Five Steps to Simplify Your Compensation Program

As compensation professionals we are often asked if there are alternatives to simplify the method by which compensation decisions are made and communicated within an organization. This has become especially important when Human Resources is required to provide services with reduced staff. The following are five basic ways to simplify the complexities of compensation.

Step 1: Consolidate job titles and descriptions based on broader criteria & common activities, and move to a “job classification” pay system.

Job classifications describe the primary functions, typical responsibilities, judgment required, qualifications, personal interactions, and degree of confidentiality required of a family of positions. Job classifications are used to place positions in the proper salary range and compare salaries to those of other organizations in the labor market. Broad job descriptions are used to describe a group of jobs. This system is typically found in the public sector and higher education.

An effective example of this type of program can be found in the State of Nebraska. The program identifies a number of broad classifications including the following:

• Officers and Administrators
• Professionals
• Technicians
• Protective Service Workers
• Para Professionals
• Administrative Support
• Skilled Craft Workers
• Service Maintenance

Competencies and complexities are established within each broad classification level based on required skills. Employees are placed into the classification and level based upon their competency levels and ability to perform the complexity required.

Step 2: Reduce the number of pay grades and salary ranges by moving to a “Broadbanded” pay system.

Broadbanding links directly to the use of classification systems.  Broadbanding allows for more flexibility in determining individual compensation based on the combination of individual skill & competency as well as the complexity of the job.

According to research from Stern & Associates, “broadbanding is the consolidation of traditional pay structures, consisting of many, narrow pay ranges into a few, wide ranges or bands.” Broadbanding support responsive, swift-moving organizational cultures.

Organizations with competency-, longevity-, and performance–based pay systems find broadbands are essential to their programs.

Before moving to broadbanding, however, Stern & Associates suggests organizations consider the following:

• Broadbanding demands that managers are aware of, and can interpret, market pay data.
• Broadband control points are not precise for individual jobs.
• Broadbanding increases the potential for employees to float to the top of the band, and receive pay rates way out of sync with the market.
• Broadbands lack the automatic cost-control mechanism inherent in narrow pay ranges.
• Broadbanding eliminates the possibility for precise job analysis / evaluation.

Step 3: Develop performance appraisal methodologies that focus on job competency and individual contribution.

Another method of simplification is to move away from generic performance systems, and move towards competency-based performance management systems. The design of a competency-based performance management system is for employers to reward their employees for their knowledge, skills, and competencies. There is no straightforward calibration in determining if an organization is well fit for a competency-based management system. There are three factors to consider, however, that further explain why competency-based plans are worth the attention:

1. The decline of the job as we know it today (i.e., many employers increasingly view the job as an anachronism — a dated concept);
2. Many organizations that have successfully built skill-based pay plans for non-exempt workers have gone on to build skill-based pay plans for knowledge workers; and,
3. Competency-based pay fits the strategic focus on core competencies, i.e., the linking of core competencies and business strategy for business success.

Step 4: Eliminate merit or pay-for-performance programs tied to base pay and instead allow for a bonus / incentive system that focuses more on outcomes and results.

Moving to a pay-for-performance system that rewards employees using bonuses or flat dollar amounts based on their performance for a specific period of time is one way to simplify the difficult process of determine pay adjustments based on individual performance. According to research from the U.S. Merit Systems Protection Board Report to the President and Congress on merit pay,

“pay for performance can encompass a variety of rewards for above average performance. The two most common are bonuses, which are one-time cash payments, and performance-based pay, which provides a permanent increase to base pay.

Bonuses represent an amount of pay that is ‘at risk’ every year. In contrast to base pay, which is stable and primarily reflects an employee’s market value, bonuses should depend purely on performance and are not guaranteed. Employees in these types of systems frequently receive base pay that is considered comparable to average market rate to facilitate recruitment and retention of a high-quality workforce, but additional dollars are distributed (often annually) on the basis of performance during the rating period. As a result, employees are guaranteed a certain salary, with the potential for earning more. The amount generally depends on a variety of factors, such as the available funding and the evaluation of the individual’s contributions, but the organization retains discretion over how much to spend each year.”

Be careful before implementing a bonus or incentive plan, however.  If base pay levels are not fully competitive, reliance on bonuses as a reward may increase turnover.

Step 5: Step up employee / management HR committees to discuss new programs and to provide assistance in straight-forward communication.

A key to the success of any program redesign, regardless of how much the end product has been simplified, is the ability to effectively communicate with those impacted by the program.  The most effective way is to meet with a task force of employees & managers to review program changes and to clarify the communication prior to dissemination.  However, there have been concerns over the years regarding the legality of this communication methodology. Some suggested steps to take in communicating new programs can include the following:

1. Be thorough in your communication – Make sure employees at all levels clearly understand the changes and how the changes will affect their individual pay.
2. Focus on answering the question “What in it (the changes) for me?” – Since this is affecting something personal (pay), it is best to be able to explain thoroughly what will affect employees personally.
3. Use a variety of means to communicate – There are various forms of media to use when communicating adjustments. Use one or two to address the changes…for some, an e-mail will work, for others one on one meetings, or “town meetings” will be needed.  Remember that individuals generally need to hear a message three times before they remember and understand the information provided.
4. Ask for and listen to employee feedback – Besides giving you a gauge on how the adjustments are being received, this also will communicate to employees that you care about their thoughts on the changes, promoting positive organizational culture.

However, as Astron Solutions National Director Michael Maciekowich reminds us, there are rules regarding the use of employee participation committees when discussing topics such as compensation.  As per the National Labor Relations Board, “Section 8(a)(2) of the National Labor Relations Act (“NLRA”) makes it unlawful for an employer to establish certain employee participation programs or employee committees. It is important that the makeup of the committee include management and should be reviewed by legal counsel prior to meeting.”  Before launching an employee participation committee, be sure to check with counsel to ensure legal compliance.

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