Minnesota Public Employer Labor Relations Association

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Minnesota Public Employer Labor Relations
Association

• Summer Conference
• August 23-25,2000

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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

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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

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Strategic Compensation

• The conceptual design of a compensation program
  should be based on The business
  environment The organizational
  environment Employee considerations The
  market environment

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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

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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

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Current Executive Considerations

• Attract, retain and motivate
• Increased interest in incentives
• Achieving pay in relation to performance

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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

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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

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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

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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

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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)

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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"

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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

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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

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Broad Banding-When Will it Fail?

• The organizations 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

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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.

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Characteristics

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

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Where is it Used?

• Building inspectors
• Police officers
• Engineers
• Clerical
• Firefighters
• Public works jobs
• Water and waste water operators

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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

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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

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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

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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

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Individual Based Incentives

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

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Characteristics

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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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More articles to read on these topics at

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