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Introduction to Job Evaluation SHRM White Paper 8/1/1997 By Kenneth H. Pritchard, CCP,Reviewed July 2002 Overview Job evaluation is a formal process for determining the relative value of jobs based on job content, with emphasis on such factors as skill, effort, responsibility and working conditions. Job evaluation may contrast with or complement market pricing, which uses the labor market to set the worth of jobs. A key benefit of market pricing is its emphasis on external competitiveness; however, a big drawback is insufficient and/or unreliable market data for all the jobs in the organization. Accordingly, job evaluation in some formeven a simple one, such as slottingis needed to supplement a market pricing approach to the valuation of work. A key benefit of job content evaluation is internal consistency. Another is utilityall jobs can be evaluated based on content. Organizations use job evaluation to: Ensure compliance with legal requirements, including federal laws and regulations on equal pay and state/provincial or local ordinances on comparable worth. Establish a rational, consistent job structure based on value to the organization in terms of each job's complexity, importance and/or other factors (with or without reference to market valuation). Help provide a basis for pay-for-performance. Assist in establishing pay rates and structures that are competitive. Contrary to popular belief, some job evaluation systems are intrinsically linked to or validated by the market. However, market sensitivity is sometimes a problem with job evaluation. Solutions include pay setting flexibility for new hires and special pay programs, often called "market rates" or "special rates." The market and content approaches to the valuation of work both require work analysis. Work analysis for the market pricing approach is relatively quick and elementary. Work analysis in the content evaluation approach takes longer and is more involved in most cases. In the job content evaluation approach to valuing work, the evaluator determines the relative value of job content by applying a job evaluation system. The process for evaluating each job may be very complex and time-consuming (for example, rating the job on 187 items of the Position Analysis Questionnaire, PAQ), moderately complex (assessing job elements against evaluation factors using the Factor Evaluation System, FES, or one of its many clones) or very simple (ranking one whole job against another). Likewise, the job evaluation system itself may be technically complex and hard to explain (factor analysis used to empirically derive the job dimensions and standard equation no. 2 of the PAQ), moderately complex (regression analysis used to weight factors in the FES or other pointfactor systems) or very simple (using the paired comparison technique to rank-order the benchmarks against which all other jobs in the organization are slotted). Methods and Systems There are thousands of different job evaluation systems now in use. Each entirely or mainly uses one of about a dozen primary technical approaches, such as the factor comparison, point-factor, job component, definition, ranking and slotting methods. Each method, and thus each system, is either quantitative or non-quantitative. Three important, but quite different quantitative systems are the PAQ, the FES and the Hay system. Though not widely used, the PAQ is renowned in the field of industrial/organizational psychology for its technical excellence and usefulness in job evaluation, selection and related HR program areas. The FES, used by the Federal government to evaluate its white-collar jobs, extended early point-factor methodology and is widely copied, in technique or actual content, by many other systems used in the public and private sectors. The modern Hay system, properly called the Hay Guide Chart-Profile Method of Job Evaluation, is extensively used in the private sector to evaluate executive, managerial, supervisory, professional and/or nonexempt white- and blue-collar jobs. Its use in the public sector is growing. The 187 job elements of the PAQ are standardized. The standard job evaluation equation (factors made up of combinations of the job elements and their weights) is empirically derived from the market place. Factors and their weights can be customized for an organization, but most use standard equation no. 2 which, because it is proprietary, can be seen as a "black box"the job analyst enters ratings for each of 187 job elements into a computer that "mysteriously" produces the job evaluation point total. Compensable factors, degrees and weights of point-factor systems, such as FES clones, can be validated by the market, but rarely are. FES-type evaluation systems are usually wholly or partially customized for an organization, while Hay Guide Charts developed for an organization typically have both standard and custom features. Two relatively well known nonquantitative systems are the Federal government's Federal Wage System and Hay's CompuGuide. System Development, Implementation and Operation Some steps in the system design-development-test/evaluation-implementation cycle are tied to the methodology and/or the specific system to be used; others are nearly universal. For example, a typical system implementation project has these common steps: 1. Specify parameters of the project, and gain approvals and support. 2. Determine evaluation method/system to be used. 3. Collect job data consistent with the method/system (what content is valued?). - Specify data collection techniques and design or adapt data collection instruments. -Collect data, ensuring adequacy and accuracy. 4. Analyze data, document job content and evaluate jobs. 5. Develop job worth hierarchy: use points to establish exact position in hierarchy, group jobs into grades based on appropriate breaks or take another approach that is fair, understandable, defensible and practical. 6. Allocate jobs (via grades, for example) to the existing pay structure or develop a new one. 7. Document system development (for use if challenged) and establish operating procedures, including process(es) for reconsidering decisions and/or a formal appeals procedure. 8. Gain final approvals. 9. Implement and administer system. In addition, most organizations should employ a robust management-employee communications program to keep everyone informed. Consistent with the universal steps, typical system-specific steps for a quantitative approach to job evaluation (point-factor methodology in this example) are: 1. Select compensable factors. 2. Define degrees for each factor. 3. Determine values (weights) for factors and degrees. 4. Apply these criteria to each job to derive points on each factor and obtain a point total. 5. Allocate each job to a grade (range of points) or exact position in the hierarchy based on total points. Typical system-specific steps for a non-quantitative approach to job evaluation (whole job ranking methodology in this example) are: 1. Identify and briefly describe the benchmarks (jobs identified as key based on employee count, importance to the organization and other considerations). 2. Rank order them into a hierarchy through paired comparisons (which job in each comparison is "better" than the other overall?). 3. Slot the remaining jobs by comparing each to the rank-ordered benchmarks. Slotting then becomes the operational method by which new jobs are evaluated. Slotting can also be used to supplement, or as an alternative to, an established quantitative approach by comparing critical job elements of the job to be slotted to those of jobs already allocated to the organization's job worth hierarchy. However the organization's job worth hierarchy is established, job evaluators continue to use job content to place value on new and changed jobs. Some organizations use market pricing as a check on job evaluation. Pay rates in organizations using the job content evaluation approach to the valuation of jobs are set by reference to the market, collective bargaining or other means. Considerations and Closing Key considerations for organizations contemplating job evaluation are: Will job evaluation provide substantial benefits to the organization? Which method/system should be used? Should more than one method/system be used; for example, one for exempt, salaried jobs and another for nonexempt, white-collar jobs? Will the organization apply the system(s) equitably? Will the organization commit the resources needed to develop, implement and operate the system(s) over time? Job evaluation is useful for many reasons. It can serve an organization well. Persons needing more information about job evaluation as a means to valuing work should consider the references below. Selected References Ghorpade, Jai. A Handbook for the Human Resource Director. (Englewood Cliffs, NJ): Prentice Hall, 1988. Hackett, Thomas J. and Valerie C. Williams. "Documenting Job Content, An Approach to Job and Work Analysis." American Compensation Association Monograph, 1993. Henderson, Richard. Compensation Management...Rewarding Performance. (Englewood Cliffs, NJ). Prentice Hall, 1989. Lister, Brenda J. and Andree Mercier. "Evaluating Job Content, An Approach to Establishing a JobWorth Hierarchy." American Compensation Association Monograph, 1993. Michael, Hartmann and O'Farrell (Editors). Pay Equity, Empirical Inquiries. (Washington, DC): National Academy Press, 1989. Pritchard, Kenneth. "Introduction to Work (Job) Analysis." SHRM White Paper, August 1997. Pritchard, Kenneth. "Job Descriptions--An Overview." SHRM White Paper, April 1995. Compensation Series Part II: Job Evaluation SHRM Briefly Stated 7/1/2004 Definition of Job Evaluation Job evaluation is the systematic determination of the relative worth and value of jobs within an organization. The job evaluation process determines the relative worth of each job by establishing a hierarchy of jobs within an organization. Job evaluation is conducted following the completion of a formal job analysis, which focuses on the delineation of job duties and responsibilities (i.e., a job description) and essential knowledge, skills and abilities (i.e., job specifications), after all pertinent job requirements have been defined. For more information on job analysis, read Compensation Series Part 1 . Job evaluation provides a rational foundation to the organization’s concern for a total compensation system that is both internally and externally equitable. At the same time, it is important that the system be flexible enough to balance the interests of the organization in relation to its strategic objectives. In certain instances, this can mean that there may be a conflict between balancing the financial interests of the organization and meeting the needs and expectations of the workforce, either in general or by job category, based on market-driven influences. Job Evaluation Methods Job evaluation methods can either be quantitative, qualitative or some combination of both. • Nonquantitative methods—attempt to establish a relative order to jobs. • Quantitative methods—attempt to establish how much more one job is worth compared with another job by using a scaling system. There are four primary methods of job evaluation. While all job evaluation methods have the same general objective, they differ significantly in complexity and in the approach used to evaluate jobs. Regardless of the method used, the intent is the same—to develop a measurable, defensible process on which to base the compensation program for the organization. • Job ranking method —The job ranking method is considered the simplest method of job evaluation. It places jobs in order, ranging from highest to lowest in value to the organization. The entire job is considered rather than the individual elements. • Job classification method —In the job classification method, descriptions for each class of jobs are written. Jobs are then put into the grade that best matches its class description in the judgment of the evaluator. Because this process is subjective, with a wide variety of jobs and generally written job descriptions, jobs could easily fall within more than one grade level. A related issue is the reliance of this method on job titles and duties, which assumes that they are similar among organizations. Many federal, state and local governments, which traditionally used the classification method, are moving to the point method for these reasons. • Point factor method —The point factor method is the most widely used job evaluation method. It is more sophisticated than the ranking or classification methods because it actually breaks jobs down into compensable factors and places weights, or points , on them. A compensable factor identifies job factors that are commonly present throughout a group of jobs. These factors are identified as part of the job analysis process. For example, the compensable factors for jobs in an office and clerical setting would be different from those in a clinical laboratory setting, where hazards encountered in the work environment in the form of potential biological and chemical exposures would most likely be identified as compensable factors. As such, the compensable factors used and the weights assigned will reflect the nature and scope of the job under study. One major advantage to the point method is that the job evaluation process and the determination of total points for each job occur before the pay structure is even a consideration. This aspect ensures that the evaluator remains focused on assessing the relative worth of the job (i.e., internal equity) instead of allowing past compensation patterns to influence how this position will be graded. • Factor comparison method —The factor comparison method is a quantitative job evaluation method and represents a combination of the ranking and point methods. The first step in this process involves identifying benchmark jobs (i.e., jobs that can be found in many organizations and are normally performed by several individuals who have similar duties within the organization: secretary, stock clerk, security guard, accountant, sales representative, supervisor and manager). The second step involves the selection of compensable factors and the ranking of all benchmark jobs after factor analysis is completed. Third, a comparison of jobs to market rates for benchmarking purposes takes place which results in the assignment of monetary values for each compensable factor. Finally, all jobs in the organization are evaluated by comparing them with their respective benchmark jobs, if available. A major advantage to the point method is that it is a custom job evaluation method—it is unique to the organization. The major disadvantage is that it is time-consuming to establish and maintain. In addition, the organization must pay close attention to market rates to maintain the integrity of the system. A comparison of the four primary methods of job evaluation, including their advantages and disadvantages, is provided in Figure 1. Figure 1: Comparison of Job Evaluation Methods Method/ Uses Advantages Disadvantages Comparison Nonquantitative Job ranking/ Job-to-job (also known as whole job comparison) • Best suited for small organizations where a hierarchical ordering of jobs will suffice and resources are lacking for a complex system • Simplest and quickest method • Very effective when there are relatively few jobs to be evaluated (less than 30 unique jobs) • Inexpensive • Puts jobs into a sequence but does not determine the relative value of one job compared with another • Does not measure differences between jobs • Judgments are subjective • Because no baseline standards are used for comparison, a new job must be compared against all existing jobs in the organization each time a job is added Job classification/ Job-to-standard • Often used with government and public sector employees • Best suited for large organizations with many jobs and limited resources to commit to the evaluation process • The job category and grade structure exist independent of the jobs • Judgments are subjective • Understandable and wellaccepted by employees • Looks only at whole job • Classifications can change as duties and responsibilities do • No formal audit trail • May be ambiguous (i.e., some jobs may appear to fit within more than one category) • Accuracy of evaluation dependent upon the clarity of the grade description Quantitative Factor comparison/ Job-to-job • Best suited for organizations with the time and resources to develop a custom evaluation system • Has a better chance of succeeding when jobs are not greatly affected by inflation and fluctuating • Value of the job is expressed in monetary terms • Can be applied to a wide range of jobs; new jobs can be easily accommodated • Produces reasonably objective and defensible results • Complex and time-consuming • May be difficult to explain to employees • Requires good job documentation, including job descriptions, i.e., a thorough job analysis process market conditions • Provides good documentation • Process is easy to audit if implemented properly Point factor/ Job-to-standard • An extension of the factor comparison method • Best suited for organizations desiring a systematic procedure for evaluating each job • A set of compensable factors is identified as determining the worth of jobs; typical major categories include skills, responsibilities, effort and working conditions; each factor is divided into levels or degrees which are then assigned points • Value of the job is expressed in monetary terms • Produces reasonably • objective and defensible results • Provides good documentation • Process is easy to audit if implemented properly • Relies on subjective judgment of those doing the evaluation • Requires close attention to shifts in market rates to maintain credibility of the system • Complex and time-consuming • May be difficult to explain to employees • Requires good job documentation, including job descriptions, i.e., a thorough job analysis process • Relies on the subjective judgment of those doing the evaluation • Requires close attention to shifts in market rates to maintain credibility of the system Job Evaluation— Who Should Be Involved in the Process? The purpose of the job evaluation process is to establish an internal structure on which to base employee compensation. In fact, it is not uncommon for organizations to have multiple structures derived through multiple approaches to job evaluation to accommodate different functional groups (i.e., managerial, administrative, technical and/or manufacturing). Research suggests that attending to the fairness of the design process and the approach chosen (job evaluation, skill/competency-based plans and market pricing) rather than focusing solely on the results (an internal pay structure) is likely to achieve employee and management commitment, trust and acceptance of the results. 1 For this reason, it is not unusual for organizations to strive to obtain a high level of involvement and commitment from managers and employees in the job evaluation process by including them in the design phase of the program. A common approach is to use committees, task forces or project teams from a cross section of the organization, including nonmanagerial employees. Whether these groups serve in a consultative capacity or actually determine the compensable factors and pay structure that will be utilized is up to the organization. What is important is that managers and employees alike have some involvement in the process to ensure that they have some basis for understanding how it works and an appreciation for how it will impact their compensation now and in the future. Job Evaluation and Potential Legal Issues • Job Evaluation and the Americans with Disabilities Act (ADA) As defined by the ADA, a disabled person is someone who has a physical or mental impairment that substantially limits that person in some major life activities, who has a record of such an impairment or who is regarded as having such an impairment. The ADA contains a number of specific requirements that deal with the employment of individuals with disabilities. It requires employers to identify the essential functions (i.e., fundamental duties and responsibilities) of each job prior to initiating the selection process. However, an effort should be made to evaluate all aspects of a job during the evaluation process, not just the essential job functions. If this were not the case, total points assigned could be different. As an example, an administrative employee may be expected to make periodic visits to construction sites to deliver important papers, attend meetings to take meeting minutes and provide other administrative support to line managers in the field. Total points assigned could be different from the points assigned if only the essential job functions were to be considered (i.e., in this instance, points for hazardous working conditions may apply). This, in turn, could affect the job grade and pay level. For persons with disabilities, employers must make a reasonable accommodation, which is a modification or adjustment to a job or work environment that enables a qualified individual with a disability to have equal employment opportunity. Reasonable accommodation is restricted to actions that do not place an “undue hardship” on an employer. An undue hardship is a significant difficulty or expense imposed on an employer in making an accommodation for individuals with disabilities. The ADA offers only general guidelines in determining when an accommodation becomes unreasonable and places undue hardship on an employer. However, most accommodation expenditures by employers are relatively inexpensive. In fact, the best advice on the least costly reasonable accommodation(s) will often come directly from the disabled employee. • Job Evaluation and the Potential for Bias Factor points should be examined carefully for potential inherent biases in relation to jobs traditionally held by females and minorities. The standard used to determine the pay levels for each factor may have built-in biases that would affect these groups due to preconceived notions of relative worth in the job hierarchy. Examples of such jobs include but are not limited to office and clerical positions, teachers, nurses, security guards, semiskilled trade positions and custodial positions. Fast Fact: HR-Software.net offers free Job Evaluation Software at www.hrsoftware.net/cgi/JobEvaluation.cgi Literature and Research • Survey of Compensation Policies and Practices: To determine which compensation practices and policies are most commonly used, WorldatWork partnered with Loyola University and the Hay Group, LLC, to jointly develop and field a survey to members of WorldatWork. This 2002-2003 study sought to determine the prevalence and effectiveness of current compensation practices. For the vast majority of organizations, determination of overall job value is based on both internal job valuing (i.e., job evaluation) and external job valuing (i.e., market pricing). Approximately 1,200 compensation professionals from a broad cross section of organizations in several countries completed the detailed survey. Highlights from this study revealed a number of interesting findings outlined below. o Ninety-six percent of companies utilize some form of job evaluation—the two most common methodologies are point factor (27%) and whole job comparison (23%). o The most effective job evaluation methodology is deemed by respondents to be point factor job evaluation; broad banding (normally used as a job pricing method only) is deemed the least effective. o Fifty-eight percent of organizations believe that 60% of their positions can be matched to the market, but the remaining 40% are high impact/critical positions. o Most organizations (97%) reported having some form of job descriptions, albeit 33% indicated that a large portion of their job descriptions were out-of-date. o Review of job evaluations is typically done at the request of line management (60% of the time). o Only 18% of respondents reported proactive job evaluation reviews. o The HR department alone (60% of the time) is responsible for assigning jobs to salary grades. o Ninety-one percent of respondents reported that their organizations have a compensation philosophy, with 62% indicating that this philosophy is documented. This study would seem to indicate that while there is considerable variation across organizations as to how the various aspects of compensation programs are administered, there is general consensus that job evaluation is alive, well and effective. 2 • Job and Work Evaluation: A Literature Review : Classification and job evaluation have come under scrutiny in the public sector. A literature review was conducted to help public sector human resource professionals make informed decisions about whether or not to change or abandon traditional classification and job evaluation systems for compensation purposes. It is concluded that traditional classification and job evaluation procedures continue to have relevance in public sector settings. However, current classification and job evaluation systems need to be broadened to adapt to the changing nature of work in the public sector. Recommendations to shift the focus from “job” to “work” evaluation are offered in this article. 3 • The Role of Departmental Position and Power in Job Evaluation: This study examines the job evaluation process for nonacademic jobs in a large western university. When a department wanted to upgrade a job, it received approval to proceed and then submitted a revised job description to human resource department for evaluation. HR specialists utilized a point system consisting of four main compensable factors: decision-making responsibility, job complexity, interdepartmental contact and authority. Each factor was evaluated for each job, and total points were assigned to each job. The total points were used to determine the pay grade for each job and its placement within the pay grade. The researchers found that the power of the originating department (as indicated by number of faculty members and size of budget) consistently predicted the number of new positions approved and job upgrades received. In addition, the power of the incumbent also affected the results. This research calls into question the objectivity of the job evaluation process—one of the hallmarks on which it is based. The authors concluded that in addition to assessing the worth of a job within the organization, the job evaluation process also reflects the political and social context of the organization. 4 In Brief The bottom line is that distinctions in pay matter. They matter to employees who are eager to achieve career goals and status within an organization. They matter to managers who are interested in recognizing, rewarding and motivating the employees who work for them in a fair and equitable manner. They matter to the employer who is seeking to maintain a profitable and successful workplace for all stakeholders of the organization, whether for short-term or long-term reinvestment purposes (in the case of a not-for-profit organization) or to achieve a profitable return on investment for stockholders (if the organization is for profit). Job evaluation is the key to establishing a fair and equitable pay structure for the organization. Regardless of the approach selected, it will be successful only if it is followed consistently and with the business objectives of the organization in mind. Part III of this series will examine an alternative to job evaluation—market pricing. Sources Mathis, R., and Jackson, J. (2003). Human Resource Management, Tenth Edition. United States: Thomson South-Western. Milkovich, G., and Newman, J. (2002). Compensation, Seventh Edition. San Francisco: McGraw-Hill Higher Education. Society for Human Resource Management. (2002). The SHRM Learning System: Compensation and Benefits. Alexandria, VA: Society for Human Resource Management . Footnotes Milkovich, G., and Newman, J. (2002). Compensation, Seventh Edition. San Francisco: McGraw-Hill Higher Education, p. 141. 1 WorldatWork, Scott, D., and Hay Group, LLC. (2003). Survey of compensation policies and practices . WorldatWork, 3. 2 Henneman, R. (2003). Job and work evaluation: A literature review. Public Personnel Management, 32, 1, 47+. 3 Welbourne, T., and Trevor, C. (2000). The roles of departmental position and power in job evaluation. Academy of Management Journal, 43, 761-771. 4 Author: Leslie A. Weatherly, SPHR, SHRM Research Department SHRM Briefly Stated 7/1/2004 Compensation Series Part III: Job Evaluation and Market Pricing Market pricing is the process of setting pay structures almost exclusively by collecting, analyzing and matching job salary survey data with rates paid in the external market. An organization may elect to use this method for certain professions that are market driven (i.e., information systems, engineering) or as a compensation philosophy across the board. Used in isolation, however, market pricing has limitations as an authentic job evaluation system. This is because organizations that consciously choose to elect employee pay strategies that emphasize external competitiveness also tend to deemphasize internal equity. This, in turn, leads to a lack of job parity within the organization, and/or relative job worth, with positions that would otherwise have like status and pay. This could ultimately result in allegations of unfair employment practices in relation to “pay equity” or “comparable worth.” By relying on pay rates paid by competitors in the external marketplace, organizations that tend to fill a large percentage of their job vacancies with hires from the outside (versus promotion or transfer from within) are dependent upon obtaining as much salary information as possible from the relevant marketplace. In other words, it is customary for the pay rates for a majority of the jobs in their organization to be benchmarked against comparable jobs in either their general or industry-specific marketplace by job category. Once a job hierarchy is developed around benchmark pay rates, any remaining jobs can be blended into the job hierarchy based on whole-job comparisons to the jobs that have already been benchmarked in the selected market (for more information read Compensation Series Part II: Job Evaluation ). This system works well as long as information is readily available. However, it can pose a problem if information is difficult to obtain and/or competitors are few and far between. Market-Based Job Evaluation and Pricing—Approaches • Pure market pricing —an evaluation of jobs on the basis of their market value (market-based job evaluation); although pure market pricing is not considered a true job evaluation system, market rates can be used to develop a job-worth hierarchy. • Guideline method —a combination of a traditional job evaluation method for purposes of internal equity and job alignment, and a formal market-based job evaluation method for the pricing of jobs. • Maturity curves —a method used as a premium pay mechanism to correlate pay in relation to tenure in a professional field such as teaching, research or engineering. Administrative Process The fundamentals of the market pricing process are similar to those of job analysis and job evaluation. Ideally, the process should begin with a comprehensive job analysis and the preparation of a job description for each position. At a minimum, a work analysis (i.e., an abbreviated form of job analysis of a job incumbent’s work product or service flow conducted by a job analyst) is generally conducted to determine where processes can be redesigned and/or improved. At the conclusion of this phase of the process, an analysis of the relevant labor market(s) is conducted for as many jobs as possible. During phase two, the job analysts blend any remaining jobs into the job hierarchy. This phase of the process is immediately followed by a labor market analysis for as many jobs as possible. The remaining jobs are blended in, and an internal committee reviews the internal job relationships. The final step in the process is the pricing of those jobs not priced directly in the market. Jobs are priced in the labor market in which the organization wants to be competitive, and these prevailing rates are used as the relative “worth” of the jobs. Figure 1: Advantages and Disadvantages of Market-Based Evaluations Advantages Disadvantages • Responsive to external competition while initially deemphasizing internal equity • High dependence on diverse, accurate and up-to-date survey data set(s) for a broad array of organization’s jobs • Well-suited to organizations in highly competitive business environments, i.e., high-tech and/or scientific environments • Viewed as less legally defensible than job-content approaches • Does not recognize importance of internal job equity Market pricing goes beyond the use of benchmark jobs and then the slotting of nonbenchmark jobs. The objective of market pricing is to base most, if not all, of the internal pay structure on external pay rates by competitors, breaking down boundaries between the internal organization and external market forces. Some companies even match all forms of pay for each job to its competitors in the market. Pricing Jobs Once market data have been obtained from the desired competitive markets and at the desired competitive level, as defined by the organization’s compensation philosophy, the organization’s hierarchy of relative worth must be priced. It is unlikely that an organization will be able to identify a survey match for every job in the organization. The jobs that can be matched to a survey and for which data are obtainable are called benchmark jobs. These are the jobs around which the organization’s overall compensation structure can be developed. Due to antitrust regulations, it should be noted that organizations should avoid direct comparisons of pay and salary data with competitors (i.e., they should not contact other companies directly to ask what they pay for a particular job). Third-party salary surveys through professional associations, professional societies or consulting groups are recommended to avoid any implication of conflict in this regard. In order to ensure success in the market-based job evaluation process, certain steps should be followed: 1. Identify the benchmark jobs to be surveyed on behalf of the organization. Ensure that the benchmark jobs: • Are representative of the types of work performed in the organization. • Represent a broad cross-section of employees (high to low job categories). • Represent a significant percentage of the employee population. • Hold job duties and responsibilities that are readily identifiable in the marketplace. • Are present in the geographic area and the organizations to be surveyed. 2. Identify the reference point for comparison when matching jobs with the competition. Compare job duties and responsibilities that: • Reflect the organizational scope of the position and reporting relationships —not titles, because they are often misleading. • Focus on the industry or on a specific job. • Are within markets, based on size, profitability, sales/assets, geographic area and/or industry. • Are local, regional and/or national. Market Pricing—A Critique HR practice leaders should give careful thought and consideration to which job evaluation method will work best for their organization before making a formal recommendation. While there are advantages to market pricing, there are also some disadvantages. Pure market pricing carried to an extreme deemphasizes internal alignment and may result in a neutral or, perhaps even worse, an inefficient pay structure for an organization in the marketplace. If the focus becomes a duplication of a competitor’s pay structure, any unique or difficult-to-imitate aspects of the organization’s pay structure that may have set it apart in the past will be lost. If the marketplace from which an organization is able to draw its salary survey data is sizable, then the sense of fairness in relation to pay structure will carry more weight with the general employee population. In sum, balancing internal and external employee pressures for a fair and equitable pay system is a matter of judgment, bearing in mind the strategic objectives established by the organization. Deemphasizing pay alignment within the organization may lead to feelings of unfair treatment among employees and inconsistency with the fundamental culture in relation to recognizing and rewarding employees. Unaligned or inequitable pay relationships may also lead employees to seek alternative employment, file grievances or forego opportunities for advancement within the organization. At the same time, neglecting external competitive pay practices may also affect the ability to attract, hire and retain applicants who match the organization’s needs. External pay relationships impact labor costs and hence are vital to an organization’s ability to compete effectively and efficiently in the product and service market. Literature and Research Work Valuation Addresses Shortcomings of Both Job Evaluation and Market Pricing 1 The authors argue that few HR leaders are satisfied with traditional job evaluation, which is timeconsuming, bureaucratic and judgmental. At the same time, the limitations of a pure market pricing approach to job evaluation are discussed, including its heavy reliance on surveys, accurate job matches and current data. The authors propose an alternative to both methods — work valuation. Work valuation recognizes the need to tie work performance to the business goals of the organization. As such, the authors identify a number of factors for consideration. They believe that work should be broadly defined and not limited to jobs. Under this approach, different types of work would be valued instead of jobs, including competencies, roles and teams. Another premise is that the individuals who know the work the best, i.e., the managers, not internal or external HR consultants, should assess the value of work. Finally, work valuation can be used as a basis for establishing total compensation levels, including incentive compensation along with base pay. Determining Base Compensation: Should You Use Market Value or Internal Equity? 2 Employers typically rely on one of two methodologies to determine a base compensation system for employees: market value or internal equity. However, as noted by the author, the two approaches are not mutually exclusive. This article provides useful information and concepts for building a fair and equitable compensation system taking advantage of the best of both systems. Insights into the pitfalls to avoid with both internal equity systems (i.e., it is a fairly subjective process) and market-based compensation systems (i.e., it is a very time-consuming and complex process) are also highlighted. The Case for Computer-Assisted Market-Based Job Evaluation 3 Computer-assisted market-based job evaluation allows an organization to customize aspects of traditional job evaluation, computer-assisted job evaluation and market pricing in a way that works to its best advantage. Executives want to pay competitively and strategically. Market salary management is based on the external value of key business functions (for example, marketing, engineering, computer science, accounting). For this reason, a computer-assisted approach is valuable in estimating the market value of nonbenchmark jobs that point-fact computer-based job evaluation approaches cannot do. Strategic job value is an optional feature that can add to a job’s competitive market value the importance of the job in terms of influence on profit, return on assets, quality, sales, cost or other elements that are central to effective business management. No other approach to job evaluation has the flexibility to allow for strategic job valuing. The article also points out some of the reasons that problems exist with traditional job evaluation systems, including the following: • The plans are predominately point-factor plans that are unresponsive to the market and strategic job value. • The methodologies tend to emphasize internal alignment rather than external and true business issues. • The salary data are drawn from a broad labor market rather than the organization’s specific labor market. Sources American Compensation Association. (1993). Documenting Job Content: An Approach to Job and Work Analysis. Scottsdale, AZ: American Management Association. Milkovitch, G., & Newman, J. (2002). Compensation, Seventh Edition. San Francisco: McGraw-Hill Higher Education. Pritchard, K. (2002, July). Introduction to market pricing. Retrieved June 10, 2004, from www.shrm.org/hrresources/whitepapers_published/CMS_000054.asp#P-4_0 Pritchard, K. (2001, May). Introduction to work (job) analysis. Retrieved June 10, 2004, from www.shrm.org/hrresources/whitepapers_published/CMS_000055.asp#P-4_0 Endnotes Heneman, R., & LeBlanc, P. (2003). Work valuation addresses shortcomings of both job evaluation and market pricing. Compensation and Benefits Review, 35, 1, 7-11. 1 Determining base compensation: Should you use market value or internal equity? Interview with James C. Fox, Fox Lawson & Associates and Employee Benefit Plan Review. (2002). Employee Benefit Plan Review, 57, 5, 4-5. 2 Schuster, J., Zingheim, P., & Dertien, M. (1990). The case for computer-assisted market-based job evaluation. Compensation and Benefits Review, 22, 3, 44-54. 3 Author: Leslie A. Weatherly, SPHR, SHRM Research Department Also in the Compensations Series: Part I: Job Analysis Part II: Job Evaluation Compensation Trends SHRM White Paper 1/1/2006 By Catherine Dovey, CCP, SPHR The business world continues to be extremely competitive, and businesses are constantly looking at ways to maintain a competitive edge. The job market has picked up. Merit increases have gone up slightly, with 3.5% projected for 2006 by Watson Wyatt and World at Work. Benefits costs continue to outpace inflation and are projected to continue to increase at this pace in the future. Managers are asked to do more with less. At the same time, we have mission and value statements that say that employees are our most valuable assets. How do we keep our costs in line while rewarding employees? Start With a Clear Compensation Strategy When faced with tough economic times, managers get pressure from all sidesemployees, partners, vendors, distributors, stockholders and suppliers. Having a formal compensation philosophy can help organizations navigate through pay decisions when business pressures escalate. A strong compensation philosophy is typically linked to an organizations mission and core competencies. For example, if research and development is what differentiates an organization from its competitors, that organization may have a history of hiring the best R&D staff and being willing to pay for them. Another organization might compete primarily on price and have a philosophy of paying low to help keep the cost structure in line. Having this philosophical discussion with key decision makers before linking pay into the discussion can make the pay decision process much simpler. Traditional Compensation Plans Are Most Common A recent survey 1 reported that 80% of organizations are using the 40 th to 60 th percentile to target base pay. Only 9% of organizations are using broadbands (defined as a range width of 100% or more), and only 7% use competency-based pay. Fifty percent of companies nationally use traditional job evaluation techniques such as point factor and whole job systems. Skill-based pay, career banding and job family systems are still in the single digits, according to this survey. In spite of the all the articles about new compensation techniques like broadbanding and competency-based pay, traditional pay plans are still the most common. Some of these new approaches have had unexpected long-term consequences, such as increased salary or administration costs. In addition, new or unusual plans can be difficult to communicate and may not be as easily understood by managers or employees. When it comes to base pay plans, traditional plans continue to win out. However, organizations should look at building pay systems that support their goals rather than implementing plans that happen to work well in other organizations. Merit Budgets Slightly Stronger Merit budgets are increasing slightly, but are still in the 3.5% to 4% range for most industries in most parts of the United States. This means that theres not much in the way of pay increases to spread around. The difference between earning a 3% increase and a 4% increase is unlikely to drive behavior changes. So what are some of the alternatives that will allow organizations to reward their highest performers? Some organizations are linking much larger pay increases to their very highest performers and giving a little less to the average performers. Consider using a merit matrix with variable timing. Average performers might get a 5% increase in 18 months, rather than getting a 3% increase every 12 months. Top performers might still receive an increase every 12 months. Another alternative is to look at changing the number of performance levels used. The majority of organizations in the United States use a five-point scale to measure performance. 2 However, with very small pay increases, it is easier to get a more meaningful differentiation with a three- or fourpoint scale. Performance Is King Several studies have shown that there is a direct correlation between high-performing companies and the time spent on employee performance management. 3 Based on a study conducted by Frank Russell company, Fortune magazines 100 Best Companies to Work For outperformed the Standard and Poors 500 by over 430%. 4 Although there are exceptions, most employees dont get out of bed in the morning thinking, Im going go waste my energy and mess things up at work today. Employees generally want to do a good job and have a positive impact. Often employees simply dont know what the most critical priorities are or whether they are spending their time and energy on work that will have a lasting impact on organizational success. High-performing organizations spend more time communicating with employees about organizational strategies and linking employee performance to organizational outcomes. 5 Variable Pay Use Grows Were continuing to see an increase in the use of variable pay, such as profitsharing, small group incentives, gainsharing, goalsharing, lump-sum awards and other incentives. Based on a recent survey, the percentage of companies offering one or more variable pay plans have increased 16% since 2001. 6 The basic idea behind variable pay is that organizations can share their success when performance is good without increasing salaries (fixed costs) for future periods. This approach has become very useful in recent years as the economy has shifted and organizations have needed the ability to adapt quickly to changing market pressures. The most common variable pay programs are lump-sum merit awards that are given in lieu of addto-base pay increases for high performers or for individuals who are at the top of their pay range. In spite of the increase in variable pay plans, most nonexempt employees still earn a very small amount of their total pay in variable pay form, typically about 5% of base pay. Exempt staff have a higher percentage of pay at risk, 10% to 12%. 7 Although the percentage of pay may be perceived as relatively small, the message seems to come through clearly. Employees have more clarity about what they need to do to earn incentives or rewards. As long as those incentives are linked to organizational outcomes, there is likely to be a positive effect on organizational performance. Communication Is Critical Employees today have access to more data than ever before. In the last few years, HR professionals have seen an increase in the number of employees who come in and express concern about being underpaid. While most organizations communicate with employees once a year about the annual merit pay adjustment, many employees get information more frequently from the Internet. Even without intentionally looking for it, employees might find themselves on Web sites telling them what their correct rate of pay is. The salary information on the Internet is not always accurate. First, much of the data is self-reported, so anyone can report any wage and have it included in the database. The other issue is that data on the Web often reflects national salary data adjusted based on the cost of living or average pay rates. While this method may work well in some circumstances, different parts of the country have different demand for certain skill sets, and this results in pay rates that do not conform to national averages. As HR professionals, we can help to educate employees about their pay. We should be talking about pay rates and trends. If we review survey data and do not make pay structure changes, we should let employees know that we did the analysis and concluded that their pay rates were competitive. Employees need assurance that we are monitoring our pay systems and will make adjustments when they are appropriate. Keep Your Eye on the Future Organizations can sometimes be penny-wise and pound-foolish when it comes to current pay levels and employment policies. At the present time, unemployment has flattened out, and employers are beginning to have difficulty hiring staff. Most economists and futurist are predicting significant skills shortage in the near term. An organizations reputation as an employer doesnt turn on a dime. The job applicants who are applying to our organizations today will likely be the folks who will be talking to other applicants a year or more from now. Weve all heard folks talking about how badly they were treated by an organization or how low the pay is. Organizations have an opportunity to establish a reputation as an employer of choice before the labor market gets even tighter. Scott, D., & Hay Group, LLC. (2003, March). Survey of compensation policies and practices. Scottsdale, AZ: WorldatWork. 1 Shafer, P., & Campbell, B. (2004, May). Paying for performance 2003-2004. WorldatWork and Hewitt Associates. 2 3 Kotter, J., & Heskett, J. (1992). Corporate culture and performance. New York: The Free Press. Frank Russell Company. (2004). Transforming your organization: Creating a great place to work. Delivered by Robert Levering at the Building Trust Conference in Washington, D.C., on April 14, 2004. 4 Becker, B., Huselid, M., & Ulrich, D. (2001). The HR scorecard: Linking people, strategy, and performance. Boston: Harvard Business School Press. 5 6 WorldatWork. 2004-05 Salary Budget Survey. Scottsdale, AZ: Author. 7 Ibid. Catherine Dovey, CCP, SPHR, is principal at Dovey HR Strategies, a Seattle-based human resource management consulting firm. She is also a member of SHRMs Total Rewards/Compensation and Benefits Special Expertise Panel. This white paper was originally written in December 2004 and was last updated in January 2006. It is intended as information only and is not a substitute for legal or other professional advice. The interpretations, conclusions and recommendations in this paper are those of the author and do not necessarily represent those of SHRM. All content is for informational use only and is not to be construed as a guaranteed outcome. SHRM can not accept any responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information. Broadbanding SHRM White Paper 3/1/1993 By Sandra L. O'Neil, SPHR, Revised June 2001 and Reviewed July 2002 The term "broadbanding" has no single definition. Generally it refers to the melding of job clusters or tiers of positions into relatively wide bands of pay ranges for the express purpose of gaining flexibility in managing career growth and administering base pay. In effect the bands are implemented as an alternative to traditional pay grade structures. Banding collapses a number of pay ranges in a traditional structure into a few broad bands, each spanning the pay opportunity formerly covered by several separate pay ranges. There is no standard definition for "a few bands," nor is there a common number of bands from one organization to another. Nonetheless, companies adopting this approach generally have reduced the number of pay ranges by one half to two thirds. For example, a company with twelve exempt grades may only use four or five exempt bands. As with traditional ranges, the spread of a broadband can vary. It is often around 100 percent, but may be as narrow as 75 percent or wider than 125 percent or even 200 percent. In broadbands with range spreads of over 100 percent, the conventional midpoint loses much of its value as a reference or control point for all jobs in that band. Why Consider Broadbanding? Do broadbands represent a significant improvement over traditional pay range structures? Or are they just a "cosmetic" change? Since broadbanding is still relatively new, its long-term effectiveness and desirability is still debated by HR professionals. Regardless there are several needs in the business community that sustain the use of broadband structures. The Need to Re-examine Reward System Values Banding requires a re-examination of reward system values, approaches and processes. For most organizations, that means challenging a support system that has been in place a long time and very likely looks like all the others. So, why change to banding? Many employers have sound, strategic reasons for maintaining a traditional compensation system, including the fact that their organization hierarchy and career development system remain stable and unchallenged. But a number of organizations in the midst of significant transformation seek an alternative pay structure to fit a markedly changed organizational culture. For them, neither status quo nor incremental change is the answer. An all-new direction must be considered. The Need to Shift Employees' Focus From Forever Higher Pay Grades to Genuine Career Growth In many organizations, employees are facing fewer advancement opportunities. This is due to a number of factors, such as the wave of baby boomers bottlenecked in middle- management jobs. Also, as organizations become leaner and flatter, many promotional opportunities have disappeared as a result of mergers, restructuring and downsizing. Broadbands help reset employee expectations and create realistic career aspirations by redefining promotional opportunities. With fewer bands, employees recognize that promotions (as only defined by a change to higher grade level) will occur less frequently than before. Also, since the broadbands are typically further apart than traditional ranges, employees recognize that they must assume significantly greater job responsibilities to warrant placement in a higher band. The Need to Encourage a Broadly Skilled Work Force Companies have to react quickly to competitive challenge. By necessity, employees must be broadly skilled and adaptive. Companies whose employees are trained to quickly assume new tasks and projects will be better positioned to compete effectively than companies whose employees resist these job changes. Traditional ranges may inhibit skill acquisition and cross training since jobs are narrowly defined and employees have come to expect a higher pay grade (i.e., promotion) for assuming new or different duties and responsibilities. Employees may be reluctant to acquire new skills or consider a new job if the change does not offer a promotion to a higher grade and range. By removing the numerous and visible classifications among jobs, broadbanding systems encourage employees to evaluate skill acquisition and cross-training opportunities in terms of their potential for professional development and personal growth--rather than to simply ask, "Will this move get me into a higher grade?" The Need to Pay the Person Traditional pay structures link an individual's pay through such processes as job evaluation, market pricing and structure design. This linkage implicitly assumes that the set of responsibilities and specifications for a job is relatively stable and that there is a "fit" between the employee and the job. However, most jobs are dynamic, and it is not unusual to find that employees in the same job possess different skills and qualifications. Traditional systems overlook the influence an individual has over the content of his or her job and thus mismatches can and do occur. A banding system provides a wider spread of pay opportunity in which to recognize and reward different levels of individual contribution. There is room for employees to enhance or enlarge their jobs without bumping into the grade range maximum. Broadbands enable companies to base pay decisions on the person performing the job instead of on the job itself. The Need to Reduce Administrative Effort The temptation by managers to request the reevaluation of jobs, based on minor changes in job responsibility, has increased in recent years due to relatively "tight" merit increase budgets. Compensation staff and other managers are seeking to reduce the time required to analyze such minor job changes and to focus instead on jobs that are undergoing significant redesign as might occur in an organizational restructuring. In a broadbanding system, jobs still need to be classified. But with fewer groupings, the task of evaluating jobs becomes easier. Companies may not need complex job evaluation systems such as point-factor plans to measure and value their jobs. Instead, they may use a combination of ranking-to-market and whole job slotting to complete this task. Of course, companies using these methods should not stop documenting the content of jobs, as job descriptions remain useful and valuable management tools. Potential Drawbacks There are some aspects of broadbanding that potentially are problematic. First, traditional pay grades form clear and distinct boundaries within organizations. These boundaries often delineate eligibility for management incentives, perquisites or other similar rewards, and there may be resistance to a new set of rules. Broadbands will also send different messages to employees with regard to job values. Employees formerly in higher grade levels may think broadbanding has devalued their jobs by placing them into a group with formerly lower level employees. Employees formerly in lower grade levels may mistakenly anticipate a windfall pay increase because of the wider range for the assigned band and the fact that they share the band with previously higher graded employees or with their immediate supervisor. Also, under a traditional structure, narrow range spreads serve as an automatic cost-control mechanism for base pay. Employers need to be aware that with broadbanding there is the potential for all employees to float to the maximum, which for many jobs in the band would be much higher than market value. As such, employers adopting broadbanding need to develop other cost-control and total payroll planning strategies. Competitive pay analyses present a special difficulty under broadbanding. The use of market pay data increases, and there is a greater need for market comparisons and the ability of non-HR managers to use and interpret market data. Managing Pay: The Key Issue The single biggest issue related to broadbanding is the loss of the pay range midpoint as a barometer of external competitiveness and as a control point for salary planning. As an alternative to midpoints, some companies establish specific zones or control points within a band. These reference points, sometimes called "targets," frequently become the primary if not sole guidance for managers making pay decisions. For example, presume there is a salary band from $20,000 to $42,000. There could be two target jobs within this salary band: Target Job A with a minimum target of $31,500, a maximum target of $38,500 and an external value of $35,000; and Target Job B with a minimum target of $22,500, a maximum target of $27,500 and an external value of $25,000. Unlike traditional ranges, it is possible for employees in Job A or B to be compensated outside of these targets without the need for special approvals or procedures. The targets are intended as guides, not mandates, for managers making pay decisions. For most companies, broadbanding represents an extraordinary cultural change. They introduce broadbands because they believe bands make better business sense. It is important to carefully weigh the strategic effectiveness of the current system versus the flexibility and management philosophy underlying a broadband system. Sandra L. O'Neil, SPHR, Member, SHRM Compensation and Benefits Committee, and Principal, HR Associates, a Miami, Florida based human resources management consulting firm. This paper is intended as general information, and is not a substitute for legal or other professional advice. Finding the Right Method for Team Compensation SHRM White Paper 12/1/2004 By Larry S. Carlton, DBA, SPHR Introduction Human resource managers are responsible for designing total compensation packages that must simultaneously meet employee expectations of adequate compensation while achieving employer goals of containing labor costs and retaining a fully competent workforce. It may appear a simple matter to meet both objectives, but in practice the concept involves a complicated array of issues emerging from both within and beyond the workplace. HR managers need to consider the dynamics of social contracts, personality types, industry standards, employee expectations, competitive imperatives, cultural and national diversity, legal requirements and a myriad of other interrelated issues in order to fully meet organizational needs. The purpose of this white paper is to simplify this maze by outlining some of the basic concepts in developing a team-based compensation package. In order to provide some framework in which to understand the dynamics of compensation development, the following topics will be explored: Individual versus team compensation. Types of teams. Types of team compensation programs. Examples of possible team compensation approaches. In exploring the broad challenge of developing team compensation packages, a systematic approach to some of the underlying issues may help HR professionals come to terms with the many dynamics affecting effective integration of compensation policies with organizational strategic objectives. This paper will attempt to provide such a framework as a beginning approach to developing effective total compensation packages for team-based business units. Individual Versus Team Compensation While team-based organizational units are not new in the global workplace, they are becoming increasingly popular as business continues to evolve in a competitive transnational environment. Much has been written in the past two decades about the benefits of team orientation, especially in the wake of such popular approaches as Total Quality Management (TQM), ISO 900(x) certification and a myriad of other (albeit some unabashedly faddish) trends in organizational design. The element that ties all of these sometimes disparate organizational approaches is the imperative to remain competitive in an increasingly global market. American firms, in particular, have been undergoing a remarkable wave of reengineering efforts that have transformed the workplace in ways perhaps unimagined in past decades. In some ways this transformation in the American workplace may seem remarkably un-American. After all, American culture and history are filled with examples of rugged individualism and the demand for the recognition of individual effort. On the other hand, teamwork is also highly regarded as the way America works. Perhaps the ultimate example of how Americans resolve this apparent individual versus team dichotomy is the modern professional sports team. Individual players, often referred to as superstars, command stratospheric salaries and are afforded rarely paralleled adulation. Yet, even the top performers depend on the efforts of other team members in order to reach their remarkable achievements. A superstar receives numerous awards and a multimillion dollar salary for maintaining double-digit scoring averages, but would be hard-pressed to perform at a similar level without the blocking, rebounding and passing contributions of the other team members. It is misleading, however, to carry the professional sports analogy too far in discussing business entities. It is therefore important to design company compensation packages based on a realistic comparison of real people working in normal jobs. According to Milkovich and Newman (2004, pp. 286-287), most employees believe that pay should somehow be tied to performance. The authors cite numerous studies supporting this idea. The challenge to HR professionals is in the design of compensation packages that recognize individual effort within the framework of developing team reward criteria. Caudron (1994, p. 40) cites a common dilemma in establishing team-based pay systems: Unfortunately, in most companies today the compensation system is based on paying employees for their individual performance. This makes it hard for workers to buy into the team concept. Why should they become team players if they are still going to be reviewed and paid based on individual merit? She explains that in her research examples of group incentive plans are relatively rare. Even companies that have extensive experience in developing self-directed work teams have not significantly changed the compensation systems that support a team structure. She cites several examples of organizations that have attempted to switch to a team-based approach, explaining the difficulties of the transformation in each experience and what organizations continue to experience in the endeavor. Milkovich (2002, pp. 309-311) outlines five typical causes for the failure of team-based approaches. First, there is great variety in team composition. Teams can be full-time, temporary, project-specific, cross-functional or can take a variety of other visages. The lack of standardization leads to lack of definition of what a team actually means. Secondly, there is a level problem. This term defines the difficulty in determining optimum group size. Too largeand individuals are unlikely to see how their inputs can significantly affect group performance. Too smalland groups tend to engage in unwanted behaviors (such as hoarding best performers and resisting the introduction of new members). Additionally, it is difficult to design effective rewards for groups that have different objectives. A third problem comes with the inherent complexity of the team compensation plan. In practice, developing team plans can become overly complicated in the effort to ensure equity-based performance. Perhaps because the typical American business culture is so deeply rooted in the idea of rewarding individual performance, some plans develop very complex equations to accommodate individual-within-the-group performance. Fourth, there is the problem of team control. It is difficult to base team rewards on quantitative objectives when the achievement of those objectives depends on factors beyond the teams control. For example, rewarding a farm-worker team on the basis of total bushels picked may be considered grossly unfair when the team is penalized for bad weather conditions. The final common problem involves effective communication of the compensation plan. Most organizational design teams devote more time to developing the mechanics of the compensation plan than to explaining it to employees, with an accompanying confusion on the part of employees as to how the compensation plan actually works. Types of Teams Adding to the difficulty of determining team-based compensation policies is the underlying problem of defining exactly what a team is. Shonk (1992, p. 1) defines a team as two or more persons who must coordinate their activities to accomplish a common goal. While this definition may appear somewhat simplistic, focusing on the key term coordinate helps an HR manager grasp the concept. A highly integrated group of people who continuously coordinate their individual activities to achieve group objectives is one way to begin the process of defining teams. Shonk (1992, pp. 4-5) goes on to explore some reasons why team-based organizations are important. There are several compelling reasons why organizations adopt team structures, including increased quality, flexibility, coordination, productivity, employee satisfaction and development, and decreased costs. More importantly, in practice, teams might take form of many structures, including (Shonk, 1992, pp. 27-31): Suggestion teams are temporarily chartered to develop solutions to particular problems, but are usually not given authority to implement those solutions. Problem-solving teams are similar to the above, but are often given at least limited autonomy in implementing the recommended solutions. Semiautonomous teams usually have significant inputs into the planning, organizing and controlling functions affecting work unit issues. Self-managing teams are fully responsible for managing their daily activities. These teams have great leeway in setting goals, allocating resources, hiring and replacing team members and recommending solutions to external problems. It is apparent that the above teams are defined by the level of autonomy they have in addressing work-related issues. For managers, this is one approach to defining the structure of groups in order to allocate a fair compensation strategy for rewarding group results. There are numerous other approaches to defining teams. Teams can be formed along functional lines, cross-functional alignment, geographic boundaries, product lines or other defined parameters. It makes sense, then, for the HR manager to help define a team approach that is germane to the type of work being done and to enlist the employees in determining what those parameters should be. One common theme in the literature of team development is the importance of enlisting employee inputs in determining team structure. Another key component in developing team structure is alignment with corporate strategic direction. James Fairfield-Sonn of the University of Hartford highlights the importance of linking strategy to team development, regardless of the size of the company or the nature of its essential business. He cites two examples of companies with widely different structures. One is a manufacturing concern producing plumbing, heating and air conditioning supplies. The other is an entity providing residential rehabilitation services for inmates convicted of substance-abuse-related crimes. While radically different in basic structure and organization, both of these concerns redesigned the way in which work is accomplished by developing team-based structures aligned with basic strategic direction. The author concludes with the observation that a team-based approach to complete work is neither inherently good nor inherently bad, but it is critically important to form teams made up of individuals who are convinced of the utility of team-based approaches and who have a clear understanding of how team achievement links to overall organizational goals. Types of Team Compensation Programs Just as it is difficult to clearly describe team components, it is similarly difficult to clearly determine how to best compensate teams. Milkovich (2002, pp. 308-309) asks the basic question of whether or not any incentive plan actually boosts performance. He determines that the answer is undoubtedly yes, but he is equally emphatic in describing the intrinsic difficulties of assigning fair distribution of group rewards to individual performance. He goes on to outline several quantitative approaches that have had some success in the business environment. One such approach is the gain-share plan. In this construct, employees are rewarded when the team achieves some type of quantifiable performance gain. Often, this is tied to gains in profits. Other measures may include reduced waste and scrap, lower labor costs, increased market share, etc. According to Milkovich, some of the key elements of a gain-share plan include: Strength of reinforcement, implying that incentive pay should be tied to behaviors that help achieve team objectives. Productivity standards that are clearly defined and accepted by employees as fair. Equitable share between management and employees, including provisions for emergency reserves to cover lean production periods. Scope of the formula to ensure reasonably broad types of productivity and ensuring that counterproductive behaviors are not encouraged. Perceived fairness that includes all reasonably involved contributors. Ease of administration to preclude communication difficulties. Production variability measures that account for production volatility. Another approach to the problem is the Scanlon Plan. This approach is designed to lower labor costs without lowering the level of activity (Milkovich, 2002, pp. 313-314). Incentives are a function of payroll costs divided by net sales. The resulting figures are adjusted to provide a split between team members and the company, with provisions to provide some emergency reserves to compensate for periods of low productivity. Similar to the Scanlon Plan is the Rucker Plan, which uses a more complex calculation to determine group productivity. In this plan, production bonuses are determined by the ratio between the total wage bill and the value of the total production. Bonuses are tied to the amounts over projected value of production that can be directly tied to the contribution of labor. Improshare ( improved productivity through sharing) is a newer gain-share plan that Milkovitch says is easy to administer. Plan developers find a standard of production that reliably predicts the expected number of hours required to produce a predetermined output. Employees are rewarded for besting that standard in a 50/50 split with management. Earnings-at-risk plans are still another approach to group incentives. Milkovich (2002, pp. 317318) cautions against separating this approach from the others because, in a sense, all incentive plans are based on the risk that production will fail to meet expectations, with an accompanying drop in wage levels. However, it is also important to remark that there are a large variety of ways to tie performance gains to group activities that cannot be neatly categorized in one of the gainshare plans mentioned above. From the above examples, it is easy to understand how complex the team compensation equation can be. For HR managers it is imperative to align all of the various components of a team-based structure to ensure that the essential elements of efficiency, equity and compliance are included in compensation development. Examples of Previously Successful Team Compensation Programs By now, it should be evident that there is tremendous variety in the way team-based compensation programs are structured and implemented. It is even possible to say that each company devising such a team-based plan is unique. Nevertheless, it is helpful to explore some actual examples of how different companies have implemented these strategies. Zenith Electronics Corporation developed a pilot program to test a new compensation program based on project equity (The Management Roundtable, 1997). The initiative came as a result of a billion-dollar contract Zenith won to develop a system of delivering digital technology to consumers via a single in-home setup box. Devising a series of milestone-related incentives, each full- and part-time team member was given a specific number of shares that would eventually convert into substantial bonuses, providing the team reached each of its predetermined milestones. In addition, about 30 percent of the total available shares were reserved to reward particularly outstanding individual performance in meeting team goals. The company was careful to build flexibility in the pilot program to ensure that the incentive plan succeeded in motivating employees to keep performing at a high level, especially in light of the many changes that had to be made in response to changing customer requirements. In the end, the company met all of its objectives and is currently planning to expand on this initial success in future endeavors. General Motors (GM) created a new set of team incentive programs in its Saturn Corporation subsidiary (Overman, 1995). The first of GMs divisions organized completely along self-directed work teams, the company had great leeway in developing an entirely new (for GM) compensation program. The new plan was developed with base pay, risk pay and reward pay components. While base pay lags the competitive market, overall compensation can be substantially above the prevailing market rate. At its inception, risk pay was set at five percent of total compensation pay, but subsequently was increased to 10 percent. The company credits an extensive team training curriculum coupled with a general perception that the rewards system is fairly administered to the success of the novel program. Sales organizations present unique problems to HR managers charged with developing a teambased compensation system. By long-standing tradition, most sales-oriented units are very closely aligned with an individual incentive plan. Wally Wood (1994) outlines some successful strategies sales forces have used to reengineer along team-based lines. Monroe Auto Equipment Co. in Monroe, Michigan, effectively implemented a 100 percent team plan for its sales force. The company decided that freeloaders was a sales-management problem, not a sales-compensation issue and pays each team member equally based on team performance. At least at Monroe, this approach has proven successful: the company regularly secures the highest market share and margins within its territory. Another company, The Alexander Group, realized success by reengineering its sales force along customer lines. By redefining the customer base, the company was able to focus sales teams on the most likely targets for their medical products, with accompanying increases in team success. Wood cites several other examples of successful transitions of sales organization from individual to team-based compensation programs. He finds that companies ranging from small furniture outlets to behemoths like Hewlett-Packard can successfully make this transition, provided top management clearly explains the importance of the change and consistently applies the team-based formula. So Now What? Developing a team-based compensation plan is inherently difficult for many reasons. Foremost among these are overcoming traditional reliance on individual-based pay and the difficulties in devising formulas that accurately reflect individual contribution in a team environment. As with all compensation issues, it is critically important to meet the standards of efficiency, equity and compliance in establishing group performance plans. While this paper cannot claim to encompass all of the critical issues involved, it can serve to help HR professionals begin the arduous process of developing a team-based approach. Some common elements recur throughout the existing research material on this subject. Team compensation must reinforce appropriate behaviors. Team objectives must be unambiguously aligned with overall strategic goals. Development of team compensation plans should coincide with other internal reengineering efforts that together reinforce the new team-based organizational structure. There is no single best way to implement team plans. Each must account for a wide difference in corporate goals, ability to pay, environmental variables and more. The organization leaders must have a strong conviction that these changes are necessary to achieve long-term organizational needs. Lastly, and probably most importantly, the redesigned plan must be accurately communicated to all affected employees to ensure commitment and acceptance of the plan. Bibliography Cauldron, S. (1994, October). Tie individual pay to team success. Personnel Journal, 73(10), pp. 40-46. Fairfield-Sonn, J. (Date undetermined). Moving toward a team-based organization: linking strategy and structure. Retrieved from http://blue.temple.edu/~eastern/fairnet.html . Milkovich, G. T., & Newman, J. M. (2002). Pay for performance plans. In Compensation (7 pp. 307-351. Boston: Irwin McGraw-Hill. th ed.), Overman, Stephanie. (1995, March). Saturn teams working and profiting. HR Magazine, 40(3), p.73. Shonk, J. H. (1992). Team-based organizations. Homewood, Il: Business One Irwin. The Management Roundtable. (1997). Zenith rewards key project team with project-based shares. Retrieved from http://navibar.mapnavibar.map.html Wood, W. (1994, April). Reinventing the sales force. Across the board 31(4) , p. 24. SHRM wishes to thank Larry S. Carlton, DBA, SPHR for contributing this paper. This paper is intended to provide general information and is not a substitute for legal or other professional advice. Larry Carlton is an Associate Professor with the Extended Campus of Embry-Riddle Aeronautical University. He holds a B.S. and M.S. in Human Resources and a DBA. Mr. Carlton is Vice President of HR for Bio Tech Services, Inc. and the 2003/2004 President of the Sumter HR Management Association. Fundamentals of Employee Recognition SHRM White Paper 5/1/2005 By Teresa A. Daniel, J.D. and Gary S. Metcalf, Ph.D. Introduction Rewards Get Results There are two things that people want more than sex and moneyand that is recognition and praise. This observation is attributed to Mary Kay Ash, the successful founder of Mary Kay Cosmetics, but could have been made by any number of HR professionals who know this statement to be true. High-performance companies understand the importance of offering awards and incentives that recognize, validate and value outstanding work. They keep employees motivated and are effective methods of reinforcing company expectations and goals, especially in times when merit budgets are low (or even frozen), promotions are rare, health care premiums are on the rise and overall job satisfaction is low. According to the latest research, nearly nine out of 10 companies offer some sort of recognition programs for employees. From informal programs (a simple thank you) to formal programs (such as service recognition or above-and-beyond performance programs), companies are using everything from plaques to vacation packages, merchandise to spa certificates as a way to say, Nice job! For a program to be effective, however, it must create value. This means that any program must have a performance componentor it will be meaningless. While many managers, including those in HR, sometimes dismiss recognition and reward programs as feel-good activities, evidence suggests that there is a strong link between noncash awards and incentives and improved job performance. In fact, nearly all of the companies responding in the 2003 National Association for Employee Recognition/WorldatWork study reported aligning recognition strategies directly to the overall strategy of the organization. This indicates that companies are thinking very strategically about the programs they implement and the impact those programs can have on the success of their organizations. Noncash awards and incentivesranging from a note to the employee that says, Good job to a gift certificate for a nice dinnercan be a cost-effective and valuable tool that can help raise employee morale, lower stress, absenteeism and turnover, and increase productivity, competitiveness, revenue and profits. If you look at companies that people love to work for, you will find that these are the companies that recognize their people and not only tell them that they are doing a great job, but show their appreciation through tangible signals such as incentives, recognition and rewards. Rationale for Implementing a Recognition Program In the 2003 National Recognition Survey, sponsored by WorldatWork and the National Association for Employee Recognition (NAER), 87% of the 413 responding companies reported that they had some form of an employee recognition program and 40% of the respondents indicated that they were expanding their programs. Companies hope to achieve a number of results through their recognition programs, but creating a positive work environment was the top reason cited in this survey (80%). Other goals included creating a culture of recognition (76%), motivating high performance (75%), reinforcing desired behaviors (75%), increasing employee morale (71%), supporting the organizations mission and values (66%), increasing retention/decreasing turnover (51%), encouraging loyalty (40%), supporting a culture change (24%) and other (5%). Companies have also cited a number of additional reasons for adopting these types of programs, including the following: reducing costs; attracting and retaining key employees; increasing employee productivity, competitiveness, revenues and profitability; improving quality, safety and customer service; and lowering stress, absenteeism and turnover. While it is clear that employees benefit from these types of programs, it is the companies adopting them that benefit the most. Findings from a recent Watson Wyatt Worldwide study indicate that companies with an effective recognition program in place realized a median return to shareholders that was almost double that of companies that did not have any such programs in place. Keys to an Effective Program Employees not only want good pay and benefits, they also want to be valued and appreciated for their work, to be treated fairly, to do work that is important, and to have opportunities for advancement and involvement in the company. Recognition and reward programs play an important role in organizational success by helping attract and retain high-performing employees. An effective recognition program should meet several essential criteria, as outlined below. 1. Management Commitment Managers must commit credible and sufficient resources to any incentive program. The road to results begins with resources. Simply put, management backing is the key ingredient. Managers must dedicate the resources, including the time it takes to plan and execute a program. And managers must provide something elsegive employees and supervisors the power to run the program. 2. Link to Bottom-Line Results of the Company To be effective, any program must connect with the needs and expectations of the workforce, as well as the companys overall goals and strategies. If there is no direct link to the bottom-line results of the company and no performance measures to establish this link, employees will be left wondering why the company is offering a program that is so disconnected from their day-to-day reality and the company will get no meaningful payback on its investment. 3. Recognized Value of Awards to Employees Employees must understand the missionwhy the incentive program is being launched. They must be convinced that the chosen recognition system is appropriate for the sacrifices that will be expected in order to achieve the programs goals. The way to make this happen and get buy-in at the same time is to give employees ownership of the program. Employees must have some opportunity to make decisions and exert control over the programs direction. Any materialistic awards and rewards must be valued by all participants and perceived as having value, dignity and meaning. A recognition system begins to falter when employees start thinking that their actions are being insulted by inconsequential incentives. 4. Fairness/Equity in Distribution of Awards The participants in the program must believe that the system of recognition is just and objective. To achieve this, all employees who meet the criteria outlined for receiving the award should be included and recognized. Some companies even include employees in the selection of incentive recipients and also in the determination of selection criteria. 5. Simplicity of Program The entire incentive process should be thoroughly maintained with a minimum of administrative effort. Keep it simple. Any system that requires either excessive management control, financial calculations that require complex gyrations or sophisticated plans that require exceptional employee understanding will not achieve desired results. 6. Continuous Evaluation/Improvement Programs must be continuously monitored in order to keep them relevant and current. The evaluative process should include a review of the following types of questions: Does the program provide rewards that are adequate, fair, competitive and appropriate? Have the programs objectives been met? Has it helped to change processes and/or did it support the companys other performance initiatives? Are there appropriate levels of communication? Was there a celebration? Do employees find the program to be meaningful? What would you do differently the next time? This evaluative process should be completed at the conclusion of every award cycle so that adjustments can be made to improve the system and also to update the program to retain employee interest. What Makes a Good Reward? Be SMART Recognition can be delivered in a number of ways, but to be truly effective, it should be delivered in a SSMART way (with credit to Jim Brintnall for this acronym): 1. Supports Organizational Goals and Values Any incentives or recognition awards will be most successful when they are congruent with the organizations stated mission, vision, values and goals. It is important that employees see a clear connection between what management says is important and what is actually rewarded at work. 2. Sincere and Simple Be sure that the awards are appropriate for your culture and that they are given in a sincere and heartfelt manner. Managers and supervisors often fail to give recognition because they dont know what to say. A simple recipe for recognition can work magic in your organization: thank the employee by name; state what the employee did to earn the recognition; explain how you felt about the employees behavior; state how the behavior added value to the company; and thank the employee again by name. Calling the person by name and letting him or her know that you personally value the effort can be as motivating as the actual reward. 3. Meaningful An employee who completes a two-year project should be rewarded in a more substantial way than an employee who simply does a favor for his or her manager. Beware of canned award or incentive programs. Company cultures differ greatly, and what works in one environment may fail woefully in another. The reward must be meaningful to the individual receiving it. Since all of us are different, it is incumbent on the persons manager to learn enough about his or her subordinates to know what types of things motivate them and what they would find important. Beware, though, of the form letter. One quick thank you note on a managers personal stationery will have much more impact than a cup with the companys logo and a form letter. The way the reward is delivered can make or break the programpeople can be more motivated by a single act of personal consideration by their manager than by a large cash bonus that is delivered poorly. 4. Adaptable In addition, certain groups of employees may not be motivated by all of the companys incentives. As a result, it is important to offer a variety of incentives and recognition opportunities in order to meet the varying needs of the workforce. For example, Generation X employees (those born between 1966 and 1978 and who have earned a reputation for their lack of commitment to organizations in terms of time and loyalty) are more likely to be motivated by time off than money, while older workers will likely find the bonus incentives more attractive. 5. Relevant The things that get rewarded are the things that get done. It is critical to decide what behaviors to reward and then to reward them consistently. Be specific as to why the reward is being givenwhat behavior occurred that is being reinforced? 6. Timely The reward or recognition should be made as close to the time of the desired behavior as humanly possible in order to strengthen the link between the employees action and the result to the company. Conclusions The most effective ways to motivate employees to achieve the desired goals of the organization include creating an environment with strong, respectful and supportive relationships between the organizations managers/supervisors and employees and a focus on genuine expressions of appreciation for specific employee achievements, service milestones and a day-to-day acknowledgement of performance excellence. In a nutshell, a positive employee reward and recognition strategy can be summed up by the following: nothing is better than a sincere thank you for a job well done. Appendix: Climate Assessment for Your Current Recognition Program While not all-inclusive, your answers to the following questions will provide you with a quick and dirty overview of how well your organization is doing in terms of rewarding and recognizing employees. Rate yourself honestly on the True/False questions listed below by noting a T or F beside each statement: 1. ___ We show some form of appreciation to our employees every week. 2. ___ We measure what we reward and we reward what we measure. 3. ___ We compete, between teams, for gifts and prizes. 4. ___ Employees get to choose at least some of their projects. 5. ___ We reward behaviors linked to only one or two key organizational values. 6. ___ Employees see the rewards we currently offer as valuable. 7. ___ Employees generally think that our reward programs are silly or demeaning. 8. ___ Our organizational, departmental and individual goals are clearly defined and understood. 9. ___ Peers recognize and reward each other. 10.___ We recognize small improvements as well as the major ones. To score your answers: Score one point for TRUE on questions 1, 6 and 10. Score two points for TRUE on questions 2, 4, 8 and 9. Score one point for FALSE on questions 3, 5 and 7. Grand total of your points = ______ What Your Total Score Tells You: 13 14 points: EXCELLENT!! Youre doing a great job. 11 12 points: Job satisfaction among employees is likely to be fairly high. Keep working to improve your retention rates. 7 10 points: Not bad, but you are still losing key people by missing essential components in your recognition program. 1 6 points: It is time to rethink your recognition program. There are more strategies available to you.