M6 - Administering and Evaluating Base Pay Programs Flashcards
Monitoring Pay Levels – Paying Outside Range or Band
Monitoring Pay Levels – Paying Outside Range or Band
Red circle rate – employee paid above range maximum
Causes:
-Demotion
-Goldstar – high potential employee
-Reorganization or acquisition
-Ranges may need adjusting, if many people are above maximum
Suggested Actions:
- Freeze pay
- Less frequent increases
- Reduce base pay and make up differences with lump sum
- Reduce salary (not recommended / rare)
- Promote employee to higher level job they can perform
- Give lump-sum increases in future
Green circle rate – employee paid below range minimum Causes: -Recent promotion, then range moves -Hired at minimum, then range moves -Job re-evaluation -Reorganization or acquisition
Suggested actions
- Raise pay to new minimum when range moves
- Raise pay to minimum – don’t allow green circles
- Separate merit budget from adjustment to minimum
- Evaluate to see if position is properly graded
Caution: green circles can create possible legal issues
Compression
What is compression?
The difference between two grades or in certain instances when the pay difference between two employees is too small
What causes compression?
- New hire pay rates are higher
- Supervisor / subordinate total pay (overtime included)
- Midpoint differentials too close
- Automatic increases
- Merit pay inadequacies
- Unionized environment
Symptoms of compensation planning problems – Problems associated with pay compression should be treated as symptoms of compensation planning problems.
Solutions:
- Review pay structure
- Establish midpoint differentials (15% to 25%)
- Use merit pay
- Reclassification, add additional job duties
- Rotate overtime
- Use additional work / life issues
- Utilize lump-sum increases
- Make market adjustments
- Include supervisors in an incentive plan
Maintaining Pay Structures
Maintaining Pay Structures
- Review benchmark jobs to ensure validity and re-price based upon analysis
- Re-evaluate jobs which have changed sufficiently to bring grade into question
- Re-evaluate competitive posture of the organization
- Review internal equity and external competitiveness – Review current pay system to ensure both internal equity and external competitiveness
- Adjust “policy line” (regression line or line through midpoints)
- Evaluate impact on salary increase budget
- Management understanding of how the plan operates and how it affects their department / organization
Keeping Salary Structure Current
Keeping Salary Structure Current
Review compensation strategy and competitive posture
Determine competitive pay movement in your market(s)
- Historical: competitive pay movement between the time of the survey and the start of the salary administration plan year
- Future: anticipated competitive pay movement during the new salary administration year
Consider COLA or just market movement – Should you consider COLA or just market movement?
Determine the amount for adjustment – Based on the competitive analysis, determine the amount for structure adjustment:
- Do you apply an equal percent to all grades?
- Do you change midpoint differential, overlap and spread by applying an unequal percent?
Base Pay Program Review and Audit – Considerations
Base Pay Program Review and Audit – Considerations
Ultimately, base pay compensation programs must tie back to the organization’s strategic plans. This is accomplished by maintaining alignment of the compensation strategy, HR strategy, business strategy and mission. With this alignment assured, communication, implementation, administration and evaluation will serve to maintain the base pay program. Ongoing evaluation that drives design modifications will maintain the currency and effectiveness of the program.
External / internal equity
- Are the salary ranges or broadbands competitive?
- Are vacancies filled in a timely manner?
- Does the salary program link to turnover rates and pay levels?
Job information / job descriptions
- Current?
- Document essential job functions?
- Job titles reflect job content?
Salary ranges and broadbands
- Are all positions assigned to a range or band?
- Market pricing process?
- Process understood and credible?
PAY POLICIES Compa-ratios: -Overall ratio? -Competitive versus midpoints? -Control over fixed salary expenses? -Percent difference between midpoints? -Salaries in relation to assigned range?
Job Evaluation
- Competitive / equitable ranges?
- Relationship between results and market based salaries?
- Do compensable factors reflect view of job value?
- Revaluation time frames?
Salary increases
- Based on performance?
- Relationship between increases and performance?
- Salary compression issues?
Promotional increases
- Are promotional increases provided?
- Relation to merit increases?
- Consistent application of policy?
- Exceptions to policy?
Salary program guidelines
- Written salary management program guidelines
- Communicated to employees?
- Administered consistently?
- Exceptions managed and documented?
Legal compliance
- Federal and local regulatory requirements?
- Classification process in place?
- Variable pay classifications?
Internal Audit
Internal Audit
Who conducts the audit? Typically HR or the design team consisting of: -Senior management -Operations management -Employees -Outside consultants
When to audit?
- Review and audit is part of a continuous improvement process.
- Usually a good time to conduct an audit is after a program cycle is complete.
How the process is planned?
- Audits need to be comprehensive, structured, detailed and planned according to schedule.
- Collect baseline information, measure results and review survey / other feedback.
- There should be a timetable.
What to do with findings?
-An audit will identify issues – it will not solve anything. -Follow up with appropriate actions.
Valid information – It is important that information provided to audit team is valid, unbiased, clear and verifiable.
Selecting Evaluation / Auditing Criteria
Selecting Evaluation / Auditing Criteria
Relative importance of criteria will be specific to the organization or organizational unit at a specific time and will be valid for an uncertain period of time. Take care not to let criteria become important simply because they are easily measured.
Acceptance by interested parties
- Ownership
- Management
- Employees
- Third parties representing employees
Compensation costs
- Cash outlays
- Creation of liabilities
Impact on organization’s performance
- Customer satisfaction
- Profit
- Growth
- External image
- Market penetration
Human resources effectiveness
- Ability to attract and retain critical skills
- Effectiveness of human resources utilization
- Effectiveness in developing human resources / capital
“Goodness” characteristics of strategies / programs
- Fair
- Competitive
- Understandable
- Acceptable to stakeholders
Measures
Measures
Evaluations are about measurements. The measurement used depends on the objectives of the program. The program is not complete until it is determined whether or not it achieved its objectives.
Results
- Objective: attract and retain qualified employees
- Question: Do existing programs add value and achieve results?
- Results measurements: number of openings, duration of openings, number of resignations
Process
- Objective: reduce management time on program administration
- Question: Are managers spending too much time administering rewards programs?
- Process measurements: backlog of requests for performance appraisals, timeliness of pay increase process
Compliance / alignment (policy and legal)
- Objective: improve pay relationships of employees relative to policy and market considerations
- Question: Is the program aligned with policy and program objectives?
- Compliance / alignment measurement: actual rates and ranges versus market position specified by policy, compa-ratios, percent of employees outside pay ranges
Documentation
- Objective: maintain currency of files and comply with legal requirements
- Question: Are files up-to-date and in compliance with regulations?
- Documentation measurements: percentage of outdated files, internal audit results
Performing Technical Audits
Performing Technical Audits
Evaluating a program can consist of a technical audit of program features and the results it produces. The results of the technical audit may lead to the design of a new program, a redesign of the existing program or no change in activity.
Measure actual results against intended results (per policy)
- Measure what is done
- Measure how it is done
Identify sources of malfunctioning
- Failure to adhere to policy (Lack of understanding or Unwillingness to adhere to policy)
- Policy in error
Identify potential “fixes” to methodology / process
- Change policy
- Modify communication / retrain to improve understanding of policy
- Improve processes (participants, their roles and how they act)
Review program fairness and pay delivery
- Participants in process
- Role of participant
- Equity of rules
- Involvement of affected parties
- Access to effective appeal mechanisms
Conducting Perception Audits
Perception audits measure what people think is happening or is supposed to happen. This is done less frequently than technical audits. Attitude surveys have been known to raise expectations. Surveys have also been known to tell management more than management was willing to hear. However, if one intends to measure the true effectiveness of a program, it is not possible to ignore the perceptions of its stakeholders.
Identify various interested parties such as:
- Executive management
- Operating management
- Employees or employee representatives
- Regulatory agencies
Measure perceptions using qualitative data collection methods
- Employee surveys or questionnaires developed in-house. Example: “How do you think the company’s pay levels compare to similar employers in this area?”
- Ask parties to come forth with their opinions
- Use a third party to survey stakeholders using standardized questionnaires, focus groups or interviews
Analyze “gaps”
- Actual versus perceived
- Intended versus perceived
Identify potential fixes to programs or policies
- Communicate to reduce misperceptions
- Re-educate managers and employees on what is intended
- Revise or clarify policies to change actual results (if other than intended)
Applying the Results
Applying the Results
Once the compensation program review and audit are completed, the evaluators should prepare a report of essential findings to be shared with the CEO, executive management and the compensation committee of the board, as appropriate.
Executive summary
- Summary of objectives and methods
- Executive interview themes / implications
- Focus group themes / implications
- Survey results
- External analyses results
- Internal reviews of specific programs
Action Plans
Action Plans
Results from technical and perception audits will guide actions to be taken. Audits will often confirm current practice. Remember that making program changes purely for the sake of change is not prudent and is not an efficient use of resources.
Elements of an action plan include:
- Objectives
- Work steps required
- Individual rules and responsibilities
- Deliverables
- Projected costs
- Target completion dates
Recommendations for actions include:
- Strategy revisions
- Program revisions
- Administrative policy revisions
- Communication / training
Outcomes:
- Positive effect on the organization
- Positions HR as a strategic partner
- Enhances employee perceptions and attitudes toward the organization • Assures management of program effectiveness
Program Management Cycle
Program Management Cycle
Visual of an ever-looping flow chart:
Corporate vision/mission –> business strategy –> HR strategy –> total rewards strategy –> program design & administration –> program evaluation revise or enhance
Ultimately, base pay compensation programs must tie back to the organization’s strategic plans. This is accomplished by maintaining alignment of the compensation strategy, HR strategy, business strategy and mission.
With this alignment assured, a program management cycle of design, communication, implementation, administration and evaluation will serve to maintain the base pay program. Ongoing evaluation that drives design modifications will maintain the currency and effectiveness of the program.
Q1: Which of the following is a typical approach used to correct green circle rates?
A) Giving increases less frequently than the normal schedule B) Lowering the pay and giving the amount outside the range as a lump sum C) Granting 3% increases every four months until pay equals or exceeds the range minimum D) Giving the amount below minimum in a lump sum
C) Granting 3% increases every four months until pay equals or exceeds the range minimum
Q2: What best describes an effective approach to reducing supervisor and subordinate pay compression? A) Ensure that supervisor and subordinate midpoints are 5% apart. B) Include supervisors in an incentive plan. C) Eliminate overtime for hourly employees. D) Offer spot bonuses to top performing hourly employees.
B) Include supervisors in an incentive plan.
