5 Steps to Simplify Your Compensation Program

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As Compensation professionals we are often asked if there are key ways 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 and 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. 

A good example of this type of program can be found in the State of Nebraska.  In their program a number of broad classifications were determined that included 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. 

Recently Wal-Mart moved to a classification-based compensation system. The new plan divides workers into seven classes. Starting wages are clearly defined, as are progress from class to class.  Under the plan, annual raises are set at a flat rate, not a percentage of salary. Those with a "standard" annual evaluation would get 40 cents more an hour. Those "above standard" would get 55 cents.

Step 2: Reduce the number of pay grades and salary ranges by moving to a "Broad-Banded" pay system. 

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

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 is intended to support agile, flatter, faster-paced, de-bureaucratized organizational cultures. Broadbands are imperative for companies with competency-based pay programs, but are also used in companies with longevity- and performance-based pay programs.

Before moving to broadbanding, companies should 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--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, towards competency-based performance management systems.  According to research from SHRM, these performance management systems are designed to reward employees for their knowledge, skills, and competencies. The design and development of these systems are not as straightforward as in a factory or service setting, where a company can build compensable skill blocks around the skills needed to produce tangible products or deliver specific services. However, three factors stand out to further explain why competency-based plans are worth the attention:

1. The decline of the job as we know it today (i.e., many firms increasingly view the job as an anachronism — a dated concept);
2. Many firms that have successfully built skill-based 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 the base pay and instead allow for a bonus system.  

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.  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 and 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.  The following is a brief summary from About.Com on the latest legal implications of employee communications methodology.

The National Labor Relations Board (NLRB), in a ruling released on July 25, 2001, decided that the seven employee committees used by Crown Cork & Seal Co., at its Sugar Land, Texas aluminum-can manufacturing plant, do not violate the National Labor Relation Act's ban on company-sponsored unions. An earlier NLRB regional office finding in favor of the employee who originally filed the suit was overturned by an administrative law judge in February, 1998. At the Crown Cork & Seal plant, employees on teams made decisions about production, safety, and other workplace issues. The NLRB ruled that the employee teams could not be classified as labor organizations since they had 'supervisory' authority to plan and implement their decisions.