Strategic Compensation and Broad Banding in the New Millennium

1. Minnesota Public Employer Labor Relations Association Summer Conference August 23-25,2000

2. Objectives of This Presentation • Discuss latest best practice • Strategic focus • Multiple systems to meet specific business unit needs • Discuss New Directions for the Millennium • Broad banding • Skill based pay • Individual incentives • Group based incentives • Implications under Pay Equity Law

3. Strategic Compensation • Aligning the compensation system with the goals and objectives of the organization or organizational unit:• Spend dollars to achieve greatest impact• Match productivity with results• Stimulate creativity• Enhance "ownership" value

4. Strategic Compensation • The conceptual design of a compensation program should be based on:• The business environment• The organizational environment• Employee considerations• The market environment

5. The New Business Environment • Strategic planning is necessary • Planning is specific and long term • Market share is threatened - there are new competitors • Past success is no guarantee of future success • Productivity and quality are paramount • Reorganization and restructuring

6. The New Organizational Environment • Reduced layers of management - fewer career opportunities • More direct impact on performance • Shorter term employees - loyalty to career, not the organization • An aging work force - decreasing pool of talent • Decreasing number of specialist but increasing needs • Entry level educational skills - changing demographics

7. Current Executive Considerations • Attract, retain and motivate • Increased interest in incentives • Achieving pay in relation to performance

8. Future Compensation Trends • Emergence of management as an "investor" • Increased focus on entrepreneurship • Higher pay levels of all types • Growth in variable elements of pay - linking pay directly with productivity and "profit" • Increased decentralization of pay programs • Decreased emphasis on internal equity • Increased differentiation of pay practices by organizational unit

9. Systems to Consider • Mix of reward versus entitlement pay • Individual versus group incentives • Performance measurement • Alternative reward approaches • Broad banding • Skill based pay • Individual incentives • Group based incentives

10. Broad Banding Broad Banding is the collapsing of a number of traditional salary ranges within a traditional salary structure into a few broad bands. •Salary Bands - broadening of salary ranges • Career Bands - encompasses entire career salary range

11. Characteristics - Broad Band System • Significantly fewer salary grades (or bands) • Much wider ranges than those of conventional pay structures • Usually a reduction of at least 1/2 the number of salary ranges • No salary range midpoint identified because a band encompasses so many jobs of differing value • Jobs are placed in band based on market data or value

12. Where is it Used? • Jobs usually include (by rank order) • Management • Trades and Maintenance • Clerical and Administrative • Professional and Technical • Uniformed (uses this method the least)

13. Broad Banding - Advantages • Greater flexibility in moving employees to meet organizational needs (lateral moves) • Less focus on titles and pay grades (supports team approach) • Encourages broadening of skills • Supports flatter organizational structures • Less time spent on job evaluation • But more time may be spent on band placement • Offers a wider spread of pay opportunity in which to recognize and reward different levels of individual employee contribution • Supports an orientation towards greater responsibility on the part of management to "manage compensation"

14. Broad Banding - Disadvantages • Can be difficult to conduct external competitive analysis by job title or class summary benchmarking • Wider ranges result in less traditional cost control measures • elimination of control points (midpoints) • higher salary range maximums • Places more responsibility for administration on both Human Resources and Management • Employee education/communication is critical • Requires a different job evaluation orientation (traditional systems will not work) • Inflated expectations from stakeholders

15. Broad Banding - When Will It Work? • When you want a pay structure which supports a flatter organizational structure • The organization strongly supports career development, cross-training and inter-occupational mobility • Pay for skills (compensation) is encouraged • Change has top management's support • Effective communication channels exist within the organization • An effective performance management system is in place • First-line supervisors are well trained in performance management and in communicating the elements of the pay system to employees

16. Broad Banding-When Will it Fail? • The organization’s existing culture values a traditional organizational hierarchy • The current compensation program is successful and already supports the organization's business strategy • Many elements are currently tied to pay grade (e.g. eligibility for benefits and incentives, office size, etc.) • Banding is regarded only as a way to solve salary administration issues

17. Skill Based Pay - An Overview Skill based pay is a system designed to reward employees for the skills they possess and use in the work setting. Pay is directly related to the number of definable and measurable skills acquired and applied.

18. Characteristics • Individually based pay vs. job based pay • Focus is on skill development • Encourages cross training • Permits flexibility in staffing

19. Where is it Used? • Building inspectors • Police officers • Engineers • Clerical • Firefighters • Public works jobs • Water and waste water operators

20. Skill Based Pay - Advantages • Encourages skill development and career development • Creates staffing flexibility • Improved employee satisfaction • Reinforces teamwork and employee involvement • Lower staff requirements for the same amount of work • Higher output and quality over the long term

21. Skill Based Pay - Disadvantages • Can be difficult to conduct external competitive analysis by job title benchmarking • Skill blocks can be difficult to define and price • Works best for trades and production based jobs • May result in paying for skills not used • Certification/re-certification process needs to be established • Time and money needed for training • More employees can "top out" • Administrative complexities

22. When Will It Work? • When you want a pay system which supports a new culture • The organization strongly supports career development and cross-training • Pay for skills is encouraged • The change is supported by supervisors and managers • When training money and time are readily available • The organization supports total quality initiatives

23. When Is It Likely To Fail? • There is a lack of supervisor and management support • Unwillingness to endure implementation problems and training time needed • Cultural desire for equity at expense of individual differences • Skill blocks are not well defined • Failure to install proper certification process

24. Individual Based Incentives Individual based incentives include any plan(s) that reward(s) individual employees for their own performance or contribution.

25. Characteristics • Emphasis is on individual performance or contribution • Types of plans include:• Pay for performance• Suggestion programs• Recognition programs

26. Advantages • Focus on individual employee performance or contribution • Consistent with historical values of pay and performance • Incents managers and supervisors to address performance issues • Relatively easy to install

27. Disadvantages • Plans lose potency after 1 - 2 years • Difficult to set measurable performance criteria for many jobs • Encourages individual performance at expense of group • Can create feelings of superiority and/or inferiority • Creates administrative systems that must be monitored • May be perceived as unfair because of its subjective nature • Forces managers/supervisors to confront employees who do not perform at or above standards

28. When Will They Work? • Clear measures are established for success • Evaluators receive good and frequent training • Rewards are worthwhile and meaningful • Communication is excellent • When top performance can be distinguished from regular duties • The organization supports individual effort over group performance

29. When Will They Fail? • Managers/supervisors cannot or will not distinguish between different levels of performance • Organization does not fund the incentive program - rewards are not meaningful • Measurement system is poorly defined • Monetary value is low in comparison to effort expended

30. Group Based Incentives Group based incentives focus on solving problems of cost, quality, and efficiency leading to a monetary reward for documented improvements. • Programs include:• Small group incentives• Gainsharing/Goalsharing

31. Characteristics • Emphasis is on teamwork • Teams are rewarded for improvement • Rewards ($) are usually considered "found" money • Formula based (not subjective) • Measures of improvement can be financial, operational or a combination

32. Example • Baltimore County • Food service workers in corrections • Average cost per meal before program = $1.35 • Average cost per meal after program = $1.05 • $ .30 savings per meal • 3000 meals per day • Savings = $900 per day, $27,000 per month, $324,000 per year • $162,000 split among employees

33. Advantages • Encourages teamwork and employee involvement • Increases in pay are funded out of "found" money • Supports new culture of work • Encourages higher productivity and quality • Lower staffing levels needed

34. Disadvantages • Plans need to be re-adjusted every few years • Difficulty in setting measurable objectives • Public distrust of paying for improvements • Productivity improvements need to be bought back • Rewards may not be large enough to motivate change in behavior • Significant time and cost involved to set up

35. When Will They Work? • When the culture supports teamwork • Good base line performance measures are available • Management and employees enjoy a level of mutual trust • When all levels of employees are included • When rewards are separate from regular pay • The organization supports total quality initiatives

36. When Will They Fail? • Lack of policy maker, management, and supervisor support • Overly complex bonus/pay-out formula(s) • Employee and management distrust • Legislative meddling • Lack of good baseline measures • Poor communication

37. Implications for Pay Equity • No legal impediments to performance pay • Pay equity allows for performance pay under the “Exceptional Service Pay” test • Performance pay means payment above the salary range maximum to employees who meet specified performance or production standards

38. Implications for Pay Equity • If no employee receive any of these payments or • If 20% or less of the male classes receive these payments… • You report if 20% or less of the males receive these payments • DOER must find you in compliance on this test

39. Implications for Pay Equity • Otherwise, you calculate the % of male and female classes that receive exceptional service pay (out of all male and female classes) and divide the % female classes by the % male classes • The resulting percent should equal 80% or more to pass

40. More articles to read on these topics at www.foxlawson.com