As discussed in the last post, perceptions regarding pay for performance may vary by level in an organization. Although most would agree that no one believes their system is perfect, perceptions on how well this compensation strategy accomplishes it stated goals varies.
So, what are some of the steps taken by organizations where perceptions approximate each other across levels?
When examining successful programs, a number of practices correlate with those that experience success. Some of the major characteristics include:
• Ensuring support of performance and the utilized system at all levels of the organization;
• Considering performance management as a living system, not just a review process for allocating money;
• Making efforts to incorporate performance into regular discussions and interactions;
• Providing constant and consistent training to ensure that supervisors and employees understand how the system works;
• Evaluating managers on how well they provide feedback and coaching to employees;
• Seeking to link employee actions to organizational goals;
• Using an automated system that tracks interaction, outcomes, and reviews; and
• Utilizing multiple levels of review of scoring.
When examining specific process components, several areas are critical. Utilizing a national survey by HCS of 400 firms with more than 250 employees, the most common practices among successful organizations pertained to preparation, format, and review processes. The results of the survey appear in Figure 1.
As shown in the figure, most successful organizations train staff and supervisors. Approximately half (55 percent) offer quick prep sessions to remind supervisors of the process and helpful hints before the reviews are conducted. Almost 60 percent provide real time assistance during the review process to assist with resolving any review issues.
Although around only 25 percent utilize 360 degree evaluations, self-assessments are a key part of the process in approximately 58 percent of respondents. More than 60 percent give quarterly feedback and more than 90 percent require narrative in the review. During the review process, around 68 percent conduct calibration sessions, while almost 75 percent utilize multiple level validations.
Although each organization is different, these elements seem fairly universal among those that are successful with pay for performance.
A key element of the rise of human resources as a profession and an organizational partner relates to adding value. The more we can turn our scarce resources into outcomes of greater value, the more we benefit the organization. Put simply, value arises from putting less into a process than you get out. Moreover, success aligns closely with how well we maximize our resources to produce value on a consistent value. The human resource function possesses the capability to add value in two different ways: utilization of resources directly allocated to the function as well as advising the organization on how its overall resources can best be maximized.
Most of us seek to maximize value all of the time. In our personal and professional lives, we calculate if a potential cost or investment equals what we receive in return. Think about the last time you took your significant other out to dinner. When you weighed the different restaurant options, you probably compared location, atmosphere or ambiance, food quality, and service. You might have considered a pricy, yet fancy option that has nice lighting, cozy corners, fantastic service, and gourmet food. The type of place you leave after the meal not just satisfied, but impressed. Alternatively, a more moderately priced option might be more plain, but leave more money for other things. As part of making a decision, we attempt to estimate the relative value of each. In other words, would the extra comforts and enjoyment equal the additional cost or would the additional cost be better spent elsewhere?
This same type of valuing should be utilized when making decisions on the type of systems we utilize in our human resource functions. In an organization, the primary method of assessing value of a system is how well it supports desired outcomes. Lets look at an example. Compensation systems or how we reward monetarily plays an important role in every organization. Employees come to work for a variety of reasons, but take home pay represents one of those elementary components of the employee-employer relationship.
So, what should we assess our compensation systems with? There are three core criteria for assessing comp and class systems:
First, a system should be judged by how well it enables an organization to meet its strategic goals. The most appropriate system aligns with the organization’s strategic goals and objectives and reinforces the associated outcomes. Does your current compensation align with your organization’s strategic goals?
Secondly, the ideal system will encourage desired behaviors among employees within the organization. In other words, the system communicates what is important to employees and sets the standard for behavior, activity, and interaction. If an organization wants to perform at a high level, it needs a system that supports those types of behaviors and outcomes. Conversely, if an organization cares little about performance, the system needs to support minimum standards or uniformity. What does your organization communicate? What behaviors does it encourage among employees?
Finally, the ideal system will communicate to the market place the type of employer the organization is, so that potential employees can assess the match between themselves and the organization. High potential as well as capability candidates seek organizations that match their goals. The system demonstrates to a potential hire what is important to the organization. What are you communicating to the market? How is it impacting your ability to recruit desirable candidates?
Most of us have dealt with the compensation and classification system in our organization in one capacity or another. As managers, we use the system when we hire, promote, and evaluate while as human resource professionals the system provides the backbone for organizing work and defining the value work within our organization. Although the system serves many purposes, most managers and employees alike focus on how it sets value. As human beings, we have the tendency of equating our personal value with our income or pay. We view pay as a synopsis of our value to society as well as ourselves. As a result, compensation supersedes simply providing for our material needs and relates to who we are.
Most organizations recognize this perception, yet focus on creating and maintaining a system that ensures equity and management satisfaction. As a result, every organization possesses some balance between fairness or equity and making managers happy from a staff and resource allocation standpoint. Although we could discuss the management happiness element at length, I want to address the fairness component in this post. Most of us talk about internal and external equity on a regular basis, but stop short of describing what we believe forms or determines equity. Put another way, we have mixed views of how we should establish value and concentrate on equity in the general sense.
Every organization possesses some hypothetical balance between the three most common factors that create value: experience, skills, or results.
Experience formed the basis of the traditional way of thinking about value. The base assumption being that as an employee worked in a job longer, he or she became more productive and more valuable. Utilizing the craft model, an employee started as an apprentice and finished his or her career as a master with transition occurring due to more time on the job. This made sense in a pre-industrial and industrial world, but diminished in value as we entered the post-industrial period.
More recently, value has shifted to skills and away from experience. This change related to the acceptance of a threshold point where an employee becomes most valuable when reaching full competence with the skills relevant to the job and stays at that level over time. Although the time necessary to reach full competency varies by job and industry, most agree that somewhere between three and seven years captures the attainment of full competence. Unless an employee is an exceptional performer, this point would represent full market value for the job and the incumbent.
Today, results or outcomes determine value. In most organizations, individual value shifted from how long someone worked at a job to reaching full competence to being able to complete assigned work in an efficient and effective manner. Consequently, each employee’s value should relate to what he or she contributes to the organization.
Almost all organizations possess some combination of the three factors in their compensation and classification system, if not practices. The important questions to answer include:
How do you want to define value?
How will it will it support your strategic direction?
What type of employees will your mix attract?
These answers should form an important component of your compensation philosophy.
Most of us equate at least a portion of our personal value or identify to our job. Two of the main reasons for the lack of autonomy between the spheres relates to the percentage of our lives we spending working and the ever decreasing line between the workplace and home. As a result, when we combine the psychological with the actual requirements, most employees feel undervalued for the work they perform. Imagine how unlikely it would be to ask a group of your employees what they feel about their current pay and the response would be they are all overpaid.
As the labor market continues to recover slowing, more organizations want to know “what is this job worth?” Although the question seems straightforward at first, approaches vary and “devil is in the details.” Some of the most common approaches include:
Gut valuing encompasses using our intuition to make a quick decision regarding a person, situation, or event. Past experience and contextual analysis play into the decision, but little detailed or formal analysis occurs. A typical example is when a supervisor starts a discussion of individual compensation by saying, “I really think this person is worth x amount and not a penny more.”
A slightly better approach considers a person’s value to the organization as a whole. This method of compensation evaluation formally or informally ranks an employee by how easy it would be for the organization to continue to operate at its current level without the person.
A more refined version of the organizational value method considers the actual performance level of the individual employee. Either by formal evaluations or perceived personal contribution, employee compensation arises from who is a hard worker and who is not. Although performance should make up an important portion of the compensation calculation, many organizations utilize too much subjectivity in their determinations.
Each of these approaches set compensation more on a case-by-case basis. As a result, little empirical or comparable data comes into play in setting pay levels. Although this might not be significant in an organization with a single employee, as the number of employees grow, it becomes a serious concern due to fairness and equity requirements.
Evaluation involves assessing jobs to determine relative worth. Regardless if an organization adopts a formal or informal approach to determining value, two dimensions come into play: internal and external. The internal dimension pertains to how comparable a job is to similar jobs within the same organization, while the external dimension encompasses the relative value of the position’s pay compared to other local or regional employers. Once establishing the comparable value, most organizations determine the most appropriate placement.
As any organization looks at compensation, it is imperative that some form internal and external evaluation occur. Only through a more comprehensive analysis can an organization determine how fair and equitable it is, but what it can do to attract and retain the type of employees it desires.
As the economy starts to improve, more organizations are turning their attention to considering the best course of action for improving compensation competitiveness once resources become available. Not all organizations have resources available right now, but the number anticipating taking some action is increasing. A variety of recent surveys indicates that between 40 and 60 percent of organizations will take some type of compensation action this year. Although this is exciting since it will relieve some of the uncertainty and need in most workplaces, it is only part of the picture. Once identifying resources, the next big challenge is determining how best to allocate the limited funds. Although this might seem like a good problem to have, it does present some interesting as well as controversial decisions.
Most employee surveys reveal that the average worker desires that their reward account for remaining with their employer, taking on the work of others as downsizing occurred, and dealing with the general stress of their business attempting to survive in such trying times. When employees comment on their expectations, the central theme relates to “being paid back” for their investment as well as some form of compensation for “weathering the storm.”
The intersection of employee expectations, available resources, and employer judgment poses two key questions related to the next step:
Should a broad, all-inclusive strategy of allocation be employed or a more targeted approach?
Most organizations have to decide between a small “across the board” increase for all employees or consolidating scare funds into a finite number of strategic compensation actions. For an organization with a relatively stable market differential across the organization, an all-inclusive approach makes sense if resources are available. However, when there are market differentials by classification, job family, or location, it may not be the most advantageous approach when competition is a concern. As the economy continues to recover, these competitive fault lines move due to market forces and key staff may leave for better opportunities. Consequently, overall relative market position of the organization, market position of specific classifications, and demand of the priorities should all be factored into deciding on the best approach.
Should we try to make up for the last four years when resources were not given to employees or start from today forward?
Given the slowness of the recovery, most organizations will be unable and unwilling to allocate sufficient resources to “make an employee whole” in the next few years. If we extrapolate the pre-2008 trend until today, most organizations would need to increase current pay between 15 and 25 percent to “catch up.” Not only is the cost unrealistic, the benefit from the investment would be short lived since most employees would view the action similar to a debt repaid instead of a recognition of sound performance. Since the market as a whole remained flat over the last four years, most employees kept their pre-2008 relative position. Specifically, if I was five percent below the market in 2008, I should be approximately five percent below the market now. However, short of making up for lost increases and providing a reward, employees may not recognize initial compensation increases as worthy of the personal and professional challenges of the last four years. A middle position adopted by some organizations mixes a partial increase to address the past coupled with a small annual increase for the current year.
What should you do? It depends on where your organization was before the downturn, what resources you have now, status of your current market, and where you want to go in the future.
With the economy showing some signs of coming back, more employees are starting to hope that their patience and diligence from the last few years will be rewarded. In many organizations, we are entering year four or five without any type of sizable increase. As we have discussed before, the lack of raises has created a rather strong demand that employees anticipate being met. In other words, employees are waiting to be rewarding for “sticking with” their employer through a crisis that many associate with big business.
The good news is that more compensation money seems to be on the way.
A recent survey by Glassdoor.com found for the first time since 2008 that there were more raise optimists than pessimists or more people believe there will be raises than believe otherwise. Among the 2,000 workers included in their Employment Confidence Survey, 43 percent expected a raise in the next 12 months. Moreover, 46 percent expected their company outlook to improve in the next 12 months for a six point increase over three months ago.
The interesting news is that pay practice may have changed for now.
Aon Hewitt most recent compensation survey of 1,500 companies found that employers plan to increase pay on average 2.9 percent in 2012. The increase to almost three percent is a definite improvement over the low point of 1.4 percent in 2009, yet still below the high flying days before the economic downturn. One reason why this number may seem better than it really is relates to how this pay is provided. Most companies when they have wanted to reward stars during the downturn have utilized more flexible pay strategies, such as bonuses or uniform allotments. The Aon Hewitt study found that 90 percent of surveyed companies have been providing one time bonuses to various employees.
Similarly, a recent HCS survey confirmed that more than 60 percent of respondents are not going back to previous compensation practices, but moving to more strategic approaches. The emphasis of decision makers is on improving future performance and increasing the quality of applicants. There is less concern for rewarding those that remained with the organization during the downturn or even those who increased productivity to do more with less as workforces were reduced. Put simply, there are numerous organizations that feel that keeping a job is payment or reward enough.
What do these changes mean when money starts to become available again?
Organizations are going to be more careful and use flexible pay options.
Human resource leader need to examine the short and long term consequences of this change related to recruitment, engagement, and retention.
Employees will need to receive large enough increases to offset their disappointment of not “being made whole.”
Differentiation will be more important as organizations focus on performance more than equity over the next few years and tools and procedures need to be robust enough to endure the extra employee scrutiny.
The raging debate over if the public is paid more than the private sector has heated up since the beginning of the recession. Although think tanks, compensation professionals, and other leaders in both sectors have been discussing the evidence for more than a decade, the question has come to the forefront in the last three years. The major reasons for the renewed momentum since 2008 relate to the difference in the impact of the downturn on employment in the public compared to the private sector coupled with a desire to reduce public spending, the size of government to better align with current tax revenues, and the magnitude of future public pension liabilities. Recent events in Wisconsin are a good representation of the debate that is going on more nationally: (http://www.washingtonpost.com/wp-dyn/content/article/2011/02/22/AR2011022205319.html). A key element of the Wisconsin debate relates to equity and fairness of total compensation. A sample of a few of the recent news stories comparing total compensation between the sectors include:
The last article from the Kansas City Star summarizes the public verses private pay question in the following terms: “There’s no hotter debate in America today than whether government employees are overpaid.” I was working with an organization in Kansas City the day the article came out and was asked about the public verses private pay issue in general and the Bureau of Labor Statistics study that underlines the article, specifically (http://www.bls.gov/news.release/ecec.nr0.htm).
In reviewing the analysis behind many of the reports, there are common weaknesses across each. Most of the studies comparing public and private compensation focus on aggregate averages for both sectors. The creation of this “large soup” gives a good indication of the central tendency of each market segment, but does little to truly compare both sectors to each other in a meaningful way. As with any salary analysis exercise, there are three similar key elements that need to be kept in mind:
Most comparisons include businesses of all sizes as well as government entities at all levels and size. Instead of looking at components of the markets that are similar, all industries are included. The private sector includes approximately 1.2 percent agriculture, 22.2 percent industry, and 76.7 percent services (2010 estimates) while the public sector looks more like a combination of a small portion of industry and the middle and upper end of services. Obviously, if we limit the private market to only those segments similar to government the results would be different.
Just as the markets are not the same, the jobs as well as the concentration of jobs are not the same across the sectors. Each sector has jobs of different types and levels, but they do not overlap perfectly. In other words, the concentration of a type of job is not the same when comparing both. Moreover, there are differences in compensation that are job specific based on the level of job and the unique market position relevant to the job. An example of this finding appears in: (http://www.bloomberg.com/news/2011-03-09/nyc-less-educated-workers-out-earn-private-sector-study-shows.html)
The similarity we should consider relates to differences in the work requirements, level of unionization, methods of reward, and organization size. The Bureau of Labor Statistics (BLS) recognizes these differences are present and includes a warning in most press or report releases. These differentials are important and should be controlled for as part of any comparison of the public and private sectors.
Whenever we discuss compensation, it is always tempting to invoke the “apples to apples” requirement. Basically, we want to make sure that our comparison is good between the divergent items we are examining. As more work is done to examine differences between public and private compensation these factors need to be kept in mind for salary as well as total compensation comparisons.
Up to this point we have looked at how to make the labor market survey process successful. We have discussed the questions to ask, how to structure the survey based on the information desired, and how to ensure the analysis gives us what we want. Now, I want to turn toward some of the challenges that we all face when interpreting and relaying the market information. Any time numbers are involved and we fail to receive the result that we hoped for we start to question the numbers. It is similar to when the losing coach questions the officiating after a loss occurs and explains his or her team’s lack of success within the context of the calls made on the field. If we do not receive the outcome we anticipated or meet our goal, we question the process. This trait is so ingrained in us that it is easy to make that argument before even seeing the results of the analysis.
What are the most common complaints? There are three that come to the forefront the most often:
Our organization is unique
My job is unique
Things have changed
Our Organization is Unique
One of the most common statements I hear from employee groups is that their organization is completely unique. Although most organizations have some unique components, processes, or structures, most organizations have more in common than unique characteristics. Part of our very human nature is to define ourselves through a complex identity related to place, group, and interests. This instinct or comfortable perception helps us feel part of something and is an important part of most organizational cultures. Nevertheless, while it is beneficial for organizational cohesion when present at the organization- wide level, it does not define the labor market place only the organization’s placement in the market. In other words, as unique as we want to be in the market, all it does is define our perceptional positioning among new hires and our turnover rate among those seeking new opportunities. As a result, uniqueness does not preclude our organization from market forces, it is just one portion of what helps place us in the market.
My Job is Unique
The typical follow up to the first concern is regarding the individual jobs of the organization. Basically, the comment is normally something like: “no one does it like we do work here, so you really can’t compare us to anyone.” Most of us want to believe we offer something that combines unique skills and abilities that could not be found in another living soul. Again, this is part of the identity definition we all create of ourselves. Most analysis shows that there is more variation in jobs than organizations. A common cause for job uniqueness that has been exacerbated by the recession is job blending. As most organizations shrank their workforce, the number of tasks each employee performed increased. In some cases, the increase was more volume, but in others it was new tasks outside of the typical work assigned. The best ways to address blended jobs in the survey process is to collect data for components of the jobs and use the highest paying as the comparable or combine and weight the components.
Things Have Changed
A survey of any type is a snapshot in time. The market is always changing. If during your process you feel the market has changed significantly since the snapshot was taken, then aging or adjusting the data may be necessary. Another more time consuming option is to recollect the portion of the data that might have changed. A good rule of thumb in calculating the impact of change is to examine the amount of elapsed time and the cost of living change during the period. The cost of living amount can be utilized as a multiplier to “age” the data. Another option is to examine a secondary survey collected more recently and examine where the reviewed jobs fall in the newer survey.
We live in an era when data is king. Now more than ever, everything is counted, analyzed, and reviewed in almost every facet of our lives. Over the last several decades, most organizations have significantly increased the amount data available, but are struggling now with how to analyze it in a meaningful way that actually benefits their organization. Labor market analysis is no different. Strong advances have been made in data collection and now we more data than ever before. However, how we analyze the data, what it actually means, and how we use it to manage compensation are concerns most of us deal with on a routine basis. A simple illustration of a single job that I have used with clients demonstrates the importance of answering these questions.
If we collect data on a job that pays $25,000 at the midpoint from three peer organizations. In most markets, we would want to collect more than three peers, but three are utilized in the illustration to keep it simple. Figure 1 summarizes the results of each peer. The matches vary in staffing, midpoint pay, and match quality. In this case, the largest employer pays the most at $25,500 while the smallest pays the least at $23,000. However, the smallest possibly due to duties assigned, span of control, or differences in organization of work is a less than ideal match. Figure 2 presents four common methods of analyzing the results in Figure 1.
Figure 2 reports some rather large differences in results. Moreover, the conclusions with these results would be quite different. A simple average would indicate that the employer is paying approximately three percent greater than the market. The weighted average taking into account the size of the respondents finds that the employer is ten percent behind the market. The matched average or average that includes weights for the quality of the match shows a less than one percent differential. The refined match which weights after dropping the weakest matches places the employer about one percent behind market. It should be evident that we could draw very different perspectives on the market placement of this job depending on the approach we select. Furthermore, this issue is exacerbated by the fact that these differentials are magnified by the volume of jobs included in the analysis.
So, is this job ahead, behind, or at market? Should we take some type of action? The only way to answer these questions is to have more information before, during, and after the analysis process.
The biggest thing is to really take the time to understand the meaning of the data as well as the analysis. There are three major steps we can follow that will minimize the chance we have these quandaries:
Summary of the analyzed classifications
Analysis of results
Overview of significance
Summary of Analyzed Classifications
The first component of the analysis as well as reporting process should “set the stage” for the analysis results. The minimum that should be presented is the name of the classification, a short description of the class, current pay range, and distributional characteristics of the associated range. In addition, relevant survey data should be added to the summary that includes number of respondents, type of respondents, quality of each match on some rating scale, and any distributional concerns related to the respondents. Now that the reader can understand the source, relevance, and scope of the data, the results can be presented in a more meaningful way.
Analysis of Results
There is some debate over the analysis and presentation of results in a labor market survey. Typically, results are presented in a number of ways to capture the relative position of the market vis-à-vis the employer conducting the analysis:
Ranges values(minimum, midpoint, and maximum)
Range spread (percentage)
Actual salary values
There are two differing points of view related to the best method of comparative analysis. The first camp favors range comparison as the best method of assessing market positioning. The merits of this approach include ensuring that the breadth of options are included in the analysis, potential earning power is taken into account, and individual actions have less effect on overall results. The opposing camp focuses on comparing actual salaries. This approach centers on the differentials that exist in actual individual pay and provide a snapshot of actual pay practices. However, it suffers from comparability weaknesses related to mitigating factors that all impact compensation levels, such as time in class, longevity, pay increases, and general pay plan mobility.
Once the unit of analysis is selected, the results should be summarized with the following:
Overview of the Significance
Once the data is collected and analyzed, it must be interpreted. What does it really mean? A good set of questions to ask to assess the significance for each job pertains to the type of respondent: talent competitor, similar industry, or regional leader. A talent competitor takes employees from your organization as well as you recruit from them. Data collected from a similar industry would be relevant since the products and services produced by the organization most resemble that of the employer conducting the study. A regional leader is typically a large employer that possesses the size and influence to define and adjust the resources and perceptions in the labor marketplace.
Matching or determining what goes together is a basic human cognitive ability. If you have children, you probably witnessed the surprising desire and ability of very young children to put similar things together. More than once, I wandered through the house looking for a missing toddler to find her building a mountain of shoes, dividing folks from knives on the kitchen floor, or placing different colored CDs in different piles. My niece has grown up in a household full of pets. My sister loves animals and has added to her collection regularly over the last 20 years. When my niece was young they had a dog. She learned to call it a “doggie” and laughed a very contagious laugh whenever she saw the family pet. In time, my sister added a cat to her household. The cat was similar in color to the dog so it became a “doggie” too. When we are children, we build in a systematic fashion on the knowledge we already possess. My niece built on her image of a dog and decided the cat was the same since it had four legs, fur, ate out of a bowl, and was fun to pet. She loved to play fetch with the dog and in time discovered that the cat was not a “doggie” since no matter how many times she threw a stick the cat just sat there and stared at her.
The twin determinants of basic validity of a labor market survey are which jobs are included and who are the competing organizations. Both are heavily impacted by how well we complete the matching process. If we make incomplete assumptions about “similar” jobs or organizations, we may find like my niece that not all four legged creatures are the same or do the same things. As was discussed in the last post, there are some basic questions that need to be answered before we create our labor market survey. We should strive to match our survey process as close as possible to what we want to accomplish.
Once we have these answers, we should ask the following questions to ensure that we have good data for matching:
What jobs should be included?
What organizations should we compare ourselves to?
What do we want to compare?
What jobs should be included?
Once we know the parameters of what we want to know, comparable or similar jobs need to be selected. Although some of us might plan to survey every job in our organization, only the smallest of entities will be successful at a comprehensive approach due to time and resource limitations on your organization as well as those responding. The selected jobs need to be representative of the family or series being analyzed, represent a significant number of the current incumbents in that family or series, and comparable in your relevant market. This list can be created by human resource professionals, functional managers, or discussions with employees. The factors that we need to know about the jobs for peer matching purposes include function, duties, reporting relationship, level in family or series, and job scope (financial or non-financial). Job selection and job matching once the data is collected are the most critical elements of the survey effort.
What organizations should we compare ourselves to?
Once we know the jobs we are concerned about, the organizations for comparison should be identified. This question is best answered broadly and then in a most specific manner. Defining the relevant labor market is the first step. This geographic area represents the pool that your organization can lose as well as take employees. Within that pool, similar organizations needs to be identified based on similar services, division of labor, staffing, size, location, and market practices. Once the data is collected, this should be revisited to ensure appropriate comparison.
What do we want to compare?
The last major question pertains to the actual data that will be made available after completing the collection process. Some of the most common data includes base salary, total cash, non-cash payments, and benefits. The survey could ask about ranges, averages, medians, distribution (percentiles), or actual values. In order to understand how an organization got to where it is, it is becoming more common to ask about how employees are reward and how they impacts their pay level and position.
Now that the survey is created, it is time to discuss the analysis.