How Much Risk Can You Afford

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How Much Risk Can You Afford?

• Assessing Employee Compensation

Chris Bailey, CCP Stacey McClure, PHR
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• Among mortals, second thoughts are wisest.
• Euripides

• When in doubt, make a fool of yourself. There is
  a microscopically thin line between being
  brilliantly creative and acting like the most
  gigantic idiot on earth. So what the heck, leap
• Cynthia Heimel

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• Unless you walk out into the unknown, the odds of
  making a profound difference in your life are
  pretty low
• Tom Peters

• Few thoughts are brought to a successful issue by
  impetuous desire, but most by calm and prudent
  forethought
• Thucydides

4

• An element of abstention, of restraint, must
  enter into all finer joys.
• Vida D. Scudder

• Its all right letting yourself go, as long you
  can get yourself back.
• Mick Jagger

5

• Security is mostly a superstition. It does not
  exist in nature, nor do the children of men as a
  whole experience it. Avoiding danger is no safer
  in the long run than outright exposure. Life is
  a daring adventure or nothing
• Helen Keller

• It is better to be a thousand times careful than
  once dead
• Proverb

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Defining Risk

• Risk is
• Any issue that impedes an organizations ability
  to achieve its objectives
• The tendency of a system or function to have
  problems
• Not necessarily a known problem, but could be
• A red flag or warning
• The likelihood of less-than-expected results
• A venture undertaken without regard to possible
  loss or injury

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The SAO Risk Model
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Risks in Compensation Systems

• Business Risk
• Disconnect between organizations mission and
  goals and its compensation programs
• Financial Risk
• Large expenditures for pay and benefits
• Potential for lawsuits
• Service Risk
• Inability to attract qualified employees
• Increased workloads due to turnover or low
  productivity

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Avoiding Risk

• Sounds good, but...
• the problem with avoiding any risk (legal or
  otherwise)
• It is not possible
• There is always risk in not taking risks
• Think in terms of risk selection rather than risk
  avoidance

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Survey Says

• Risk in state compensation can be tied to four
  main areas
• Compensation Management
• Strategic Thinking
• Communication
• Organizational Culture

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• Most pay systems failures that I have observed
  took place because the pay system was a
  stand-alone program without a concrete foundation
  in the business plan.
• Robert L. Heneman
• Business Driven Compensation Policies

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Employee Compensation

• In FY 2003, state agencies spent more than 5
  billion for employee salaries
• What percentage of your budget is spent on
  compensation?
• How much time is spent strategically planning for
  these expenditures?
• How does this compare to other large items in
  your budgets?
• Is there any other budget item that directly
  impacts agency employees?

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Compensation Strategy

• A strategic risk occurs when
• A compensation system is only seen as a cost, not
  an investment
• There is no process or plan for compensation
  budgeting
• You ignore integrating other systems
• There is no method to reward employees at all or
  everyone is rewarded equally
• Managers lack accountability for salary
  administration

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• Some say that market forces will take care of the
  wage gap. If we had relied on market forces, we
  would have never passed the Civil Rights Act, the
  Family and Medical Leave Act or the Americans
  with Disabilities Act
• U.S. Senator Tom Harkin

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Equal Pay Act and Title VII of the Civil Rights
Act of 1964

• Overlap between Title VII and Equal Pay Act
• Both prohibit sex based wage discrimination
• EPA only covers discrimination in wages
• Title VII requires a person to go through EEO
• EPA does not cover applicants for
  employment..Title VII does
• Associated Compensation Risks
• Initial Placement
• Starting Salary
• Same Title Two SalaryGrades

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FLSA Issues

• Verify correct exemption statuses
• Ensure appropriate use of compensatory time or
  compensation to your non-exempt employees
• Review exempt employees to ensure they make more
  than 455 a week
• Do not determine exemptions solely based on job
  titles

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FLSA Issues

• Action Items
• New regulations are a signal to employers to
  examine their workforces and classifications to
  ensure that they are in compliance with the
  regulations
• Employers should review the salary levels of all
  exempt employees, and either reclassify as
  non-exempt or raise the salary of any that fall
  below the regulatory minimum

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Classification

• Issues with Classification occur when
• It is a piece-meal process
• There is confusion about how to use the plan
• Problems are not communicated to SCO
• A review of the classification of positions is
  not conducted on regular basis
• The focus is on pay grade or pay level versus
  actual duties
• Employees are paid outside of a classification
  without data to support those decisions

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Salary Administration

• The effectiveness of compensation diminishes
  when
• You pay solely at the minimum of the salary range
• You setting hiring salaries without justification
• You have unmanageable salary compression
• You do not articulate criteria for receiving
  increases
• You lack specific guidelines on issues such as
  geographic differentials, certifications, etc.
• You do not build a strong, consistent connection
  between performance and rewards

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• As we know there are risks with everything, but
  effective HR support and monitoring can mitigate
  these risks.
• Wages/salaries represent the largest cost item
  for many organizations and failing to manage them
  effectively is a sure ticket to poor
  organizational performance.
• SHRM, Effectively Managing Base Pay Strategies
  And Programs For Success

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Strategic Thinking and Linkage

• Risks include
• Lack of alignment of compensation and performance
  with agency goals and business plan
• Not putting limited funding in hands of key
  talent
• Not understanding key talent
• Lack of linkage between agencys success factors
  and HR. There is a disconnect between the two
• Not using the compensation system as an enabler

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Strategic Thinking/Linkage

• If you do not link compensation to your business
  plan then
• The compensation plan in not owned by top
  management
• Managers are not held accountable for their
  salary management

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The Strategic Fit
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• Of all the organizational processes,
  communication is the
• Most pervasive
• Least understood
• Most critical for success
• Least planned for
• Most talked about
• Least acted upon
• Attracting and Motivating Employees in This
  Changing World, Watson and Wyatt 2003

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Communication and Compensation

• A haphazard communication plan or worse, no
  plan at all increases the risk of
• Employee resistance
• Confusion
• Resentment
• Disengagement
• Effective communication plans can
• Keep employees well informed
• Increase employee awareness of and appreciation
  for programs
• Reinforce company philosophy and culture
• Build employee trust

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Knowledge of Pay

• Study revealed
• 48 of employees understood the rational behind
  their rate of pay and only 41 know how pay
  increases are determined
• There is a gap in understanding considerations
  for promotions or merit increases
• Findings
• Organizations dont need to throw money at the
  problem
• Employees want employers to translate the pay
  structure into their opportunities for pay
  increases and promotions
• Employers can achieve higher organizational
  effectiveness when they share more knowledge
  about pay and pay processes

Source The Knowledge of Pay Study, E-mails from
the Front-Line. World_at_Work, 2002.
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Communicating with Management

• Understand and articulate the critical issues of
  managers and executives in your agency
• Demonstrate that you understand the business of
  the business
• Be willing to listen to criticism
• Limit the permission to complain
• Lead by example

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Communicating with Employees

• Communicate and involve more, not less
• Listen actively to concerns and questions
• Ensure that employees feel their opinions and
  voice are valued
• Help employees see their roles in the
  organization
• Avoid spinning the truth or passing blame
• Dont be afraid of giving bad news

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• Organizations are in large part shaped by the way
  people think and interact. To make organizations
  more innovative, we must change the way people
  think and interact.
• Andrew Papageorge

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Organizational Culture

• What is it?
• Norms, values, behavior patterns, rituals and
  traditions
• Rules, policies and processes
• Ceremonies and events
• Rewards and recognitions
• Organizational structure
• Leadership behavior
• Organizational mindset

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Cultural Risk Areas

• Processes and procedures
• Fear of litigation
• Focus on process versus end result
• Over controlled processes
• Organizational structure
• Centralization versus decentralization
• Chain of command
• Geographic dispersion
• Management and employee mindset
• Adapting to change
• Decision making
• Creativity and innovation

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So What About Risk?

• Progress always involves risks. You cant steal
  second base and keep your foot on first
• Frederick B. Wilcox
• Yes, risk taking is inherently failure-prone.
  Otherwise it would be called sure-thing-taking.
• Tim McMahon
• Nothing will ever be attempted, if all possible
  objections must be first overcome.
• Samuel Johnson
• Never be afraid to try something new. Remember,
  amateurs build the ark professionals built the
  Titanic.
• Unknown

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Steps to Address Risk

• Map
• Controls
• Find balance between excessive and weak controls
• Consider the significance of risk and the level
  of control needed

• Determine Strategy
• Decide if you will eliminate, transfer, accept,
  or manage those risks
• Apply risk management techniques

• Map Risks
• Identify and analyze related risks
• Consider the probability of occurrence and
  business impact
• Prioritize the most critical risks

• Map
• Objectives
• Understand organizational goals
• Consider timing and business impact
• Prioritize critical objectives