Salary Compression: Practical Solutions to Prevent and Address Pay Inequities

Transcription

1 Salary Compression: Practical Solutions to Prevent and Address Pay Inequities FEATURED FACULTY: Shari Dunn, Managing Principal, CompAnalysis (510) X102 Upon receiving her B.A. degree in psychology from the University of California at Berkeley, Ms. Dunn headed to New York City to take a position in the human resources department of the Marine Midland Bank, and later worked at Nabisco in operations research. Returning to the S.F. Bay Area, she became a Research Associate for McKinsey & Co. Next, she moved to Deloitte (then Touche Ross) as a consultant. It was at these two prominent consulting firms that she became knowledgeable about the challenges associated with paying employees effectively, and also gained high-level strategic consulting experience. Recognizing the additional value of applied corporate experience, she then spent the next ten years in compensation management positions with Fibreboard Corporation, Boise Cascade, Bank of America, and Castle & Cooke, where she worked both domestically and internationally. In 1980, she established CompAnalysis, a consultancy dedicated to helping employers make successful compensation decisions. The firm has grown to become the leading independent S.F. Bay Area compensation management consulting firm, specializing in broad-based pay plans.

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3 Pay Compression Solutions: Planning as the Key to Prevention Shari Dunn, Managing Principal CompAnalysis, Inc. for Center for Competitive Management 1 What is Compression? Compression is a pay management issue characterized by inequitable pay. Inequitable pay in this case means that differences in pay are disproportionate to job, performance, and/or tenure dff differences. 2 1

4 Examples of Apparent Compression New hire paid more than existing incumbent in same position Subordinate paid more than or equal to his/her boss Salary of employee in lower graded job paid more than employee in higher graded job (assuming performance is equivalent) 3 What s Wrong with Compression? Engenders distrust Sabotages efforts to positively engage employees Presents evidence of apparent inequitable pay practices, either in reality or in the perception of the employees Could lead to loss of productivity, undesirable turnover, and possible allegations of illegal discrimination 4 2

5 What s Wrong with Compression? Limits employer s ability to achieve some or all of the organization s compensation objectives: employee retention internal equity & fairness cost effectiveness (under or over pay situations) legal compliance motivation of improved performance 5 What are Some Causes of Compression? hierarchical organizational structures having too many levels reactive hiring decisions relative to hot skills tenure based pay general increases poorly maintained salary structures failure to reclassify jobs as changes in responsibility occur 6 3

6 What are Some Causes of Compression? ORGANIZATIONAL HIERARCHY: job families with too many levels (inability to distinguish meaningful differences between levels) jobs leveled based on personal qualities such as education and/or experience, rather than on differences in levels of responsibility narrow labor market ranges that don t accommodate employer s designated number of levels organizational structure itself too many levels of reporting, including one on one reporting relationships, calling into question the legitimacy of the supervisory responsibilities 7 What are Some Causes of Compression? REACTIVE HIRING DECISIONS: job classification failure (inaccurate market data and/or internal job comparisons) hiring manager s choice to ignore compensation guidelines hiring anxiety being convinced that no candidates are available at designated pay level, plus urgent need blifi belief in anecdotal evidence listening i to candidates themselves, as well as search firms/agencies 8 4

7 What are Some Causes of Compression? TENURE BASED PAY: paying py more for long service regardless of job itself and/or performance (may occur when new supervisor is brought in to manage long service employee) 9 What are Some Causes of Compression? GENERAL PAY INCREASES: providing sameincrease percentagesto to allemployees year after year regardless of existing salaries (perpetuates existing pay inequities) similar to tenure issue doesn t differentiate based on factors critical organizational success such as performance focus is on increases, not on resulting pay 10 5

8 What are Some Causes of Compression? POORLY MAINTAINED SALARY STRUCTURES: failure to adjust structure(s) (ranges) annually based on labor market inflation failure to re design structure(s) to accommodate changes in company s size, reporting relationships, and/or any other developments (e.g., number of grades, distances between grades) 11 What are Some Causes of Compression? FAILURE TO RE CLASSIFY JOBS: allowing classifications to become out of date ignoring significant changes in job responsibilities, reporting relationships, qualifications, etc. not recognizing job specific market changes that indicate job classification changes to remain competitive, even when job duties remain the same (related to the hot jobs issue that can cause compression due to hiring decisions) 12 6

9 What are Some Solutions to Compression? 1. Engage organization in compensation planning; develop custom pay strategy based on desired philosophy 2. Design base pay structure(s) consistent with strategy/philosophy 3. Classify jobs independent of incumbents 4. Establish consistent salary administration practices; audit for legal compliance 5. Communicate plans and train managers 13 What are Some Solutions to Compression? COMPENSATION PLANNING & STRATEGY DEVELOPMENT: Collaboratively establish overall plan objectives Identify pay determinants (see chart) Decide on elements of pay (base, bonus, etc.) Create statement of pay philosophy Consider non monetary solutions 14 7

10 Determinants of Pay Differences What makes an employee valuable SKILLS Competencies Knowledge Intelligence BEHAVIORS Collaboration Communication Leadership Employee Working with others JOB DUTIES Activities Tasks Labor RESULTS Outcomes Contributors Productivity Goal achievement 15 Compensation Planning & Strategy Development Ties to company s overall business strategy, focuses on organizational goals Assures relevance Is an ongoing reference point and a guiding force Facilitates communication at all levels Minimizes resistance 16 8

11 Compensation Planning & Strategy Development Brief Example of Pay Philosophy: XYZ Company s compensation philosophy is to pay base salaries that are at least equal to the 60th percentile of the local market for comparable jobs. In addition, incentive bonuses will reflect both individual and team performance results, measured in terms of goal achievement. Pay decisions will not reflect employees tenure, nor will they be based on age, race, gender, or any other protected characteristic. 17 What are Some Solutions to Compression? BASE PAY STRUCTURE DESIGN: Tailor number of grades to organizational characteristics (type of hierarchy) Experiment with differences between grades Consider using job value structure instead of traditional ranges 18 9

12 Salary Structures Traditional (ranges) Job values (single dollar values) 19 Traditional Salary Structure TRADITIONAL STRUCTURES: Series of overlapping pay ranges (8 12% differences) Focus is on the increase percentage Not definitive Use of minimums & maximums (both words have a negative connotation) $

13 Job Value Salary Structure Series of Job Values $ Benefits of Using the Job Value Structure Facilitates pay administration consistent with defined pay goals and compensation philosophy, including pay equity Used properly, precludes compression problems Facilitates systematic budgeting for salary costs Simple to administer and communicate Series of job values replaces traditional midpoints; eliminates traditional minimums and maximums Salary adjustments based on definitive ideal resulting pay, not on increase percentages (scenario can change annually depending on budget) May be tied to performance or not 22 11

14 What are Some Solutions to Compression? JOB CLASSIFICATION: Classify jobs based on both (a) ()job specific labor market data and (b) internal job comparisons Audit for exemption status (can be a compression issue) Make sure classification represent jobs, not people 23 Job Classification Process Internal Analysis Published labor market surveys $ Wage & Salary Structure

15 Determining Job Values Measures job, not person Job Classification Process Combination of two indicators: internal (from job comparison process) external (from market data analysis) Results in recommended placement of jobs in pay structure consisting of series of job values 25 Labor Market Data Analysis Analysis & Interpretation Multiple survey sources used for each job, chosen for relevance on a job by job basis Comparisons based on job content, not titles Pay data aged to a common future date to reflect inflation Application of professional judgment in comparing jobs to the lb labor market 26 13

16 Job Classification Process: Internal Job Comparison Obtain specific job content information in addition to what is included in job descriptions Learnabout about jobs withmanagers; opportunity for managers to think about jobs from five perspectives Way to compare apples and oranges Way to tailor market ranges to internal structure Systematic, relative comparison process that is documented not arbitrary Focus on jobs as they should be performed not on people 27 Job Classification Process: Internal Job Comparison Comparison Factors Level of knowledge, skill & ability required by anyone holding the job Supervisory responsibility Contacts and working relationships Independent action Potential impact of job on the success of the organization 28 14

17 What are Some Solutions to Compression? ESTABLISH SALARY ADMINISTRATION PRACTICES: Focus on actual salaries resulting from increases, rather than on the increase percentages, as in merit increase matrices Adjust salaries based solely on job values and performance (if intended based on philosophy); audit for non discrimination Create standard hiring rates as a percentage of job value (midpoint) Change the terminology from merit increases to adjustments Consider focal point adjustments to assure consistency and budget adherence 29 Salary Administration Establish ideal pay scenario consistently and within budget: exampleonly: Job Value of $40,000 Top performers Excellent Performers Good performers New Hires/Development 110% of Job Value 105% of Job value 100% of Job Value 90% of Job Value $44,000 $42,000 $40,000 $36,000 Need Improvement 80% of Job Value $32,

18 Salary Administration CENTRALIZE THE PROCESS Making pay adjustments by consistently applying uniform criteria will: Eliminate compression Result in high level of explainable pay equity Improve retention of valuable employees Minimize legal risks Enables monitoring of application of available lbl funds where they are most needed in the organization 31 What are Some Solutions to Compression? COMMUNICATE AND TRAIN: Informed and educated employees and managers least likely l to feel plan is unfair fi Managers more likely to make pay decisions that don t result in compression Can be a legal defense Saves time making one off decisions; frees managers up to actually manage, focusing on jobs, coaching/training i i and performance measurement 32 16

19 Communication & Training Most employees feel that their pay is determined arbitrarily, and thus think it is unfair. If compression exists, their concerns might be justified. Without effective communication, they create their own story about pay. 33 Communication & Training Senior Management: make sure they support & understand plan Middle Management & Supervisors: provide them with tools to explain pay plans to staff Non Supervisory Employees: provide regular recaps of plan in allstaff meetings, via newsletters and on your intranet. t Reinforce and repeat the information. Include in employee orientation 34 17

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