PATHWAYS AND PROGRESS:

Best Practices to Ensure Fair Compensation

A cutting-edge report on compensation practices

demonstrating flexible approaches and proven solutions

by Chicago Area PartnershipsA collaboration of community, government and corporate representatives

The Chicago Area Partnerships (CAPS) is a unique organizational modelencompassing community, government and corporate representatives who havecome together in partnership to discuss and provide leadership on workplace issuesin which they have shared interest. Convened in 1992, CAPS was created to providea forum where key women’s and civil rights organizations, federal contractors con-sidered leaders in affirmative action, and Office of Federal Contract CompliancePrograms (OFCCP) officials could come together to examine, discuss, and deviseinnovative programs to address any or all aspects of cutting-edge issues in equalemployment opportunity/human resources (EEO/HR), as well as to share creativeand voluntary approaches to already-existing programs and policies. CAPS fulfillstwo significant purposes. First, meetings of this uniquely composed group result inbringing together important players to network and communicate different perspectives and practices. Second, it provides opportunities to collaborate on specific EEO/HR projects.

Additional copies of this report areavailable for $10 per copy to coverpostage and handling from: Women Employed111 North Wabash AvenueSuite 1300Chicago, Illinois 60602

The report is also available online atwww.womenemployed.org.

May 2003

CAPS MembersAbbott LaboratoriesAllstate Insurance CompanyBank OneDeloitte & Touche LLPExelonMotorolaNorthern Trust Bank

Chicago Jobs CouncilChicago Women in TradesMexican American Legal Defense

and Education FundWomen Employed

U.S. Department of Labor, Office of Federal Contract Compliance Programs

Emeritus MembersKathleen AlmaneyLarry HolleranHalcolm HollimanNick JudgeJoanne Strong

PATHWAYS AND PROGRESS:

Best Practices to Ensure Fair Compensation

by Chicago Area Partnerships

A collaboration of community, government

and corporate representatives

May 2003

1 Executive Summary

3 Introduction

5 Definitions

6 Barriers to Fair Compensation

9 Best Practices

Case Summaries

11 The Allstate Corporation

14 Bank One Corporation

17 Chicago Panel on School Policy

19 IRMCO

22 Northern Trust Corporation

25 United States Government

28 YSI Incorporated

29 Glossary of Compensation Terms

30 Resources

31 References

Contents

1

Pathways and Progress: BestPractices to Ensure FairCompensation is the product ofthe Chicago Area Partnerships

(CAPS), a unique organizational modelcomprised of community, governmentand corporate representatives. CAPSwas created in 1992 as a forum to dis-cuss and provide leadership on work-place issues. In 1996 CAPS published a report, Pathways & Progress: CorporateBest Practices to Shatter the Glass Ceiling.Both of these reports and the CAPSmodel represent what can be achievedwhen common interests are identifiedand ideas are shared in a collaborativeprocess.

Pathways and Progress: Best Practices to Ensure Fair Compensation begins bydefining a set of commonly used termsas they relate to employment and com-pensation systems: bias, compensation,compensation philosophy, discrimination,and fairness. Fair compensation is anobjective, balanced assessment of per-formance, market, competencies andother job-related factors. It is nondis-criminatory, nonbiased and, at a mini-mum, is in compliance with all lawsand regulatory requirements. It hasconsistent internal systems and a regu-lar audit to ensure implementation.

The report next identifies multiplebarriers that often hinder the realiza-tion of fair compensation in manyorganizations. Potential barriers fallinto one of the following five cate-gories:

Philosophy: An internally publishedstatement that articulates an organiza-tion’s approach to compensation

Structure: Systems developed toimplement a compensation philosophy

Administration: The implementationof compensation systems

Measurement: Internal processes and external benchmarks to evaluateimplementation

Communication/Education: Theopenness and clarity of an organiza-tion’s philosophy, process, and administration

Although numerous barriers to fair compensation are delineated inPathways and Progress, it is vital thateach organization identify those barri-ers that specifically affect that organiza-tion’s unique culture and work environment.

Potential barriers include

� Failure to consistently apply thecompensation philosophy to all levelsof the organization, including execu-tives and senior management.

�Wage compression issues that maygenerate fairness issues; for example,the marketplace may drive new-hirewages higher, while current experi-enced employees’ salaries do not rise as quickly.

� Discretionary rewards that rely on a superior’s discretion and judgment,rather than on preestablished criteria.

� Fear of what might be found (or fear of the potential cost of fixing what might be found) that may inhibitefforts to review practices or mayinhibit communication about theresults.

� Lack of communication aboutrewards systems: employees must fullyknow what it is, when it is awarded,and how it is awarded for the programto be perceived as fair and consistent.

Pathways and Progress presents a seriesof best practices that offer practical andeffective solutions to address the barri-ers to fair compensation.

Best practices include

� Promoting an integrated view ofrewards—not only traditional, quantifi-able elements, but also more intangible,non-cash elements such as careeropportunities, learning and develop-ment, work challenge, and supportiveculture.

� Directly linking an organization’sperformance appraisal system to thecompensation system and ensuring thatpeople within the system know therelationship between the two.

� Transparency—in other words,employees understand the process orsystem by which they are paid.

� Auditing front end and back end with basic tests for irrelevant factors.

� Creating good dialogue at the top,with the CEO, owner or executivedirector.

CAPS believes that there is value inhighlighting specific models or bestpractices to prevent or eliminate poten-tial arbitrariness and/or discriminationin compensation practices. The reportincludes seven case summaries of pro-grams that promote fair compensation.The organizations showcased representa broad range of employers—small andlarge businesses from the corporate,government, and nonprofit sectors.Organizations were asked to submitcase summaries describing efforts thatwere comprehensive, instructive andtransferable and that demonstratedresults. The case summaries capturemany of the components outlined inthe five best practice categories identi-fied by CAPS. They are meant to beinformative rather than exhaustiveexamples of best practices.

Executive Summary

2

Organizations that contributed casesummaries are

The Allstate CorporationBank One CorporationChicago Panel on School PolicyIRMCONorthern Trust CorporationUnited States GovernmentYSI Incorporated

Pathways and Progress: Best Practices toEnsure Fair Compensation provides ref-erence points for organizations toassess and measure their compensationphilosophies and practices. This reportshould challenge organizations to askwhat more can be done to open path-ways and achieve real progress for theiremployees.

Additional copies of this report areavailable for $10 per copy to coverpostage and handling from: Women Employed111 North Wabash AvenueSuite 1300Chicago, Illinois 60602

The report is also available online atwww.womenemployed.org.

CAPS MembersAbbott LaboratoriesAllstate Insurance CompanyBank OneDeloitte & Touche LLPExelonMotorolaNorthern Trust Bank

Chicago Jobs CouncilChicago Women in TradesMexican American Legal Defense

and Education FundWomen Employed

U.S. Department of Labor, Office of Federal Contract Compliance Programs

Emeritus MembersKathleen AlmaneyLarry HolleranHalcolm HollimanNick JudgeJoanne Strong

3

Compensation is an essentialand universal component ofthe management process ofevery organization. Most

organizations want to fulfill their mission, achieve their objectives andmaximize return on their investment,particularly on their human capital.Doing so requires that their compensa-tion philosophy, design, delivery anddecisions be balanced, fair, focused, and understood by their employee andpotential employee constituencies.

The Chicago Area Partnerships(CAPS) is a forum of community, gov-ernment and corporate representativeswhose mission is to freely and openlydiscuss and provide leadership onworkplace issues. The partnership has a ten-year history of bringing diverse,credible and unique perspectives tothese issues. CAPS targets as majorprojects specific issues that are bothpervasive and problematic—pervasive in that they affect workers atall levels in all types of organizationsand work environments, andproblematic in that they can be easilyimpacted by arbitrary and biasedbehavior.

Project purposeCAPS’ focus on this project is intendedto promote fair compensation philoso-phies, policies, processes and behaviors.By encouraging practices that enableand enhance an organization’s ability torecruit, retain, incent, and reward itsemployees, CAPS hopes to addressboth the real and perceived problemsassociated with compensation.

Value statementThe following beliefs are embodied inthe organization, presentation and documentation of this project:

� Compensation should reflect the rel-ative value of an individual’s contribu-tion to an organization, a principle that

FocusThe focus of this project is on theprinciples of fairness as they apply toemployee compensation within anorganization. Even though benefits areconsidered integral to any total com-pensation philosophy and the princi-ples of fairness are equally applicable,the project’s primary emphasis isdirected to pay as represented bywages, bonuses, incentives, stockoptions, etc.

Fairness is an issue withincompanies and across labor

markets. In this study thefocus is on what can becontrolled by individualor collective entities.Cross-industry or cross-sector issues, such as the

relative social valueassigned to industry vs.

nonprofits or pay systemscovered in master bargaining

agreements, are examples of uncon-trollable elements. We do, however,address issues in which market differ-ences can influence the fairness of paywithin a company, such as the weightgiven salary history in nonprofit vs.for-profit sectors.

Executive compensation, its fairnessand its magnitude, are issues of currentand continual interest to employeesand the general public. Although weacknowledge the high interest, thedesign of compensation plans for a fewof an organization’s executives is not aspecific topic of this project. However,the magnitude of executive compensa-tion, both in actual practice and in per-ception, is referenced in various projectsections as it relates to the concept ofoverall pay fairness.

As indicated in the “Project Scope”section, collectively bargained compen-sation and administration shouldinclude the application of the fair com-pensation principles and elements out-lined in this project. However, the way

should be universally applicable to allemployees in that organization. Actualcompensation practices can be adverse-ly affected by irrelevant factors and canconsequently become arbitrary andeven discriminatory.

� The employment community willbenefit from a thoughtful discussion of the challenges in establishing andmaintaining fair and equitable compen-sation practices within its uniqueorganizations.

� There is value in high-lighting specific models,including best practicesthat are effective inpromoting fair com-pensation.

Project scopeThe project’s intent is toaddress compensationpractices that are realisticallyapplicable to all levels of employees,occupations and workplaces, includinggovernment agencies, for-profits andnot-for-profits. The principles and fundamental concepts included in thisstudy can also be useful in both thenegotiation and the implementation ofwage and benefit sections of collectivebargaining agreements.

Primary audiencePeople who make compensation deci-sions will gain the greatest value fromthis project. That includes compensa-tion committees of boards, executives,owners, managers and supervisors,human resource and compensation specialists, and union negotiators, i.e.,anyone who cares about and canimpact the fairness of compensation. In addition, employees, present andpotential, will find this document help-ful in understanding and determiningwhat constitutes a fair compensationsystem.

Noteto start-ups and

micro businessesThe same principles and

fundamental concepts in thisstudy apply. See Resources,

page 30, for additionalmaterials.

Introduction

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in which bargaining is conducted, thedevelopment of bargaining objectives,priorities and trade-offs are not topicareas on which this project is focused.There is an implied assumption thatconcluded agreements are in the bestinterests of represented employees andthe management with whom they arenegotiated. Good faith in bargainingfor fair compensation is a basic tenet.

This project is not an exposition ofthe technical aspects of compensation,comparable worth or living wage con-cepts, nor is it an interpretation of legaland regulatory requirements. Legal andregulatory mandates are considered abaseline for implementing any faircompensation plan or practice.

Value of the project to employersAll employers recognize the impor-tance of attracting, hiring and retainingemployees with the skills, abilities andother qualities necessary to achieve thegoals of their organizations. Theseskills, abilities and qualities are possessed by many people whose per-sonal characteristics—e. g., age, disabil-ity, ethnicity, gender, nepotism, race,sexual orientation, veteran status—maynot be identical and should be irrele-vant in making hiring, compensation,advancement, and other humanresource and business decisions.Compensation is a key factor in attract-ing and retaining women and people ofcolor, vital and growing components ofthe current and future workforce.

The models, practices, guidelines andresearch presented in this project willhelp employers evaluate their currentcompensation practices and solve equi-ty problems they may have, as well asprovide flexible and proven practicesthey may wish to adopt.

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BiasCriteria used by an employer inemployment decisions that are legal but have no objective correlation towork performance.

CompensationPay and benefits. Our focus in this document is primarily on pay. Payincludes wages, bonuses, stock options,incentives, etc.

Compensation PhilosophyThe principles that guide design,implementation and administration of compensation in an organization.Compensation philosophy drives thestrategy that aligns an organization’scompensation program, consisting ofboth pay and benefits, with the organi-zation’s mission, goals and businessobjective. Having a compensation philosophy ensures that a compensa-tion program supports an organization’sculture.

Definitions

DiscriminationCriteria that are used by an employerin employment decisions (e.g., hiring,compensation, promotion, discharge)but that are prohibited by law. Federalstatutes prohibit discrimination inemployment based on age, color, dis-ability, national origin, race, religion,sex and veteran’s status. State and localstatutes may, in addition, prohibit dis-crimination based on marital status,parental status and sexual orientation.

FairnessFair compensation is an objective, balanced assessment of performance,market, competencies and other job-related factors. It is nondiscriminatory,nonbiased and, at a minimum, is incompliance with all laws and regulatoryrequirements. It has consistent internalsystems and a regular audit to ensureimplementation.

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Barriers to Fair Compensation

Potential barriers to fair com-pensation fall into one of fiveseparate categories: philoso-phy, structure, administration,

measurement and communication/edu-cation. Listed here are the potentialbarriers within each category.

Philosophy An internally published statement ofcompensation philosophy that clearlyarticulates an organization’s approachto compensation can serve as an orga-nizational compass to ensure that allcompensation processes and decisionsare aligned and supportive of thedesired end result. Some potential barriers to fair pay related to compen-sation philosophy are as follows:

� Failure of an organization to developand communicate an articulated com-pensation philosophy and system.

� A company culture that does not support its own articulated fair compensation policies and practices.

� Failure to consistently apply thecompensation philosophy to all levelsof the organization, including execu-tives and senior management.

� Failure of an organization to main-tain its compensation philosophy or to articulate the changes in philosophycaused by adapting to changes ortrends in compensation practices over a period of time.

� Failure to clearly target a specificemployee-applicant population withinthe same business segment and level,resulting in multiple and contradictorychoices of whom the company wants to attract.

� Failure to take into account in thecompensation philosophy the conse-quences and/or impact of other company actions such as mergers,divestitures, etc.

� Failure to recognize the unintendedconsequences of particular compensa-tion decisions. For example, value-added compensation that pays peoplefor perceived additional value to thebusiness can be a double-edged sword:it can motivate those employees whostand to benefit from it and can discourage those employees who arenot eligible.

StructureCompensation practices are only aseffective as the systems developed toimplement the compensation philoso-phy. Most compensation systems havesome form of grade or level structurethat has implications for the fairness ofthe system. Some potential barriers tofair pay that are related to the structureof compensation systems and processesare listed here:

� The more complex a compensationsystem is, the more difficult it is totrack decisions and criteria regardingcompensation.

� Broad bands do not automaticallyresolve grade issues; job comparisonwithin a broad band can become evenmore difficult.

� Some organizations place great faithin market forces and/or market datawithout understanding the uses, limita-tions and consequences.� Inaccurate assumptions that certainqualifications are necessary for a jobcan influence the market data usedfor that job.� Companies may decide to test forhigher-than-minimum levels of qual-ifications, thereby skewing the infor-mation from which their market dataare gathered.� Geographic differences in pay aresometimes a subset of the marketdata issue.

� An organization’s performanceappraisal system may or may not betied to the compensation system, butthe relationship should be made clear.� The performance appraisal systemmay not truly be tied to the compen-sation system when it is stated that it is.� The performance appraisal systemmay be of poor quality, and the faithand reliance placed on such a systemto distinguish better and poorer performance may be misplaced.� Rankings and forced distributioncomponents of performance apprais-al systems may be counterproductiveto fair pay.

�Wage compression issues may gener-ate fairness issues; for example, themarketplace may drive new-hire wageshigher, while current experiencedemployees’ salaries do not rise as quickly.

� Systems may not have “fairness ofresults” as a stated goal, but the resultsof the processes need to be auditedagainst legal and fairness standards.

� The existence of multiple pay systems within a company can be a barrier if all are not tied to an over-arching compensation philosophy.

� Acquiring and blending (or notblending) pay systems through mergersor acquisitions can be a barrier.Whether or not two divisions are in thesame or different businesses can be afactor in deciding whether to blend thepay systems. It is possible to have acompanywide philosophy that ties different pay systems together.

AdministrationThe very best compensation system canbe undermined by improper implemen-tation. Some potential barriers relativeto system administration follow:

7

� Consideration of and adjustment forthe prior salary history of new hires canjeopardize fair pay in comparison tothat of incumbents.

� The lack of integrated organizationalsystems can be a barrier; for example,the recruiting system may not be fullyaligned with the compensation philoso-phy or system.

� A company’s current market per-formance and its competitive positioncan limit its available cash for compen-sation.

� Discretionary rewards can pose prob-lems for fairness because they rely on asuperior’s discretion and judgment,rather than on preestablished criteria.

� The greater the number of decisionpoints in a compensation process bymultiple managers at varying levels, orthe more diffuse those points are, thegreater the potential for unfair prac-tices to creep into the system.

� Untrained managers making com-pensation decisions can affect fairness.

� Incentive pay that is reserved for certain jobs or levels can create perceptions of unfairness.

� Companies can use marketplace pres-sures as an excuse to defend themselvesagainst inquiries into the fairness oftheir practices.

� Inconsistency breeds unfairness. Forexample, job grades may not alwaysmatch titles across the organization—i.e., the same title can have very differ-ent grades across functions. Variousfactors may drive grades and titleswithin an organization, for example,salary history, seniority, value of the jobto the organization, etc.

� Short-term decisions may have long-term consequences; for example, a difference in compensation that has

minimal impact in one year can add upto a substantial impact over the courseof several years.

� The ways that organizations quantifyand compare risk for different jobs maynot be valued consistently across theorganization. Types of risk include risktaking for the organization, risk man-agement for the organization, and riskthat individual employees assume, suchas commission-based pay.

� Compensation decisions may be tiedto the perceived impact of irrelevantfactors on performance, for example,being married or having children.

� Individual perceptions can influencefair pay. For example, managers mayfavor degrees from prestigious universi-ties or prefer employees with higherGPAs.

�Workforce characteristics mayunfairly influence pay practices; forexample, younger employees may bemore comfortable negotiating or discussing pay, and that factor mayinfluence an individual manager tomake unfair pay decisions.

� Consistency does not equal fairness:a compensation system or annual pro-gram that is administered consistentlymay still be unfair.

� Organizations may assign premiumsfor skills they do not already have in-house; but once these skills are in-house, they impact the pay and performance matrix of all other similarly situated employees.

MeasurementCompensation practices should includesome internal processes and externalbenchmarks to ensure that there is no unintended barrier to fairness operating within the system or itsimplementation.

� The absence of a systematic self-examination process can be a barrier to fairness. Failure to audit pay systemsperiodically or to make corrections asneeded can be a barrier to fair pay.

� Typically, organizations audit by raceand gender even though these are notnecessarily the only factors that canimpact fair pay practices. For example,age may be an appropriate factor toaudit. Although age can be tied tohigher wages as a function of experi-ence or seniority, some organizationsmay try to reduce costs by reducing thenumber of higher-paid employees.

� Audits are tied to systems issues: data that are not captured cannot beaudited.

� The size and sophistication of a com-pany can be a barrier to using someaudit techniques to ensure fair paypractices. It is more difficult, for exam-ple, to see patterns in data from smallercompanies. These may need to use dif-ferent, simpler audit techniques.

� Because of their size, smaller organi-zations or smaller units within anorganization may fail to audit andtherefore may miss unfair practices orinequities.

� Fear of what might be found (or fearof the potential cost of fixing whatmight be found) may inhibit efforts toreview practices or may inhibit com-munication about the results.

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� Audit techniques may become barriers if they are selected to drivefavorable results as opposed to provid-ing the best objective information.

� Audit results may not drive theexpected and required change.

� Comparison between dissimilar systems may produce erroneous conclusions.

Communication/EducationOpen, honest, clear and consistentcommunication regarding the organiza-tion’s compensation philosophy,process, and administration is a criticalfeature of a fair compensation program.Potential barriers to fair compensationrelated to communication and educa-tion are as follows:

� Since a company’s philosophy canand should impact its actions andchoices, it is imperative that allemployees and prospective employeesknow the philosophy.

� The degree to which systems andbenchmarks for measurement are clear-ly defined impacts both their fairnessand the perception of their fairness.

� A real or perceived cloak of silencesurrounding compensation can be usedto keep unfair pay practices hidden andongoing. For example, failure to postpay ranges where appropriate or to discuss ranges with employees or failure to create open communicationand dialogue about compensation,including a mechanism for raising and resolving issues—all can be detrimental.

� Communication is critical for bonusplans to be successful; bonuses can be abarrier to fair pay if the bonus structureis unknown by the affected workforce.

� Communication is critical forrewards systems; employees must fullyknow what the program is, when it isawarded, and how it is awarded for it to be perceived as fair and consistent.

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It is essential that each organiza-tion devise a compensation systemin the context of its particular mis-sion—what it is and what it does.

It is also important that executive lead-ers embrace compensation/fair paypractices since these individuals are thetrue change agents. A compensationsystem grounded in fairness typicallyintegrates various aspects of the fivebest practice categories listed here.

PhilosophyA compensation system encompasses a philosophy or set of principles bywhich people are paid. Best practices ina fair compensation philosophy includethese:

� Communicate any differentiation in pay practices clearly (e.g., payingcertain positions at higher-than-marketrates because they are the core of thebusiness).

� Clearly determine an approach for paying external hires relative toincumbents.

� Link pay ranges to neutral, relevantfactors (e.g., skill level, competencies,job description).

� Link compensation to the organiza-tion’s as well as the individual’s and/orteam’s performance by ensuring that allpay systems within the company,including executive pay systems, aretied to the overarching compensationphilosophy.

� Promote an integrated view ofrewards—not only traditional, quantifi-able elements, but also more intangible,noncash elements such as career oppor-tunities, learning and development,work challenge, and supportive culture.

� Ensure that the pay philosophy isintegrated with the benefits philosophyand programs.

� Demonstrate greater commitment tosharing results with employees throughbonuses, incentive pay, use of options,etc., if feasible.

StructureCompensation practices are only aseffective as the systems developed toimplement the compensation philoso-phy. Some best practices related to thestructure of compensation systems andprocesses include the following:

� Develop tracking tools and processesto monitor compensation criteria anddecisions.

� Understand the impact of marketforces and/or market data on the com-pensation systems, and challengeassumptions that may drive inequity.

� Directly link an organization’s performance appraisal system to thecompensation system, and ensure thatpeople within the system know therelationship between the two.

� Recognize wage compression issues,and devise a strategy to address them.

� Routinely audit the outcomes ofcompensation systems against legal andfairness standards (see “Measurement”).

� Identify and resolve potential fairnessissues when acquiring or blending (ornot blending) pay systems throughmergers or acquisitions.

AdministrationA compensation philosophy is only asgood as its implementation. In a consistently administered and appliedcompensation system these practicesare followed:

� The manager has a key role in theeffective delivery of the compensationsystem.� Managers are trained so that theyunderstand basic principles of compensation and the organization’sphilosophy of compensation. Inaddition, behavioral training is pro-vided on how to make compensationdecisions, communicate about com-pensation to employees, and so on. � Managers are equipped and sup-ported in communicating about

Best Practices

Rewards Systems

Employee

Base pay

Incentivecompensation

Benefits

Careeropportunities

Work challenge

Learning and development opportunities

Consistency of values (personal and corporate)

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compensation in the organization,including the risks and the benefitsof open communication.� Managers are rewarded (in theirown compensation) for effectiveimplementation of compensationprograms and have consequences fornot handling compensation well. � Employees are given some respon-sibility for dialogue with their man-agers. In that way, if the managerdoes not initiate conversation, theemployee may.

� Performance is inextricably linked tocompensation, and a clear, well-com-municated performance managementsystem is in place.� The manager and the employee setclear standards and/or goals at thebeginning of the cycle.� The manager and the employeedetermine up front how performancewill be measured.� Regular progress discussions takeplace between the manager and theemployee.� An annual discussion of perform-ance that occurs between the manag-er and the employee is open andhonest and focuses on past perform-ance, development in the future andgoals for the next period.

� Transparency is key—in other words,employees understand the process orsystem by which they are paid.

Measurement What is measured and reported is whatgets results. Suggested best practicesinclude

� Test/evaluate both quantitatively andqualitatively.� The distribution of performanceratings in relation to pay increases� Employee surveys� Turnover rates� Exit interviews

� Audit front end and back end withbasic tests for irrelevant factors.

�When testing reveals deficiencies,provide managers with information,training and tools so that they canimplement necessary changes with fullunderstanding.

� Conduct periodic checks to ensurethat reality matches philosophy andthat equity is maintained. For example,how does the organization deal withexternal hires’ vs. incumbents’ pay andother causes of wage compression?

Communication/EducationA well-communicated system includesthe following:

� Benchmarks for measurement thatare defined clearly up front

� Good dialogue beginning at the top,with the CEO, owner or executivedirector� Manager-to-manager communica-tions across business units� Communication between employ-ees and managers to set objectivesand discuss performance and pay � Pay ranges that are posted foremployees to facilitate an open dialogue and provide an explanationof how they are paid� An identified process or person foremployees to follow or consult ifthey feel their pay is unfair

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The Allstate Corporation

Allstate offers a wide range ofprotection and savings toolsthat work together to achievefinancial security. The Allstate

Corporation is the nation’s largest pub-licly held personal lines insurer. Widelyknown through its slogan, “You’re InGood Hands With Allstate, ®” Allstatehas approximately 13,000 ExclusiveAgents in the U.S. and Canada, andprovides insurance products to morethan 16 million households servedthough Allstate and non-proprietarychannels. Customers can access Allstateproducts and services through Allstateagents or, in select states, atallstate.com and 1-800-Allstate.Encompass and Deerbrook Insurancebrand property and casualty productsare sold exclusively throughIndependent Agents. Allstate FinancialGroup includes the businesses that provide life insurance, retirement andinvestment products through AllstateAgents, workplace marketing,Independent Agents, banks and securities firms.

Founded in 1931 as part of Sears,Roebuck & Co., Allstate became a publicly traded company in 1993. Atthe time, its initial public offering wasthe largest in U.S. history. On June 30,1995, it became a totally independentcompany after Sears divested itsremaining shares to Sears’s stock-holders.

Allstate, based in Northbrook,Illinois, is one of the nation's leadinginsurers in urban areas and has sup-ported auto and highway safety reformsincluding seat belts, air bags, and teendriver education. The company haswon numerous awards over the yearsfor its philanthropic and employee volunteerism efforts.

Total number of employees: 39,627

Number of employees impacted:3,380 in Information Technology (IT)

Purpose: An innovative pay structureto ensure competitiveness in the ITmarket predicated on: compensationlinked to performance; managementresponsibility for effective delivery ofthe compensation system; and tools tofacilitate communication between managers and employees

Background: The current pay systembegan in early 1997. Due to the ITdepartment’s continually changingwork environment and the volatility ofthe IT job market, it was necessary tomove to a pay structure that providedmore flexibility and ensured competi-tiveness in the market. A pay structureprogram called Career Clusters wasimplemented in July 1998. Prior tothis, jobs in IT were distributed in 19narrow salary grades with only a 5%difference between each salary gradeand a 50% range spread. It was verychallenging for the IT group to distin-guish work performed by employeescompared to how work was beingdefined in the marketplace. Throughseveral iterations since its introduction,there are currently three very broadCluster levels below the incentive eligible manager. Each Cluster has anestablished minimum and maximumrange of opportunity with rangespreads over 200%. Each Cluster isdefined by a set of universal competen-cies: Leadership, Accountability/Results, Collaboration/Teamwork, andCustomer/Client Focus.

A Market Reference Range (MRR)has been established for each marketdescription from Allstate’s surveysources that aligns to work that is per-formed within the organization. TheMRR provides perspective on howmuch the work pays in the market-place. The MRR is used in salary

administration as a guideline in makinga salary increase decision. The MarketData is established using a reputablesalary survey in the market conductedby Mercer. The MRR may fluctuate upor down from year to year, driven bymarket changes in the survey data. Toalleviate substantial swings in the data,a two-year average is used to establishthe MRR. The broader salary range forthe Cluster allows for additional oppor-tunity beyond the MRR to recognizeemployees continuing to acquire newskills and provide higher levels of per-formance results. Two key job aids areprovided to salary administrators toassist in the salary making decision.The first is a communication docu-ment, “The Pay Decision Process – JobAid and Worksheet.” It is intended tofacilitate a conversation between themanager and the employee regardingthe salary decision process. The secondis a “Relative Review Process (RRP) –Job Aid,” which provides the managerwith additional insight into three vari-ables that should be considered whendeciding how much of an increaseshould be given to an employee. Thethree variables are employee perform-ance, relativity to the market, andimpact of the work to the organization.The results of the employee’s perform-ance represent two thirds of the deci-sion, and the other two variables makeup the remaining third. Promotionsoccur when an employee takes on addi-tional responsibility when moving fromone Cluster to another Cluster at ahigher level (see page 13 for diagram of Career Clusters).

Strategy: Members of the compensa-tion team and a team of line managersfrom IT formed a partnership to createthe Career Clusters structure withinIT. This team helped to create thedesign, implementation and communi-cation processes that would be needed

Case Summary

12

for such a significant change. The linemanagers in IT led the meetings toreiterate the company compensationphilosophy and explain why Allstateneeded to stay in sync with the dynamic IT environment by introduc-ing Career Clusters as a way to ensurecompetitive pay. This approach provided more credence amongst theIT community to embrace the changemore easily and create ownership ofCareer Clusters.

After the initial introduction ofCareer Clusters, the next phaseinvolved an exercise for the manager tomatch each employee to the marketdescriptions. It was very important formanagers to base their decision on thework, not the performance during thisphase. First, the manager compared theuniversal competency attributes for aspecific Cluster for every employee todetermine the appropriate Clusterlevel. Managers were also provided

with a chart indicating the prior salarygrade alignment that coincided withthe proposed Cluster environment as areference. Second, the employee wasaligned to a market description withinthe Cluster that represented the workperformed from day-to-day.

For each market description, there isa corresponding MRR, which repre-sents the market salary range (25th,50th, 75th, and 90th percentiles), as aguide for managers when making salarydecisions. The MRR is a reference formanagers to determine what the mar-ket is paying for the type of work listedin the market description. The overallCluster salary range, consisting of aminimum and maximum, is what man-agers govern (the top and the bottomof the salary range opportunity).Employees will be matched to differentmarket descriptions as their work orskills change; therefore their MRR willchange accordingly.

Outcome and conclusion: TheCareer Clusters pay structure providesflexibility and ensures that Allstate ITprofessionals are competitively paid inthe marketplace. Career Clusters hasbeen successful by virtue of a very lowturnover rate over the past severalyears. A continuing challenge is keep-ing managers and employees fluent inhow Career Clusters works, whiletransferring within or out of the ITenvironment. Overall, the feedbackfrom managers and employees is favor-able for the Career Clusters structure.

13

Associate/Specialist

Professional

Consultant

Career Clusters Salary Range Opportunity — 3 Cluster Salary Ranges

minimum

maximum

-Market data

-Provides the 25th to 90th percentile total cash

Market Reference Range (MRR)

Career Clusters Universal Competencies — Consultant Level

Universal Competency

Role Level Leadership Accountability/ Collaboration/Teamwork Customer/Client FocusResults

Consultant Coaches, mentors, andinfluences others toaccept change andreinforce corporatevision. Revises andadapts work processesto support changingbusiness tactics.Customarily and regularly exercises discretion, latitudeand judgment.

Accountable forspecific projector processresults.

Provides guidance to andoversight of collaborativeefforts including teams.Most results are accom-plished through collabora-tion with others. Little orno routine work.

Manages specific relation-ships with customers orclients. Defines customeror client relationships.Formulates customer orclient solutions. Monitorsclient or customer satisfaction.

14

Bank One Corporation, head-quartered in Chicago, is thenation’s sixth largest bankholding company. Bank One

is a diversified financial holding compa-ny that offers a full range of financialservices to consumers and commercialcustomers through its domestic retailand small business banking, its lending,treasury management and capital mar-kets products to commercial customers,its credit card services, and investmentand management services. TheCorporation operates national lines ofbusiness, which include CommercialBanking, Retail Banking, InvestmentManagement and Credit Card Servicesalong with its corporate functions.

Bank One Corporation was formedin 1998 by the merger of two largebanking companies, First ChicagoNBD Corporation and Banc OneCorporation. Human Resources prac-tices from both legacy organizationswere reviewed and integrated. Creatinga premier financial services organiza-tion that delivers solid, profitable long-term growth required building the coreinfrastructure for sustained success.Doing the right thing for shareholdersand the long-term health of the compa-ny necessitated an examination andrestructuring of compensation to makeit less entitlement-based and tied moreclosely to how well the company andindividual perform.

Total number of employees: 72,553

Number of employees impacted: All

Purpose: Post-merger integration of two very different compensation systems to align with an overarchingcompensation philosophy tied to competitive base pay and performance-based compensation

Background: Following the merger of

legacy First Chicago NBD (“FCNBD”)and Banc One in October, 1998, a keypost-merger task entailed integratingall of the various salary administrationand bonus or incentive compensationprograms. Attaining a full integrationdepended on melding the differingphilosophies, programs and supportsystems for establishing and adminis-tering variable pay. For example, atFCNBD, actual individual incentiveawards were provided at managementdiscretion, while at Banc One, individ-ual awards were based significantly onfinancial results, measurable factors or“ratings” with small discretionary com-ponents. At FCNBD, the performancereview process was not directly linkedto the incentive award process and wasnot focused on quantitative ratings. Bycontrast, at Banc One, performanceratings were integrated into a scorecardfor determining individual awards.FCNBD had few unique lines of busi-ness incentive plans while at Banc One,a majority of management employeeswere eligible for line-of-business con-trolled incentive plans. FCNBD usedpay bands while Banc One used paygrades for exempt and non-exemptjobs.

In designing the initial post-mergercompensation program, elements wereincorporated from each organization’spast programs. For example, in 1999,Bank One standardized the compensa-tion program utilizing pay banding.The pay-banding program wasdesigned to streamline salary adminis-tration and provide more flexibilitywith respect to individual salary management, job assignments anddevelopmental experience.

Each business segment establishedincentive plans that covered eligibleemployees (eligibility was established ata defined pay-band level). Past expensehistory influenced the funding of theincentive pools, but business segment

performance could result in a reductionin funding. Individual awards werebased on a mix of financial results andscorecard measures that were usuallyestablished within each business seg-ment. Individual “scorecards” typicallydid not contain individual award targetsor formulae, but often contained gener-al funding or award ranges and specificperformance objectives. Also, stockoptions were distributed as part of atotal incentive package to qualifiedemployees, generally including a mix of cash, restricted stock and options,depending on level and performance.

Immediately following the merger,there was no direct linkage betweenperformance and compensation.Rather, compensation systems focusedon retaining key employees. A per-formance evaluation system wasdesigned that focused on fostering adevelopment-oriented environment.Managers and employees were encouraged to engage in performancecommunication to facilitate career discussions. Employees were involvedin the evaluation process, but perform-ance was described without referenceto a label or number.

Strategy: Bank One’s philosophy is tobe the leanest, best performing compa-ny, with competitive base pay and per-formance-based compensation targetedto the top quartile of the market.Compensation will reflect how well thecompany and individual perform.Beginning in 2001, with a newChairman and a new managementteam, Bank One’s compensation philos-ophy and systems were revised to attaina greater alignment between the share-holder, management and employeeinterests. One issue was how to makethe compensation system fairer, com-petitive and a driver for change in theorganization. The concern over “fair-ness” related to the belief that compen-

Bank One Corporation Case Summary

15

sation should be based on the impact ofthe employee’s position to the organi-zation and demonstrated performance.New incentive plans have beendesigned to create a balance betweenindividual and collective accountability.The goal is to have employees be ableto make more money, but only if theorganization performs. In addition,there was a move to reduce or elimi-nate entitlements for more highly-compensated employees that rewardemployees purely based on rank, expectations or longevity in the corporation (such as 401(k) plans).

Revising the compensation philoso-phy had several components:

� The Chairman and the PlanningGroup (the executive managementteam) decided they should not receive acash bonus or restricted stock based onthe Bank’s performance in 2000, whichwas a “rebuilding” year. This under-scored the commitment to the principlethat Bank One would not pay seniormanagers more when the companydoes worse. Communication was pro-vided to all employees to emphasizethat senior managers would be the firstto sacrifice, where appropriate. Thehigher the managerial level, the morehis or her compensation would be tiedto the company’s performance.

� The performance review process wasrevised in 2001 to establish ratings tomore clearly differentiate performanceamong individuals. In the performancereview, employees are evaluated onstandard “core competencies” as well asjob-specific standards and/or individualgoals and objectives. All employeesreceive an overall rating of “ExceedsExpectations,” “Meets Expectations” or“Needs Improvement.” The perform-ance review and rating are requiredannually in conjunction with the annualcompensation review. In addition,annual incentives paid to individual

contributors require the support of a performance rating.

� In formal communications from theChairman and in his informal “townhall” meetings, employees are clearlyinformed of the changes in compensa-tion to support a new corporate cul-ture. Employees are informed that theyare entitled to receive meaningful per-formance reviews with regular feedbackand constructive advice. There is anincreased emphasis on raising the baron performance targets, individualaccountability, initiative and attainmentof results. Increased managementreporting of accurate and fair reportingof financial and performance metricshas been implemented to make deci-sions based on fact to allocate resourcesproperly and to help support perform-ance-based compensation.

Employees continue to initiate theperformance review process by com-pleting a self-assessment of their per-formance. This performance reviewinstrument is typically accompanied by dialogue between the employee andmanager and facilitates the clarificationof expectations, the discussion of per-formance concerns and developmentneeds, and the establishment of futuregoals.

� For annual incentives, potentialfunding levels for the business seg-ments are reviewed together during the year based on ongoing performanceindicators. In that way, businesses areevaluated on an incentive perspectivebased on the performance and successof the organization, as well as the per-formance of the business against itsbusiness objectives and performanceplan.

� For base salaries, the target competi-tive posture is to pay at or near themedian for similar positions in compet-itive organizations while increasing thecompetitive pay posture through use of

cash and restricted stock incentives andselective stock option awards. The goalis to encourage employees to think andact as stakeholders by offering them anappropriate stake in Bank One’s finan-cial performance. For that reason, BankOne established a new relationship ofrestricted stock to annual cash as partof a combined package of cash andrestricted stock as the reward for previous year’s performance providedto eligible and deserving employees.Total annual incentive distributionguidelines for the prescribed target mixof cash and restricted stock are provid-ed to managers in all lines of businessand groups. All awards are based onbusiness unit and/or corporate financialresults and individual financial or non-financial goals and objectives. Theimpact of corporate financial resultsincreases for higher level positions,which reflects the impact of such positions on the performance of theorganization. The higher the manager,the more his or her compensation willbe tied to the company’s performance.Obviously, pay for performance con-tains a risk component for failure toperform, both at an individual andorganizational level.

� Stock option awards are no longergranted to employees as a substitute fordecreased incentive pool funding andlower bonus amounts. In fact, they aredone at a different time of year thanthe merit increase, bonus and restrictedshare decision. Stock options are notentitlements for individual employeesbased on rank. Individual stock optionsare awarded to the highest professionaland managerial level performers whowill stay to strengthen the performanceof the Bank. Stock options may beawarded annually or less frequently.The primary factor considered whendetermining an employee’s optionaward is the employee’s ability to posi-tively impact Bank One’s future per-

16

formance. Indicators include anemployee’s past performance, compe-tencies, and skills (including manage-ment and leadership skills), commit-ment to the Corporation, potential toassume more responsibility and for significantly impacting the financialand operational success of Bank One inthe longer term. The new compensa-tion of the Bank provides more aggres-sive stock compensation opportunitiesat lower levels while maintaining totalstock utilization near the average ofpeer companies.

In addition, Bank One has taken alead in expensing options to provideclarity, transparency and accuracy toshareholders. Bank One was the firstfinancial institution in the UnitedStates to take this step. Since manyemployees are stockholders throughthe stock purchase plan, this measure is an important internal as well asexternal issue.

� The band structure was found to betoo broad to accurately reflect marketpractices for specific jobs. In reality,pay decisions will be made on marketdata tied to functional jobs. Also, froma developmental perspective, the Bankutilizes functional job titles anddescriptions as the method to defineindividual career progression. As aresult, the Bank’s focus is to move awayfrom pay bands and resultant obses-sions on hierarchy to functional jobsand job families. This reflects the goalof shifting Bank One’s culture to onethat rewards individuals for the workthey perform and the results that theydeliver. This is part of the Bank’sefforts underway to reinforce a philosophy of pay for performance.

Outcome and conclusion: Bank Oneredesigned its business models and hasbrought new thinking and perspectivesinto the organization. The process hasinvolved continued change and furtherchange will occur as systems are ques-tioned and assumptions are challenged.

A challenge that continues is toadminister the compensation programin a manner that conforms to corporatebudget guidelines. Annual salary“merit” increases are not an entitle-ment for “presenteeism” – attendanceat a job without regard to actual per-formance or the contribution of anemployee to the organization’s objec-tives and success. General guidelineshave been developed as an average percentage for the award of meritincreases, but managers are encouragedto differentiate among employees basedon performance, competitive pay infor-mation, pay equity and budget.

The new compensation philosophyemphasizes the use of variable pay forexempt employees to build a perform-ance-driven organization. Building fair-ness into the compensation systems andpractices depends on several factors:

� Clear guidance. General instructionsand guidelines for performance evalua-tions, annual salaries, annual cashincentives, and restricted stock recom-mendations are provided to each man-ager for the annual review cycle (ARC).The ARC guidance includes compensa-tion guidance that emphasizes theimportance of pay equity considera-tions and of demonstrating legitimatefactors that account for differences incompensation among individuals (suchas performance, skills, experience, levelof responsibility, span of control,amount of authority and impact to theorganization.) A separate decision ismade about options.

� Reviews and controls. The ARCprocess provides for input by managersaccording to compensation plan guid-ance. The proposed compensationamounts and awards are reviewed bysuccessive levels of line managers andby Human Resources Managers andline of business CompensationSpecialists. Individual awards may bedifferent than the suggested guidelines,but all recommendations are subject tosenior management review.

� Linkage to performance. Performancereviews must be entered into the Bank’scompensation system before any decisions are made for an individual.Performance results are reflected inmerit as well as in bonus/incentivedecisions.

� Internal audits. Line of businessCompensation Specialists provide serv-ices that include conducting internalanalyses of the compensation practicesand proposed awards and distributionsas part of senior managerial review ofthe compensation. The line of businessCompensation Specialists and EEOcompliance staff have teamed to pro-vide tools for internal equity analyses tolook at pay practices and the impact onminorities and women. In general, suchanalyses review compensation withinthe same functional job and line ofbusiness to establish valid comparisonsbased on the same job responsibilities.Where appropriate, special increasesmay be provided to recognize an indi-vidual employee’s professional develop-ment or to adjust a salary amount topromote pay equity.

17

The Chicago Panel on SchoolPolicy (the Panel), a nonprofitorganization, was founded in1982 by a coalition of nonprofit

agencies in Chicago. Its initial focuswas on generating consensus amongthe group in response to a seriousfinancial crisis faced by the ChicagoBoard of Education. The Panel alwayshad as its mission the improvement ofschools and education for Chicago’schildren. Throughout the changes inmethodology listed below, the Panelstayed true to its mission.

In the early 1980s, the Panel was anactive and effective partner in the edu-cation reform movement; its workhelped produce the School Reform Actof 1988. From the late 80s through1996, the Panel focused its efforts onresearch projects that examined theimpact of reform on public schools.The Panel conducted definitive workon such issues as high school dropoutrates, student mobility, school financeand local school councils.

In 1996, after several years of operat-ing with only an oversight board ofdirectors, the organization added a lim-ited staff. The Panel also moved awayfrom longitudinal research and expand-ed its focus to educational policies andpractices, allowing the agency a broad-er voice on many school improvementissues. This was accomplished by defin-ing, evaluating, supporting and advanc-ing effective practices through short-term qualitative assessments, applica-tions of research and public forums.

The Panel continued to carve out aspecial role for itself in the politicalrealms of school reform and city poli-tics by producing objective analyses ofimplemented reforms and their impactrather than advocating only for particu-lar programs. The Panel achievednational recognition for the quality ofits work and was successful in influenc-ing public dialogue on many schoolreform issues.

Total number of employees: One ortwo full-time staff and between fourand ten consultants and part-time staff

Number of employees impacted: All

Purpose: Promoting an integratedview of rewards that focuses on non-cash elements to attract and retainpart-time employees and consultants in a nonprofit organization

Background: As is true with manynonprofit agencies, the Panel faced itsgreatest challenges in two areas—budget and staffing. The Panel’s budgetof $400,000 needed to cover employeesalaries, overhead and printing costs.Clearly, each defines and limits theother. An important issue in staffingthe Panel was how to attract and keeptalented, qualified individuals in part-time positions in an organization thatcould not pay what might be earned inanother industry. An additional staffingchallenge centered on retaining indi-viduals dedicated to education, a fieldunquestionably conscious of credentialsand formal training, but in whichbudgets do not permit salaries thatcompensate those credentials.

Strategy: The Panel's strategy wassimple: plan for the highly likely andeventual employee turnover in a waythat was productive for both staff andthe organization. The Panel could notcompete in terms of salary, but it couldoffer a work environment that valuedteam work, shared responsibility andleadership, and rewarded quality workwith recognition and experiences thatenhanced the resumes of staff.

The Executive Director articulated a clear position and communicated it to the people she recruited and hired.Since the Panel could not match thesalaries of the private sector, it providedother forms of reward: experience,training, project management and assis-

tance in finding the next job. In return,the Panel asked employees to give asmuch notice as possible when theyintended to begin searching for a joband not leave mid-project.

Suggestions for projects were welcome and training requests wereapproved because of the dual benefit toboth the employees and the Panel—personal needs were met and skill levelsof the staff improved. Once employeesgave notice that they were beginning tolook for a job, the Executive Directoractively worked to connect them to hernetwork of contacts and providedadvice and guidance in exchange for acommitment by the employees to finishtheir projects and to help find and traintheir replacements.

Efforts to create a highly-valuedwork environment included flexiblehours and an emphasis on completingthe work rather than “punching thetime clock.” Staff meetings includedbreakfast or lunch supplied by thePanel. Time spent consulting withother staffers on problems and chal-lenges was supported. The ExecutiveDirector encouraged staff to ask foritems that might make working condi-tions more comfortable and thereforemore productive—a new desk chair, asoftware program that would helpeveryone, a copier that worked. Takentogether, these items cost the organiza-tion less than the salaries of one or twofull-time employees, yet the strategyallowed for more help, fair hourlywages and good working conditions forthe consultants/part-time employees.

The Panel also believed that it wasimportant to encourage talented pro-fessionals to remain in nonprofit work.Staff realized opportunities to gainexperience they might not otherwisehave been able to until later in theircareers—i.e., project management,project development, attribution forparticipation in projects, acknowledg-ment in Panel publications, and oppor-

Chicago Panel on School Policy Case Summary

18

tunities to meet leaders in the field.Employees received training andcoaching to take initiative, to lead public discussions and forums and totry things they had not done before.While they clearly had not received the salaries they might have in anotherindustry, when consultants/part-timeemployees left their work at the Panel,they had impressive skills added totheir resumes and examples of qualitywork to which they had made signifi-cant contributions.

Outcome and conclusion: Thisemployee development and compensa-tion strategy worked well in allowingthe Chicago Panel to be productivewhile managing the organization'sturnover and small budget.Organizational productivity was veryhigh. The Panel was successful inattracting high-quality, advanced-degreed people who were organized,highly motivated and knew how to takethe initiative to get the organization’swork done efficiently. Most employeesstayed at the Panel for one or twoyears. Most also gave six monthsnotice, which provided the Panel withtime to plan to fill positions. Many for-mer employees remained a resource forthe Panel after they left. Some formeremployees were active as consultantsfor the Panel for an average period oftwo years.

One challenge to the strategy wasthat it required a great deal of manage-ment time to see that the projects werecompleted in a timely fashion. It wouldnot have worked if the ExecutiveDirector had not exhibited a great dealof flexibility, willingness to deal withinevitable schedule changes andpatience to manage people who werenot present every day in the office. Ifshe had it to do over again, she wouldrestructure her position so that more ofthe day-to-day issues of the organiza-tion were handled by someone else sothat the majority of her time wouldhave been spent on project/peoplemanagement.

However, as a whole, the Panel'sstrategy of proactively addressing andworking with consultants and part-timeemployees was an effective way to dealwith its compensation handicap andproduce a large quantity of outstandingwork which had a major impact oneducational improvement. It provided a high quality workforce for the Paneland, at the same time, provided experience, training and career assistance for employees.

19

IRMCO has been located inEvanston, Illinois, since 1917 andis the only lubricant company inthe world dedicated entirely to

the formulation and manufacture ofecologically sound metal-forming lubri-cants. These products are developedwithout petroleum or mineral oils, witha focus on positive environmental qual-ities. IRMCO is widely recognized asthe industry leader in new technologydevelopment and has routinely demon-strated its ability to replace oil-basedchemistries in some of the most criticalmetal-forming operations. This fourthgeneration family-owned company wasselected as one of Illinois's top twofamily businesses concurrently for threeyears by Loyola University and is thesponsor of the Precision MetalForming Association’s Environmentalaward.

IRMCO has always emphasized thatoutstanding people are the key to suc-cess. Its business concept is supportedby a company culture that attracts thebest and brightest associates who arefocused on high performance results,socially and environmentally responsi-ble products, sustainable growth andworld class execution.

Total number of employees: 16

Number of employees impacted: All

Purpose: Overhaul of compensationand performance management systemsto improve communication and moreeffectively link employee pay to per-formance

Background: In 1989, the Presidentand CEO of the company died at anearly age and left control of the compa-ny to his two sons. At the time of hisdeath, IRMCO offered a variety ofcompensation packages. These includ-ed a discretionary Profit Sharing Plan,

a Gain Sharing Plan, a Product Development Incentive, and aCommission Plan.

All of these offered some type ofcompensation. The following wereproblems associated with these plans:

� The Profit Sharing Plan was discre-tionary and paid into an associate’sretirement account rather than a bonus.

� The financials were not shared withthe associate, therefore there was con-fusion on how much net income wasavailable for the Profit Sharing Planand how it was divided between theassociates.

� The plans were based on an individ-ual’s results, rather than a team effort.

� Commissions were paid on gross revenue without regard to expenses and higher margins.

� Most of the plans paid associates atyear end, causing problems with thecompany’s cash flow.

The company needed to introduce a new structure where the associate’scompensation was variable and depend-ed on his or her productivity and thesuccess of the company. They wanted a plan that supported IRMCO’s CoreValues and Beliefs that “the company isdependent on the knowledge, creativity,skill, teamwork and integrity of eachand every associate.”

Strategy: Between 1997 and 1999,IRMCO created four new programs:Open Book Management, TheStakeholder Performance Bonus Plan,Commissions based on Net Income,and The Wolfpack Program. Thesewere instituted to address the problemswith the previous program.

Open Book Management was createdto address the issue of communicationand profit sharing. Associates areencouraged to review financials, includ-

ing team budgets, proposed vs. actualexpenses, overall operating costs andsales levels for current and new cus-tomers. Current financial statementsand key performance indicators areposted each month. All IRMCO associ-ates are seen as stakeholders who havea direct link to the success and failureof the company. It is critical that eachassociate takes the time to truly under-stand what it costs to run the businessand how their contributions can affectthe outcome. Associates are able to seewhere the money is being spent.Monthly financial meetings are held toupdate and educate associates on read-ing and understanding financial state-ments. Associates are also required tostay within the budget the team has set.

The Stakeholder Performance BonusPlan was created to give associates ameaningful way to be compensated fortheir hard work and contributions tothe company’s results. The plan istotally funded by IRMCO. Each associ-ate is awarded a confidential number ofStakeholder Shares appropriate fortheir skills, experience, and past per-formance. The value of each share isbased on 15% of net income beforetaxes and paid out each quarter as regu-lar income. The associate no longer hasto wait until year end for a distribu-tion—there is access to it before retire-ment and it is not discretionary. This isa bonus in addition to regular salary.

The Owners Return on Investmentand Commission structure is tied to theStakeholders Performance Bonus Plan.The owners do not participate in theStakeholders Performance Bonus; theyinstead receive a Return on Investment.The Return on Investment is a per-centage of net income. Similarly, thesales team is compensated with a com-mission based on net income ratherthan gross margin. The incentive is toreduce expenses and compensate basedon the company’s results.

IRMCO Case Summary

20

the associates. These teams areintended to be “commando squads”or “hit squads” staffed by those withthe best resources and/or ability tosolve the problem. An Alpha Wolfleads these teams.

� Alpha Wolf can be volunteered for.If no one comes forward, team lead-ers or the President and VicePresident will assign one. The AlphaWolf’s role is to:� Call regular, short team meet-ings.� Keep meeting minutes and sendto company on e-mail after eachmeeting.� Post measurement and trackingresults on the Wolf Tracks wall toensure that improvement “sticks”and other associates are properlyinformed.� Guide, but do not dominate.Make sure the burden gets shared—but make sure it gets done.� Keep track of individual assign-ments and action items in the packmeeting minutes.

�Wolf Tracks. The Company’sWolf Tracks wall is designed to keepall associates informed of companyand customer progress.

� Company Wolfpack. A monthlymeeting for all in-house associates.The meeting provides a chance toupdate everyone on important devel-opments and nominate Lone Wolfcandidates.

� The Hunt. IRMCO’s strategicplan created each year by thePresident and Vice President.

�Wolf Dough. IRMCO currencygiven to associates as recognition.

PrinciplesPurpose: To systematically improveIRMCO through a team of involvedassociates. To make gains in quality,profitability, productivity, and cus-tomer relations through

� Active and regular participation inthe system.

� Training, skill development andopen communication.

� Being focused on results.

Every associate in the companymust:

� Understand that making continu-ous improvement is part of every-one’s job. Improvement steps willnever stop. There is no finish line inthe race for quality. Change is theonly constant.

� Realize that waste, inefficiency,and inconsistency are everywhere.There is always a better way.

� Accept responsibility for continu-ously improving their own job andtheir own team, as well as the com-pany as a whole.

Method: The principal method is tosystematically

� Raise the opportunities forimprovement through associate com-munication on the e-mail and surveyresults.

� Solve those problems throughWolfpacks and an empowered work-force.

� Implement the improvements anddevelop written standards and meth-ods of measuring results.

� Ensure the solution stays in placethrough use of the PDCA cycle (Plan,Do, Check, Assess).

� Share the financial gains with allassociates through a shareholder bonus.

Expected results: By continuouslyimproving the quality of the productsand services IRMCO supplies to cus-tomers, and by reducing costs, IRMCOwill be much more competitive, whichwill benefit all by resulting in:

� Increased job security.

� Improved earning potential.

� More fun, job satisfaction, and self-esteem.

� Long term success.

Components

� Lone Wolf Award. A way for co-workers to publicly recognize individ-ual associates each quarter for any extraspecial efforts. Every month at thecompany-wide Wolfpack meeting, asso-ciates are nominated for their “extraeffort” or “breaking away” from thepack for total quality. All nominationsare placed in a hat and the winner isdrawn at random. The associate is eli-gible for a $150 activity reimbursementhonoring their achievement.

� Quality Idea or Opportunity forImprovement. All associates are invit-ed to identify special areas where theyneed help in solving a problem, elimi-nating a bottleneck, improving cus-tomer relations, improving quality, orrelieving some pressure that inhibitstheir job performance.

�Wolfpacks. Small teams assembledto work on and implement theimprovement opportunity outlined by

IRMCO’s Wolfpack Program

21

Teamwork is supported through theWolfpack program. The wolf hasbecome IRMCO’s metaphor for team-work. A wolf pack in the wild is knownfor its ability to support each other andachieve greater success as a group(together everyone achieves more).IRMCO chose the wolf “lingo” as away to focus the company on TeamBuilding, Continuous Improvement,and Total Quality Management. (Seepage 20).

Outcome and conclusion: The com-pany believes that the combination ofthese programs has led IRMCO associ-ates to take pride in their work andexcel in making IRMCO a better com-pany. Everyone is aware of the compa-ny’s financial condition and they worktogether to make it as lean as possible.The departments work in groups ofthree and often overlap to help out inother areas. In 2001, the companyreduced its 23 associates to 16 withouta decrease in revenue. The reward sys-tem has encouraged them to take onmore responsibility and ownership ofthe company’s results.

Cross training is a result of teamspirit. Books are available for each posi-tion with detailed descriptions of eachjob function. Each associate is reviewedon his/her own job description, but alsoon his/her contribution to the companyand its customers. The Lone WolfAward (described on page 20) encour-ages associates to go beyond the call of duty and help out their fellow associates.

IRMCO is a family-owned businessthat has developed a positive workingenvironment for all associates. Theylike knowing the company’s financialstatus and enjoy sharing in the profit.Brainstorming sessions, BBQ’s, volley-ball games on the company’s court, abig screen TV in the lunch room andgroup outings are also part ofIRMCO’s success in developing a greatplace for people to work. A favoritesaying around IRMCO is “to live anddie for the big I.”

22

The Northern TrustCorporation, whose businessbegan in 1889, is a multibankholding company headquar-

tered in Chicago with a growing network of offices in 12 states andinternational offices in five countries.At the end of 2001, Northern Trusthad assets of $39.7 billion. Trust assetsunder administration were nearly $1.7trillion, including $330.1 billion undertheir investment management.

Northern Trust has earned distinc-tion as a leading provider of personalfiduciary, asset management, personaland private banking, and mastertrust/custody and treasury managementservices. A 113-year tradition of com-bining high-touch service and expertisewith industry-leading technology distinguishes Northern Trust in its twoprimary businesses, Personal FinancialServices and Corporate andInstitutional Services.

In addition to being well known forits long-term relationships with clients,Northern Trust also believes that long-term relationships with employees arejust as important. The company’s busi-ness strategy requires attracting andretaining the best people, so Northerninvests a great deal in building thecapabilities of its employees andrewarding excellent performance.

Total number of employees: 9,500worldwide, including over 6,000 in theChicago area

Number of employees impacted: 560

Purpose: Developing and administer-ing a comprehensive communicationand education process to implement anew compensation philosophy andinstill confidence in its fairness

Background: In a corporate reorgani-zation, two business units had beencombined into one, and employee roles

and responsibilities were changing.Specifically, the functions of commer-cial banking and corporate trust/custody were being merged. The newlyformed business unit brought togethera total of 560 Chicago-based employ-ees; and even though new roles werecreated, fortunately no staff reductionsoccurred.

This new organizational structuremeant that individual roles for bothmanagers and staff needed to be clearlydefined, and new compensation pro-grams developed to support the mergerof those functions. In addition, due tothe prior practice of little open com-munication and education for managersor employees about compensation,there were many misconceptions andsome lack of trust.

Two factors had exacerbated the lackof trust:

� In the prior calendar year, theCorporation’s compensation philosophyhad moved away from a system of paygrades and salary ranges that had beenin place for the prior 15 years. Beinginstalled in its place was a broad“career banding” system that groupedjobs into nine job families and eightcareer bands. The transition of all jobsto these new bands was not yet fullyunderstood and embraced by managersand staff.

� Employees in each of the functionsto be merged (“banking” and “trust”people) had held misperceptions thattheir group’s pay structure was lowerthan that of the other group, and there-fore, not as valued in the company.This “myth vs. reality” phenomenonabout the prior pay practices had to beaddressed with the affected groups.

Thus, a comprehensive educationand communication process was neededto improve employees’ understandingof compensation and improve theirconfidence in the fairness of the pay

system. The entire education and com-munication strategy took the followingyear to develop and implement. Thetraining sessions developed for man-agers were delivered over a period ofapproximately six months, and thecommunication that surrounded theinitiative for managers and employeeswas carried out over the full year period.

Strategy: Extensive training programsfor managers were created. This train-ing included information as well as skilldevelopment. Through a series of foursessions, managers learned about thephilosophy of compensation in the newbusiness unit. They learned the detailsof how competitor compensation prac-tices are gathered and analyzed todetermine market pay comparisons andincentive plan structures. They learnedwhat factors to consider in makingcompensation decisions. They prac-ticed, through case studies, how toarrive at fair compensation for variousemployee situations. They also role-played how to communicate aboutcompensation decisions with employ-ees. Finally, they were given a job-aidto use for quick reference as a refresheron the classes.

The job aid, which was created justfor this training, is included on page23. The most valuable aspect of this jobaid was the “Star” Model, which helpedmanagers remember the five key fac-tors in making merit pay decisions—one factor for each point of the Star.Managers learned that they must con-sider: (1) salary survey data, (2) theemployee’s performance, (3) perform-ance of the employee’s peers, (4) theemployee’s experience level comparedto internal and external candidates, aswell as (5) the current year’s budget,before making a final merit pay decision.

Additionally, many types of commu-nication vehicles were developed for

The Northern Trust Corporation Case Summary

23

employees. There were large groupcommunication sessions that providedinformation on the philosophy of com-pensation, small group sessions withineach work group on the incentive planapplicable to that group, and individualsessions between managers and each ofhis/her employees. These individualsessions were designed to answer eachemployee’s specific questions and helphim/her understand how the informa-tion they had received applied tohis/her own compensation.

Throughout the process, time forquestions was designed into all themeeting agendas, and an e-mail “mail-box” and answer newsletter were used.Open and frequent communicationprocesses were keys to the overall success of the strategy.

Outcome and conclusion: The resultsof the overall effort were evaluatedrelying on three different methods:

� Evaluation questionnaires were com-pleted by participants at the end ofeach session and again after the wholeset of programs had been rolled out.

� The Northern’s Employee OpinionSurvey, which is administered toemployees on a regular basis, providedinformation on perceptions about compensation.

� Anecdotal data coming back to internal Human Resources staff alsoprovided an important perspective onthe success of the initiative.

The overall results of the projectwere determined to have successfullymet the original goals. For example,high level results from the EmployeeOpinion Surveys for the business unit,completed just before and then severalmonths after the merger showed a definite positive trend in employees’perceptions about compensation. Thefollowing statistics reflect an improved

Prepare

� Set date, time and location

� Get clear about your justification for the increase amount...based on“Star” model

� Anticipate your team member’s reactions and questions

Conduct pay discussion

� Opening: welcome and purpose

� Set the stage; restate pay philosophy

� Review link of pay decision to “Star” model

� State the increase amount

� Give team member opportunityto respond

Making Pay Decisions

Communicating Pay Decisions

Pay decision

Performance

Survey

BudgetExperience

Peers

Survey data: How does pay compare to median, 75th percentile?Performance data: How did performance compare to set expectations?Peers: How did performance compare to others in group?Budget: How much do we have to allocate?Experience: How does experience compare internally and externally?

� Acknowledge/resolve open issues

� Close —be positive!

Pitfalls to Guard Against

Can’t explain/justify your decision

Lack of honesty about performance

Incomplete use of “Partners in Performance”

� Performance Updates

� Career Development Discussions

� Performance Summary

All team members get sameincrease

Mixed messages to poor performers

Performance expectations too fundamental

24

“favorable rating,” defined as the per-centage of employees rating a surveyitem as “Very Good” or “Good,” thetop two out of five ratings possible:

Favorable Rating How do you rate Improvedyour total compensation package? 13% improvement

How do you rate the amount of pay you get for your job? 5% improvement

How satisfied are you with therecognition you get for the work you do? 6% improvement

In addition, an analysis of summarydata from exit interviews with peopleleaving the organization indicated thatfewer employees cited pay as a reasonfor leaving the business unit the yearfollowing the communication andtraining programs than the year beforethe merger took place.

Even though these overall results ofthe project were positive, data from theprogram evaluations and commentsmade to the Human Resources staffindicated that the manager andemployee groups reported slightly different perceptions.

Managers definitely understood thecompensation philosophy and pro-grams much better than before and hada sense of ownership for them…feelingless victimized by a process mandatedby the “corporate office.” Becausemanagers better understood the com-pensation philosophy, strategies andpractices through what they hadlearned in training, they became morewilling to support the compensationprograms in conversations with theirpeople. In addition, they reported thatthey had developed their skills in mak-ing pay decisions and had achievedgreater comfort in discussing thosedecisions with individual employees.

While the program was less success-ful with employees, they reported thattheir understanding of overall compen-sation philosophy and programsincreased. More work had to be doneto improve people’s understanding ofhow the philosophy and programsapply to each employee’s compensation.

Changes and additions were madefor the next year as a result of the feedback, and this first-year initiativeturned into an annual education/com-munication program for the businessunit over the next several years. Theseadditional sessions provided the oppor-

tunity to include new managers in thetraining and to improve employees’understanding of how each person’s payis determined.

Another outgrowth of the commit-ment at Northern Trust to communi-cate more effectively with all employeesabout pay matters has occurred as partof the HR Department’s initiative tobroaden and deepen the use of thecompany’s intranet site. The newlyexpanded site, called People Place, nowincludes an array of information aboutpay that is available to all employees,such as the compensation philosophy,base salary and variable salary programsummaries, and information about howpay decisions are made. The constantlyupdated site also contains an evolvingQ&A section, along with a completeglossary of compensation terminology.

25

The United States Government

Federal Pay Systems The Constitution of the United Statesassigns fiscal control to the Congress.This control is exercised throughappropriation acts and, in the case ofFederal salaries, by enacting laws, policies, principles, and procedures toestablish pay rates for Federal employ-ees. Federal employees are covered by a number of different pay systems,some established by individual laws,some by administrative determination.1

Total number of employees:2,701,593 2

Number of employees impacted: All

Purpose: Understanding the basics ofthe Federal pay system: an example oftransparency in administration of paysystem

Background: The three statutory paysystems for Federal white-collar employ-ees are the General Schedule, theForeign Service, and certain employees in the Veterans HealthAdministration in the Department of Veterans Affairs.3 The GeneralSchedule pay system covers, with spe-cific exemptions, most “white collar”positions in the executive branch andcertain legislative branch agencies.4

The General Schedule consists of 15grades, each broadly defined in law interms of work difficulty, responsibility,and the qualifications required for per-formance (see table below). A salaryrange of 10 steps is provided for eachgrade. Within-grade advancement isscheduled after each 52 weeks of serv-ice in the first three steps in a grade,after 104 weeks in steps 4, 5, and 6, andafter 156 weeks in steps 7, 8, and 9. Toqualify for advancement to the next

higher step, an employee must demon-strate work at an acceptable level ofcompetence. Employees demonstrating“high quality performance” mayadvance more rapidly through the raterange for their grades by being grantedadditional step increases, called “qualitystep increases (QSI).” An employeemay receive only one QSI during any52-week period.

Locality-based comparability pay-ments apply to most General Scheduleemployees.5 To determine an employ-ee’s locality rate of pay, increase theemployee’s “schedule rate of pay” bythe locality pay percentage authorizedby the President for the locality payarea in which the employee’s officialduty station is located. There are 32locality pay areas.6

Foreign Service pay plans and salaryschedules for Officers (pay plan FO)and Personnel (FP) were established

Case Summary

GRADE STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 STEP 6 STEP 7 STEP 8 STEP 9 STEP 10

GS-1 $ 15,214 $ 15,722 $ 16,228 $ 16,731 $ 17,238 $ 17,536 $ 18,034 $ 18,538 $ 18,559 $ 19,031 varies

GS-2 17,106 17,512 18,079 18,559 18,767 19,319 19,871 20,423 20,975 21,527 varies

GS-3 18,664 19,286 19,908 20,530 21,152 21,774 22,396 23,018 23,640 24,262 622

GS-4 20,952 21,650 22,348 23,046 23,744 24,442 25,140 25,838 26,536 27,234 698

GS-5 23,442 24,223 25,004 25,785 26,566 27,347 28,128 28,909 29,690 30,471 781

GS-6 26,130 27,001 27,872 28,743 29,614 30,485 31,356 32,227 33,098 33,969 871

GS-7 29,037 30,005 30,973 31,941 32,909 33,877 34,845 35,813 36,781 37,749 968

GS-8 32,158 33,230 34,302 35,374 36,446 37,518 38,590 39,662 40,734 41,806 1,072

GS-9 35,519 36,703 37,887 39,071 40,255 41,439 42,623 43,807 44,991 46,175 1,184

GS-10 39,115 40,419 41,723 43,027 44,331 45,635 46,939 48,243 49,547 50,851 1,304

GS-11 42,976 44,409 45,842 47,275 48,708 50,141 51,574 53,007 54,440 55,873 1,433

GS-12 51,508 53,225 54,942 56,659 58,376 60,093 61,810 63,527 65,244 66,961 1,717

GS-13 61,251 63,293 65,335 67,377 69,419 71,461 73,503 75,545 77,587 79,629 2,042

GS-14 72,381 74,794 77,207 79,620 82,033 84,446 86,859 89,272 91,685 94,098 2,413

GS-15 85,140 87,978 90,816 93,654 96,492 99,330 102,168 105,006 107,844 110,682 2,838

Salary Table 2003-GS2003 GENERAL SCHEDULE INCORPORATING A 3.10% GENERAL INCREASEEffective January 2003. Annual Rates by Grade and Step

withingrade

amounts

26

under the Foreign Service Act of 1980.Other Foreign Service pay plans whichare linked to Federal pay schedules areAmbassadors (FA), linked to theExecutive Schedule, and SeniorForeign Service (FE), linked to theSenior Executive Service.

The Veterans Health Administra-tion in the Department of VeteransAffairs provides unique pay plans fortheir physicians and dentists (VM), andpodiatrists and optometrists (VP).

Other Major Pay Systems: The WageSystem category covers employees inpay plans covered only by the FederalWage System (FWS). The FWS coverstrade, craft, and labor occupations(“blue-collar occupations”) in theFederal Government.7 Employees inother blue-collar pay plans are placedin the Other Acts and AdministrativelyDetermined category.

The Executive Schedule was established by Congress to cover topofficials in the executive branch. Thisschedule has five levels, each with a single rate.8 (See table above right). In 1989, the Ethics Reform Act linkedExecutive Schedule increases toincreases in the Employment CostIndex (ECI).

Congress authorizes agency heads toset salaries for those in AdministrativelyDetermined (AD) pay systems. Thesesalaries may apply to the entire agencyor to particular groups of positionswithout regard to the GeneralSchedule. Some agencies under this paysystem establish their own schedules ofrates (the AD pay plan is an example ofthis); others use the generic GeneralSchedule grade and step structure. Anexample of this is pay plan GG which isa pay plan that is similar to the GeneralSchedule and is used by federal agen-cies such as the Department of Defenseand the Commerce Department.Separate provisions are also made forstipend payments to certain student

employees training in Governmenthospitals, clinics, or laboratories andfor payments to member residents whowork at Federal institutions, such as theArmed Forces Retirement Home.Nurses employed by the Departmentof Veterans Affairs’ Veterans HealthAdministration also have a unique,locality-based pay plan (VN).

The Senior Executive Service (SES)covers most managerial, supervisory,and policy positions in the executivebranch which are classified above GS-15 and do not require Senate confirma-tion. There are currently six salary lev-els in the SES (see table on page 27).They are set by the President at thesame time as the annual increases areauthorized for the General Schedule.9

Strategy: The United StatesGovernment’s Office of PersonnelManagement (OPM) has launched amajor review of federal compensationsystems. These systems date from thelate 1940’s. OPM and others have ques-tioned whether the current system hasthe agility and adaptability to promotestrategic performance initiatives. Theyhave also taken a critical look atwhether these systems can be respon-sive to market forces. Even in the cur-

rent atmosphere of reevaluation andreconsideration, in its 2002 publication,“A Fresh Start for Federal Pay: The Casefor Modernization—A White Paper,”OPM restated its commitment to cer-tain basic merit principles. One ofthese principles is openness in Federalpay systems:

Merit system principles, the founda-tion of the modern idea of a civilservice, remain important today.Principles such as equity, proceduraljustice, and openness are essential to a sound public service. Agencies thathave already moved outside the main-stream pay and job evaluation systemscontinue to use these principles effec-tively. As the Federal Governmentconsiders modernizing our compen-sation systems, merit system princi-ples can remain our essential guides.

This white paper further expoundson the virtue of openness in Federalpay stating,

Another theme the merit systemunderscores is openness supported byeffective communication. Howeverarcane the Federal pay system mayappear to outsiders, most Federalemployees understand its basic designand deployment. Organizations craft-ing new compensation approacheslearn quickly that the key to success isconstant and consistent communica-tion. The idea that employees shouldhave a clear understanding aboutwhat they can expect to happen andwhat will affect the outcomes thatimpact them is particularly relevantfor the pay systems and other strate-gic rewards programs that not onlyput food on the table, but also maysubsidize transportation costs andfinance educational expenses. Anystrategic human capital managementimprovements an agency might hopeto achieve with a refined strategicrewards approach could be at sub-

Salary Table 2003-EX

Rates of Pay for theExecutive Schedule (EX)

Level I 171900

Level II 154700

Level III 142500

Level IV 134000

Level V 125400

27

stantial risk if employees are left todivine its contingencies and payoffson their own.

Outcome and conclusion: It is tooearly to know whether there will be amajor reorganization of the Federal paysystem and if so, what that reorganiza-tion will look like. What is clear is thatmaking sure that the Federal pay system remains open and understand-able will remain a core value through-out the process.

2003 Scheduled Rates of Basic PayFOR MEMBERS OF THE SENIOR EXECUTIVE SERVICE, EMPLOYEES IN SENIOR-LEVEL AND SCIENTIFIC OR PROFESSIONAL POSITIONS, ADMINISTRATIVE LAW JUDGES, AND MEMBERS OF BOARDS OFCONTRACT APPEALS. Effective January 2003

Endnotes

1. U.S. Office of PersonnelManagement. Federal CivilianWorkforce Statistics as of March 31,2001.

2. U.S. Office of PersonnelManagement. Federal WorkforceStatistics as of November 2001.

3. United States Code, subchapter I ofchapter 53 of title 5.

4. United States Code, subchapter IIIof chapter 53 of title 5.

5. Authorized under 5 U.S.C. 5304.Regulations are at 5 CFR part 531,subpart F.

6. Defined in 5 CFR 531.603.

7. United States Code, subchapter IVof chapter 53 of title 5.

8. United States Code, subchapter II ofchapter 53 of title 5.

9. U.S. Office of PersonnelManagement. Federal CivilianWorkforce Statistics as of March 31,2001.

Salary Table 2003-ES

RATES OF BASIC PAY FOR MEMBERS OF THESENIOR EXECUTIVESERVICE (SES)

Annual rate

ES-1 $116,500

ES-2 $122,000

ES-3 $127,500

ES-4 $133,800

ES-5 $134,000

ES-6 $134,000

Salary Table 2003-ALJ

RATES OF BASIC PAY FORADMINISTRATIVE LAWJUDGE (ALJ) POSITIONS

Annual rate

AL-3/A $89,200

AL-3/B $96,000

AL-3/C $102,900

AL-3/D $109,800

AL-3/E $116,600

AL-3/F $123,400

AL-2 $130,400

AL-1 $134,000

Salary Table 2003-BCA

RATES OF BASIC PAY FORMEMBERS OF BOARDS OF CONTRACT APPEALS (BCA)

Annual rate

CHAIRMAN $134,000

VICE CHAIRMAN $129,980

OTHER MEMBER $125,960

Salary Table 2003-SL/ST

RATES OF BASIC PAY FOREMPLOYEES IN SENIOR-LEVEL (SL) AND SCIEN-TIFIC OR PROFESSIONAL(ST) POSITIONS

Annual rate

MINIMUM $102,168

MAXIMUM $134,000

28

YSI Incorporated

YSI Incorporated, a $60-millionemployee-owned businessheadquartered in YellowSprings, Ohio, is a leader in

selected technology solutions and serv-ices for data collection and analysis. Byproviding data integrity, YSI is “mind-ing the planet” and working with itscustomers to build an ecologically sus-tainable habitat. YSI has four core val-ues that provide focus for their goalsand actions—employee ownership,innovation, community, and ecologicalsustainability. YSI’s three strategic busi-ness units—Environmental,Temperature, and Life Sciences—develop applications for collecting,monitoring, and assessing the physicaland biochemical properties in water,bioprocessing, and a multitude of med-ical, aerospace, and industrial settings.YSI's mission is to be the recognizedleader in selected technology solutionsand services to users performing datacollection and analysis essential toenrich life and protect the world'sresources.

Total number of employees: 333worldwide, including 288 in the U.S.

Number of employees impacted: AllU.S. employees

Purpose: Revamp of compensation andperformance management systems,including several tools for measure-ment, as a result of productive dialoguebetween employees and managers.

Background: Like many companiespost 9-11-01, business conditions soft-ened and YSI faced economic uncer-tainty. As a result, a three-month salaryfreeze was imposed on U.S.-basedemployees. As several months passed,employee-owners (YSI is an ESOP[Employee Stock Ownership Plan]company) began to get restless and

worried, and wondered how long thefreeze might last. In addition, YSIincorporated a practice of groupingmany non-related positions into broad-band ranges which was very confusingand misleading to many employees.

Strategy: Rather than allow concernand fear to continue and heighten, YSIused its Employee Owners Council(EOC) as a communications vehicle tofacilitate discussion. YSI’s EOC is com-prised of 16 units of 10 to 15 employ-ees, each with an elected representative.All 16 elected representatives meetevery four to six weeks with the compa-ny CEO and report back to their unitmembers in a timely manner.

In mid-April, senior management, atthe urging of the EOC leaders, agreedto draft a formal policy to address thesalary issue and use the EOC as thesounding board for feedback andrefinement. Management committed to respond to questions and commit to further action.

This activity also prompted a reviewand revamp of the company’s perform-ance management system, i.e., annualdevelopment plans, performance evalu-ations, and salary reviews. For example,salaries had not been compared andadjusted to industry norms for a num-ber of years. The Human Resourcesdepartment conducted a thorough andcomprehensive review of YSI salariesagainst comparable positions in theappropriate geographic area. This wasdone using salary survey data providedby two national firms whose surveyshad included YSI participation earlierin the year. Further, Human Resourceshas committed to do this industryreview on an annual basis in the 4thquarter of every year.

Outcome and conclusion: The col-laborative efforts on behalf of manage-ment and the EOC regarding the salary

freeze resulted in a promise to end thefreeze as of a specified date, and tomake increases retroactive for thoseemployees whose salaries were inter-rupted by the freeze. The new practicealso gauges each position against itsspecific salary range and its currentgeographic market value.

And, most recently, YSI used theEOC to recalibrate and re-energize thetrue spirit of company ownership. Notonly do employee owners enjoy certainrights, but they are expected to acceptresponsibilities as outlined in the “YSIEmployee-Owner Rights andResponsibilities Creed.” One of theseresponsibilities is “to seek out informa-tion; to stay informed; to question andto understand.” YSI employees certain-ly do this and management responds.

YSI has over a fifty-two year historyand culture of open communicationsand employee support and recognition.The time and energy it takes to main-tain open communications has its pay-off—in loyalty (YSI has many long-tenured workers), invested workers,and rising productivity. A recentemployee satisfaction survey indicatedthat the most highly-rated response wasthat YSI’s workforce values employeeownership.

Case Summary

29

Base pay is the basic compensation anemployee receives, usually as a wage orsalary.

Benefits are a collection of elements distinct from direct compensation,including, but not limited to health coverage, retirement savings, vacation,domestic partner benefits, and tuitionreimbursement.

Bonus is usually a lump-sum payment(cash, stock, etc.) made in addition to anemployee’s normal salary or wage. Maybe based on performance (individual orcompany) but is not necessarily based on defined performance criteria and standards.

Broadbanding is a pay strategy that consolidates a large number of relativelynarrow pay grades into much fewer broadbands with relatively wide salary ranges,typically in the neighborhood of 100 percent or more.

Competency-based pay is aligned to thelevel at which an employee operates indefined competencies.

Compression is when pay differentialsare too small to be considered equitable.The term may apply to differencesbetween 1) the pay of supervisors andsubordinates, 2) the pay of experiencedand newly-hired personnel in the samejob, and 3) pay-range midpoints in suc-cessive job grades or related grades acrosspay structures.

Deferred compensation is any numberof compensation payments that arepayable to an employee at some point inthe future. Many deferred compensationpayments include contributions to pension fund annuities at the time of payment, and the annuity payments aresheltered from taxes until benefits begin.

Direct compensation refers to pay thatis received by an employee including basepay, commissions, differential pay, incen-tive pay and cash awards.

Exempt is a term referring to employeeswho are exempt from the overtime provi-sions of the Fair Labor Standards Act of1938. These employees include execu-tives, administrative employees, profes-sional employees and those engaged inoutside sales.

Gainsharing plans are group incentiveswhere a portion of the gains an organiza-tion realizes from group efforts is sharedwith the group.

Incentive pay is designed to reward theaccomplishment of specific results.Awards are usually tied to expectedresults identified at the beginning of theperformance cycle. The pay can beapplied to an individual, to a group, com-panywide or a combination of any.

Indirect compensation commonly refersto benefits.

Knowledge-based pay bases an employ-ee’s pay on the level of knowledge s/hehas in a field or defined domain.

Labor market is the place where labor isexchanged for wages. These places areidentified and defined by a combinationof the following factors: 1) geography(local, regional, national, international),2) industry, 3) education, licensing or certification required and experience, and4) function or occupation.

Merit pay refers to a situation where anindividual’s performance is the basis foreither the amount or timing of payincreases.

Open pay system is a compensation pro-gram in which information about salaryranges—in some cases, even individualemployee wage level—is made public.

Glossary of Compensation Terminology

Pay grades are used to group jobstogether that have approximately thesame relative internal worth and are paidat the same rate or rate range (also knownas job grades.)

Pay ranges are associated with paygrades; they set the upper and lowerbounds of possible compensation for individuals whose jobs fall in the range.

Performance-based pay is pay that isbased on an individual’s performance andseeks to reward superior performance.

Profit-sharing distributes a portion of anorganization’s profits to its employees.

Skill-based pay is a person-based com-pensation system based on the repertoireof jobs an employee can perform ratherthan the specific job that the employeemay be doing at a particular time. Payincreases generally are associated with theaddition and/or improvement of the skillsof an individual employee, as opposed tobetter performance or seniority withinthe system. Pay level generally is notdependent on whether any of the skillsare utilized.

Total compensation is the completereward/recognition package for employ-ees, including all forms of money, benefits, perquisites, services and in-kindpayments.

Variable pay is pay linked to reachingthresholds associated with increasing levels of performance. Variable pay may include bonus, gainsharing, and incentive pay.

Department of Labor, “Analyzing Compensation Data: A Guide to Three Approaches”

D

D

O

W

Organizations for start-ups, micro businesses, and nonprofits

Nationwide

Resources

http://www.dol.gov/esa/regs/compliance/ofccp/compdata.htm

epartment of Labor, “Compliance Tools” Provides links to a variety of compli-ance-assistive tools, including severaltargeted to small businesses.

The Executive Service Corps (ESC)http://www.escus.org/flash/who-we-are.html

National Federation of IndependentBusiness (NFIB)http://www.nfib.com/cgi-bin/NFIB.dll/Public/SiteNavigation/

http://www.dol.gov/dol/compliance/compliance-comptools.htm

30

epartment of Labor, “Employment Law Guide” Offers laws, regulations, and technicalassistance for businesses.http://www.dol.gov/asp/programs/guide.htm

ffice of Federal Contract Compliance Programs, “Best Compensation Practices”Outlines several best practices and stepsto promote fairness in compensation.Also provides links to award-winningaffirmative action programs.http://www.dol.gov/esa/regs/compliance/ofccp/practice.htm

omen Employed, “Top 20 Websitesfor Salary and Wage Information” http://www.womenemployed.org/publica-tions/top_20_web_sites.pdf

home.jsp

Service Corps of Retired Executives(SCORE)http://www.score.org/

WorldatWorkhttp://www.worldatwork.org/Content/Infocentral/info-sbs-frame.html

Chicago

DePaul University EntrepreneurshipProgramhttp://condor.depaul.edu/~entrepre/index.html

Executive Service Corps of Chicagohttp://www.esc-chicago.org/

Human Resource ManagementAssociation of Chicago (HRMAC) http://www.hrmac.org/index.html

Northwestern School of Law Small-Business Opportunity Centerhttp://www.law.northwestern.edu/small-business/

University of Illinois at ChicagoCenter for Human ResourceManagement, Center for UrbanBusiness, and Institute forEntrepreneurial Studieshttp://www.uic.edu/cba/Research/Research.htm

31

Equal Employment OpportunityCommission, Compliance Manual:Compensation Discrimination (chapter 10)http://www.eeoc.gov/docs/compensation.html

Society for Human ResourceManagement,Glossary of Compensation TermsReprinted from the Society of HumanResource Management Learning Systemwith permission from the Society ofHuman Resource Management.http://www.shrm.org/

Winning Workplaces,Case Summary CitationsWinning Workplaces is a not-for-profitthat provides information, training, ideas,consulting, and easy-to-use tools to helpsmall and midsize organizations creategreat workplaces. Founded by the formerowners of FelPro, Inc., recognized byFortune and Working Mother magazines asa leader in great workplace practices,Winning Workplaces helps employersassess needs and develop strategies toimprove their workplace practicesthrough seminars, products, and an information clearinghouse. www.winningworkplaces.org

WorldatWork, Glossary of Compensation Terms Reprinted with permission. Adapted fromC1, Regulatory Environments forCompensation Programs, and T1, TotalRewards Management, WorldatWork(formerly American CompensationAssociation) 14040 N. Northsight Blvd., Scottsdale,AZ 85260; Phone (877) 951-9191; Fax (480) 483-8352. ©1999 WorldatWork. Unauthorizedreproduction or distribution is strictlyprohibited.http://www.worldatwork.org/

Consultants who shared their expertisewith CAPS:

Patricia D. Braun Human Resources ManagementConsultant braunpd@aol.com

Barbara MannyPresidentBenefits & Compensation Resources205 Landis LaneDeerfield, IL 60015Phone: 847-236-1208Fax: 847-236-1209b-cresources@msn.com

Don NemerovDirector, Total Rewards ConsultingHuman Resource Services PricewaterhouseCoopersOne North Wacker, Chicago IL 60606Phone: 312-298-5622 Fax: 312-298-7312 donald.s.nemerov@us.pwcglobal.com

References