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American Association of School Personnel Administrators

Key Elements of a Total Compensation Plan

Presented by:Bruce G. Lawson, CCP

PresidentFox Lawson & Associates LLC

PO Box 32985Phoenix, AZ 85064

Phone: (602) 840-1070Fax: (602) 840-1071

October 22, 1999

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Objectives of This Presentation

Discuss latest best practice Strategic focus Multiple systems to meet specific business unit

needs Key Elements of a strategic compensation plan

Job analysis Job evaluation options Compensation program Alternative reward systems

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Strategic Compensation

Aligning the compensation system with the goals and objectives of the School District:

• Spend dollars to achieve greatest impact• Match productivity with results• Stimulate creativity• Enhance "ownership" value

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Strategic Compensation

The conceptual design of a compensation program should be based on: • The business environment• The organizational environment• Employee considerations• The market environment

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The New Business Environment

Strategic planning is necessary Planning is specific and long term

Market share is threatened - there are new competitors

Past success is no guarantee of future success Productivity and quality are paramount

Reorganization and restructuring

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The New Organizational Environment

Reduced layers of management - fewer career opportunities More direct impact on performance

Shorter term employees - loyalty to career, not the organization

An aging work force - decreasing pool of talent Decreasing number of specialists but increasing needs Entry level educational skills - changing demographics

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Current Considerations

Attract, retain and motivate Increased interest in incentives

Achieving pay in relation to performance

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Future Compensation Trends

Emergence of management as an "investor" Increased focus on entrepreneurship Higher pay levels of all types Growth in variable elements of pay - linking pay directly with

productivity and "profit" Increased decentralization of pay programs

Decreased emphasis on internal equity Increased differentiation of pay practices by organizational unit

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Systems to Consider

Mix of reward versus entitlement pay Individual versus group incentives Performance measurement Alternative reward approaches

Broad banding Skill based pay Individual incentives Group based incentives

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Elements of a Strategic Compensation Program

Job analysisJob evaluationBase compensation planAlternative reward systems

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Job Analysis Considerations

Data collectionData verificationEstablishment of classification

structure

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Job Evaluation Options

Point factorFactor comparisonMarket pricingDecision banding

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Compensation Plan Development

Select benchmarksMarket pricingSurveys versus published dataCompensation structure design

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Alternative Reward Systems

Broad bandingSkill based payGoal sharing/Gain sharingPerformance based pay

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Broad Banding

Broad Banding is the collapsingof a number of traditional salaryranges within a traditional salarystructure into a few broad bands.

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Characteristics of a Broad Band system

Significantly fewer salary grades (or bands) Much wider ranges than those of

conventional pay structures No salary range midpoint identified because a

band encompasses so many jobs of differing value

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Broad Banding - Advantages

Greater flexibility in moving employees to meet organizational needs (lateral moves)

Less focus on titles and pay grades (supports team approach) Encourages broadening of skills Eliminates geographical structures Supports flatter organizational structures Less time spent on job evaluation Offers a wider spread of pay opportunity in which to recognize and

reward different levels of individual employee contribution Supports an orientation towards greater responsibility on the part of

management to "manage compensation"

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Broad Banding - Disadvantages

Can be difficult to conduct external competitive analysis by job title or class summary benchmarking

Wider ranges result in less traditional cost control measures elimination of control points (midpoints) higher salary range maximums

Places more responsibility for administration on both Human Resources and Management

Employee education/communication is critical Requires a different job evaluation orientation (traditional systems

will not work) Inflated expectations from stakeholders

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Broad Banding - When Will It Work?

When you want a pay structure which supports a flatter organizational structure

The organization strongly supports career development, cross-training and inter-occupational mobility

Pay for skills (compensation) is encouraged Change has top management's support Effective communication channels exist within the organization An effective performance management system is in place First-line supervisors are well trained in performance management

and in communicating the elements of the pay system to employees

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Broad Banding - When Is It Likely to Fail?

The Organization’s existing culture values a traditional organizational hierarchy

The current compensation program is successful and already supports the organization's business strategy

Many elements are currently tied to pay grade (e.g. eligibility for benefits and incentives, office size, etc.)

Banding is regarded only as a way to solve salary administration issues

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Skill Based Pay

Skill based pay is a systemdesigned to reward employees forthe skills they possess and use inthe work setting. Pay is directlyrelated to the number of definableand measurable skills acquiredand applied.

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Characteristics

Individually based pay versus job based pay Focus is on skill development Encourages cross training Permits flexibility in staffing

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Skill Based Pay - Advantages

Encourages skill development and career development

Creates staffing flexibility Improved employee satisfaction Reinforces teamwork and employee involvement Lower staff requirements for the same amount of

work Higher output and quality over the long term

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Skill Based Pay - Disadvantages

Can be difficult to conduct external competitive analysis by job title benchmarking

Skill blocks can be difficult to define and price Works best for trades and production based jobs May result in paying for skills not used Certification/re-certification process needs to be

established Time and money needed for training More employees can "top out" Administrative complexities

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Skill Based Pay - When Will It Work?

When you want a pay system which supports a new culture

The organization strongly supports career development and cross-training

Pay for skills is encouraged The change is supported by supervisors and managers When training money and time are readily available The organization supports total quality initiatives

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Skill Based Pay - When Is It Likely To Fail?

There is a lack of supervisor and management support

Unwillingness to endure implementation problems

Cultural desire for equity at expense of individual differences

Skill blocks are not well defined Failure to install proper certification process

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Individual Based Incentives

Individual based incentivesinclude any plan(s) that reward(s)individual employees for theirown performance or contribution.

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Characteristics

Emphasis is on individual performance or contribution

Types of plans include:• Pay for performance• Suggestion programs• Recognition programs

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Individual Based Incentives - Advantages

Focus on individual employee performance or contribution

Consistent with historical values of pay and performance

Incentive to address performance issues Relatively easy to install

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Individual Based Incentives - Disadvantages

Plans lose potency after 1 - 2 years Difficult to set measurable performance criteria for many jobs Encourages individual performance at expense of group Can create feelings of superiority and/or inferiority Creates administrative systems that must be monitored May be perceived as unfair because of its subjective nature Forces managers/supervisors to confront employees who do not

perform at or above standards

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Individual Based Incentives - When Will They Work?

Clear measures are established for success Evaluators receive good and frequent training Rewards are worthwhile and meaningful Communication is excellent When top performance can be distinguished from regular

duties The organization supports individual effort over group

performance

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Individual Based Incentives - When Are They Likely To Fail?

Managers/supervisors cannot or will not distinguish between different levels of performance

Organization does not fund the incentive program - rewards are not meaningful

Measurement system is poorly defined Monetary value is low in comparison to

effort expended

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Group Based Incentives

Group based incentives focus on solvingproblems of cost, quality, and efficiencyleading to a monetary reward for documentedimprovements. Programs include:

• Small group incentives• Gain sharing/Goal sharing

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Characteristics

Emphasis is on teamwork Teams are rewarded for improvement Rewards ($) are usually considered "found"

money Formula based (not subjective) Measures of improvement can be financial,

operational or a combination

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Group Based Incentives - Advantages

Encourages teamwork and employee involvement

Increases in pay are funded out of "found" money

Supports new culture of work Encourages higher productivity and quality Lower staffing levels needed

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Group Based Incentives - Disadvantages

Plans need to be re-adjusted every few years Difficulty in setting measurable objectives Public distrust of paying for improvements Productivity improvements need to be bought

back Rewards may not be large enough to motivate

change in behavior Significant time and cost involved to set up

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Group Based Incentives - When Will They Work?

When the culture supports teamwork Good base line performance measures are

available Management and employees enjoy a level of

mutual trust When all levels of employees are included When rewards are separate from regular pay The organization supports total quality initiatives

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Group Based Incentives - When Are They Likely To Fail?

Lack of policy maker, management, and supervisor support

Overly complex bonus/pay-out formula(s) Employee and management distrust Legislative meddling Lack of good baseline measures Poor communication

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The Bottom Line

Compensation should be used as a tool to assist the District in achieving its strategic objectives

It should be consistent with organizational needs

It should be responsive to employee concerns