay new employee start dates by two to four weeks or put some of the open requisitions on hold. The money that is not used can fund a merit pool. Postpone merit increase effective dates. This should only be considered as a last resort; however, with a solid and honest employee communication plan, an organization can postpone the merit increase effective date by three to six months. Employees will be more receptive to this alternative if they also receive something else of value; for example, extra vacation days. Reduce the headcount. This is a last resort. An organization can offer valued employees part-time jobs or a sabbatical, and lay off lower-performing employees.

Create a Three-Year Strategic Plan for Compensation and Benefits Many organizations have very detailed strategic, marketing and financial plans, but put almost no planning into their compensation and benefit plans— which rank as one of their top five expenses. Organizations can follow these steps for creating a strategic compensation, benefits and performance plan: Review cost trends for each benefits plan. Then, survey employees to ensure the money provides value to employees. Survey benefits trends outside the organization. A benefits broker can provide good information on the local and industry trends. Review turnover records. Why do employees leave and where do they go? Review actual cost for base-pay plan increases. Organizations usually spend much more than what was budgeted. By reviewing actual costs, an organization can identify trends for spending on market adjustments and promotions, and budget more successfully in the future.

50 • Solving the Compensation Puzzle

Review the performance-appraisal process. What percentage of employees did not receive a performance appraisal last year? What was the reason? Research the trend between pay and performance. Double check high performance scores with the size of increase. There may be a slight adjustment for position in the range: Employees low in the range should have higher merit increases, while employees high in the range should have lower increases.

Transformational vs. Transactional Upgrades A transformational change to a compensation system is more than an update to the current system. It creates a whole new system. The change starts with the basics, such as the organization’s compensation philosophy and the basic delivery of pay. A transformational upgrade is deductive because the pay-forperformance system cascades down from the pay philosophy and affects the whole system. In contrast, a transactional upgrade is an inductive upgrade because it rebuilds the system from existing pieces. This type of change updates all the pieces, including job descriptions, market study, internal equity and related components. Transactional upgrades are minor upgrades that result in a conservative roll-out process. Transformational Upgrades: Advantages/Disadvantages This is the best alternative if it has been more than five years since the organization has made a major change to its compensation system. This approach works well for organizations that are struggling with a change in ownership, major change in location, acquisition/merger and other changes in strategic direction. The risk to this approach is that it takes longer to restructure all the pieces, obtain buy-in and communicate the system to managers and employees. Transactional Upgrades: Advantages/Disadvantages This approach focuses on one piece at a time and may take two to three years to implement. Advantages are that this is more likely to fit into the workload of the HR department and can be merged into other HR systems. A disadvantage is that, in some cases, the programs work together from a dissimilar point and do not support each other.

The Pay-for-Performance Foundation • 51

Real-Life EXAMPLE

Swimming with the Sharks Before starting a project of this magnitude, it is very important to carefully consider the culture, history, communication styles and level of stress whirling around in the organization. No matter how much senior management is pushing for a pay-for-performance system, it will not work if there are other serious employee-related events happening at the same time. For example, an organization should not plan a new compensation program if it also is planning a major employee downsizing or if the business is about to be sold. When one HR professional started a new consulting assignment with a nonprofit scientific organization, everything about the firm seemed wonderful. It was in the field of cancer research and there were many women in management and senior scientific positions. This group was not ready for a major compensation study, however, as there was a full-blown war waging between the administrative and the scientific staff. This was fueled by real financial issues, such as a looming loss of funding. Without this trust, it was obvious that the work that needed to be done was some serious OD work. To do more than a band-aid approach to their compensation system would have been a waste of time and resources. Compensation Boot Camp

Concepts and Definitions Equity theory. This theory suggests that employees will compare their own effort to other employees’ efforts and decide if the monetary reward was worth the effort. Fair Labor Standards Act of 1938 (FLSA). This federal law addresses major abuses that intensified in the 1930s and the Great Depression. FLSA governs minimum wage, overtime pay, pay equality for men and women in the same types of jobs, child labor and recordkeeping requirements. Pay satisfaction. This is the difference between what employees believe they should be paid versus what they are actually paid. If these perceptions are equal, then an employee has pay satisfaction.

52 • Solving the Compensation Puzzle

Sanity Suggestions n

Developing a pay-for-performance system takes a long-term commitment. It seems easy on the surface, but to create, implement and maintain the system generally will take more than one year. n An effective compensation program recognizes that monetary rewards change employee behavior. Employees want appreciation and a pleasant work environment, but none of that will matter if they feel that extra effort goes unrewarded and unnoticed. n Take the time to do the process right. A pay plan that partners with a weak performance appraisal plan or a management team that abuses employees will thwart the system’s success.

Ch a p t er

5

How to Write a Job Description

A job description identifies the specific job duties of a position within an organization. It outlines the basic requirements, including the job title and responsibilities of a job. A job description is a unique management tool. No other document in an HR department has as many uses as a job description. Job descriptions play a key role in linking performance and pay. It is almost impossible to reward employees for excellent performance without a written job description. This document is crucial in many salary decisions, starting with the position’s market value. Job descriptions also provide important information for decisions regarding hiring, training, and career development. Job descriptions can reduce the risk of an unfavorable Fair Labor Standards Act (FLSA) audit and will help an organization document important information regarding claims supported by the Americans with Disability Act (ADA).

Common Uses for a Job Description A well-written job description is the cornerstone for many important peoplemanagement issues. It outlines the purpose of the job, what type of candidates will be recruited, what education/experience they will need, what to pay them and how to evaluate them. A job description also provides the organization with a key retention tool—a career ladder with specific requirements needed to move up within a company.

Simplifying the Process of Writing Job Descriptions For most organizations, writing job descriptions can be daunting. By planning and involving employees at all levels, this task can be achieved with mini53

54 • Solving the Compensation Puzzle

mal frustration and with surprisingly great results. There are no short cuts in this process; the best descriptions start by asking employees to write their own job descriptions, which results in fine detail and accuracy. In most cases, employees are the best source of what their jobs entail. This method will get important employee buy-in to the process, reduce lawsuits and avoid messy employee relations problems later. Step 1: Get Senior Management Support An organization needs senior management support to create job descriptions. To accomplish this project, it is important to outline the purpose, resources required and support needed from senior management. The following issues and corresponding answers should be prepared for a meeting with management to gain its support for this project. Issue: “We don’t need job descriptions because they are too formal and not useful for a small company.” Answer: It is much easier to start a job description process when an organization is small. When an organization grows to more than 50 employees, it is more difficult to sort out titles, levels, responsibilities and promotional ladders. Job descriptions are a necessary first step in hiring the right employees, determining their pay and identifying who will evaluate their performance. Issue: “If we have job descriptions, some employees will argue when asked to

complete a task that not contained in their job descriptions.” Answer: This is a common concern that can be alleviated by clearly communi-

cating the purpose of a job description. It is a summary of an employee’s job and is not designed to list everything he or she does for an organization. Issue: “Job descriptions will be outdated before we are even finished writing them.” Answer: In today’s rapidly changing workplace, it is common for some job descriptions to become outdated before the process has been completed. If there are significant changes to the job’s duties and responsibilities, it is necessary to leave time at the end of the process to circle back and update the job description. For minor changes that constitute less than 30 percent of the job content, HR professionals can make updates during the organization’s regular job description update cycle.

How to Write a Job Description • 55

Step 2: What Is the Purpose of the Organization’s Job Descriptions? Before embarking on the monumental task of writing job descriptions for an organization, HR professionals need to know what the company is trying to achieve. Job descriptions are a useful resource for hiring, performance appraisal and compensation decisions. After gaining top management support to proceed with the project, the next step is getting buy-in from the entire senior management team. A short presentation that outlines the purposes of job descriptions will help draw support for this critical project. Will employees provide the initial input for their job descriptions or will this information be obtained from another source? (See Tool 2 for more information.) What is the approval process for ensuring job descriptions are accurate? Typically, a manager and a department head need to approve employee questionnaires. What is the timeline for getting the job descriptions to HR or a central location for the final edit? It is important to have editing of your job descriptions completed based on the same editing criteria. A consistent editing process also helps prevent one department from inflating its job descriptions while another department provides insufficient job information. An editing checklist is explained in greater detail at the end of this chapter. Step 3: Create a Timeline with Specific Due Dates At this point, HR professionals must clearly outline the due dates for managers to submit approved job descriptions, with the names, titles and supervisors for each employee in the company. This process forces the company to nail down important organizational information, including who reports to whom and job titles for all employees.

Enhancing the Quality of Job Descriptions Today’s Generation X and Y employees require greater communication skills than any other generation of the American workforce. By taking the time to describe the project and how they will benefit from it, HR professionals will receive a higher-quality job description and have a better chance of completing the project on time.

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A brief “town hall” meeting with face-to-face interaction is the best way to explain the project to employees. E-mail and conference calls are other feasible alternatives, but this project is too important to take the chance of conveying confusing and conflicting messages.

Gathering Job Description Information In most cases, the employee performing a job should write the job description for that position. Not only is this information usually more accurate, it also encourages the employee to buy-in to the project when he or she is actively participating in the process. (See Tool 2 for more information.) The most successful organizations approach this project with an open mind, recognizing that the final product is an objective summary of the job and its major responsibilities. Encourage the employee to think of the job’s general purpose and deliverables, rather than a list of his her unique qualifications. Instill a philosophy of thinking about the organization’s jobs in terms of outcomes, responsibilities, and accountabilities, rather than simply listing tasks and duties. Encourage employees to cluster the main responsibilities of their job and then add detail with clear action verbs. (See Tool 3 for more information.) Avoid trendy, vague statements such as “deals with clients in a professional manner.” Instead, state, “Responds within 24 hours of a customer’s request, with accurate information given in a tactful, respectful manner.” As an important final tip, a supervisor should emphasize that the job description will be a fluid document. It is important to write the job’s current description—not what it may become in the future. It is better to take a snapshot of the current job on the day its description is written, acknowledging that its duties and responsibilities are bound to change.

Tips for Writing Job Descriptions Production/Lower-Level Employees Employees on the production floor may not be comfortable writing in English. If this is the case, assign the section leader to coordinate the project, or translate the job questionnaire form for them. When one job description

How to Write a Job Description • 57

covers many job titles, the lead or senior person can write the first draft and make it available to others who have the same job title. After the department supervisor completes and approves the form, schedule a meeting for the employees involved to review this draft and provide feedback. This process can be managed effectively by forming a small committee to write the common job description and disseminate it to job incumbents for final review. Several Employees with the Same Function One of the most difficult steps in the job description process is identifying basic jobs that are duplicated in several departments. It is not unusual to discover the same job has many different titles across the organization. Employees and their managers may use this information to work the system and get additional pay when it is not warranted. The best way to handle this is to give all employees the opportunity to complete a job description form. This serves two purposes: 1) It allows all employees to get an equal say, and 2) It helps to see the jobs that are similar, in addition to those that have changed over the years and are dissimilar. When the HR department completes the final tally and edit of job descriptions, it will be easier to see which jobs are similar. For these jobs, select one or two of the best descriptions and send them to the supervisor and manager for approval. Executive-Level Employees For executive staff, it can be very difficult to carve out time from their busy schedules to write their own job description. In the case of senior management, however, the individual defines the job. In some organizations, for example, the chief financial officer (CFO) may only handle accounting functions. In other organizations, many departments may report to this function, including information systems, HR, administration and facilities. One way to create a “win/win” for both sides is to interview the executive using a job description input form. The interview notes will be transferred to a job description input form for the executive’s review.

Suggestions for the Supervisor Review Process A supervisor’s review with an employee is an excellent opportunity for a detailed discussion about gaps or differences of opinion on the duties, priorities and responsibilities of the job in relation to the employee’s skills, education and level of experience.

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Supervisors should carefully review and edit an employee’s job description. In about 25 percent of cases, the employee’s and supervisor’s job perception differs, causing major problems. This needs to be resolved before the project can move forward. When they agreed on the final job description, it can be transferred to an electronic format. When all documents are in an electronic format, it is easier to make minor modifications and turn the job description input form into a formal job description. As a supervisor in this process, a face-to-face meeting will go a long way in getting the final results the organization needs. There is nothing more frustrating than receiving a heavily edited job description from a supervisor with no explanation. The best job descriptions are created when there is honest, straightforward communication about the job’s requirements, deliverables and purpose. Sometimes the supervisor and the employee are on the same wave length, but there often is a miscommunication in how the employee describes the job in relation to how the supervisor views the job’s responsibilities.

Common Issues that Arise During the Supervisor Review Problem: The description form from the employee is written poorly or without sufficient detail. Suggested Solution: Encourage the supervisor to ask the employee openended questions, which can result in a productive brainstorming session for filling in the gaps. Problem: The employee has written the minimum education and experience

requirements to fit the employee’s own education and experience, not what the job needs. Suggested Solution: The supervisor should remind the employee to consider the minimum requirements for the job, not what he or she brings to the table. If this employee wins the lottery and leaves the organization, how would he or she be replaced? Problem: The employee’s perceived requirements of the job are greater than

what is really needed. Suggested Solution: The supervisor should find out why the employee’s misconception exists. In some cases, there is “job creep” where a skilled, long-

How to Write a Job Description • 59

term employee is willing to take on additional tasks without the supervisor’s knowledge. Problem: The supervisor and the employee cannot agree on some key factors in the job description. Suggested Solution: Rather than say, “My way or the highway,” it is better to reach a compromise that makes sense. This is where another opinion—either from the department head or HR—may provide additional insight to get the issue solved.

The Necessity of Management Approval Once the supervisor and the employee have agreed on the job description, the manager and/or department head should review all job descriptions. This task is not high on a department head’s or manager’s list of priorities. It may be easier to schedule an in-person meeting or a conference call to review the job descriptions with the supervisor and manager/department head. Once the HR department has completed the final editing, the vice president or senior manager of each major department should review them. In some organizations, the chief operating officer, chief executive officer or executive director may want to be involved. In the majority of organizations, however, this task is usually delegated to the department head.

Editing the Job Description: The Final Check Title Does the title accurately convey the level, responsibility and type of work? Is the title descriptive, but not so unique that it cannot be used for other positions in the organization? For example, a generic title such as “accountant” is preferred over a specific title such as “government revenue accountant” because it covers all positions that will be used on a salary survey. The title should be gender neutral to avoid sex discrimination charges. For example, “foreman” should be changed to “team captain.” Is the title contemporary? Titles are very important to most employees and it costs nothing to use an up-to-date title. In today’s work environment, most secretaries are called “administrative assistants” and most executive secretaries are called “executive assistants.”

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Eliminate odd or specialized titles; for example, a “software architect” pertains to the software industry and should not be used in a small business in the education area. Manager titles should be reserved for supervisory employees who have direct management responsibilities in hiring, firing and providing performance feedback for at least two full-time employees. The title of manager can be used for careers that commonly use “manager” to fulfill a project management role in a specific industry; for example, “case managers” pertain to the health care industry, while “product managers” are in the software industry. Generally, it is good practice to create a title that fits the industry and is easily understood. Job Duties and Responsibilities Is the list of duties on the job description reasonable in number with sufficient details? Are the job descriptions too vague and/or too short to help define the position? A job description should clearly state at least eight to 10 primary responsibilities and provide examples to enable the reader to visualize the job. By reading the job’s duties, responsibilities and expected outcomes, can the reader understand what the job’s purpose is and what the organization is paying for? Make sure the description clearly states the level of responsibility and the outcomes expected. Job Families A job family is an important key to happy employees, employee retention and successful succession planning. It is a group of related jobs usually from entry level to intermediate level to senior level. A job family can include management levels related to the purpose and scope of the supervised positions. For example, the following is an example of a job family in an organization’s accounting department listed from low level to high level: Level 1: Accounting Associate (clerical entry level) Level 2: Accounting Administrator (intermediate clerical level) Level 3: Senior Accounting Specialist (senior clerical level) Level 4: Staff Accountant (entry professional level)

How to Write a Job Description • 61

Level 5: General Accountant (intermediate professional level) Level 6: Senior Accountant (senior professional level) Level 7: Accounting Supervisor (entry supervisory level) Level 8: Accounting Manager (management level) Level 9: Director of Accounting (senior management level) Typically, job families have at least two to three incumbents in each level. Do not create extra levels if the organization’s structure, number of employees and/ or company philosophy does not support the extra levels. In smaller organizations, there may only be work for one clerical level, one professional level and an accounting manager who supervises other functions as well as accounting. It is important to provide a link between jobs with clearly written job descriptions that outline the differences in responsibilities from one level to another, and differences in experience and/or education. This helps the organization plan and groom employees for the future, while helping employees do some of their own career planning. This creates a win/win for everyone: It motivates employees to grow and develop with the organization, and discourages them from leaving to pursue their career path at another company. It also is important to realize that not all employees are management material. In today’s world it makes sense to have a dual-career ladder that encourages technical excellence. Consistent Education/Experience Requirements Minimum experience and education requirements should be consistent across all departments within an organization. For example, an organization may require the following as minimums for each level of responsibility, with criteria for moving to the next level. n Lead: Minimum of two years’ experience and high school diploma or equivalent. Generally provides supervision limited to work direction, training and scheduling. n Supervisor: Minimum of four years’ experience and an associate degree or equivalent experience. Generally provides hands-on supervision to a small- to medium-size work group. Gives performance appraisals and provides input on hiring and firing.

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n

Manager: Minimum of six years’ experience and bachelor’s degree or equivalent experience. Generally supervises a larger group of employees with a supervisor or lead over smaller work units. May manage employees in different locations or diverse departments. Manages budgets, training, and firing decisions for the departments. n Director: Minimum of eight years’ experience and a bachelor’s degree, master’s degree preferred, or certification or equivalent experience. Generally has at least one manager reporting to the position or manages a department that has a corporate-wide impact reporting to a vice president or higher. Has a key budget, financial and strategic direction responsibility. n Vice President: Minimum of 10 years’ experience and a master’s degree or equivalent experience. Generally directs several departments with managers and several in-direct reports. Has very significant impact on organization budget, finances and strategic directions. Decisions have significant impact on the organization and could have lasting effect on the bottom line. May be a corporate officer or sit on the board of directors.

The FLSA Puzzle: Is the Position Non-Exempt or Exempt? An exempt employee is not eligible for overtime pay. A non-exempt employee receives overtime pay. Is the pay decision for determining exempt or non-exempt status reflected in the job description’s duties, responsibilities, and education and experience requirements? For a job to be classified as exempt, it should carefully match the choice of exemption. Do not use words in an exempt job description that describe a heavily supervised position that does not use independent discretion or judgment and/or does not require a degree or an advanced level of instruction. A non-exempt job description might contain the following words or phrases: coordinate, assist, aide, closely supervise, follow detailed instructions, basic knowledge. Currently, there are six categories which qualify a position to be exempt under the Fair Labor Standards Act (FLSA): executive, administrative, professional, creative learned professional, computer professional and outside sales. Categorizing a non-exempt position as exempt can be a very serious and costly mistake for an employer. To review guidelines for classifying employees as exempt or non-exempt, visit www.dol.gov/esa. In cases where it is justified, use words directly from these guidelines in the job description. Without exception, for all exempt employees, the job description must cover

How to Write a Job Description • 63

the job’s primary duty. Primary duty means the principle, main, major or most important duty that the employee performs. Determining an employee’s primary duty must be based on all the facts, emphasizing the employee’s job as a whole. Look at the job’s main purpose, and the level the employee performs at the majority of the time. In all of these exemptions, a minimum salary level must be met. Executive Exemption n The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise. n The employee must customarily and regularly direct the work of at least two or more regular full-time employees. Temporary employees do not count. n The employee must have the authority to hire or fire other employees, or recommend hiring, firing, advancement promotion or any other status change. n Titles that would not qualify under this exemption: lead, foreman, shift supervisor, and employees with “manager” in their title, but who do not have management responsibility. Administrative Exemption employee’s primary duty must be performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and n The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. n Titles that would not qualify under this exemption: administrative assistant, executive secretary, lower-level office managers, contract administrators, lower-level buyers, schedulers and production coordinators. n The

Professional Exemption—Learned Professional employee’s primary duty must involve performing work that requires advanced knowledge (usually requiring a four-year college degree), defined as work which is predominately intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. n The advanced knowledge must be in the field of science or learning; and n The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. n The

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n

Titles that would not qualify under this exemption: engineering designer, drafter, LPN, rate clerks and customer service representatives.

Professional Exemption—Creative Professional The employee’s primary duty must be performing work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. n Titles that would not qualify are production assistants, graphic assistants, proofreaders, broadcasters, reporters and basic technical writers. n

Professional Exemption—Computer Professional This is the one exemption that has a different threshold to achieve as far as minimum salary. n The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing at least one of the following as a primary duty: analysis, design, programming, software engineering, documentation and testing. It is important to read all the regulations for this list of primary duties to make sure the decision to make the position exempt is a sound one. n Titles that are not generally considered exempt under this exemption are: help desk, computer operators, entry-level programmers and software engineers. n

Outside Sales Exemption The employee’s primary duty must be making sales (as defined in the FLSA regulations), or obtaining orders or contracts for services or the use of facilities for which a consideration will be paid by the client or customer; and n The employee must be customarily and regularly engaged away from the employee’s place or places of business. Titles that would generally not qualify under this exemption are: inside sales, phone sales reps and telemarketers. n

Note: For jobs that cannot be easily classified as exempt or non-exempt, it is wise to get the opinion of a compensation consultant or a labor attorney.

Job Descriptions and the Americans with Disabilities Act (ADA) The job description must protect the organization from employee issues which fall under the Americans with Disabilities Act (ADA). The job description must identify one to four responsibilities that can be categorized as minor responsibilities. These responsibilities usually constitute less than 5 percent of

How to Write a Job Description • 65

the time spent on the job and can be easily transferred to another employee. ADA requires this segregation of job duties. The act also specifies that major responsibilities do not have to be counted in a reasonable accommodation with an employee who has a serious health condition. In addition to covering the employee’s responsibilities in a job, the physical requirements of performing the job, including business travel and driving, must be included.

How to Keep Job Descriptions Up-to-Date Job descriptions should be reviewed and updated at the time of the employee’s annual performance appraisal. This keeps the information current and provides a good review of employee accountability. When a position becomes vacant, but before the formal recruiting process starts, is an ideal time to review the job description. Before hiring or moving another employee into the role, consider the experience/education requirements, bundling tasks or transferring some tasks to other roles. If a new position needs to be created, completing a new job description will help determine the level, requirements and the type of responsibilities that should be bundled into the new position.

Employee Job Description Input Form There are sample tools for launching this project in the Tools section at the end of the book, including: n A sample memo to instruct employees how to write job descriptions, with key action words to increase the accuracy of this process. n Definitions that clarify terms for employees. n Job Description Input forms: one for exempt employees and one for nonexempt employees. n Sample job descriptions in final form. After reading the instructions for writing a job description in town hall employee meetings, encourage employees to spend a maximum of one hour completing the form. This allotted period reduces wasted time and produces a better result.

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Real-Life EXAMPLE

The Case of the Fishing Company Managers Who Hated Paperwork An HR professional was assigned the task of creating the first compensation system for a Pacific Northwest-based Alaska fishing company, which prided itself on being one of the last pioneers and was modeled after the gold rushes in Alaska and California. The company recently experienced a growth spurt and multiplied its original size due to mergers and acquisitions. Its sudden growth required adding an important infrastructure, including compensation, benefits and performance management. This was a demanding project because the senior executives hated paperwork and, in most cases, computers. Their preferred communication method was scribbling on the back of an envelope. It was a challenge to get senior management to focus on a project that had no correlation to the amount of fish they could catch during Alaska’s short fishing season. Four factors, however, made the project successful: n Traveling to Alaska and going out in the middle of the night to watch a tender bring in a big load to the floating processor. This allowed the HR team to observe the individuals’ jobs and work environment. n Emphasizing that the new pay-for-performance system would help take the guesswork out of managing employees and save them money. Senior management was assured that the job description was meant to only outline the highlights of someone’s job—not include every single duty the employee might be asked to perform. n Assisting management with writing their own job descriptions. After interviewing them to obtain information, the HR team worked up drafts for their review. n A little tender loving care brought the executive staff on board as cheerleaders for the creation of job descriptions. When executives are involved in the process and see how minimally painful and useful it is, the project has gained built-in supporters. Do not assume that executives know what to expect in a complex pay-for-performance/compensation study. Even worse, they may have had a bad experience with this type of system in the past.

Tips and Takeaways 1. Do a careful edit of job families. Each job level in a job family should be distinct in experience, education and responsibilities. A job family is a similar career track with different levels. Create job-family levels when

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there is an organization need for more skill and experience level. In most cases, the organization should have enough employees to fill at least two incumbents at each level. 2. Clean up your act. This process is not painless. An organization benefits by cleaning up issues that have been ignored for years, but do not go away by themselves. Cleaning up titles, restructuring jobs and reconciling exempt and non-exempt issues are worth the time and effort. 3. Know your priorities. This process will help clarify job responsibilities. That will go a long way in using an organization’s dollars wisely because it should get what it pays for from employees. 4. Take control of the future. A specific process for writing job descriptions for newly created jobs will help control the organization’s biggest expense—employee pay. 5. Avoid analysis paralysis. This process is more complicated than it looks. It is a fine balancing act to address the issues that must be solved, but still get the project done with some useful outcomes. Job descriptions that sit on a shelf do not serve any purpose. Compensation Boot Camp

Job Description Terms and Job Analysis Methods Interview: This technique is usually combined with a structured questionnaire.

It is often used with executive staff to make sure the job description reflects the job’s nuances. Observation: This term is commonly used for basic clerical and/or hourly jobs

in which work can be observed accurately in a short time; for example, a cashier or a basic production assembler. Structured questionnaire: This is the most common tool for gathering job de-

scription information. In most cases, the employee fills out the first draft.

Sanity Suggestions n

Make sure resources are available to accomplish this project. It may require additional assistance in two areas: lower-level administrative help and more senior-level job analysis consulting. The main tasks of the lowerlevel administrative support in this type of project is coordinating employee town hall information meetings, tracking the outstanding job descriptions that need approval, and transferring the final description document into the

68 • Solving the Compensation Puzzle

“official job description.” This will take administrative support approximately one hour per job description. It also may be necessary to hire legal or consulting assistance for dealing with sticky issues such as exempt and non-exempt classifications, writing clear job families and assisting with negotiating with different departments about similar job titles. It will generally take an experienced HR professional or compensation consultant a minimum of 30 minutes to edit each job description. n There are no shortcuts. It is important to communicate clearly that this is a large project but, if done correctly, it will provide an excellent backbone for many important human resource systems. It also will provide consistency between employees, individual jobs and different departments. n Good things take time. It may seem like there is never a good time to initiate this project due to competing business demands. Start with a department that has the least amount of stress/deadlines and then go back to other departments at a later date. Some managers will always have an excuse not to meet deadlines. That is why it is often necessary to obtain a reasonable commitment when the job descriptions can be completed. Often, the process of updating job descriptions can be linked to another process, such as a market study.

Ch a p t er

6

Make Sure Employees Are in the Right Salary Range External Equity—The Market Study Many factors influence internal and external pay levels, such as external, internal, organizational and job factors. Although these factors have different weights, they must be considered as a whole. External factors include supply and demand for labor; supply of labor from visas; supply of labor from colleges/trade schools; how the organization’s specific industry is doing financially; and the cost of living in the region. Organizational factors include size; whether it is a profit, non-profit or government entity; the organization’s financial stability; pay philosophy; and the job’s value to the company. Job factors to consider are education and skill required; creative, intuitive, resourcefulness and management abilities; responsibility for company assets such as money and large clients; physical requirements and working conditions. What steps does an organization need to take to evaluate its jobs fairly? There are two methods to complete an accurate evaluation of what an organization should pay for all of its jobs: internal equity and external equity. It is important to evaluate positions using both methods.

How to Prepare for a Market Study 1. Devise a project plan with resources, timeline and budget. A market study can be started after completing the organization’s job descriptions. Allocate two to three months for a 50-job market study and three to four months for a 100-job market study. (See Tool 11 for more information.)

69

70 • Solving the Compensation Puzzle

Figure 6 Salary Survey Market Data Choices PROJECT PLAN & RESOURCES

TYPE OF SALARY INFORMATION

JOB MATCHING

Pick salary surveys. Use at least three!

Non-Profit For Profit Type of Industry

Match only data points in survey with enough data.

Decide on effective date of the study.

Geography: Hourly Jobs-Local Salaried Jobs-Regional Executive Jobs-National

Need at least: 10 organizations and 15 incumbents for enough data.

2. Decide what sources to use to find salary data. Sources available include custom surveys, published traditional surveys and Internet surveys. 3. Determine the market study’s effective date. Select an effective date for your first market study approximately one to two quarters after the expected completion date. For example, if the study is expected to be completed in July, make the effective date the following October. This will be an important date for aging or pro-rating data. 4. What geographic area will be used for gathering salary data? The geography used for the market study should roughly mirror the recruiting area. For example, if hourly employees are hired from the immediate metropolitan area, use this as the main source of salary information. If the recruiting area for salaried employees is larger, then include the immediate metropolitan area and the surrounding county. For an executive position, enlarge the recruiting area to the entire state or region of the country. Figure 7 Relevant Labor Market Employee Group

Local

Production, Hourly

3

Regional

Non-Exempt, Administrative

3

Highly-Skilled Technicians

3

3

IT, Scientists, & Engineers

3

3

Professional

3

3

Managers

3

3

Executives

3

3

National

International

3

3

3

Make Sure Employees Are in the Right Salary Range • 71

5. Is it important to match industry data for profit, non-profit or government status? Taking the time to match jobs exactly to the organization’s industry for at least one survey data point will increase the data’s trustworthiness. 6. Is there enough data to make the survey useful? Good salary survey information revolves around the data’s credibility. As a minimum guideline, only use data with at least 10 organizations reporting in and 15 incumbents.

Major Sources of Salary Information Traditional Published Salary Surveys Traditional published salary sources come from three main areas: government, non-profit (associations) and consulting firms. It is worth the time to delve into the variety of options because some may be very expensive. Government Salary Surveys This category covers surveys produced by the federal, state or local governments. At one time, these surveys were up to two years old. Today, these surveys are almost as current as many annual traditional surveys because data can be gathered via the Internet or e-mail. The hardest part is navigating various websites for the first time. After reaching a comfort level, data gathering becomes easier. The advantages of government surveys are that they cover a wide variety of jobs; they may cover remote areas where it is usually difficult to obtain data; and they are the most inexpensive option, ranging from free to less than $250.00. The disadvantages of government surveys are hard-to-navigate websites; the data is not always as up-to-date as other sources, and the participants may not be the same from year to year. Sample Sources of Government Salary Surveys This is a sample of salary surveys for illustrative purposes only. It is important for the company to research the surveys that best fit its needs. n Survey Handbook and Directory—A Guide to Finding and Using Salary Surveys, available at www.worldatwork.org

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n

Bureau of Labor Statistics, www.bls.gov Arizona Employers’ Council, www.azeci.com n Employer’s Association of Florida, www.eafinc.org n

Non-Profit and Association Salary Surveys The best sources for industry-specific salary surveys fall under this category. Almost every type of business has an association. In fact, even the association business sector has an association called the American Society of Association Executives, which publishes an excellent job-related salary survey. To find out if an organization is covered by an association, ask the marketing and/or business development staff to gather this information. Typically, these surveys are reasonably priced for participants and/or association members. Some surveys, however, cost more than $1,500 and may charge separately for executive, sales, professional and lower-level technical staff. Find out the pricing structure and what it includes before making a commitment to purchase the survey. There are many advantages to non-profit association surveys. They are the best source of highly-credible industry-specific data, making job matching easier because the organization structure and types of roles are similar. They are a cost-effective way to obtain a large number of survey matches. The disadvantages of non-profit association surveys are that they may provide too narrow a view; for example, accounting jobs are in any industry. They also cover a larger geographic area than optimal for lower-level jobs, such as stock room, custodians and receptionists. Figure 8 Three Major Types of Salary Survey Choices Published

• Traditional salary surveys • Useful for all organizations

Internet

• New source • Can save time—must understand data source

Custom

• Survey designed for only your organization • Most common—public sector & non-profit

Sample Sources of Non-Profit/Association Surveys The following is a partial list of non-profit/association surveys.

Make Sure Employees Are in the Right Salary Range • 73

n

Association Surveys: – American Electronics Association, www.aeanet.org – American Society of Association Executives, www.asaenet.org – National Association of Colleges & Employers, www.nace.org – National Association for Law Placement, www.nalp.org n Surveys for the Non-Profit Sector: – Abbott, Langer & Associates, www.abbott-langer.com – Cordom Associates, www.cordom-salary-surveys.com Traditional Salary Surveys from Consulting Firms These are the traditional, published salary surveys that are published by large compensation consulting firms that do survey generation. Up until the 90s, most salary survey information was not available through any other data source in a timely fashion. With the emphasis on data gathering, software tools, e-mail and the Internet, this has changed substantially. Now there are many more survey choices. These surveys have been published for more than 20 years and provide stability and longevity that other survey types may not. Consulting firm salary surveys have many advantages. They provide comprehensive data that is continually updated. They are used by large companies with huge payrolls, and may cover Canadian wages and other international compensation. Consulting firms may be willing to do job matching for a price. Consulting firm surveys also have disadvantages. They can be expensive and an organization may have to buy several surveys to cover all positions in the company. In addition, the surveys may not cover small labor markets. Sample Sources for Traditional Published Salary Surveys Most of these salary surveys are published by compensation and/or benefits consulting firms. Their main objective is to make a profit from selling the survey, selling consulting time or selling products for compensation, benefits or payroll. Some surveys are focused on smaller organizations with less than 3,000 employees. These smaller organization surveys also may be appropriate for larger organizations located in one major area of the country. n Small organization/regional salary surveys: – Business & Legal Reports (BLR), www.blr.com – Compdata, www.compdatasurveys.com – Milliman, www.salarysurveys.milliman.com

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n Traditional,

published salary surveys: – Mercer, www.imercer.com – Radford Surveys, www.radford.com – Watson Wyatt Data Services, www.wwdssurveys.com

Internet Salary Surveys This survey information is available only on the Internet. These surveys typically gather their information from a large number of sources, including employees. The Internet has changed the amount of information employees can obtain about their own job, and has a huge impact on the compensation field and what is communicated to employees. There are many benefits to Internet salary surveys. Information is updated frequently, sometimes weekly. There are many more slices of data, such as size, location and type of industry. Some sites coach visitors through the process to match jobs more effectively. In addition, they are a cost-effective way to obtain data from multiple industries and/or multiple locations, and do not require you to submit your data. Despite their advantages, Internet salary surveys also have a downside. They have a short history—many sources have not even been around for five years. They can be very expensive, so companies need to know exactly what they are getting for their money. Sometimes, the data can run high or low, so it is wise to compare an Internet survey with at least one other survey. Visit www. payscale.com for a listing of all job levels in private and public sectors in the United States and Canada. (See Tool 9 for more information.) Custom Salary Surveys A custom salary survey is most commonly used in the public sector because pay is open. Public-sector organizations are relying more on data than the pay information of the immediate surrounding public-sector organizations. A custom salary survey is expensive because it is very time consuming. It usually is sent by e-mail to a group of similar public-sector entities. Salary survey information is requested on jobs by using a “capsule” job description. Other information is gathered at this time, including benefits and pay practices such as on-call pay. In rare cases, a custom salary survey may be used in the private sector to find good matches beyond published salary surveys. In the private

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sector, this information can only be gathered through a third party, such as a compensation consultant. It is important to use a third party to gather the information so it is not construed as price fixing under the Sherman Anti-Trust Act. (See CD-ROM Tool 16 for more information.) Custom surveys are up-to-date and tailored exactly to the company’s jobs and industry. Custom surveys also have disadvantages. They are expensive and must be conducted by a third party to avoid anti-trust violations under the Sherman Anti-Trust Act. They also are narrower in scope than traditional published surveys.

How to Make the Salary Survey Decision This is one of the biggest decisions an organization will make regarding its compensation system. Most organizations, however, do not spend even five minutes considering what sources to use for this very important and, in many cases, very expensive decision. These salary surveys set an organization’s parameters for its salaries. The following three guidelines will ensure making the best decision possible for the organization. 1. Use a minimum of three salary surveys. It is amazing how many organizations make million-dollar decisions with one salary survey source. Surveys are only as reliable as the employers providing the information to the survey company, the interpretation of the data by the survey company and many other issues. By comparing three surveys for each job match, the company can make a more informed decision. 2. Determine the labor market for the salary survey sources. Different job levels often have different labor markets. For example, clerical/hourly positions usually have a labor market of a fairly small metropolitan area. This is even truer as the price of gasoline goes up and the public transit options improve. For executive positions in the market study, it is not unusual to cover a region of several states or a national labor market. Find out what surveys the organization’s local network of HR professionals utilize. In most cases, the area-specific salary survey changes by region of the country. Everyone in the local area is competing for many of the same generic jobs (such as clerical, administrative, accounting, IS and HR), so it is important to know the pay rates. 3. Select at least one salary survey specializing in the organization’s industry sector. For example, there are very good surveys specific to the hospital business sector.

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Timing Is Everything When is the best time to conduct a market study? The organization will save substantial time and money by determining the best time to complete its market study. Many salary surveys are published annually, while very few are published every six months. For planning and budgeting purposes, it is important to know what month the survey is published, the deadline for ordering the survey and the deadline for participating in the survey. The survey usually is a lot less expensive for participants. Sometimes, if a company does not participate in the study, it will not be allowed to purchase the survey. Carefully plan when the organization is going to do the compensation market study, taking into consideration when market adjustment decisions should be made for inclusion in the company’s budgeting cycle. For example, for a calendar-year budget, complete the salary study in the summer to be ready for final budgeting plans in the fall. Dovetail this with the merit pay (annual increase) time. A full market study includes a majority of a company’s positions in the external market study. How often should an organization complete a market study? It is important to commit to conducting a study at predetermined, fixed-time intervals because the labor market does not stand still. By waiting, an organization may experience expensive turnover, employee relations issues and a need to budget a high amount to catch up to the current market. A for-profit organization should conduct a full market study every two years. Non-profits and public-sector organizations should generally perform a study every three years. In the “off” year, it is important to select a few positions to study based on how fast the market is moving (e.g., nurses and pharmacists). Assess the number of employees in a particular position. For example, if there are 100 nurses out of 150 employees, it would make good business sense to study this job at least once a year. Last, but not least, are employees leaving a particular job or is the organization having trouble hiring for this job because of the pay? It is better to confirm a trend on a timely basis than wait until it may be too late. Where should a market study be conducted if the organization has a home office and branch offices or other employee locations? For all U.S.-based locations, use the headquarters office as the base to study the market. Then, adjust

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the other locations based on changes in cost of living. There are many Internet sites that provide information on cost-of-living adjustments (COLA); for example: Homefair.com and Yahoo Real Estate.

How to Use Salary Survey Information To an inexperienced compensation professional, it looks easy to take a bunch of job descriptions and find meaningful matches. If it were so simple, there would not be such a high demand for compensation experts. With sound outside compensation surveys used with compensation expertise, the organization will have reliable information for making quality decisions regarding its pay systems.

How to Match the Organization’s Jobs to Its Pay Surveys Look for the section that matches the organization’s size and industry the most closely. This rule may have to be a bit flexible to get market information that is robust with the number of organizations reporting in. Be consistent on what is matched in the salary survey. Here are the main types of “middle numbers”: Simple Average: This is the most-often-used number. A simple average takes the average from all the same jobs of one organization and averages this organization average. For example, for 10 companies, all nine have one software engineer and one company has 79 software engineers, then the average is made up of 10 averages, even though there were a total of 79 plus nine software engineers for a total number of 10 averages. By using the weighted average, the software engineer average would consist of 79 software engineers, plus nine more for an average number of 88 averages. Typically, the simple average is for a small company, while the weighted is more accurate for larger companies. Median: The median number is just the middle number, which can be useful if the scale has a bell shape. By using the median alone, it can be hard to determine if there are “average” numbers clustered around one end of the curve. Mode: The mode (number listed the most often) is seldom used to compute compensation averages for a market study. This number does have an application in highly-sensitive lower-level jobs. This can be useful to know where you stand in this cluster of organizations (such as a three-mile radius of fast food stores) so you don’t lose employees for just a few cents.

78 • Solving the Compensation Puzzle

Market Survey Tips n

Strive to match approximately 70 percent of the job content on your job description to the description on the salary survey. Match duties to duties, not title to title. n Look at how the job falls into the job family versus the job family listed in the survey. n Look closely at the job versus the salary survey’s education, experience, scope and reporting relationships to get the best match possible. n Use a salary survey source that has enough information; for example, at least five to six companies reporting in and at least 10 incumbents. n If necessary, be a bit creative—especially for small companies that may have a combo-job; for example, the job may be 50 percent office manager and 50 percent human resource manager. Gather the data for both jobs and divide by two. n If the job does not have a good title match, look for duties and deliverables.

Matching Jobs Like a Compensation Professional Two tried-and-true techniques are used for job matching: data aging and extrapolation. When aging data, consistency is critical in matching of jobs to market information, and it is fairly common to be working with salary survey information that has different “effective” or print dates. To bring the data forward to one date, it needs to be aged or pro-rated. This is a simple concept. Take the salary average from the survey, look at the survey’s effective date and then age the data forward to the market study’s effective data. Determine your salary study’s effective date, which is usually during the first or last quarter of the fiscal year. Review the effective date of the survey data. A good rule of thumb is to age your data 4 percent a year or 1 percent a quarter because over time merit budgets have been about 4 percent per year. Take the market average and adjust it to take into account the preceding steps. For example: n

Study effective date: July 2008

n

Data is effective Oct. 1, 2007—data is nine months old

n

Raw market average is $4,000 a month

n

To compute the final number, take the $4,000 average multiplied by 1.03

n

Answer: $4,120

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The second method, called extrapolation, is easy to use. It requires estimating a data point using known information from another data point. In compensation, this technique can help estimate higher jobs or lower jobs in a job family by gathering the information about the middle job in a salary survey. The major drawback is that positions described in salary surveys are not always an exact match to the jobs in question. One way to make the survey information more useful is to extrapolate up or down one salary grade so that the survey match is more accurate. Since most salary grades are, on average, 12 percent apart, a good estimate to use is 12 percent per level. To extrapolate up, add 12 percent, the approximate salary difference between one salary grade and the grade below it. The opposite is true for extrapolating down one grade. If the position in the salary survey is higher than the organization’s position, subtract 12 percent from the salary survey number.

Example n

Survey has a Buyer II Position requiring three years of experience plus a degree or equivalent. n Average in the salary survey is $3,880. n Positions that need matching: Buyer I position with one year of experience plus a degree or equivalent. One level below the salary survey average: $3,880 - 12 percent Buyer Senior III with five years of experience plus a degree or equivalent. One level above the salary survey average: Average: $3,880 + 12 percent

Quality Assurance: The Critical Last Step In any type of numbers research project, it is important to review the data to make sure it makes sense. For example, three salary survey mid-points that are $3,500, $3,450, $3,666 are credible because they tightly hang together. If the market averages for a job are $3,500, $3,455, $3,400, $4,888, there is cause for concern that the last number is an outlier. An outlier is a number that is obviously higher or lower than the other numbers in the set. Look at the survey that contains the $4,888 match and see if there is a better job match, perhaps under a different title. Use another survey that has a

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match that is more in line with the other three matches. Check the math to make sure there were no errors. You may end up with the conclusion to eliminate $4,888. It is not needed because there are three other surveys.

Make Sure the Salary Plan Fits the Organization Internal equity is an inside review of positions against other positions within your organization. Similar job titles in different industries can have a higher value based on a number of factors, such as type of clientele, work environment and specialized skills. For example, two different organizations can have the same job title but different pay. Consider the title of “quality assurance inspector” in a pacemaker company and in a sleeping bag manufacturer. Both of these positions are responsible for double checking the equipment before it is shipped to a customer. The impact of this position is obvious when sending out defective equipment. Most likely, no one will die in a defective sleeping bag, but it could happen with a defective pacemaker. The internal equity study is a very important step because it can help an organization be more accurate in its base-pay systems. It takes into account the organization’s unique positions, combination jobs (two or more roles for one job) and the unique customer or work environment. There are some specific methods for determining internal equity at the end of this chapter. There are many advantages to conducting an internal equity study in addition to the external market study. With today’s abundance of information, it’s not unusual for employees to know what their co-workers make. When there are pay discrepancies, it has a negative impact on morale. Employees also may migrate to a similar job, but at higher pay, offered in other departments. Both internal and external equity should be used when job content changes due to mergers and acquisitions and job tasks are bundled together. It is estimated that 30 percent of the jobs in small companies are “combo jobs” filled by one incumbent responsible for two separate jobs. Internal equity also gives the employee credit for jobs that have a greater impact internally than other market comparisons. It recognizes jobs that may have more responsibility and liability than other similar jobs in similar locations.

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Internal Equity Challenges Many organizations do not use this important evaluation tool because they underestimate how important it is to valuing jobs. Part of this lack of internal equity study can be attributed to a tight labor market, especially for skilled positions. To fill jobs, an organization often will completely abandon internal equity. Organizations owe it to employees to evaluate using both internal and external equity. Internal equity tools also will help evaluate jobs in the organization that may look similar and have similar titles but, with further analysis, it is apparent the organization uses this position in completely different ways. Real-Life Examples

The Case of the Complex Collection Many organizations, both in the public and private sectors, have an accounts receivable role where most of the account collection is performed. A group of accounts receivable specialists can have many substantial differences. For example, it makes a difference whether the employee is collecting money for a department store versus navigating the right channels to get a complex medical procedure paid. Other things that can make this job more complex include working with international clients, clients who do not speak English and many other variables.

The Case of the Difficult Blood Draw Another example is an organization that does cancer research in an expeditious manner. The same employees recruit patients for a cancer study, meet with the client to get the paperwork completed in their home, and then perform a blood draw as part of the study. It would be unfair for this organization to compare this job to a hospital phlebotomist who draws blood in a more routine setting such as a family clinic.

The Case of the Life-Saving Social Worker Two social workers’ jobs require a master’s degree in social work. At first glance, all social work jobs can be assumed to be similar. In reality, they can be quite different. In most cases, the responsibilities of counseling and coaching are quite similar. But the impact of the MSW who works with individuals in crisis may also have suicide watch and prevention as job functions. The social worker who works with families in a retirement care center has a different impact and clientele.

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Steps for Completing an Internal Equity Review There are two main methods to conduct a formal internal equity review: 1) job ranking and 2) a point-factor system. Job ranking is an easy way to make sure that the market data makes sense for the organization’s jobs and its labor market. After completing the market study, the next step is to place jobs mathematically into a salary range. For an organization that has a “meet the market” compensation philosophy, the market data average is matched to the closest mid-point in the salary range. The following step is one of the most important steps in a successful pay-for-performance system. Job ranking requires reviewing each unique job with its market position locked into salary grades. Compensation is an art, not an exact science. What’s the process for job ranking? It is most useful to take money out of the equation and encourage the senior management team to look at salary grades and then the jobs that are slotted together in the salary range. In very small companies, this process can be performed with a CEO or business owner. A group of senior managers representing all areas is preferable. When money is a factor, managers start thinking about individual employees. It takes some real facilitation skills to get a senior management team to stay focused on this task, so it may work better to have an outside resource lead this process. 1. Slot jobs into salary grades with the market average matching the mid-point. 2. Double check and deal with any non-exempt or exempt issues. 3. Schedule time with the senior management team. Make sure all organization functions are represented. 4. Explain how the market study was conducted and the importance of the internal equity process. 5. Explain the rules for job ranking. Without some structure and some rules, things can get out of hand fast. Start at the bottom of the non-exempt scale and go up. It is easier to deal with the lower-level jobs first. Allow for only a 1-2 grade move from the actual market data. Review each job and ask the following questions: a. Does this job belong with the other jobs in the same salary grade? b. Are many employees leaving this job for pay reasons? c. How does this fit within the appropriate job family? Most of the time, it is desirable to see a one-grade jump between levels of a job family. For

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example, a payroll assistant should be at least one-grade below a payroll specialist. d. How do current employees’ salaries compare with the new grade?

Job Ranking The job ranking process is easy to use and explain to employees and managers. This is a method that can be accomplished by hiring an outside compensation consultant or utilizing a senior manager to facilitate the discussion. One of the advantages, particularly for a new compensation system, is enlisting an outside consultant to keep managers on task and also act as a referee. The good news is that this process can be accomplished in less than eight hours, which means using an external consultant will be fairly affordable. Advantages: Job ranking systems are not appropriate for every organization. To

be successful, this technique should be used for organizations with fewer than 400 unique jobs. It is wise to reduce the number that a group must review to no larger than 100 unique jobs. Larger organizations generally need to select another system. Disadvantages: Job ranking system results will be only estimates of the correct job hierarchy; not the exact hierarchy used in the point-factor system. Job ranking also needs to be facilitated by a skilled compensation specialist who can handle aggressive managers who want to place their employees in higher salary grades.

Real-Life Example For large organizations that do not have the time or money to develop a pointfactor system, it is advisable to divide the organization into manageable chunks. To illustrate, the point-factor method for measuring internal equity was not a workable choice for a large, non-profit health care organization in Florida with more than 400 unique jobs. With a little bit of creativity, the organization was divided into five major areas: non-exempt clinical, exempt clinical, non-exempt non-clinical, exempt non-clinical and executive. Reducing the workforce into five salary structures was an effective way to measure internal equity.

Point-Factor Internal Equity System The point-factor system is a job “evaluation” method and is in contrast to a job ranking system that assigns numerical point values for each major job compo-

84 • Solving the Compensation Puzzle

nent. One of the ways to achieve this is to buy an “off the shelf” system such as the Hay Point Factor System, which is used by approximately 5,000 employers worldwide. This method uses compensable factors such as knowledge, problem-solving skills, accountability and work environment. Most of the organizations that use a Hay Point Factor System are fairly large so that the expense of using it can be spread across many employees. To find out more information, go to the Hay Plan website at www.haygroup.com. Another alternative is for an organization to design its own point-factor system. The advantage of a customized system is that it is designed to cover exactly what an organization wants to pay for. Once this system is designed, an organization can use it for many years. The major cost is its design. This book contains a sample, custom point-factor system for reference. It is important to note that for this system to really add value to an organization, it needs to be tailored closely to the attributes the organization sees as value added. This process can have a substantial value beyond compensation—done correctly, it sets the parameters and forces an organization to convey exactly what they want to pay for.

Point-Factor System Advantages and Disadvantages Advantages: The major advantage to using a system for internal equity, such as the point-factor system, is that it forces an organization to quantify total points for each unique job, the true value that the company places on this job. This process often provides value beyond just compensation. It forces an organization to do some real soul searching about the traits they value in employees. This exercise has some side benefits for recruitment, promotions and job design. Disadvantages: The disadvantages to choosing a point-factor system to deter-

mine internal equity revolve around time investment and cost to design a custom system. Unless there is an internal resource that is already familiar with the design of a point-factor system, the organization should hire an outside resource. The cost for this outside resource will vary, but an organization should plan on adding approximately $7,000 to $15,000 in consulting fees for each 30 unique jobs that need to be evaluated. A time commitment from senior management also is needed for the initial design of the system. This generally requires at least three half-day meetings, and then a smaller group will need to review job descriptions and assign points using the new point-factor guide.

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The design of a point-factor system is very complex. If it is done incorrectly, it can have some disastrous results, from paying for the wrong attributes to possibly being sued on the basis of gender discrimination. It is important to note that once the system is designed, the organization needs to make a commitment to consistently evaluate all new jobs using the point system.

Steps for Designing a Point-Factor System The diagram below outlines the steps for designing a point-factor system. There are samples which can help in customizing a system specific to the organization. (See CD-ROM Tool 15 for more information.) 1. Discuss the pros and cons of a point-factor system to receive full support from the management team. 2. Create a project plan with steps, resources needed and timelines. 3. Hire an outside resource if needed. 4. Train the design team on the principles of a point-factor system. 5. Select and define job factors. There should be a minimum of six and a maximum of 10 factors. Job factors vary for different industries, types of employees and the organization’s culture and purpose. 6. Weigh job factors—generally from a low of 25 points to a maximum of 60 points per job factor. This is one of the most important steps, as the factors with the highest points should correspond with the same factors that the organization deems are most critical for job and organization success. For example, a company in the Midwest with nice offices and a standard Monday-to-Friday work schedule generally would assign a 25‑point maximum to the work-environment factor. Contrast this with an electric utility in the northernmost tip of Alaska and the work environment would certainly be more perilous and warrant a maximum of 50 or more points. Overall, a total point value of somewhere between 300 to 600 maximum points is recommended. 7. Define the job-factor levels. This is the step where the value of each step is defined within the job factor; for example, a high school education as a job requirement may warrant a total of 10 points out of 60; an associate’s degree, 20 points; a bachelor’s degree, 35 points; a master’s degree, 45 points; five points for each additional certification; and at the highest level (Ph.D., M.D. or J.D.), a maximum of 60 points. 8. Prepare the job descriptions. Without accurate job descriptions, even a great point-factor system will not produce the desired results.

86 • Solving the Compensation Puzzle

9. Perform a test run of the point-factor system with at least six job descriptions. Pick jobs from different departments and different levels. This is best accomplished by at least three separate evaluations. If the scores are within 30 points of each other, then it is a point-factor system that is ready to be rolled out to the rest of the organization. If the variation between points is too wide, it is worthwhile to go back and discuss the reasons why this happened, and then make any necessary adjustments to the point-factor guide sheet. 10. Each unique job needs to be independently rated by at least two raters— preferably managers that were involved in the design of the system. Once the base is established with the first round of ratings, it can be delegated to other trained employees in future years. 11. In assigning jobs to be rated by committee members, do not assign jobs from a manager’s direct reports, but those in a similar area. For example, the IS manager is a good choice for rating the software engineering department; accounting may be a good choice for rating other staff functions such as IS, purchasing and HR. (See CD-ROM Tool 15 for more information.)

How to Create Salary Grades As part of the Salary Administration Manual, three salary grades have been added to the CD. It is important to remember there is no right or wrong way to design and administer pay grades. The number of grades, width of the grades, overlap of grades and the jump between grades are all important decisions. Typically, it works well to have separate grade structures for non-exempt, exempt and executive employees. By using this structure, the organization has it clearly sorted out which jobs are non-exempt or exempt. Why set up a compensation system with more than one salary structure? Even though an organization is small now; it could grow quickly in number and type of jobs and locations and then begin to lose track of what jobs are overtime eligible. Multi-level organizations will need to have a small progression between midpoints. By designing grades that have a small jump to the next grade, it is possible to have each level of a job family be in a separate grade. The following is a job family in an accounting department: accounting administrator, senior accounting administrator, accounting lead, accounting supervisor, accounting manager, assistant controller, controller, director of accounting, vice president of finance and chief financial officer.

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Pay Range Widths: What Do You Need to Know? Decision: How many salary ranges should there be? Things to consider: How tall is the pay range (i.e., the difference between the

highest and lowest paid employee)? Is it important to keep salary grade levels different for small differences in levels? Decision: How wide should the pay ranges be? Things to consider: Are employees already topped out? Will it be an issue in the next few years? Is your organization able to keep close track of the salary range spread—or the annual salary movement?

Non-Exempt Ranges It is easy to set non-exempt ranges starting with the organization’s lowest paid job and then building ranges using an Excel spreadsheet from this point. One of the tricks of the trade is to use a positive spin on all parts of pay administration. Start the lower range as a 10 instead of a 1. This keeps the grades in a positive light for everyone, even the employees who are a 10. In most cases, the range for non-exempt employees should be set at between 30 percent and 40 percent wide. This is a smaller width than the other two grade structures because an employee generally will spend less time in a nonexempt grade than an exempt or executive grade. Exempt Salary Grades This grade system applies to employees who are exempt and below the executive level. Start this grade progression at approximately level 30. This will leave approximately 20 grades open for the exempt salary structure. It makes sense in the long run to leave enough grades for the non-exempt structure and then it will not be necessary to adjust grades based on adding non-exempt grades in the future. Typically, an organization’s exempt salary grades are about 50 percent, which is approximately 10 percent higher than its non-exempt grades. Executive Salary Grades This grade structure is for C-level positions; for example, CEO, COO and CFO and, in most cases, directors and vice presidents. There are many advantages to having a separate executive-level structure. It will help you manage pay, annual bonuses, profit sharing and stock options. This pay structure

88 • Solving the Compensation Puzzle

typically will start at grade 50 and go up to 60, with the width of the grade approximately 60 percent wide. This extra width will accommodate longterm executives who stay in their pay structure for many years.

Progression Between Salary Grades The progression between grades is the jump between one salary grade midpoint and the one below it. This concept also sets the distance between ranges. For example, if you have a narrow jump between grades (10 percent), then the end result is a lot more grades to cover the same pay ranges. Is there one right or wrong answer as to what is right for every organization? No! This is one area where an understanding of pay structure design issues will have a big payoff for your organization. The following three examples illustrate size options between grades (small, average and large) and the advantages and disadvantages to using each one. Recommended Progression between Salary Grades: n Non-exempt: 6 percent to 14 percent. Most Common: 12 percent n Exempt: 8 percent to 16 percent. Most Common: 14 percent n Executive: 10 percent to 18 percent. Most Common: 16 percent (See Tool 9 for more information.) When to Use a Small or Large Progression between Grades The main reason to create a salary structure with a small percentage jump between grades is that an organization has many levels of jobs inside the same job family. Typically, this happens in a more highly-structured traditional organization. Also, this is a common structure for a non-profit/government workforce because titles are sometimes used instead of higher salaries. The disadvantage of this type of grade structure is that there are more grades and more grade overlap. This can be more difficult to manage than having more traditional pay structures and may result in grade inflation. Conversely, the reason to have a large jump between grades is to fit pay structure to a flat, less formal organization. This pay structure matches the popular philosophy of lean and mean, and a self-directed/self-managed workforce. This works well in an organization that wants to reduce its levels and have more flexibility in its jobs. A major disadvantage to this structure is that if you have jobs that are close together in market pay and responsibility, it may be difficult to have each position in a separate pay grade.

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Real Life-ExampleS

The Case of a Nice Title, But No Raise A non-profit that had to significantly downsize because of a reduction in government funding still believed it was important to keep the levels of hierarchy intact—so the solution was to add additional salary grades close together so that each one of these levels were still in a separate grade. By adding salary grades, employees were able to maintain their titles even in the reduction of a significant number of employees. Place the Job into the Salary Grade 1. Take the market study averages and add together for one market average. 2. Select non-exempt, exempt or executive salary grades. 3. Place each job into a salary grade using the closest midpoint on the salary structure to the salary survey market average. This will be adjusted to take into account the internal equity piece (point factor) or whole job method— and the organization’s pay philosophy.

The Tale of the Housekeeper vs. Janitor Market Pay This example is from an upscale retirement home facility with more than 300 employees. Almost 30 years went by without a formal salary plan. Once the job descriptions and the job analysis were completed, it turned out two jobs were very similar—the housekeeper and the janitor. The major differences were the location of the work and time of day when most of the work was performed. The janitor job cleaned the common area in the evening hours while the housekeepers cleaned the residents’ apartments during the day. After reviewing the salary data, it was discovered that the janitor was paid more than 25 percent above the salary average for the housekeepers. The janitor was mostly a male position and the housekeepers were mostly female. The other differences were that housekeepers had a day job with lots of people interaction and the janitor worked at night. The organization then decided to place both of the jobs into the janitor grade as the housekeeping staff was very important to the organization. The housekeepers differentiated this facility from other similar retirement facilities and had the most interaction with their most important customer—the resident.

The Case of the Mysteriously Underpaid Tech Support Department A high-tech company in the Southwest was going to develop its first compensation system. HR performed its due diligence by interviewing employees, looking

90 • Solving the Compensation Puzzle

carefully at job descriptions and touring the operations. Once the market study was complete, the HR team found that 26 out of 30 tech support technicians were paid under the minimum of the new salary range. As part of the process, the HR staff looked carefully at all jobs where the actual pay of the employee group fell above or below the new salary range. They were puzzled because of the large size of the group. Did this position have a lot of turnover? Were employees leaving because of pay? Did the group have low morale? Is there a glut in the regional market because companies are leaving the area? The answer to all of these questions was “no.” The HR team asked the vice president of technical support to review the qualifications and duties of this position one more time. He spotted the problem right away: The job description listed an education minimum of an associate’s degree plus two years of experience. It turned out that the company was very successful at hiring technical support people right out of the local college with no experience. Mystery solved! HR went back to the drawing board with its salary surveys and made new survey matches based on the new position requirements. With this new information, the salaries of the tech support group were adjusted back into the salary range, resulting in only five employees out of 30 who were still under the minimum of the new salary grade. Lessons learned: It is important to be a detective sometimes to really find out why employees are below a salary grade instead of taking a risk to overspend and set a policy where the organization pays above market. Compensation Boot Camp

Terms: Market Study Midpoint pay value: This is the halfway mark between the range minimum and the maximum rates. An organization in a competitive market meets the market by paying midpoint. Pay grades: This describes the grouping of individual jobs into shared pay bands or grades for ease of administration. The goal of a pay grade is to group jobs together with similar internal equity and labor market value. A

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pay grade also contains a minimum (the least an employee should be paid) and a pay maximum (the most an employee should be paid). Simple average: Adding all data points together and dividing by the total number of data points. Each data point is given equal weight. For example, if a survey has 12 companies and data for 18 employees, the average would be the average of each company no matter how many employees are part of the average. This average works well for smaller companies that want to look at each company in a survey as an equal and not have the data be influenced by one large company. Weighted average: Greater weight is given to one variable over another. In the compensation area, this usually means that all the jobs in the survey average are weighted the same, rather than the company. For example, if there are 10 companies with 80 employees in the survey data—that means that all 80 employees’ salaries have equal weight in the survey average. If one of the companies has 71 of the jobs and the other nine companies have just one employee, the larger company’s data has a huge impact on the average. This is a good tool to use when competing with very large competitors.

Sanity Suggestions n Contract

the expertise of an outside compensation expert to install a point-factor system. Once the system is designed, it should not be difficult to continue to use with internal resources. n The internal equity process is worth the effort, but it may take some education to get the management team on board. n Internal equity is only obvious when it does not exist. Employees grow unhappy about what other similar employees are getting paid, resulting in rapid transfers to one department from others based solely on pay and other employee relations issues. This is the other half of the equation— what is the market value for your positions based within your organization? There are three ways of tackling this issue and some organizations use a combination of the methods.

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Performance Appraisal: An Essential Step to Pay for Performance By conducting the performance appraisal process correctly, an organization has a good chance of implementing an effective pay-for-performance system. It’s been noted that a manager would prefer to get a root canal than meet oneon-one with an employee and deliver a performance appraisal. A performance appraisal system is an absolute must in a pay-for-performance system. It separates successful companies from unsuccessful companies. Many organizations know that to become an employer of choice, the performance feedback link is crucial. So, although many of them will criticize the performance appraisal process, it is important to remember that it is a culmination of honest discussion which documents an organization’s plans for future job roles. A study cited by the National Science Foundation showed that when a payfor-performance program is supplemented with performance feedback and merit pay, productivity rose an average of 43 percent for companies participating in the research.

Where Do We Stand? Is there an easy way to design and implement a performance appraisal system that will fairly measure and document performance, motivate employees to do more and then magically distribute just the right amount of merit pay over the entire organization? This topic receives a lot of attention, which is evident by visiting the business section of any bookstore or reviewing Amazon’s virtual bookshelf. Something must be missing, though, because performance appraisal seems to be the number-one system that HR professionals love to hate. 93

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What Is the Bottom Line? This is one area where there are no shortcuts. Organizations that invest time, effort and training find their efforts are well worth the time. Performance management permeates organizations at many levels and needs to be integrated into all areas of the company’s people management. To achieve a successful performance appraisal system, organizations must be prepared; emphasize “how” the performance is delivered; follow-up consistently during the year; and link the performance appraisal back to the organization’s goals. Be Prepared An effective performance appraisal does not start the day before the manager delivers it. By creating a plan, scheduling preparation time and getting organized, the process will go more quickly than expected. n When? The performance appraisal process should begin at least three weeks before the due date. By working backward from this date, it is easy to schedule the necessary steps around regular work, including meetings, vacation days, business travel and other pressing deadlines. By delivering the performance appraisal on time, employers show employees that their performance is a priority. n What? Managers need the following documents and notes before writing a performance appraisal: – Last year’s performance appraisal – Coaching notes from the last review period – Follow-up performance meeting notes – Research notes, including follow-up meetings with the employee’s internal and external customers on performance feedback – Organization, department and individual employee goals – Current employee’s self-assessment – Job description n How? The following seven-step process will help get the ball rolling and the performance completed on time: – Step 1: Review all documents and make specific notes, both positive and negative, that need to be covered. – Step 2: Write a draft on the performance appraisal form. – Step 3: Set the form aside and sleep on it. – Step 4: Write a final draft.

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– Step 5: Discuss the final draft with the department head or human resources. – Step 6: Deliver the performance appraisal. – Step 7: Schedule performance appraisal follow-up meeting(s). Provide Daily Feedback for Employee Development It’s the not the organizations that pay the most or have fancy perks or offices; it’s the organizations where management cares about employees and is willing to acknowledge superior performance in formal and informal ways. The most important person in this equation is the employee’s direct supervisor. There is an adage that supports this statement: “Employees join companies and leave bosses.” Employees will tolerate almost anything if they have a boss who cares about them, is interested and supportive about their career and willing to spend the time to make it happen. The baby boomer generation usually puts up with management, but the new generations of employees will leave in droves. Managers can engage employees through formal performance appraisals. Most performance appraisal forms contain the same components: a review of performance for the past, goal feedback and the employee development plan for the following year. Companies that provide annual performance appraisals are ahead of the game. On average, almost 33 percent of employees received no performance appraisal in the past year. Senior management staff— the group that would benefit the most—is largely ignored in the process. Get Senior Management to Set a Good Example Management training and senior management leadership are keys to setting a good example. Observing senior management’s attitude is a quick and easy way to gauge how an organization perceives employment development. In organizations where leadership is a priority, there will be a trickle-down effect for middle managers and supervisors. Many studies prove that management’s behavior has a tremendous impact on the bottom line. When there is senior management buy-in, the rest is a lot easier. So what is required of managers? Managers need to set aside time, on a daily or weekly basis, to give feedback when the issues are fresh. Many employees prefer a weekly one-on-one meeting. If a manager cannot meet with the employee at a scheduled time, then he

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or she should conduct a 15-minute conference call to check in and verify that the employee is still on track with the organization’s goals and workload. Build in frequent employee appreciation. Appreciation does not always have to be shown with money. A timely and heartfelt verbal thank-you goes a long way with employees. Sadly, more than 20 percent of employees say that they have received no appreciation from their employer during the past year. Link the performance appraisal process to organization issues and goals. A good time to start an organization-wide performance appraisal process is right after the strategic plan and the corresponding company goals have been written. It is much easier to ride with the momentum that has been started with the strategic performance process than to stop and start anew. Individual performance appraisal and goal setting must mirror the organization’s strategic direction. The following examples show how to link performance to the current year’s goals and the prior year’s goals, respectively. n Link to the current year’s goals: When the organization creates a goal to establish a branch office in Germany, senior customer service employees’ goal is to learn German in the next year. n Link to the prior year’s goals: In the prior year’s strategic plan, the organization’s goal was to computerize all of its records. The performance appraisals of the nursing staff reflect how each individual nurse contributed to this organization-wide goal. Although human resources is an important catalyst, it cannot single handedly change the process. It takes support from the management team. There are other ways to jump-start the performance appraisal and employee feedback process, such as having a candid discussion with the management team and enlisting a subgroup to work with you to help make it happen. Often, the management team has a great resource who is happy to assist. One HR director, for example, received assistance directly from the chief operating officer. Dispose of old performance appraisal forms. A new form can help breathe new life into the program. SHRM and WorldatWork provide many books, articles and online resources on this topic.

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Example: A senior manager for a large international organization commented, “It’s the same employee in the same job and her performance is the same as last year. Can I just photocopy last year’s review form and have her sign it?” No! Maybe it’s time to refresh the process? How to Update the Performance Appraisal System with Minimal Aggravation Enlist managers to help. Many managers can provide their favorite reviews from former jobs. Performance Appraisal Source Book—A Collection of Practical Samples by Mike Deblieux, published by SHRM, includes a CD‑ROM with some great samples to begin the process. Most organizations have used bits and pieces of these forms to create their own form. Small changes can make a big difference and keep the system fresh. Redefine performance levels and move away from the somewhat insulting “meets expectations” series; for example, from highest performance level to lowest: n Level 5: Use “distinguished” instead of “excellent.” n Level 4: Use “commendable” instead of “above expectations.” n Level 3: Use “proficient” or “competent” instead of “meets expectations.” n Level 2: Use “slight improvement needed” instead of “below expectations.” n Level 1: Use “significant improvement needed” instead of “poor.”

Coaching—A Unique Opportunity to Change an Employee’s Life Rarely are we in a position to change someone’s life. In the workplace, however, managers can impact employees’ lives through coaching and performance appraisals. By giving the extra effort and coming from a direction of caring, managers can work with an employees to create life-changing improvements. REAL-LIFE EXAMPLES

The Case of the 20-Something Employee After graduating from college, a woman struggled to wake up in time for her first real job. She showed up late and grumpy for work every day because she was not fully awake and had not eaten breakfast. Her boss sat her down in his office and said, “There’s an issue that I’m concerned about and we need to solve it together.” He had noticed her tardiness and crabby demeanor. They reviewed her morning routing. It was impossible for her to succeed at her job by waking up at 7:30 a.m. to catch a bus at 7:42 a.m. and arrive at work at 8:08 a.m. for an 8:00 a.m. start. He told her this was not an insurmountable problem and once she was awake (past 10:00 a.m.), she was a stellar employ-

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ee. He said there was plenty of time to resolve this issue before the next merit increase cycle so she could earn the top increase. What happened? She was only late one more time (the morning after she became engaged) and received a great increase and an individual performance award.

The Case of the Drinking Employee An HR director supervised a highly-talented human resource group. To be hired into this group came with stiff competition and hard work. But it came with some nice perks. One of the most talented, smart and fun employees in the group was a stellar employee when sober, but a disaster while drinking. This employee got drunk at an important business function and pulled his pants down during a cocktail hour. His behavior had to be discussed immediately and could not wait until the next scheduled performance appraisal. The HR director got the documentation ready and sat down with him to discuss the serious consequences of repeating this behavior. But, before she could go into much detail, he opened up his briefcase and showed her a list of Alcoholics Anonymous (AA) meetings and that he was planning to attend. He left right after the discussion to attend his first AA meeting. He stopped drinking that same day. Almost 10 years later, even though they do not currently work together, he still calls her every six months to check in. Her performance feedback conversation may have changed his life. Managing and Communicating about Performance Is a Year-long Task A coaching file will enhance the quality of the review. It consists of a file (either computer or hard copy) containing all feedback received about the employee; including co-workers, customers, other managers and vendors. This regular feedback report will enhance the appraisal if it is communicated to employees immediately, not six months later. (See Tools 17 and 18 for more information.) Coaching techniques can be powerful tools. Successful managers remember just a small difference in timing, tone of voice and body language can affect an employee’s attitude. There is just a slim difference between believing that someone cares or is just nit-picking. The bottom line is that managers will be better managers, employees will be more successful and organizations will be

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more likely to thrive with a daily commitment to giving timely and specific feedback. This includes constructive criticism as well as praising employees for good performance Constructive feedback is a gift! Specific Coaching Techniques Is performance based on willingness or ability? If the performance shortfall is focused around ability, additional training often can improve the job performance. Public speaking, computer skills and basic writing skills can be improved with training. The other side of the equation—lack of willingness—is more difficult to diagnose and fix. Take, for example, a talented employee who will not put forth effort on the job. This type of employee is easy to spot: he leaves right on time, uses every excuse to arrive late, leave early, does not do anything beyond the job’s basic requirements, needs to be pushed to meet deadlines, etc. This is not an easy fix. The employee must have the desire to drive behavioral change. The Columbo Technique. This technique gets the employee to tell his or her story before assuming guilt. Say, “I’m puzzled why I was told by the night security guard that you were loading products into your car at midnight. Can you help me understand?” Sometimes the answer is innocent. Perhaps the employee received a call from an irate key customer who complained his shipment was missing a key part. The employee then called the president of the company at home and asked permission to get the part out of the warehouse and take it to the airport. Distinguishing Between an Employee with a Problem or a Problem Employee A “problem employee” has layers of problems, including performance, personality, health, drug/alcohol, financial and family issues. There is a point where this employee’s performance will never improve. The kindest way to handle a problem employee is to help him or her to quit and encourage them to take time to straighten his or her life out. An “employee with a problem” is an average employee who stumbles due to one of the following: divorce, a new job, a new supervisor, health or family issues. These are the employees who are worth investing in because once they overcome their problems, they remain faithful, long-term employees. Sup-

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port during rough times sends the signal that the employer cares about the employee. Turning a Performance Appraisal System to a Pay-for-Performance System Update the process. Rather than hearing continued griping on how bad the performance appraisal system is, ask managers to focus their energy and assist in designing a new form. This process needs the input from your management team to be successful. There are many great sources for performance appraisal forms. Generally, an organization should review its performance appraisal process and redesign its form at least every three years. (See Tools 17 and 18 for more information.) Switch to a focal review process. Most organizations are on one of two performance feedback cycles—the anniversary cycle, where the employee receives a performance review based on his or her company anniversary (usually a start date), or a focal review, where all employees receive their performance appraisals at the same time. Almost 65 percent of organizations use a focal review process and another 20 percent are considering moving to this process. Timing is key in a pay-for-performance program. Employees need clear direction about how they can be more successful and earn more money. This can be done effectively with a solid feedback loop. For profit companies, the milestones to be achieved are clear—more sales and profits for the year. For non-profits and government organizations, the milestones may be a bit different, such as managing costs, balancing budgets, service targets, etc. Hints for Managing a Successful Focal Review Program Every new HR initiative needs top management support. It is worth finding a small group of internal champions to start the focal review process. One of the biggest arguments against focal reviews is that managers with large groups complain about the burden of doing a group of performance appraisals together rather than one at a time. The following statements will help counter the opposition: n Once you have done one or two reviews, the others get easier. n The organization can do a better job of setting up the process with new forms, training and focused attention if the reviews are done at the same time.

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n

The focal review process can be scheduled when the organization is least busy: February for the retail industry, winter for the Alaska tour industry, etc. Non-exempt and exempt reviews also can be divided into two separate times of the year. n Allow time in your schedule to work at home or behind closed doors to get this important task done. n A focal review process is easier to plan in conjunction with a pay-for-performance plan because the merit pay decisions are made at one time. n Anniversary-based reviews usually are chronically late. Today’s employees are impatient and may leave if their review is overdue. Surprisingly enough, when asked, almost all employees know precisely how many days ago they should have had their review. n The process is more powerful when the annual review is a summary of all the feedback from the performance review meetings that were held throughout the year. One of the best ways to prepare for a performance review is to get employees’ feedback on their performance for the year. Teach managers to set up a regular feedback plan with a weekly dialogue with employees. If a weekly meeting is scheduled, then it is not a problem if a couple of meetings are missed. Set up a combination of individual goals and company-wide competencies. A manager who is truly interested in their employees’ progress and development is one of the most important reasons employees stay at a position. The book, 30 Reasons Employees Hate Their Managers by Bruce Katcher, contains the following interesting statistics: n 43 percent of employees say their good work goes unrecognized. n 53 percent of employees say their boss does not positively motivate them. n 61 percent of employees believe their organization tolerates poor performance. n 70 percent of employees say there is no link between their pay and their job performance.

Steps for Making the Final Link to Pay for Performance Employees must believe their pay is fair. Pay is a major source of dissatisfaction. It can make an employee so unhappy that nothing else will help. Pay alone is not a source of long-term job satisfaction. Unfortunately, all of the

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other things an organization does to make work pleasant and meaningful will not work until the “fair pay” situation is solved. The fair pay issue is the elephant in the kitchen because not much cooking gets done when there is an elephant hanging out in the kitchen. Fair pay does not mean overpayment. It makes employees feel they are paid precisely right compared to internal and external markets—fair pay means, “I’m paid precisely right.” Most employees know what fair pay is for their job by researching a plethora of readily available information resources. The tools in this book—from philosophy to trends to job descriptions to internal and external equity—will help an organization’s employees believe they are receiving fair pay. Turning the performance appraisal into a real dollar amount for past performance hopefully will motivate future performance. This technique is called a merit matrix. (See Tool 11 for more information.) To build a merit matrix you must know what the percentage of merit pay budget the company plans to spend for the year. Information is available from many sources, including published salary surveys from WorldatWork, Mercer, Watson Wyatt and Towers Perrin. The merit matrix in this book is based on a four percent spend number. An organization needs to be compared to the following two criteria to determine how much managers should spend on merit increases. Criteria #1: It is important to know what percentages of employees are matched to what levels of performance. This can be achieved in a number of ways, but the best method is to have carefully crafted definitions for each performance level. This will ensure consistency of ratings given by managers. To ensure managers stay within their merit budgets, the performance appraisal scores should be submitted to the corresponding senior manager or the human resources department. Criteria #2: To make the pay-for-performance system really work, there must be a meaningful financial difference between the 5-level performers (distinguished) and the 1-, 2- and 3-level performers. An employee will not be motivated to put out the extra effort and go from a 3-level performer to a top 5 performer unless he or she believes the financial difference is worth it. Generally, that financial difference needs be at least three percent.

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To motivate an average performer to go the extra mile, he or she needs to believe the extra effort is worth it. Managers have the most trouble with the top and the bottom of the range. They are hesitant about giving a “5” rating as much as they are about informing an employee that his or her performance needs improvement. The following are management excuses and examples of responses to convince the management team to use all five levels: Manager’s excuse: “No one deserves a ‘5.’ If I give out a ‘5,’ how will I motivate them next year?” Response: It’s important to encourage employees that a “5” rating is the “real” rating to attain. Nothing takes the air out of the sails of a high performer to know that the boss will never give out a “5.” Consider the following sports analogy: At the beginning of the baseball season, every baseball player and every team dreams about where they will be in October. The sky is the limit during spring training, but as the months go by, it is only the top players who have the opportunity to be great. Just like baseball, an employee who is a “5” one year may not be a “5’ next year. Stress to managers that to give out a “5” one year does not mean that this is a permanent decision. Manager’s excuse: “I’m afraid of the consequences if I rate an employee a ‘1.’

This employee may get angry during the performance review, cry or even worse—leave the company.” Response: This is a true demonstration of “pay-for-performance.” If this employee is rated “1” because of unsatisfactory performance, the organization can make an impact by giving no increase. The employee either is in the wrong job or does not have his or her life together enough to hold a regular job. The company should encourage the employee to move on. This way the manager can spend time developing other employees in their department. Manager’s excuse: “Should I keep an employee who performs at level ‘2’ (needs

improvement) or encourage the employee to leave the organization?” Response: This depends on if this employee could improve with a “performance plan” or this is an employee who needs to move on to another job. Many employees become good performers when they receive feedback, additional training and clear performance objectives. This employee then becomes an asset rather than a liability to the company. They are very loyal to their employers, who have given them another chance to improve their performance.

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Should a level “2” employee receive a raise? The best way to handle this is to schedule the employee for a delayed increase, usually six months after the review. This merit increase would be awarded only if the concerns stated in the original performance review were corrected. This takes follow up and hard work on behalf of the manager and the employee. This potential increase is only effective at the six-month mark—there is no retroactive pay. Figure 9 Suggested Annual Salary Increase Guidelines for FY 2009** Performance Level

Proposed Increase Range Above Midpoint

Below Midpoint

Exceptional

6.0%

7.0%

Commendable

4.5%

5.5%

Competent

3.25%

3.75%

Unsatisfactory

0%

0%

Needs Improvement

0%

0%

* Possible “second chance” in six months. **This example is based on a 4% total merit pool.

Real-Life Examples

The Case of the “Drive-thru Performance Appraisal” Terry is a human resources manager who reports directly to the president, who is the owner and founder of a manufacturing firm. The president will tell anyone, if asked, that Terry is the perfect HR manager. Unfortunately, he was unavailable to meet with her personally for her scheduled performance appraisal. So, he just handed her a copy of the completed form and told her to read it on the way to lunch. She was devastated. She asked a colleague, “Does this mean he wanted me to read the form while I was driving?”

The Once-in-a-Lifetime Thank-You A human resources manager was out of town on assignment and ready to drive 100 miles to catch a plane that would take her home across the country. Her rental car, however, would not start. Her colleagues had left for lunch assuming she was on her way back to the West coast. An employee who was not part of her project intervened by calling the rental car company, helping her retrieve her belongings at her hotel room and getting her

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on alternative transportation. She thanked him profusely on that day, and followed up with a simple thank-you card after she returned home. She never expected to hear from him again, but he sent her a nice note expressing how much he appreciated the formal thanks. He said that in his 30 years of being a truck driver, he had never in his lifetime received a written thank-you card for his efforts.

Sanity Suggestions n

There is no perfect performance appraisal form. Many organizations give up on the process based on the form/administrative process. This is the least important part of the process. The crucial part is that the performance appraisal is a conduit for quality performance conversations between the employee and the employee’s manager. Organizations who have happy, productive employees know this. n The merit increase does need to be tied directly to employee performance, so the performance appraisal does need to be linked to performance level. The best way to organize the communication process is to deliver the performance appraisal, clean up any issues with a follow-up session and then schedule a one-on-one session to explain how the amount of the merit increase was determined. n At some point, there are two other areas to explore as add-ons to this process once the basic process outlined above is successful. These are a quarterly goal session and a strong emphasis on employee development—i.e., organizations that successfully use their employee’s strengths. SHRM has a lot of great books on this topic! n Audit employee merit increases. Does the employee’s increase match the performance appraisal score? Does the performance appraisal accurately depict the employee’s performance? n Have an annual meeting with managers to discuss what various performance levels mean in the organization. Start this discussion by giving some history about last year’s scores, and then re-distribute the performance appraisal definitions for the various performance levels. For example, compare the differences of a “5” performer and a “4” performer. The differences should be substantial. n Employee engagement is the key to success. It is that special moment when no one is watching and an employee thinks like an owner and goes the extra mile to solve a problem. Unfortunately, most studies show that this is

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something that is severely lacking in most organizations. In fact, because it seems like many organizations do not reward or recognize this extra effort, many employees do the minimum in their jobs to get by. It is a tragic waste of talent and resources. n Incentive pay is one of the fastest growing areas in compensation. Incentive pay is a very important tool for rewarding high-performing employees. An incentive plan must have a strong foundation to be effective. Organizations must have accurate job descriptions, market-based salary structures, and meaningful performance appraisals linked to merit pay. For employees to believe that the organization wants their pay to be fair, and motivate them to go the extra mile, these important steps cannot be skipped. Once the pieces outlined in this book are now working together, then it’s time to plan for an incentive pay plan.

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How to Design, Update and Maintain the New Compensation System Annual updates and regular market updates are crucial to maintaining a payfor-performance system. Annual planning will save the organization money, prevent potential lawsuits, decrease employee turnover, and increase employee morale. By keeping the program up-to-date, HR professionals will prevent the agony and expense of rebuilding it from scratch. The point was made loud and clear when a vice president of human resources confided to a colleague that the Summary of Salary Grades was not in a desk drawer, but something she carried with her at all times.

How to Update a Salary Plan for New Jobs This issue is too important to be left to good intentions and empty promises, such as “I’ll get around to it.” Companies can use a formal market-update schedule to update salary plans. Typically, private-sector companies do formal updates of their pay against the market pay of similar organizations every two years. Non-profit/government organizations usually complete a formal market study update approximately every three years. This does not mean that the compensation plan is ignored in “off cycle” years. There are times when salary decisions need to be made immediately and cannot wait until the next formal salary study. The following types of jobs, for example, should be reviewed within a 90-day period—these are usually non-exempt jobs such as clerical, warehouse, production and entry-level positions. New Positions This process should start with a personnel requisition form that describes why the organization needs to hire this new position, mainly because of increased benefit costs. The following questions should be asked: n Why is this position open? 107

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n

Is there a full-time, year-round need for this position or could the work be performed more efficiently by a temporary, contract or part-time employee? n Do the job’s title, duties and level make sense when compared to similar jobs in the organization? n To what position would the new employee report? Once the job description is complete, immediately determine if the new job is exempt or non-exempt by reviewing Fair Labor Standards Act (FLSA) guidelines. The next step is the external market study. For a new job, human resources and the hiring manager can complete the internal equity process informally to make sure the new position is in a salary range that makes sense as far as the organization’s internal requirements. When a current job has been revised more than 25 percent, then a new job description should be written and submitted to HR for review. By consistently using this guideline, HR professionals will not have to spend time reviewing jobs with only minor differences. To manage this fairly, make sure that employees and supervisors are not using the reclassification to get more money for the employee. Real-Life Example

The Case of the Manager’s Clever Work Around for More Employee Pay A new HR director voiced a concern that the company’s salary costs had risen considerably higher than the budget. With some digging, she discovered that several managers were unhappy about the low merit increase pool, resulting in a very high percentage of jobs tagged for reclassification. Surprisingly, there were 150 re-evaluations out of 200 positions for just one year. As part of human resources’ review, documentation was reviewed for the re-classification without a specific guideline. Almost all jobs were approved to be raised to a higher grade. HR then wrote a guideline and designed a simple questionnaire for managers to justify the job/salary upgrades.

Salary and Benefit Information as Part of the Annual Budgeting Process This is an area that is critical for providing expert advice to ensure the organization is well prepared for the accurate budgeting of one of its biggest annual

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budget items—salaries and benefits. One of the most effective ways for HR professionals to be strong contributors at the executive level is to provide spot on, thoughtful advice on managing these systems. Sadly enough, HR professionals often shy away from the budgeting/numbers side of their job and let the organization’s financial professionals, such as the chief financial officer, make all the decisions. What is needed for the organization’s annual salary, merit pay and benefit planning budget cycle? Steps for Preparing Salary and Benefit Information for the Organization’s Budget Cycle 1. Early in the budget planning cycle, request last year’s budget and compare actual vs. planned expenses for the prior year. 2. Discuss what information should be gathered with the management team and what changes or enhancements it would like to see for the next budgeting cycle. 3. Review the organization’s strategic plans and goals for the year and double check that HR’s requests line up with this important plan. 4. Have a candid discussion with the senior management team about external influences on compensation budgets, including turnover, shortage of skills, expanding into new markets, and use of expensive outside resources such as contractors/consultants. 5. Review internal issues with the senior management team, including financial challenges, shift in ownership and business cutbacks. Recommended Salary and Benefit Budget Items

1. Budget needed for regular salary increases to base pay. This information should be gathered from at least three sources. Typically, this “salary budget increase” information is published from August to November each year through the following suggested sources: WorldatWork Salary Budget Survey, Mercer, Institute of Management Administration (IOMA), Watson Wyatt and Business and Legal Reports (BLR). This information also is available from industry associations. 2. Budget needed to move the organization’s salary structure. This means that in the years when an extensive outside market study is not being performed, most organizations will increase their current salary structures just over the rate of inflation. The average salary structure movement recommendation is typically 1 percent more than inflation. The only times that this salary structure movement would have a direct budget cost for the cur-

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rent year is if the salary structure movement moves any current salaries below the minimum of the range. In most cases, this is a “green circle” and the organization will have to bring that employee’s salary up to the minimum. This may have a small financial impact on the maximum of the range, as some of the employees who were “frozen” in the old range may fall back into the range and be eligible for regular merit increases again.

3. Market change adjustments. This is a critical item for a successful compensation system. When budgets are tight, it is a smart business decision to budget for potential market adjustments for the next fiscal year. If market change adjustments are budgeted but the money is not needed, it can be used for another purpose or moved to the next fiscal year. Market adjustments are not easy to budget. Start with the figure spent on last year’s adjustments and make a judgment from there. Do research outside the organization about what is predicted to happen to the pay for jobs that you believe are most affected by the market. Talk to colleagues, research websites and talk to recruiters. Conduct an internal survey for positions that may need a market adjustment. Interview managers and read exit interviews to see if pay was stated as an issue. Look at turnover by position, by company and reasons for it. Find out if employees are receiving outside offers. How are applicants responding to the organization’s job offers? If there are no records as a base line, it is wise to budget at least 20 percent of the entire merit pool for this purpose. For example, if your total merit pool spending number is five percent, the market adjustment number would be one percent.

4. Changes in head count—new positions and promotions. Many organizations totally miss this important budget item and then spend the rest of the year trying to scramble for the money. Review new positions and promotions against what was actually budgeted in the past two years. Ask all major departments what new positions and promotions will be needed to meet next year’s challenges.

5. Employee salaries are in the wrong place in the salary range. This is a new area in the budgeting process for pay. Companies that budget on a regular basis and make this an integral part of their salary budget planning process will have lower turnover, higher morale and distribute the annual salary dollars more fairly. This also becomes a significant piece in a successful pay-

How to Design, Update and Maintain the New Compensation System • 111

for-performance system because it links the employee and their placement in the salary range. Run a compa-ratio to understand if employees are in the right place in their salary range. An employee’s compa-ratio is the employee’s base salary over the mid-point. A compa-ratio of less than 1.00 indicates the employee is paid under the mid-point. A compa-ratio of more than 1.00 indicates the employee’s base pay is above the mid-point in the salary range. The employee’s hire date, time in the current position and the employee’s performance level are key in this analysis. A compa-ratio is easy to calculate and most HRIS systems have the built-in capability to do this. Compa-ratio Examples

The compa-ratio for the first example is .91. If the pay was at mid-point, then the compa-ratio would be 1.00. This is a satisfactory place in the range for an employee who has been in the job for less than two years or who has an average performance level. In the second example, a compa-ratio of 1.11 means that the salary is appropriate for an experienced employee or a high-performing employee. Compa-ratios can be run for a department, a division or organization-wide. This data is a good temperature check for how the organization’s salaries compare to the market. A list should be generated and sorted by hire date and performance level on an annual basis. Progressive organizations budget to keep long-term, stellar employees above the mid-point. This budget may need to be outside of the normal merit increase if an employee has fallen too far behind where he or she should be in the salary range.

Administration of the New Compensation System Communications Many organizations delay or skip this important step. This is not a time to have “analysis paralysis” and wait until the compensation system is perfect. Smart organizations communicate honestly and often about their compensation systems. It is acceptable to say, “This is a work in progress.” By not communicating, employees will make up their own version, and rumor mills usually do not put employers in a positive light. (See Tool 19 for more information.)

112 • Solving the Compensation Puzzle

The roll-out of any compensation or benefit program needs to be orchestrated with a great deal of care. Employees will notice the details of the program, how it was communicated, who is supporting it and how their concerns are answered. The following is a priority list of how to successfully communicate a compensation plan update: n Make sure that senior managers are on board with the program and realize its financial impact. A good place to start is by reviewing the Salary Administration Manual. (See CD-ROM Tool 11 for more information.) n Review details of the compensation program with managers and supervisors. Stress the link to pay to performance and make sure they are comfortable in communicating compensation to their employees. At the end of the training session, give each manager a list of their own employee compensation, with the corresponding salary grade. n After all managers have received training, schedule employee “town hall” meetings. These meetings need to be lead by an effective trainer who thoroughly understands the compensation plan. Handle complainers by waiting until after the meeting to answer specific questions related to their own situation. n Individual salary information should be delivered in private and in person by the employee’s manager. It helps to provide a script, the title, salary level and then the salary range on an individual print-out for managers to use. Pay Decisions Based on Salary Range In compensation, pay under the minimum is called a “green circle.” Rarely does an employee stay at a position long term if his or her pay rate is below the organization’s salary structure. Most organizations move the employee up to the minimum as soon as financially possible. It is not a good idea, however, to increase the salary of an employee who has serious performance problems. In this case, document the issues and put the employee on a performance improvement plan. Time will tell if the employee needs to be moved up to minimum or moved out—in other words, terminated. Organizations set up pay grades to serve as fence posts to avoid paying over the maximum. For organizations without pay grades, this can happen: After many years of receiving one increase on top of another, a long-term employee who does not move up in skill level or responsibility eventually will be making $50 per hour when the market level is $12 per hour.

How to Design, Update and Maintain the New Compensation System • 113

How does an organization handle an employee whose pay is now at the maximum of their salary range? If the employee has demonstrated excellent performance, it is important to set up a reward that is fair, but does not add to the base pay and push this pay outside the range. One suggestion is to award a one-time only bonus. To enhance retention, this bonus should be divided into four equal parts and distributed quarterly.

Promotional Adjustments Exempt or Executive Promotions Generally, the promotional increase should be a minimum of at least one percent to four percent over the salary merit pool. If the “average” merit increase is four percent, then the lowest promotional increase generally should be five percent. Depending on the number of levels and/or salary grades this promotion covers, a good “maximum” is 15 percent to 20 percent. Retention is always a factor, so an increase on the larger side of this range may work better to distribute this increase in two parts. Before making a final decision, consider the following factors: n How far a jump in pay grades is the new position? n Where is the employee in the new range? For example, an employee should be brought at least to the minimum of his or her new range. n What are other employees in this new position currently earning? n What are the new requirements of the position? Does it involve considerable pressure, workload, deadlines, travel, etc.? Non-Exempt to Exempt This is a special situation because it is important that the organization take into account the overtime that the newly promoted employee is going to relinquish. Take the extra time to know exactly how much overtime the employee has worked over the last year and then build in a factor in the “promotional” increase to cover it. As a guideline, when moving an employee from non-exempt to exempt, go through the same analysis steps as outlined above and then use a typical number of four to eight percent and add an additional amount based on the loss of overtime by changing the status to an exempt position. If the organization has benefits, such as enhanced medical benefits, or a more generous incentive plan for exempt employees, this can be factored into the decision about the amount of the promotional increase.

114 • Solving the Compensation Puzzle

Approvals of Compensation Decisions Approval to hire: Generally, an organization will start a new employee below the mid-point of the salary grade. But this should not be a hard and fast rule— always keep in mind that this new hire could be the company’s next senior executive leader. To effectively manage compensation decisions that go outside the norm, do not add a lot rules and red tape. Instead, add another pair of eyes; for example, seek approval from the CFO or Director of Human Resources. Increases outside the regular raise cycle: Consider how fair this is to other employees who will not receive a salary adjustment outside the regular raise cycle, but there are certainly times when this might be warranted. Organizations may use an out-of-cycle raise for the following reasons: n New employees are being brought into the organization at a higher rate than current long-term employees. n An employee assumes some new duties, but not to the point of job reclassification. For example, a manager who supervises a department of seven picks up a minor area of responsibility plus three more employees when another manager leaves the organization. n The organization wants to reward and retain a critical employee. This might happen if a lower-level employee in the department leaves, followed by the departure of the department manager one month later. If the highperformer leaves, it may have a significant impact on the organization, so an out-of-cycle increase can help drive that message home.

Maintaining the Pay-for-Performance Link in Hard Times In light of impatient employees in today’s competitive labor market, it is important to cut everything else before freezing employees’ salaries. Employees have long memories and a salary freeze will haunt an organization for the next 20 years. A very low annual increase (less than two percent) generally does more harm than good. Employees become very demoralized and groan, “With the taxes taken out, it’s almost nothing.” If things are so bad financially that an organization cannot give its good employees at least two percent, they should: n Distribute small merit increases (less than two percent) in a lump sum bonus, not spread out in smaller amounts over 24 paychecks. This can be done successfully by effectively communicating the reasons for cutbacks to employees. Lump sums can also be paid out quarterly.

How to Design, Update and Maintain the New Compensation System • 115

n

Show appreciation by giving employees two to three days off as a thank you. An ideal time to give time off is during the holiday season when most industries are not highly productive. n Create an attractive increase difference between low and high performers. This may mean that a larger group of lower performing employees receive no increase. This decision has many benefits, such as forcing low performers to look outside the organization, allowing the organization to maintain its headcount goals without painful layoffs. High performers see that their extra efforts are being rewarded and then production usually increases. Typically, employees are motivated by at least a three percent difference between low and high performers. n Delay the merit increase. This option must be rolled out very carefully to keep high producers from leaving for new jobs. It can be wrapped around a benefit enhancement or additional time off. If the company’s salary system is based on anniversary dates, then it may be time to switch to a program where everyone has the same annual merit increase date. This may have a side benefit of delaying increases scheduled for fall to the following spring when all employees will be eligible for an increase. If a critical high performer is part of the group that is receiving a delayed increase, the manager may want to consider implementing a performance bonus. n Create a merit increase budget by laying off low performers. This may seem heartless, but rather than having all employees miserable and looking for new jobs, it can pay off to eliminate low performers and carve out some money for merit increases. n Create a hiring freeze and hire, if possible, backfills that are temporary employees. This saves money with turnover and also frees some money up as the temporaries generally will not be eligible for benefits for at least six months. n Create a voluntary unpaid sabbatical program that gives employees the summer off. They will receive no pay, but they can keep their benefits. Real-Life Example

The Case of the Employees in the Wrong Place A large hospital chain went through a comprehensive market study after not reviewing any market information for more than seven years. After the study, new ranges were built and a plan was developed to bring the affected employees up to the minimum. When the market study and the internal

116 • Solving the Compensation Puzzle

equity were complete, the employees were set into the new salary range structure based on position title. For the first budget year after the market study, it took the organization’s entire budget to bring all employees up to their range minimum. For long-term “star” employees who had a current base salary of just above the minimum, the HR director sorted employees with performance appraisal scores above 3.7 on a 5.0 scale and then sorted by organization hire date. Employees who had been promoted since starting with the hospital system and who were in their jobs less than three years were eliminated from this list. The organization discovered the following problems: n RN with eight years of experience, 4.0 performance score with a comparatio of .85—meaning 15 percent below midpoint. n HR manager with 20 years of experience, 4.2 performance score with a compa-ratio of .90—meaning 10 percent below midpoint. n Certified Nurse Assistant with six years of experience, 4.4 performance score with a compa-ratio of .92—meaning 8 percent below midpoint. It was not financially feasible to change the pay of all employees at once, so this can be handled one step at a time on a priority basis. Set a guideline on the maximum time it should take an employee with a performance score above average to reach the salary range mid-point. Once the information is sorted by length of service, calculate the dollar amount and percentage required to bring this employee’s base pay to up to the mid-point. For example, an organization may want to use the guideline listed below. What Did the Hospital Chain Do? non-exempt employees with performance appraisal scores above 3.7 on a 5.0 scale with more than six years of experience in their current position shall be moved up to the salary range mid-point. The maximum market adjustment will be eight percent per year. All adjustments over eight percent will be budgeted and paid in the next year. n All exempt employees with performance scores above 3.7 on a 5.0 scale with more than eight years of experience in their current position should be moved up to the salary range mid-point. The maximum market adjustment will be eight percent per year. All adjustments over eight percent will be budgeted and paid in the next year. n All

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Compensation Boot Camp

Compensation Administration Terms Benchmark jobs: Jobs that are fairly common outside the organization and are easy to compare to similar jobs in most salary surveys. Examples: accountant, receptionist and engineering technician. Bottom-up approach to pay budgeting: Input to the budget is gathered from the lower-level supervisory group first and then goes up the chain of approval for final endorsement. This method allows for lower-level managers to be “heard” regarding exceptional employees and/or employee situations where there may be a real concern about a critical, highly-skilled employee leaving for more money. Cost-of-living adjustment (COLA): Across-the-board salary increases based on a change in some index of cost-of-living or pricing. The statistic used most often is the Consumer Price Index (CPI). COLA is mainly used in the public sector or with unionized employees. Top-down approach to pay budgeting: Under this method, senior management approves big decisions regarding pay and each manager is given a spend number for merit increases. In a tightly controlled system, there are no exceptions for low compa-ratios or a manager who may have a large group of stellar employees.

Figure 10 Compensation Forecasting & Budgeting Process Non-Market Study Year Six months in advance

Market Study Year 1. Decide on market study plan

Three months in advance

1. Decide on benchmark jobs

Two months in advance

1. Review data from benchmark study – decide if more jobs need to be studied 2. From benchmark study – decide on grade changes and employee market adjustments

1. Review data from market study – decide on grade adjustments 2. Run compa-ratios for each employee in each department 3. Decide on employees that need market pay adjustment

One month in advance

1. Decide on salary adjustment budget (percent) 2. Modify salary matrix to determine pay for performance

1. Decide on salary adjustment budget (percent) 2. Modify salary matrix to determine pay for performance

On time

1. Employee communication

1. Employee communication

118 • Solving the Compensation Puzzle

Sanity Suggestions n

Consider this a new challenge instead of an area to avoid at all costs. Budgets are about power. Do not let other senior managers get all the money at your department’s detriment. There should be money left over for outside help, education, training, employee appreciation fund, new HR initiatives and possible new employee benefits. n Learn the budget process and how the organization handles certain budget items. Take a class in budgeting from the SHRM Academy or ask HR colleagues or the accounting departments for suggestions. n Most organizations assign a budget coordinator from the accounting department to gather budget information from many different departments. Meet with this budget coordinator early in the process and discuss what information is needed and what sources were used in the past. n Research new requests. Look at direct competitors and organizations that are part of the same labor market. Survey the initiative internally to ascertain support for your budget requests. Get support from the direct manager, the CFO and at least two vice presidents who supervise employees in the core area. n Do homework to support why the organization should spend money on new budget initiatives. For example, an organization in a knowledge-based industry values education and employs mostly Generation Y employees; however, it does not have a tuition reimbursement program. To get this initiative approved, survey employees to see if they want this benefit, and research how similar organizations handle this issue. n

Next Steps Two complex puzzle pieces must fit together for a pay-for-performance plan to be successful in motivating and rewarding differences in performance. First, there must be a credible, accurate way to measure and evaluate performance. Second, employees must perceive that differences in performance will be recognized and rewarded. The continued execution of a pay-for-performance system takes conscientious and careful attention—but it’s worth it!

End Notes

1 Milkovich, George and Newman, Gerry. Compensation, 8th Edition. McGraw-Hill/Irwin. 2 Mathis, Robert L. and Jackson, John H. Human Resource Management, 11th Edition. South-Western College Pub., p. 367. 3 BlessingWhite, Inc. 2006 Employee Engagement Report. 4 Critchley, Robert K. Doing Nothing Is Not an Option: Facing the Imminent Labor Crisis. South-Western Educational Pub., p. 22. 5 Watson Wyatt Work USA 2002 Survey. 6 Huselid, Mark. 1995. “The Impact of Human Resource Management Practices on Turnover, Productivity and Corporate Financial Performance,” The Academy of Management Journal. Vol. 38, No. 3, pp. 635-672.

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Tool • 121

Tool 1 | Compensation Philosophy Questionnaire Please complete the following questionnaire (there are no right or wrong answers). This will be used during our compensation discussion and training to be scheduled in the near future. 1. Do you have a philosophy regarding compensation? What is that philosophy? 2. What is your philosophy regarding compensation in a union environment in terms of pay for performance, bonuses, non-bargained salary adjustments, etc.? 3. Who do we want to compare ourselves with? What organizations do we want to attract new employees from and be competitive with? 4. Where do we want to pay compared to the market (midpoints from salary surveys), at the market, below the market, above the market? Do we want to use a sign-on bonus? Do you have salary problems recruiting new employees? What types of employees do you have difficulty recruiting and why? 5. Do you have a problem retaining employees? Who do you lose employees to? 6. What do you think are the biggest positives and negatives regarding our current pay system? 7. As we work through this project, what do you need to feel assured that you trust the data and the final results? 8. What schedule should merit pay be given out at (i.e., anniversary date, or at the same time for everyone)? Do your employees know why they have received a raise? 9. When new employees are hired, are their starting salaries sometimes greater than the salaries of existing employees doing similar jobs? 10. Do you have questions or concerns regarding internal equity in your compensation program? What are they, and how would you like to see us address this topic? 11. Do employees quit over salary increase issues or leave for more money more often than expected? 12. What do employees like best about working for your company? 13. What things (compensation, benefits, other) would employees like to see changed and/or improved?

122 • Solving the Compensation Puzzle

Tool 2 | E  mployee Guidelines for Writing Excellent Job Descriptions Attached is a Job Description Input Form for you to complete and send to your manager within the next three weeks. Why do we ask employees to fill out this form? We believe that one of the top experts regarding your job is you! What is the purpose of job descriptions for our organization? First off, job descriptions are a way for employees to obtain clarity about their job, their manager’s and organization’s expectations. A job description should provide the reader with a basic understanding of the purpose of the job by providing information that clarifies and describes the job, its functions and reporting relationships. Job descriptions are an objective way to determine what the position’s “deliverables” are and then accurately fitting the job into the organization and compensating this work appropriately. Job descriptions are the cornerstone of most top-notch Human Resources’ Systems and assist organizations with recruiting, placement, training, organizational development, compensation, performance appraisal, and developing an Affirmative Action Plan. How to get you started? 1. Gather all source documents together to help you complete your Job Description Input Form. These can be similar documents such as recruitment ads, list of duties from Performance Appraisals, old job descriptions and descriptions gathered from the Internet. The best job descriptions are written in plain language using a style that you might use to describe your job to a family member. It’s most effective to find a quiet spot, just start writing and try to see how much you can get completed in an hour. 2. Prepare a first draft of the Job Description Input Form by quickly jotting down your key job duties. Do not worry about trying to list everything, just the important job duties of your position that take more than 3 percent to 5 percent of your time. 3. List the job duties in order of importance and then where you spend the majority of your time. 4. Use short sentences with lots of action verbs. To make this process easier, we have attached to this memo a list of common action verbs used in job descriptions. 5. Stay away from company-specific acronyms and specific names of computer programs— as these are not only hard to understand, but change frequently. 6. Separate your duties into Essential and Non-Essential Functions. This is an important requirement of the ADA (American with Disabilities Act). Job functions that can be separated into the Non-Essential Function part of the job description generally take less than 5 percent of your time, are considered non-critical parts of your job and can easily be transferred to another employee. How do you describe your job’s education, experience requirements and skill set/ working conditions? 1. List skills, education, and experience as minimums. Think about the minimum qualifications your organization would need to hire to do this job if you left the organization. List minimum education requirements. If you believe that your job can be done with equivalent experience rather than formal education, we’d like to know that also.

Tool • 123

Tool 2 | Employee Guidelines for Writing Excellent Job Descriptions

2. It’s also important that we record in a job description the following important pieces of a job: • Skills—this includes computer skills, programming, foreign language ability, technical hands-on skills (such as soldering), and all types of certifications/licenses such as the SPHR, CPA, RN, etc. • Physical requirements—this includes lifting (how much and how often), what your work environment is like (outdoors, noisy factory, dusty) and how the work gets done (walking, standing, sitting for extended periods of time). Physical requirements also include travel—how far, and whether it is short notice or generally planned in advance. • Supervision and place in the organization: know who you report to and how many employees you supervise. It is also helpful to know about financial responsibility, types of deadlines, stress level and types of communications you have with your position. 3. After you complete the Job Description Input Form, submit it to your supervisor. Your supervisor will then discuss with you any differences in how you see your position and how they view the job. Once agreement is reached, your manager will review it and then forward the form to Human Resources for editing. 4. Don’t worry about spelling, grammar, or fancy documents. We expect that it should take you about 60 minutes maximum to fill out your job description questionnaire. Thank you very much; please contact Human Resources if you have questions!

124 • Solving the Compensation Puzzle

Tool 3 | Action Verb Examples The BEST job descriptions use crisp, short sentences with lots of action verbs. Action verbs also help describe what the individual’s deliverables are for the organization. A wellwritten job description is a step toward defining the pay-for-performance link. Listed below are examples of action verbs that can assist you in writing your job descriptions: Distribute Investigate Promote Screen Administer Document Involve Propose Search Advise Allocate Draft Launch Publish Select Appraise Educate Lead Purchase Solve Approve Endorse Locate Rate Stimulate Assign Ensure Maintain Raise Submit Audit Establish Manage Recommend Survey Budget Evaluate Monitor Reconcile Tabulate Balance Execute Motivate Reconstruct Teach Bargain Expedite Notify Recruit Trace Calculate Facilitate Obtain Represent Translate Check Follow up Observe Report Train Coach Forecast Operate Research Update Collect Formulate Organize Resolve Upgrade Coordinate Fulfill Originate Review Up Sell Critique Implement Participate Revise Verify Create Improve Perform Sale Write Decide Initiate Persuade Scan Delegate Inspect Present Schedule Determine Instruct Prioritize Secure Discuss Interview Proceed Sell Disseminate Interpret Process Simplify

Other Important Definitions and Descriptors for Job Descriptions How Much Supervision Is Required? Limited—Employee generally proceeds on their own initiative in compliance of company’s policy. Also, the employee is able to train others. General—Involves light guidance and provides help/assistance rarely and generally only at the request of the employee. Direct—Employee is able to handle routine functions, but needs regular guidance from the supervisor for most duties. Close—Employee does not generally use own initiative, needs instruction by the supervisor as to the solution and how to do the job.

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Tool 4 | Job Description Questionnaire (Non-exempt) Please Type or Print Name:_________________________________________________ Date:____________________ Job Title:_______________________________________________ Dept:____________________ Reports To:_ ___________________________________________ Shift:____________________ A. General Purpose of the Job: B. Essential Functions: List the essential functions of the position in order of importance: C. List additional responsibilities: D. Skills, Abilities and Other Requirements: List skills or training needed to perform the job (e.g., spreadsheet or word-processing skills, keyboarding skills, ability to lift a minimum weight, ability to answer multi-line phone, written or verbal communication skills, drivers’ license, certifications, etc.). E. Education: What is the minimum education and experience required to perform the job? No requirement High School Diploma or equivalent High School plus some College AA Degree, type_____________________________________________________________ BA/BS Degree, type_ _______________________________________________________ Master’s Degree, type _ ______________________________________________________ Experience: F. Internal/External Contacts: Type and frequency of internal/external contacts. Contact

Reason

Frequency

G. Working Conditions: Special job or environmental conditions and physical requirements (sitting for long periods, lifting (# lbs), keyboarding 50 percent of time, extensive travel, exposure to outside weather conditions, overtime or shift work requirements). Disclaimer: The above information on this description has been designed to indicate the general nature and level of work performance by employees within this classification. It is not designed to contain or be interpreted as comprehensive inventory of all duties, responsibilities and qualifications required of employees assigned to this job. Completed by__________________________________________ Date:____________________ Reviewed by_ __________________________________________ Date:____________________

Human Resources Use Only: Date:

Grade:

Salary:

126 • Solving the Compensation Puzzle

Tool 5 | Job Description Questionnaire (Exempt) Please Type or Print Name:__________________________________________________________________________ Date:___________________________________________________________________________ Job Title:________________________________________________________________________ Dept:___________________________________________________________________________ Reports To:_ ____________________________________________________________________ A General Purpose of the Job: B. Essential Functions: List the essential functions of the position in order of importance: C. List additional responsibilities: D. Knowledge and Skills: What is the minimum previous related experience, whether acquired from outside or from within the company, which a person should have to perform the duties and responsibilities of the job? What special knowledge, skills or training may be required to perform the job (e.g., supervisory skills, written/verbal communication skills, spreadsheet skills, negotiation skills, certifications, etc.)? E. Education (minimum requirements/equivalent): What is the minimum education and experience required to competently perform the job? No requirement High School Diploma or equivalent High School plus some College AA Degree_ _________________________________________________ Type:__________ BA/BS Degree_________________________________________________ Type:__________ Master’s Degree________________________________________________ Type: _________ Experience: F. Internal/External Contacts: Type and frequency of internal/external contacts (vendors, attorneys, government agencies, board of directors, management). Contact

Reason

Frequency

G. Working Conditions: Special job or environmental conditions and physical requirements (sitting for long periods, lifting (# lbs), extensive travel, overtime requirements). H. Financial Responsibility: List any signature authority, budget controls and expenditure levels. I. Decision Making: J. Confidentiality: List level of confidentiality such as proprietary, financial, personnel, strategic. What level of decision making does this position have, including effect on policies and procedures? Does this position develop, recommend, approve, have final authority, etc.? Specify the number of exempt and non-exempt personnel reporting to this position and their titles. Disclaimer: The above information on this description has been designed to indicate

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Tool 5 | Job Description Questionnaire (Exempt)

the general nature and level of work performance by employees within this classification. It is not designed to contain or be interpreted as comprehensive inventory of all duties, responsibilities and qualifications required of employees assigned to this job. Completed by__________________________________________ Date:____________________ Reviewed by_ __________________________________________ Date:____________________

Human Resources Use Only: Date:

Grade:

Salary:

128 • Solving the Compensation Puzzle

Tool 6 | Completed Job Description Questionnaire (Exempt) Please Type or Print Name: Terry Gray Job Title: Sr. Accountant Reports To: Sandy Smith

Date: Jan. XX, 20XX Dept: Accounting

A. General Purpose of the Job: B. Essential Functions: List the essential functions of the position in order of importance: 1. Provides accurate monthly financial statements within 10 days of the end of the month. 2. Leads the budgeting process by setting up budget sheets for each Senior Manager and meeting with Managers to review the discrepancies from the prior year’s budget. 3. Keeps accurate capital equipment records using favorable depreciation schedules under the Fair Accounting Standards Board (FASB) recommendations and the IRS. 4. Provides timely and accurate distribution of all tax returns including state, local and federal. 5. Supervises the Accounts Payable process by training the staff, setting up guidelines for payment and solving difficult vendor situations. 6. In the absence of the Accounting Manager for up to four weeks per year, able to handle, without issue, all the accounting functions for the organization. C. List additional responsibilities: 1. Provides back up for payroll when the payroll specialist and/or the personnel analyst are both absent. 2. Assists the Office Manager with organization’s record retention program. D. Knowledge and Skills What is the minimum previous related experience, whether acquired from outside or from within the company, which a person should have to perform the duties and responsibilities of the job? Five Years Increasingly

What special knowledge, skills or training may be required to perform the job (e.g., supervisory skills, written/verbal communication skills, spreadsheet skills, negotiation skills, certifications, etc.)?

E. Education (minimum requirements/equivalent): What is the minimum education and experience required to competently perform the job? No requirement High School Diploma or equivalent High School plus some College AA Degree_ _______________________________________ Type:____________________ BA/BS Degree ____________________________________ Type:____________________ Master’s Degree ___________________________________ Type: ___________________ Experience:

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Tool 6 | Completed Job Description Questionnaire (Exempt)

F. Internal/External Contacts: Type and frequency of internal/external contacts (vendors, attorneys, government agencies, Board of Directors, management). Contact

Reason

Frequency

G. Working Conditions: Special job or environmental conditions and physical requirements (sitting for long periods, lifting (# lbs), extensive travel, overtime requirements). H. Financial Responsibility: List any signature authority, budget controls and expenditure levels. _____________________________________________________________________________ I. Decision Making: What level of decision making does this position have, including effect on policies and procedures? Does this position develop, recommend, approve, have final authority, etc.? Specify the number of exempt and non-exempt personnel reporting to this position and their titles. J. Confidentiality: List level of confidentiality such as proprietary, financial, personnel, strategic. Disclaimer: The above information on this description has been designed to indicate the general nature and level of work performance by employees within this classification. It is not designed to contain or be interpreted as comprehensive inventory of all duties, responsibilities and qualifications required of employees assigned to this job. Completed by__________________________________________ Date:____________________ Reviewed by_ __________________________________________ Date:____________________

Human Resources Use Only: Date:

Grade:

Salary:

130 • Solving the Compensation Puzzle

Tool 7 | ABC Company Official Job Description (Exempt) Name: Terry Gray Job Title: Sr. Accountant Reports To: Sandy Smith

Date: Jan. XX, 20XX Dept: Accounting

Purpose: Key staff member in charge of the senior accounting functions for the organization. Essential Functions: 1. Provides accurate monthly financial statements within 10 days of the end of the month. 2. Leads the budgeting process by setting up budget sheets for each Senior Manager and meets with Managers to review the discrepancies from the prior year’s budget. 3. Keeps accurate capital equipment records using favorable depreciation schedules under the Fair Accounting Standards Board (FASB) recommendations and the IRS. 4. Provides timely and accurate distribution of all tax returns including state, local and federal. 5. Supervises the Accounts Payable process by training the staff, setting up guidelines for payment and solving difficult vendor situations. 6. In the absence of the Accounting Manager for up to four weeks per year, able to handle, without issue, all the accounting functions for the organization. Non-essential Functions: 1. Provides back-up for payroll when the payroll specialist and/or the personnel analyst are both absent. 2. Assists the Office Manager with organization’s record retention program. Knowledge, Skills, Education and Experience: Seven years of general accounting Excellent spreadsheet skills experience with a similar size organization. Knowledge of FASB regulations Lead or supervisory experience a plus. BS Degree in Accounting CPA a plus Internal/External Contacts: Contact Board of Directors Senior Management Auditors

Reason Quarterly Meeting Prep Information & Reports Preparation of Annual Audit

Frequency 4x a year 3x a week 2x a year

Working Conditions: Special job or environmental conditions and physical requirements (sitting for long periods, lifting (# lbs), extensive travel, overtime requirements). Ability to sit at a computer for extended time. Deadline pressure.

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Tool 7 | ABC Company Official Job Description (Exempt)

Financial Responsibility: Signature authority of up to $500. Decision Making: What level of decision making does this position have, including effect on policies and procedures? Does this position develop, recommend, approve, have final authority, etc.? General accounting decisions. Cash-flow decisions.

Specify the number of exempt and non-exempt personnel reporting to this position and their titles.

One Accounts Payable Assistant—work direction only.

Confidentiality: Highly confidential position with knowledge of all of the organization’s financial, personnel and strategic information. Disclaimer: The above information on this description has been designed to indicate the general nature and level of work performance by employees within this classification. It is not designed to contain or be interpreted as comprehensive inventory of all duties, responsibilities and qualifications required of employees assigned to this job. Completed by:________________________________________ Date:______________________ Signature:______________________________________________________________________ Approved by:_________________________________________ Date:______________________ Signature:______________________________________________________________________

Human Resources Use Only: Date:

Grade:

Salary:

132 • Solving the Compensation Puzzle

Tool 8 | Job Description Resource List Listed below are a variety of additional resources to assist you in creating your job descriptions. Most of these sources have websites. Organizations: 1. Society for Human Resource Management—Information Center—1-800-283-7476 2. World At Work—1-480-951-9191 Government information (usually free): 1. U.S. Department of Labor’s Occupational Outlook Handbook—on the U.S. Department of Labor’s website 2. Dictionary of Occupational Titles (Federal Government website) ­ R resources that also include samples of job descriptions: H 1. BLR 2. Monster Job Profiles 3. Job Descriptions Now by KnowledgePoint

Survey #1 Survey Name: Survey #2 Survey Name: Survey #3 Survey Name: Survey #4 Survey Name: Survey #5 Survey Name: Survey #6 Survey Name: Survey #7 Survey Name: Survey #8 Survey Name: Survey #9 Survey Name: Survey #10 Survey Name: Survey #11 Survey Name: Survey #12 Survey Name:

39,801

Average

7

8

8

6

82,427

5

6

77,510

Survey Matches

84,303

92,653

75,789

40,470

88,622

Survey Averages

76,459

93,956

90,959

Destruction Director

99,215

66,326

86,590

87,471

76,273

85,703

82,064

Disaster Master

Average

74,286

77,812

80,921

75,823

78,304

82,372

82,784

75,733

General Technical Guru

90,515

72,437

Average

89,137

88,022

83,391

82,737

92,257

82,784

81,809

War Monger

Average

78,907

Average

43,370

77,169

41,784

Average 74,699

76,840

Average

39,450

Average 72,213

37,107

Average

78,259

Peace Maker

Average

41,307

Chaos Analyst

Average

Average

Job Title

Job Number

Koss Software Salary Survey Summary (salary data aged to 7/1/2008) | (not adjusted for cost of living)

4

72,631

73,264

74,424

75,632

67,206

Distributor of Truth

Tool • 133

Tool 9 | Part A | Market Survey Summary Sample

134 • Solving the Compensation Puzzle

Tool 9 | Part B | ABC Company List of Exempt Jobs by Grade Salary Grade

Market Survey Average

Job Title

Minimum

Midpoint

Maximum

187,841

234,801

281,761

Annual

90.31

112.88

135.46

Hourly

164,772

205,965

247,159

79.22

99.02

118.83

144,537

180,671

216,806

69.49

86.86

104.23

41

126,787

158,484

190,181

60.96

76.19

91.43

40

111,217

139,021

166,825

53.47

66.84

80.20

39

97,559

121,948

146,338

46.90

58.63

70.35

38

85,578

106,972

128,366

41.14

51.43

61.71

75,068

93,835

112,602

36.09

45.11

54.14

65,849

82,312

98,774

31.66

39.57

47.49

44 43 42

37

36

35

92,653

Destruction Director

84,303

War Monger

82,427

Disaster Master

77,510

General Technical Guru

75,789

Peace Maker

57,762

72,203

86,644

72,631

Distributor of Truth

27.77

34.71

41.66

50,669

63,336

76,003

24.36

30.45

36.54

44,446

55,558

66,670

21.37

26.71

32.05

38,988

48,735

58,482

18.74

23.43

28.12

34,200

42,750

51,300

34 33 32 31 30

40,470

Chaos Analyst

16.44

20.55

24.66

30,000

37,500

45,000

14.42

18.03

21.63

Tool • 135

Tool 10 | Sample Salary Range Structures Non-exempt 40% Ranges, 12% Grade Increases Grade

Min

Mid

Max

22

31.17

37.40

43.63

Hourly

64,829

77,795

90,761

Annual

27.83

33.39

38.96

57,883

69,460

81,036

24.85

29.82

34.79

51,681

62,018

72,354

21

20

19

18

17

16

15

14

13

12

11

10

22.18

26.62

31.06

46,144

55,373

64,602

19.81

23.77

27.73

41,200

49,440

57,680

17.69

21.22

24.76

36,786

44,143

51,500

15.79

18.95

22.11

32,844

39,413

45,982

14.01

16.92

19.74

29,325

35,190

41,056

12.59

15.11

17.62

26,183

31,420

36,657

11.24

13.49

15.74

23,378

28,054

32,729

10.04

12.04

14.05

20,873

25,048

29,223

8.96

10.75

12.54

18,637

22,364

26,092

8.00

9.60

11.20

16,640

19,968

23,296

136 • Solving the Compensation Puzzle

Tool 10 | Sample Salary Range Structures

Exempt 50% Ranges, 14% Grade Increase Grade

Min

Mid

Max

42

10,037

12,547

15,056

Monthly

120,448

150,560

180,671

Annual

41

40

39

38

37

36

35

34

33

32

31

30

8,805

11,006

13,207

105,656

132,070

158,484

7,723

9,654

11,585

92,681

115,851

139,021

6,775

8,469

10,162

81,299

101,623

121,948

5,943

7,429

8,914

71,315

89,143

106,972

5,213

6,516

7,820

62,557

78,196

93,835

4,573

5,716

6,859

54,874

68,593

82,312

4,011

5,014

6,017

48,135

60,169

72,203

3,519

4,398

5,278

42,224

52,780

63,336

3,087

3,858

4,630

37,039

46,298

55,558

2,708

3,384

4,061

32,490

40,613

48,735

2,375

2,969

3,563

28,500

35,625

42,750

2,083

2,604

3,125

25,000

31,250

37,500

Tool • 137

Tool 10 | Sample Salary Range Structures

Executive 60% Ranges, 16% Grade Increases Grade

Min

Mid

Max

52

10,092

13,120

16,147

Monthly

121,104

157,435

193,766

Annual

8,700

11,310

13,920

104,400

135,720

167,040

7,500

9,750

12,000

90,000

117,000

144,000

51

50

138 • Solving the Compensation Puzzle

Tool 11 | ABC Company Salary Administration Manual Table of Contents A. Introduction B. Corporate Compensation Philosophy C. Compensation Program Summary • Comp. Philosophy • Base Salary • Focal Review and Merit Program • Benefits D. Elements of the Salary Administration Program • Job Descriptions • Benchmark Future Jobs • Salary Surveys • Salary Structure • Job Evaluation and Classification E. Steps in the Compensation Program F. Guidelines for Using the Salary Administration Program • Hiring Salary • Geographical Considerations • Merit Adjustments and Guidelines • Promotional Adjustments • Reclassification Adjustments (Downward) • Types of Interim Mid-Cycle Adjustments • How to Keep the Salary Administration System Up to Date G. Pay-for-Performance Guidelines

Tool • 139

Tool 11 | ABC Company Salary Administration Manual

A. INTRODUCTION This salary administration program is applicable to all ABC Company regular and parttime staff. All ABC Company employees covered by this program may have access to their salary range and job description. This manual is available only to management and supervisors to help define our compensation philosophy and describe how our program is administered. Any additional questions should be asked of the Human Resources Director. ABC Company employees are entitled to know the salary range information on other positions when it relates to their immediate career path or to immediate promotional opportunities. Our practices are Company confidential. Any external requests for this information should be referred to the Human Resources Director. ABC Company reserves the right to change or alter this salary administration program at any time. B. CORPORATE COMPENSATION PHILOSOPHY ABC Company is committed to a salary administration program designed to: • Attract and retain a highly qualified and dedicated group of individuals; • Provide equitable salaries in recognition of job performance and job responsibility by aligning pay expectations with performance expectations; • Promote teamwork and foster an environment of personal and professional growth for the entire workforce; • Relate to other human resource programs and Company philosophy and objectives; and • Consider the Company’s financial position and provide for the equitable distribution of compensation throughout the Company. All ABC Company employees shall be equitably compensated for assigned duties and responsibilities without regard to race, color, religion, gender, age, national origin, marital status, or sensory, physical or mental disability, veteran status, sexual orientation or any other basis of discrimination prohibited by local, state and federal law.

140 • Solving the Compensation Puzzle

Tool 11 | ABC Company Salary Administration Manual

C. COMPENSATION PROGRAM SUMMARY (sample only) Note: Add your company benefit summary here. Compensation Philosophy ABC Company will target a market position that provides a competitive advantage in attracting and retaining extraordinarily talented individuals. ABC Company encourages and rewards high-performing individuals who excel in their position and therefore contribute to the company’s success. To keep the compensation program targeted to the market trend, the Compensation committee annually reviews the compensation program. The employee’s total compensation package is determined by type of position and is a combination of a variety of elements: base salary, stock options, commissions, bonuses and employee benefits. Employees are eligible to participate in the annual Focal Review and Merit Program. Base Salary An employee’s base compensation is determined by various components: job skills, experience, performance in the job, comparable worth of the position within the company, and geographic location. The compensation structure has salary grades and the employee’s position is slotted to the appropriate salary grade. Base compensation for employees generally targets the midpoint of ABC Company’s salary grade that corresponds with the market average. Focal Review and Merit Program ABC Company has an annual Focal Review and Merit process for performance evaluation and salary planning. It is the mechanism used by management to allocate merit increases (base salary) to appropriately reward employees for their outstanding job performance with the company. Benefits The health and welfare of the Company’s employee is critical to the success of ABC Company. ABC Company offers employees and their dependents the opportunity to participate in the Company’s medical, dental and vision programs. Employees are also eligible to participate in Life, AD&D, STD, LTD insurance plans; flexible spending program; employee assistance programs; and a 401K plan.

Tool • 141

Tool 11 | ABC Company Salary Administration Manual

D. ELEMENTS OF THE SALARY ADMINISTRATION PROGRAM Our salary administration program is based on sound compensation principles and techniques. The following elements outline the basis for our program: Job Descriptions The job description describes the major duties and responsibilities of a job and the necessary qualifications required to perform the duties. It forms the basis for the salary administration program as well as serving many other purposes as part of the entire human resource function. The job description describes typical and normal requirements of a job and is composed of the following sections: Job Title: Job titles are established to clearly indicate the general nature of the position, yet set the position apart from others in the Company. A title should be clear and descriptive of the work and skill level of the job. Supervision: This section specifies the number of exempt and non-exempt personnel reporting directly and/or indirectly to this position. Position Summary: This section provides a brief summary of the responsibilities of the position. Major Responsibilities: The specific key duties of the position. They state what the individual is required to accomplish in the position and the basis for the requirement. Additional Responsibilities: These statements reflect the minor additional duties of the job, but are not necessarily all-inclusive. Employees will be required to perform additional tasks, work in other areas and support others when specific tasks need to be accomplished. Minimum Qualifications: These statements state the minimum qualifications of education and experience. Skills, Abilities and Other Requirements: These statements list other skills or special licenses needed to perform the job such as computer languages or special certifications. Working/Environmental Conditions: This section lists special environmental conditions of the job, unpleasant conditions and special hazards, as well as any lifting, bending, vision requirements, or overnight travel. Job descriptions must be kept current to truly reflect the level of responsibility and accurate requirements of every position. The primary responsibility for this rests with the manager. Job descriptions should be reviewed at the time of employee performance appraisals.

142 • Solving the Compensation Puzzle

Tool 11 | ABC Company Salary Administration Manual

Benchmark Future Jobs Benchmark jobs are positions selected on the basis of similarity in duties, responsibilities, skills, education and experience. These positions are used for comparison with other organizations that have similar positions to ABC Company. They serve a vital function in the initial development and validation of the salary administration program and also for assistance in the future maintenance of the program. Salary Surveys A necessary step in the development and maintenance of a salary administration program is the determination of actual salary levels found in the labor market in which the ABC Company competes. This is essential to ensure ABC Company is accurately compensating and continuing to attract and retain qualified individuals. Salary survey data, which is reviewed biennially, is extremely helpful in maintaining our plan. We will continue to exercise considerable judgment and interpretation in our use of this data. We currently use several very detailed, professionally prepared surveys as our benchmark surveys, such as Milliman, Mercer, Institute of Management, Administrative Management Society, Watson Wyatt, American Electronics Association, National Institute of Business Management, Business and Legal Reports, Payscale.com, CompData, and other related applicable surveys. Salary Structure Our salary structure has been designed through the use of logical mathematical techniques, which are long recognized as sound in the field of salary administration. There is equity/parity between the ranges from the minimum to the maximum. Our salary structures contain a number of salary ranges that are represented by a minimum and maximum dollar amount. The minimum of the salary range is the least amount generally we will pay an individual who is qualified for a position slotted in this range. The maximum of the range is the top salary an individual can usually receive regardless of level of performance. The midpoint of the salary range usually represents a competitive salary level for a fully experienced and qualified individual who can perform all aspects of the position. Progression through the salary structure will usually, but not necessarily, occur in conjunction with the employee’s level of performance. All salary adjustments are based on the salary structure and percentage increase guidelines in place at the time of the change. Job Evaluation and Classification Job evaluation is the process of internally comparing the contribution of a job against other jobs in the Company. Also considered in this process is the value of these jobs externally within the market where we compete for qualified individuals. This comparison is largely made through salary survey data by comparing benchmark survey positions to their similar positions at ABC Company. Once this comparison is made, the task of evaluating and classifying each position becomes an objective process performed by Human Resources, the compensation

Tool • 143

Tool 11 | ABC Company Salary Administration Manual

committee, and, when necessary, a contracted compensation expert. This panel looks at the labor market information for external comparison. In order to analyze the jobs based on internal equity, the executive staff of ABC Company will compare jobs across departmental lines to determine the contribution of each position to the Company and their value against each other using the whole job method. This determines internal equity and ensures that ABC Company employees are appropriately compensated based on both external and internal equity. STEPS IN THE COMPENSATION PROGRAM STEP I • A Job Description Questionnaire is completed for each position. The questionnaires are used to gather information about job inputs and outputs. • The data obtained from the analysis is refined into a job description. • Job descriptions are then reviewed and approved by the individual’s supervisor, the Executive Management Team and the compensation consultant. STEP II • Current information on particulars of the positions is recorded for comparative analysis. This spreadsheet will be used throughout the process to record survey data, range positions, final salary and other pertinent information. STEP III • Job descriptions are compared with external market jobs. • Several surveys listing comparable external market jobs and salaries are used in the analysis process. STEP IV • A salary range structure is designed using logical mathematical techniques. • A preliminary analysis compares the midpoint of the salary structure ranges with the salary survey information averages. STEP V • Internal Equity is determined by using the “whole job method.” The Human Resources Director/Outside Compensation Consultant will facilitate a cross-functional management team meeting to decide on these values. An internal hierarchical structure is modeled from these values. STEP VI • Jobs are slotted into salary ranges. • Individuals whose current salary falls below the minimum of that job range should be moved to that minimum as soon as financially possible (called “green circled”). Conversely, individuals whose salaries are above the maximum of that range should not receive salary increases until the ranges move to catch up to their salary (called “red circled”). • Process for slotting jobs: – Begin by reviewing the job description. Review the capsule job descriptions in published surveys by reading them very carefully. Look for at least a 70 percent match in job content between the company job description and the survey capsule job

144 • Solving the Compensation Puzzle

Tool 11 | ABC Company Salary Administration Manual

description. Look for local data when possible. Use data which includes at least 10 companies and at least 15 incumbents. Use simple average salary data rather than a weighted average data or median data. Use base salary data. Use multiple surveys. Preferably use as many as eight surveys. Examine data for trends. GUIDELINES FOR USING THE SALARY ADMINISTRATION PROGRAM The following guidelines define the appropriate salary action and necessary steps in utilizing the entire program. Annual salary planning for the corporation will be prepared fourth quarter of the fiscal year for the following fiscal year. Divisions will be expected to forecast the following information by employee: review date, performance and merit increase percentage. Divisions will be given a “spend budget” number to manage in the process. Hiring Salary The starting salary for an employee at ABC Company is based on similar work experience and internal rates for comparable positions within the Company. A newly hired individual with adequate experience will normally have a starting salary in the lower quarter of the range. An employee with several years of similar work experience would usually start somewhere around the midpoint. A starting salary in the upper quarter is for expansive depth and breadth of experience and should be approved by the Human Resources Director and the CFO. Geographical Considerations ABC Company will use the general Seattle/Pacific NW Market as its base for salary administration. The HR Director will make a decision with consultation with standard Internet sources (i.e., Yahoo Real Estate and Homefair.com) and will make any geographical differential differences for ABC offices outside the NW. These geographical differentials will be updated as needed. This process may include a consultation with an outside compensation consultant. MERIT ADJUSTMENTS AND GUIDELINES ABC Company subscribes to a merit system for salary increases that are based upon individual performance and overall contribution to the Company. Merit increases are designed to recognize individual contributions to the Company, taking labor market trends, economic conditions and the financial position of the Company into account. These guidelines are reviewed annually to ensure a competitive posture. A supervisor should counsel an employee that reaches the 90th percentile of his/her salary range as to the future direction of the individual’s career. (The individual should be advised that increases over the maximum of the range would be given only on an exception basis.) An individual in the corrective action process is generally ineligible for a merit increase. The salary increase review cycle will be extended based on the length of time an individual has this status. Salary action may also be deferred the length of time an employee is away from work on a leave of absence for more than 12 weeks.

Tool • 145

Tool 11 | ABC Company Salary Administration Manual

Promotional Adjustments General Information: A promotion is the advancement of an individual to a position in the same or higher salary range based on performance, qualifications and/or a significant change in work content. ABC Company considers change in work content of at least 25 percent to merit a promotion and/or change in grade. Typically, ABC Company will look at the additional complexity of the work rather than just a change in work volume. When a salary increase is given with a promotion, the promoted individual will be generally brought to at least the minimum of the new salary range. * If the promotion occurs at the same time as eligibility for a merit increase, a promotional increase may be given in addition to the merit adjustment. The adjustment should consider the increase in responsibilities, position in the range, and rates paid others for similar work. All promotions should have the approval of the Department Manager. In the case of a lateral promotion, (same pay grade to same pay grade) it is up to the manager as to whether a promotional increase has been earned at that time. It may make more business sense to wait until the next merit review. In the case of a promotion from one non-exempt grade to another non-exempt grade, the usual increase is from 4 percent to 8 percent depending on the magnitude of the promotion. Except for very unusual cases, the new rate of the employee should be at least at the minimum of the new salary grade. What happens if 4-6 percent does not bring the employee to the bottom of the range? If the increase is over 10 percent to bring the individual to the bottom of the range, ABC Company will in most cases split this promotional amount into two increases. In the case of a promotion from one exempt grade to another exempt grade, the guidelines are the same as a promotion from one non-exempt pay grade to another nonexempt pay grade (4 percent - 8 percent) except when the newly promoted employee is moved up more than 1 grade. For more than a 1 grade promotion, the increase should generally include an additional 3 percent for each additional grade promoted. If the increase is more than 10 percent to bring the individual to the bottom of the range, ABC Company will in most cases split this promotional amount into two increases six months apart. Exceptions to this must be approved by the HR Director. A promotion from a non-exempt grade to an exempt grade does change the employee’s FLSA (over-time) status. The increase should partially take into account the loss of overtime pay. This increase is normally in the range of 5 percent to 10 percent. These are only meant to be guidelines. Each promotional increase should be discussed with the employee’s VP and the Director of Human Resources. All promotions above 10 percent must have also have CFO approval with generally the maximum pay increase for this exception will be 12 percent at any one time. At no time will an individual receive a promotional increase above the maximum of their range. * Movement for individual contributors to supervisor or manager may be considered a lateral promotion within the same salary range.

146 • Solving the Compensation Puzzle

Tool 11 | ABC Company Salary Administration Manual

RECLASSIFICATION ADJUSTMENTS—(DOWNWARD) A reclassification of an individual to a lower salary range may be made at the Company’s request because of a decrease in performance, the employee’s request, or due to business requirements. The supervisor will consult with the Human Resources Director and determine the rate of pay, considering the individual’s qualifications and the current average rate paid for the new position. This adjustment must have the approval of the CFO. TYPES OF INTERIM MID-CYCLE ADJUSTMENTS: Performance adjustments may be made outside the normal merit review cycle. This type of adjustment is rare and is only used to reward stellar performance. The Human Resources Director and CFO must approve this adjustment exception. • MARKET ADJUSTMENTS As part of its salary administration program, ABC Company will study on a continual basis the market impact on their current salary structure. Periodically, Human Resources may consult outside salary surveys and use the services of an outside salary consultant to make recommendations as to which positions, if any, need to adjust between major salary studies. All promotions above 10 percent must have also have CFO approval with generally the maximum pay increase for this exception will be 12 percent at any one time. At no time will an individual receive a promotional increase above the maximum of their range. HOW TO KEEP THE SALARY ADMINISTRATION SYSTEM UP TO DATE: • UPDATING THE SALARY STRUCTURE The salary structure is reviewed annually prior to the start of the calendar year through a comparison of the benchmark jobs we use for market analysis. The Human Resources Director is responsible for recommending the nature and amount of any salary structure adjustment based on employment market conditions and salary inflation. The CFO and the Human Resources Director will also make the final determination for any salary structure changes, with approval by the Executive Management Team of ABC Company. • COMPA-RATIO REVIEW To give ABC Company a gauge on where its employees fall against the midpoint periodically, a compa-ratio report will be generated. This report shows the employee’s salary against the mid-point. A compa-ratio below 1.0 may mean that the employee is paid less than the mid-point. A compa-ratio above 1.0 means that the employee’s salary is above the mid-point.

Tool • 147

Tool 11 | ABC Company Salary Administration Manual

YEARLY BENCHMARK STUDY DURING OPPOSITE YEARS OF THE MAJOR STUDY: During the off-year study, a small sampling of the jobs will be studied based on the following criteria: 1. Positions that have had a lot of market movement during the year 2. Positions that have a lot of incumbents—for example, 250 RNs in a company with a total headcount of 550 employees. 3. Positions where recruiting and / or retention shows that pay may be an issue PAY-FOR-PERFORMANCE GUIDELINES All non-temporary employees may receive a review following the completion of a 90-day preliminary period of employment. These less-formal reviews are strongly recommended but are at the discretion of the manager. In most cases, formal performance appraisals with merit consideration will be administered annually. Individuals who perform exceptionally may also be eligible for a salary increase prior to the regularly scheduled date; conversely, review dates can be extended beyond the scheduled date cycle. All merit adjustments are effective on the start of the payroll period following the date of action. A performance appraisal form must be completed by the supervisor, and reviewed by the Human Resources Director. Following the return of the signed review to the supervisor, a performance appraisal session is scheduled and completed with the individual. The employee signs the performance appraisal form indicating they have covered the information. The form is then placed in the employee’s personnel file. In most cases, salary increases must be approved on a one-over-one basis (i.e., the employee’s manager recommends the increase and the next level of management approves the increase). The Human Resources Director must review all increases for conformance to corporate guidelines. All salary increases outside the guidelines require formal consultation with the Human Resources Director. Once the appropriate approvals are granted, the employee’s manager will notify the employee of the salary adjustment. The manager completes a Request for Employee Status Change form to document the salary adjustment and forwards this to the Human Resources Director.

Index

A Action verb examples for job descriptions, 124 ADA (Americans with Disabilities Act), 36, 53, 64–65, 122 Administration of plans, 111–13, 138–47 Administrative exemption, 63 Americans with Disabilities Act (ADA), 36, 53, 64–65, 122 Appraising performance. See Performance appraisal Appreciation of employees, expressing, 96 Approvals, 59, 114

B Baby Boomers, 7 Base pay, 1, 2, 26–28, 30, 37, 111, 140 Benchmark jobs, 117, 142 Budgeting for pay for performance, 14–15, 108–11, 115–18

C Case studies. See Real-life examples Coaching, 97–99 COLA (cost of living adjustment), 15, 16, 41, 77, 117 Columbo technique, 99 Communications about pay-for-performance plans, 111–12 job descriptions, 55–56 Compa-ratios, 111 Compensation. See also Pay for performance base pay, 1, 2, 26–28, 30, 37, 111, 140 compression, 48 current compensation system, 27–28 defined, 19

equity in, 19–20 goals of systems for, 36 grades and ranges in pay, 86–91, 112–13, 133–37 learning about, 20, 36, 39 market-based studies. See Market-based salary studies pay satisfaction, concept of, 51 Compensation philosophy, 23–27, 29–30, 35, 121, 139–40 Compensation philosophy questionnaire, 29, 121 Compression, 48 Computer professionals, exemptions for, 64 Consistency, importance of, 14 Consulting firm salary surveys, 73–74 Cost of living adjustment (COLA), 15, 16, 41, 77, 117 Creative professionals, exemptions for, 64 Current compensation system, 27–28

D Daily feedback, 95 Designing pay-for-performance plans, 37–51 current employee-related events, dealing with, 50–51 draft project plans, 39 financial downturns, dealing with, 48–49 goals, importance of clarity about, 37 headquarters vs. field offices, 41 key components, 45 salary compression, 48 salary study. See Market-based salary studies 149

150 • Solving the Compensation Puzzle

sample plan for small company in midsize city, 44 secrecy about pay, dealing with, 47 teams performing the study, 41–43 three-year strategic plans, 49 transformational vs. transactional changes, 50 Diversity of workforce, 9

E Employees. See also Exempt and non-exempt employees; Performance appraisal communicating plans to, 111–12 design teams based on, 42–43 designing compensation plans around current employee-related events, 50–51 effort, rewarding, 101, 105–6 job descriptions, writing, 53–55. See also Job descriptions as key stakeholders, 23 pay satisfaction, concept of, 51 problem employees, 97–99 surveys of, 32–36 Employment trends, 5–6 Equity in compensation, 19–20, 69. See also Internal equity; Market-based salary studies Equity theory, 51 Escalator classes in American society, 9 Evaluating performance. See Performance appraisal Executive management. See Management/ executives Exempt and non-exempt employees, 62–64 job description questionnaires, 125–29 list of exempt jobs by grade, 134 promotions, 113 sample job description, exempt employee, 130–31 External equity, 19–20, 69. See also Market-based salary studies

F Fair Labor Standards Act (FLSA), 28, 36, 51, 53, 62–64, 108, 113 Families of jobs, 60–61, 66 Feedback, daily, 95 Field offices vs. headquarters, 41 Financial downturns, dealing with, 48–49, 114–15

Flexibility, importance of job descriptions, 56 pay-for-performance plans, 12 FLSA (Fair Labor Standards Act), 28, 36, 51, 53, 62–64, 108, 113 Focal review process, 100–101, 140

G Generations in workforce, 7–9, 55 Goals and philosophy compensation philosophy, 23–27, 29–30, 35, 121, 139–40 dovetailing compensation strategy to meet, 24–25 performance appraisals aligned with, 96 Government as key stakeholder, 24 salary surveys, 71–72 Grades in salary, 86–91, 112–13, 133–37, 142 “Greatest Generation,” 7 Green circle, 112 Guidelines for writing job descriptions, 123–24

H Headquarters vs. field offices, 41 Human resource strategy, compensation as, 21

I I Generation, 9 Incentive pay, 106 Internal equity, 19–20, 80–92 administration manual on, 42–43 complex or critical job requirements, allowing for, 80, 81–82 importance of, 81 job ranking, 83–84 point-factor systems, 84–86 salary grades and pay ranges, 86–91, 112–13, 133–37, 142 steps for reviewing, 82–83 Internet salary surveys, 74 Interviews and job descriptions, 67

J Job descriptions, 53–68 action verb examples for, 124

Index • 151

ADA (Americans with Disabilities Act) and, 64–65 administration manual on, 41–42 buy-in from and communication with employees, 55–56 creating job families, 60–61, 66 defined, 53 different job titles with similar functions, 57 duties and responsibilities, 60 editing, 59–62 education and experience requirements, consistency of, 61–62 employees writing, 53–55 exempt vs. non-exempt positions, 62–64 flexibility, importance of, 56 gathering information for, 56 guidelines for writing, 122–24 interviews, 67 maintaining, 65 management approval of, 59 for managerial/executive employees, 57, 66 managerial support for, 54, 66 new jobs, adding, 107–8 observation, 67 paperwork, dealing with workers resistant to, 65–66 for production and lower-level employees, 56–57 purpose of, 53, 55 resource list, 132 revising and reclassifying, 108, 146 sample job description, exempt employee, 130–31 scope creep, 38–39 steps for writing, 53–55 structured questionnaires, 67, 125–29 supervisor review of, 57–59 titles, 57, 59–60 Job families, 60–61, 66 Job ranking, 83–84

K Katcher, Bruce, 101 Key stakeholders, 21–24 employees as, 23 government as, 24 managerial support, importance of, 12, 14, 16–19, 20, 23–24

L Labor market considerations, 5–7, 29 Language diversity, 9 Learned professionals, exemptions for, 63

M Maintaining pay-for-performance plans, 107–18 administration manual on, 146–47 administration of plan, 111–13, 138–47 approvals process, 114 budget cycle, 108–11, 115–18 financial downturns, dealing with, 114–15 job descriptions, 65 key steps in, 45–47 new jobs, 107–8 performance appraisals, 96–97 regular salary studies, importance of, 37–41 revising and reclassifying existing job descriptions, 108, 146 three-year strategic plans, 49 Management/executives design teams based on, 43 exempt vs. non-exempt positions, 63 job descriptions final approval of, 59 for senior positions, 57, 66 support for creation of, 54, 66 performance appraisal, attitude and example regarding, 95–96, 105 promotional adjustments for, 113 support for pay-for-performance plan, obtaining, 12, 14, 16–19, 20, 23–24 Manual for administration of pay-forperformance plan, 138–47 Market-based salary studies, 69–80 administration manual on, 42–43 consulting firm salary surveys, 73–74 definitions pertinent to, 91–92 geographic area to be covered, 41, 70, 144 government salary surveys, 71–72 Internet salary surveys, 74 matching jobs, 77–79 nonprofit/association surveys, 72–73 number of surveys used in, 75 preparation for, 69–71 quality assurance tips, 80

152 • Solving the Compensation Puzzle

regular salary studies, importance of, 37–41 relevant labor market, determining, 70, 75–76 sources of salary information, 71–77 summary sample, 133 when to conduct, 76–77 Market competitiveness of organization and compensation strategy design, 25–27, 35 Matching organization jobs with jobs in salary surveys, 77–79 Median/midpoint pay value, 78, 91 Merit increases, 104, 105, 144 Merit pay, 13–14, 32, 140. See also Pay for performance Middle class, disappearance of, 9 Midpoint/median pay value, 78, 91 Multicultural issues, 9

N Non-exempt employees. See Exempt and non-exempt employees Nonprofit organizations, 15–16, 34–35, 72–73

O Observation for purposes of job descriptions, 67 Organizations characteristics suitable to pay-for-performance systems, 13 goals and philosophy compensation philosophy, 23–27, 29–30, 35, 121, 139–40 dovetailing compensation strategy to meet, 24–25 performance appraisals aligned with, 96 market competitiveness of, 25–27 public sector and nonprofit, 15–16, 34–35, 72–73 trends in, 5–6 vision of, 14 Outside sales exemption, 64 Overpaying employees, 11

P Pay for performance, 1–3 advantages of using, 11–12, 24–25 budgeting for, 14–15

components of successful systems, 12 constraints on using, 28–29 defined, 20 flexibility of plan, importance of, 12 goals of, 29 historical background and current situation, 5–10 learning about, 20, 36, 39 linking performance appraisal to, 100–105 managerial support for plan, 12, 14, 16–19 myths and facts about, 13 twelve-step program for designing plan, 29–33 Pay, generally. See Compensation Performance appraisal, 93–106 appreciation of employees, expressing, 95–96 coaching, 97–99 daily feedback, 95 employee effort, rewarding, 101, 105–6 focal review process, 100–101, 140 linking to pay-for-performance system, 100–105 managerial attitude and example, 95–96, 105 organizational goals, 96 preparation for, 94–95 problem employees, 97–99 updating and maintaining systems, 96–97 as year-round task, 98–99 Philosophy and goals compensation philosophy, 23–27, 29–30, 35, 121, 139–40 dovetailing compensation strategy to meet, 24–25 performance appraisals aligned with, 96 Point-factor systems, 84–86 Problem employees, 97–99 Productivity levels, 11–12 Professional exemptions, 63–64 Promotions, 113, 145–46 Public-sector organizations, 15–16

Q Questionnaires compensation philosophy, 29, 121 job descriptions, 67, 125–29

Index • 153

R Ranges and grades in pay, 86–91, 112–13, 133–37, 142 Ranking jobs, 83–84 Real-life examples budgeting for pay-for-performance plans, 115–16 coaching, 97–98 design plan for small company in mid-size city, 44 designing compensation plans around current employee-related events, 50–51 internal equity, 81–82, 84, 89–91 job descriptions, 65–66 maintaining pay-for-performance plans, 108 managerial support for pay-for-performance plan, 16–19 nonprofit with performance management problems, 34–35 performance appraisal, 97–98, 104 Reclassifying jobs, 108, 146 Reich, Robert, 9

S Salaries, generally. See Compensation; Pay for performance Salary studies. See Market-based salary studies Satisfaction with pay, concept of, 51 Scope creep, 38–39 Secrecy about pay, dealing with, 47 Simple average, 77, 91 Skills gap, 9 Small business, growth of, 5–6 Stakeholders. See Key stakeholders Structured questionnaires for job descriptions, 67, 125–29 Surveying employees, 32–36 T Three-year strategic plans, 49 Transformational vs. transactional upgrades, 50 Turnover of employees, 12 Twelve-step program for designing pay-forperformance plan, 29–33 U Underpaying employees, 11

Unions and pay-for-performance systems, 28 Updating. See Maintaining pay-for-performance plans V Vision, 14 W Weighted average, 77, 91–92

About the Author

Sharon K. Koss, SPHR, CCP, has owned her HR Consulting/Compensation firm since 1986. She is a graduate of Washington State University and has more than 30 years of HR experience. During this time, Sharon has completed more than 500 salary plans. Sharon speaks regularly on the topics of compensation and general HR and has been on the SHRM Faculty for more than 12 years. She was also Chair of the Human Resource Certification Institute in 1997. Sharon and her husband/business partner, Doug, live in Seattle with their West Highland White Terrier, Cooper.

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Recommended SHRM Published Books The Practical HR Kit Solving the Compensation Puzzle: Putting Together A Complete Pay and Performance System

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