Minnesota Public Employer Labor
Relations Association
Summer Conference
August 23-25,2000
Objectives of This Presentation
• Discuss latest best practice
– Strategic focus
– Multiple systems to meet specific business unit needs
• Discuss New Directions for the Millennium
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Broad banding
Skill based pay
Individual incentives
Group based incentives
• Implications under Pay Equity Law
Strategic Compensation
• Aligning the compensation system with the goals and
objectives of the organization or organizational unit:
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Spend dollars to achieve greatest impact
Match productivity with results
Stimulate creativity
Enhance "ownership" value
Strategic Compensation
• The conceptual design of a compensation
program should be based on:
• The business environment
• The organizational environment
• Employee considerations
• The market environment
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
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
Current Executive Considerations
• Attract, retain and motivate
• Increased interest in incentives
– Achieving pay in relation to performance
Future Compensation Trends
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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
Systems to Consider
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Mix of reward versus entitlement pay
Individual versus group incentives
Performance measurement
Alternative reward approaches
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Broad banding
Skill based pay
Individual incentives
Group based incentives
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
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
Where is it Used?
• Jobs usually include (by rank order)
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Management
Trades and Maintenance
Clerical and Administrative
Professional and Technical
Uniformed (uses this method the least)
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"
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
Broad Banding - When Will It Work?
• When you want a pay structure which supports a flatter
organizational structure
• The organization strongly supports career development, crosstraining 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
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
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.
Characteristics
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Individually based pay vs. job based pay
Focus is on skill development
Encourages cross training
Permits flexibility in staffing
Where is it Used?
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Building inspectors
Police officers
Engineers
Clerical
Firefighters
Public works jobs
Water and waste water operators
Skill Based Pay - Advantages
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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
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
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
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
Individual Based Incentives
Individual based incentives include any plan(s)
that reward(s) individual employees for their
own performance or contribution.
Characteristics
• Emphasis is on individual performance or
contribution
• Types of plans include:
• Pay for performance
• Suggestion programs
• Recognition programs
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
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
When Will They Work?
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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
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
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
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
Example
• Baltimore County
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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
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
Disadvantages
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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
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
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
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
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
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
More articles to read on these topics at
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