Competency-Based and Other Salary Management Best Practices

1. Competency-Based and Other Salary Management Best Practices Brian Walby, Ph.D., CCP, Consultant to American Society of Employers

2. Format and Topics for Today* Format: • Presentation: Best practices - competency-based pay and salary management • Most discussion and questions at end on any topic (and after the session) • High level and many topics; cannot delve into depth in time period we have Topics: • Competency-Based & Other Salary Management Best Practices (key focus) Aligning these with: • Compensation Strategy / Philosophy • Behavioral and Technical Competencies • Career Pathing • Performance Management • Other HR Programs * Note: Each company must determine a salary management program that is most appropriate for its own culture, business, preferences, etc. Information, content, concepts, etc. discussed today are generally consistent with best practices as endorsed by World at Work (Brian Walby – Lifetime Member) as well as most major HR/Compensation consulting firms. 1

3. Best Practice ‘Sequential Phases’ in Salary Planning • 1. Project Plan/Management: Staffing, tasks, roles, timing, methodology • 2. Compensation Strategy / Philosophy (key – topics on next slide) • 3. Job Analysis (JA): Gather key job duties, responsibilities, requirements • 4. Job Documentation/Descriptions (JD): Formatting job analysis data •  5. Job Evaluation: Market pricing [U.S.] or Job content [points] analysis •  6. Pay Structure Development: Traditional grades, Wide grades, Bands •  7. Assign/Slot Jobs Into Structure: Market pricing and Internal equity •  8. Program/Plan Communications: Messages, media, meetings, etc. •  9. Program/Plan Implementation: HRIS/Payroll, Pay management programs/systems, Transactions/process, HR staff roles, etc.

4. Compensation Strategy / Philosophy Key Components of an Effective Compensation Strategy/Philosophy (provides framework upon which pay policies are developed) • Company mission, values, objectives • Frame of comparative reference • Size, industry/sector, geographic index of comparator companies • Mix of, market target (e.g. 50th %ile) and approach per pay element: • Base (85% use 50th), Annual, Long Term Incentives, Benefits, Perquisites • Specific Considerations re: Base Salary (build Policies from Strategy) • Pay structure(s), pay drivers (e.g. merit, competencies), position in range per experience / performance. • Compensation communications (who will know and what they will know) (Note: Approx 2/3 of companies have written comp strategies; >90% have written or unwritten)

5. Best Practices/Key Data Capture in Job Analysis/Descriptions • Conduct Full Job Analysis (JA) every 3 to 4 yeas • Each year give incumbents and managers opportunity to review/modify JDs • JDs developed from JAs should provide 3-4 sentence job summary/overview • JD should also provide the 5 to 7 key functions comprising 70-80% of the job • Functions/responsibilities should provide identification of competencies • Other Sections to include on JA / JD for optimal legal and HR use (W&A can provide sample templates) • Job Title · Job Code • Department/Function · FLSA Status • Division or Business Unit (if applicable) · Reports to (Title) • Minimum and Preferred Education / Training · Non-essential, functions • Minimum and Preferred Experience / Skills · Internal/External Contacts • Use of Discretion and Judgment (For FLSA) . Effective date • Who JD was Prepared by, Reviewed and Approved by (Function and HR) • Mental, Physical Demands, Work Conditions (for ADA, if/as needed)

6. Competencies Definition • Behavioral competency: Any incumbent employee behavior that is readily observable, measurable and characteristic of successful performers in a job, role, company or culture. [WorldatWork] • e.g. Leadership, Interpersonal Skills, Flexibility, Initiative, Team-oriented, etc. • Technical competency: Any underlying major bodies of knowledge or skills needed to perform a particular type and level of technical work activity. Often assessed by job analysis, work output evaluation, work observation, technical review, and/or other structured testing. Typically viewed as ‘necessary but not sufficient’ to fully evaluate employees. • e.g. Technical competencies for software engineers often include: • Software requirements • Software design and coding • Software testing • Software maintenance • Software management

7. Competencies (continued) Competency ‘Model’ Definition • A set of competencies that can apply to an entire organization or to a particular job family, such as finance, purchasing, engineering, HR, etc. • A ‘model’ describes differentiating performance behaviors or technical skills / knowledge. Typically includes 6 to 10 competencies. • Each competency may have several ‘levels’ of proficiency • Competency models for a given company may be developed either: • Organically: Unique to a given company by job analysis (on-site observation or job analysis forms), expert panels, focus groups, etc. And / Or • Generically: Using and/or modifying pre-established or standardized models from professional or trade associations, consulting firms etc.

8. Competency Use or Planned Use Within HR Functions Recent research indicates competencies are increasingly used across various HR functions Walby and Associates LLC

9. Aligned and Coordinated Competency Use Across Various HR Functions ‘How’ It’s Done – Coordinated Competency Use Across Various HR Functions Develop Technical & Behavioral Competencies, Job Roles and Functions Conduct Candidate Assessment &Selection Establish Total Compensation and Talent Strategy to Support Business Success Implement PerformanceManagement Program Create Career Planning and Pathing Level Guides Within Salary Structure Walby and Associates LLC 8

10. Common Advantages: Aligned Competency Use Across HR Functions • Companies / employees focus on development of skills, knowledge and behaviors with greatest impact on strategic corporate objectives • Talent Management/HR functions / processes / policies regularly developed/modified in consideration of common elements & ‘big picture’ • Employees view their position, responsibilities, career pathing in context of the total organization, and see themselves as key component • Enhances recruitment, retention, motivation of higher caliber candidates and employees • Contributes to (correlation with) employee efficiency/performance, corporate financial/operational performance, and customer satisfaction/ retention

11. Know the Link Between Goals and Behavioral Competencies Goal Setting: Goals, Measures and Behaviors • Corporate and other Goals Drive Measures • Measures, in turn, drive Behaviors (i.e., you are likely to get what you measure, especially if you pay for what you measure) • Ensure your process begins with corporate strategy and goals Goals Measures Behaviors • Expectancy Theory: • Performance (behaviors/competencies) most likely to improve when employees: • Have ability to perform • Have clear understanding of what is expected (Corporate, Division, Individual Goals) • Receive constructive feedback and reinforcement • Have adequate support (tools, equipment, budgets, etc.) • Believe additional effort will result in improved performance (individual/group) • Believe improved behaviors and competencies will be rewarded

12. ‘Best Practice’ Methods to Create Company Competency Models • Job Analysis (JA) or Job Description Analysis (behavioral/technical): • Review of JA forms or JDs by experienced HR staff or consultants to identify key and common competencies across various positions and/or levels • Can also or further define levels by methods below or in combination: • Modify / Adapt Standardized Models (behavioral/technical): • Compare JA and JDs against competencies from standardized sources including compensation surveys or professional & trade association models. • Focus Groups (primarily for behavioral competencies): • Facilitate groups of high performers with standardized questions regarding what and how a given function or responsibility is successfully completed. • Tech Panels/Tech Workflow/Output Review/Observation/Documentation of needed competencies for business processes (tech competencies). • Panels or document review by strong performers or functional managers to identify/confirm/modify job family/career path specific tech skills/knowledge. • Behavioral Event Interviews (behavioral/technical; time consuming): • ‘BEIs’: Individual interviews with successful incumbents to extract behavioral or technical competencies from work experiences described.

13. Behavioral Competencies: Developing Standards/Models • Effective Behavioral Competencies and Standards should be: • Written:Helps to ensure employee understanding and commitment • Aligned: with Organizational Mission/Values/Objectives. Should be able to indicate how each competency supports/reflects the big picture • Relatively Brief:Lengthy standards cause potential misunderstanding • Realistic:Should ensure that expectations are achievable; historical data, professional models and employee input are all helpful • Precise:Eliminate subjectivity. For legal and practical reasons, only have as many ‘levels’ (i.e. usually 3 or 4) in your rating system as you can truly define/ describe, and result in generally consistent evaluations across trained raters • Reevaluated:Should be reviewed at least bi-annually • Consistent:Standards for the same types of positions should be consistent across the organization Note: Ideally and typically, standards should be developed for each level of performance. From a practical standpoint, it is most important to initially develop standards for the expected level (i.e., Meets Expectations or Stage II of a 3 level competency.)

14. Possible Levels / Stages of Behavioral Competencies Walby and Associates LLC

15. Example of 3 Stage or Level Behavioral Competency Behavioral Competency: ‘Managing Conflict’: Definition: Deals effectively with others in potentially antagonistic situations; uses appropriate interpersonal techniques and methods to reduce tension and conflict among team members. * Common alternatives: ‘Solid performer’, ‘Fully acceptable’. Used if building a culture in which ‘most’ (70% to 80%) of employees are performing as generally expected. Walby and Associates LLC

16. Sample Technical Competency Model Development Process Best Practice Technical Competency Model Steps include: • Review corporate goals and talent management strategy analysis/development • Purposes of competencies (including alignment with other HR programs) • Identify job families and feasibility of process, inclusion, timing, etc. • Conduct job and work process analysis (as noted earlier) • Identify / define technical competencies (JA, tech panels, high performers, etc.) • Define proficiency standards, levels and career profiles: typically 4 - 5 levels for technical competencies (JA, tech panels, standard models, high performers) • Validate models (correlation, review of results, surveys etc.) • Develop total framework of competencies and levels (see next slides) • Incorporate into HR programs (recruitment, development, pay etc.)

17. Sample Technical Competency Levels / Model • From Sample Software Engineer Technical Competencies (see earlier slide #5 in this document), below are sample ‘4 level’ competency descriptors for: • Software Design and Coding • Software Testing

18. Competencies in Salary Planning Using Pay Structures • Now that we’ve discussed competencies – behavior and technical – AND their alignment with other HR functions and services, • It is important to explain and understand how competencies, competency models and, shortly, other components of jobs work within the context of: • Various Types of Salary Structures • Career Path and Level Guides • The following several slides introduce Salary Structures and best practices regarding how behavioral and technical competencies and models can work within these structures.

19. 3 Primary ‘Types’ of Salary Structures: Grades, Bands Definition: Salary or Band ‘Range’ • The dollar amount extent (minimum to maximum) an organization will pay for jobs assigned to that band or range within a given pay structure. • Type 1. Traditional Grades: (most prevalent; used by 60% to 70% of companies) • Traditional grade structures typically have approx12 to 20 grades, are somewhat narrow: ‘Ranges’ typically 30% (nonexempt) to 60% (management). • Below is an example of a traditional grade, with a min to max range of $40,000 to $60,000, or 50% ($60,000-$40,000 = $20,000 = 50% of $40,000) Common Advantages: • Cost Control (lower ‘range’ and maximum) • More Accurate Matching of Market Data with Grade Midpoint (More Grades) • ‘Promotions’ to higher grades are easily defined Common Disadvantages: • Often need more grades to represent full spectrum of market pay data. • Increased tendency for ‘reclassification requests’ even when minor job changes • Transfers can be more difficult because of so many grades; narrower platform for competency pay.

20. 3 Primary ‘Types’ of Salary Structures: Grades, Bands Type 2. ‘Wide’ (or ‘Wider’) Grades: (used by approx 20% to 25% of companies) • Wide grade structures typically have approx 10-12 to 18-20 grades with somewhat wider ranges of ‘typically 40% (nonexempt) to 100% (management). • Below is an example of a traditional grade, with a min to max range of $80,000 to $144,000, or 80% ($144,000-$80,000 = $64,000 = 80% of $80,000) Common Advantages • Ability to capture/award higher levels of market pay (higher max) • Can better differentiate pay on various factors: performance, competencies, experience • Often a sometimes better platform for person-centered (competencies) or hybrid/alternate pay approaches (e.g. behavioral competencies plus steps) and pay adjustments • Administrative / managerial flexibility; career/pay growth if limited promotional growth Common Disadvantages: • Potential increased costs, cost control and/or admin management due to higher maximums • Usually fewer grades; more midpoint variance of a job’s grade assignment from market

21. 3 Primary ‘Types’ of Salary Structures: Grades, Bands Type 3. Salary ‘Bands’: (Note: now used by less than 15% of reporting companies) • A 1990s+ trend involving consolidation of two or more ‘grades’ into fewer but much wider ‘bands’, typically used to develop ‘levels’ or ‘job families’. • Typically involve 3 to 5 ‘market’ or ‘control’ points within the wider Band Range (100% to 300%) as ‘anchors’ for given job values in a career path, job family. 200% Range: 4 ‘Market/Control’ Points ($150,000-$50,000=$100,000= 200% of $50,000) Common Advantages • Enhanced support of person-based career development and progression within a job family/group • Decreased emphasis on promotions; sometimes easier transfer of employees across divisions, depts. De-emphasizes organizational hierarchy; flexible platform for person-based pay Common Disadvantages • Requires higher managerial cost control/focus on competencies, performance, pay policy, control etc. • Control points still usually based on job evaluation approach (e.g. market data etc – i.e. why do this?) • Promotions can be harder to define, may involve only mid-band (market point) changes, etc. • Typically requires high commitment to employee career and competency development

22. Final Comments on Salary Structures(Most small to midsize companies have 1 or 2 structures, except for geographic indexes) • Grades or bands within a given salary structure typically ‘overlap’ based on the established ‘midpoint progression’ of each grade. • Example below: 50% grades overlap by 10% midpoint progression. • Greater salary range midpoint progression (e.g. 16% to 20%+) = • Fewer grades to represent total pay spectrum of all jobs in the structure • Sometimes requires clarification of what constitutes a ‘promotion’ • Smaller salary range midpoint progression (e.g. <10% to 15%) • More grades needed to represent total pay spectrum of all jobs in structure • Easier clarification of what constitutes a ‘promotion’

23. Example of 5 HR 4-Stage ‘Tech Competencies’ Required for Job Levels in HR Generalist Career Path Level Guide & Pay Grades Similar to prior page, except these are sample HR technical competencies. Each ‘Stage’ of an HR Technical Competency should be assessed / attained prior to moving/promotion to the next level (e.g. HR Generalist II, III, etc.) job

24. Alternative: 5 HR 4-Stage ‘Tech Competencies’ Required for Job Levels in HR Generalist Career Path Level Guide & Pay Grades In this sample company’s HR technical 4-stage competency model, each competency stage is not needed to correlate with a new HR Generalist role.

25. Best Practices: Linking Competencies to Fixed & Variable Pay Recent Best Practice Research Data Indicates: • Approximately 60% to 70% of organizations have linkage between competency ratings/proficiency and base salary adjustments • Approximately half (50%) of the companies linking competencies to salary adjustments do so ‘informally’, or use ‘guidelines’ rather than strict amounts or percentages (providing operating managers some flexibility) • Whether ‘guidelines’, ‘strict percentages’, or ‘increase ‘ranges’, approximately 60%+ of organizations linking competencies to salary use one of the following: • Factor for salary adjustments within job ranges (most common) • Behavioral with or w/o technical competencies, or include goal attainment • Competency levels are aligned with ‘target salary’ or ‘pay zone’ within bands • Developmental pay increases are typically separate from, but often added to, performance increases • Approximately 40% of competencies link competency ratings to variable pay, commonly as small ‘development bonuses’ or ‘incentive award modifiers’. • Approx 70%+ of companies use competencies (usually ‘technical’, but also ‘behavioral’) as factors in promotion to a higher grade

26. SampleSalary Grade Progression ‘Guideline’ based on Behavioral and/or Technical Competency Rating/Proficiency Salary Range Quartiles (50% range Min to Max) Min: $60,000 1st Q $67,500 Midpt: $75,000 3rd Q: $82,500 Max: $90,000 Sample Guideline for Salary Progression Scale within Band / Range Above Stage I Stage II Stage III • Average Overall Behavioral Competency Rating Scale ↑ Stage I Stage II Stage III Stage IV Average Overall Technical Competency Rating Scale ↑ • Relevant ‘Guidelines’ Research Data regarding Increase for Top Performers: • Approx 25% of companies establish 125% of average increase for top performers • Approx 50% of companies establish 150% of average increase for top performers. • Approx 20% of companies establish 200% of average increase for top performers Walby and Associates LLC

27. Sample Competency Pay-Based Adaptation of Merit Matrix Sample Approach to Annual Base Salary Increase/Adjustment in a Pay Grade: (Behavioral competencies/factors are used similarly for increase guidelines in 60% of companies) Position in Salary Range: Top Third Middle Third Bottom Third Average to Slightly Below Average Increase Lump Sum Similar to Average Structure only increase Structure only Increase Average Pay Increase (e.g. 3%) Above Average Pay Increase (Average +1%-2%) No Increase or Structure Only Increase Above Average Pay Increase (Average + 1%-2%) Large Pay Increase (Average plus 3%-5%) Low Mid High Separate Behavioral (primarily) OR Combined Competency (Behavioral/Technical) Rating Walby and Associates LLC

28. Competency ‘Blocks’ Can Use Fixed Dollar Amounts or Percentages in Pay Bands (note: less often used due to complexity) • Each level of each competency attainment is affiliated with either a fixed dollar amount or a percentage of the total width of the salary range • Alternatively, or in tandem with this approach, employees may receive a ‘one time’ (lump sum) award for attaining new competency levels Walby and Associates LLC

29. Competencies in Career Path, Salary Increases, Level Guides • Now that we’ve discussed competencies – behavior and technical – AND their alignment with other HR functions and services, AND their potential application to salary structures pay adjustments, • It is important to explain and understand how competencies & models and other components of jobs work within the context of Career Path and Level Guides along with salary progression. • Key Points and Distinction: • BehavioralCompetencies are most often used to adjust salary for an employee withinhis or her assigned grade range in a structure. • i.e. Traditional performance evaluation allows moving ‘through’ range. • TechnicalCompetencies are most often used in establishing and defining (and promoting into)various levels in a Career Path / Level Guide along with other job components. • The following slides introduce best practice Career Path Level Guides using both Technical Competencies and Other Job Components.

30. Other Key Job Components in Establishing Career Path Level Guides • It is important to now identify those job components commonly used in tandem with competencies, other HR functions, and pay structures to establish Career Path Level Guides, which can further enhance any company’s approach to total career development for employees AND • How all these factors, working collaboratively, directly contribute to • Employee career satisfaction • Enhanced employee efficiency, proficiency, motivation, retention • And, ultimately, using our most important resource – our employees – to achieve corporate success – operationally and financially.

31. Other Key Job Components in Establishing Career Path Level Guides There are several additional job components that are important, research Indicates, and approximately 70% of ‘best practice’ companies anchor their Career Path Level Guides with the following: • Technical Competencies (as discussed herein so far) • Overall Scope and Basic Roles and Responsibilities of one’s job • Financial, Decision-Making and other levels of Authority • Primary Internal and External Level of Interface and Communications – including written and face to face. • Report Levels – Upwards & Downwards (Level/Number of Reports) • Minimum and Preferred Level of 1) Education and 2) Experience HOW? – Sample on Next Slide Ideally, EACH of the Above Components should be briefly described within EACH of the levels in a Job Family Career Path Level Guide (use Job Analysis, Expert Panels, Consultants, Adapt Std Models, etc.)

32. Job Components in SampleAccting Career Path Level Guide Walby and Associates LLC

33. Limited Time to Develop Competency Descriptors? Go Generic Walby and Associates LLC

34. Career ‘lattices’ (lateral moves) allow career paths to become communications vehicles for demonstrating opportunity Senior Planning Manager Project Manager Service Level Manager Planning Manager Project Leader Sr. Business Analyst Sr. Rel. Mgmt. Specialist Rel. Mgmt. Specialist Sr. Tech Writers Sr. App Tester Planner CAREER LADDERS Sr. Tech Trainers Business Analyst Tech TrainerII Tech Writer II App Tester II App Analyst II Client Support Specialist Tech Writer I App Tester I App Analyst I Sr. Client Support Analyst Tech Trainer I Client Support Analyst CAREER LATTICES Walby and Associates LLC

35. Best Practice / Successful Competency Pay Communications • Enlist full top management support throughout program development • Plan the Communications Strategy: Message, Meetings, Media, Timing • Most companies use various group meetings to outline program basics • Company compensation strategy should be included in all group mtgs • Ensure understanding of alignment of competencies within the company’s performance management system • Most companies do not disclose the entire salary structure in meetings • Companies claiming highest program success engage in one-to-one meetings between manager and employee following larger group mtgs • Employees should understand their grade and pay range, where they are in the range and why, know the standard ‘career path’ (and alternatives) within their discipline, how to progress further in range and be promoted • Conduct follow-up surveys of all participants: compare evaluations by level (e.g. management vs. exempt) and by department

36. Competency-based and Other Salary Management Best Practices Thank You Very Much for Attending!! FurtherQuestions or Discussion? Please see Brian when session is completed.