Assessing the Effectiveness of Your Compensation System

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Assessing the Effectiveness of Your Compensation
System

• State Classification Office
• Christine Bailey, CCP
• Stacey McClure, PHR

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Well Developed Compensation Systems

• Increase effectiveness by allowing organizations
  to
• Attract qualified employees
• Align employees with organizational goals
• Retain top performers
• Motivate
• Spend dollars wisely
• Reward desired behaviors

• Reduce risk if they are
• Understandable
• Appropriate for the organization
• Legally defensible
• Flexible and adaptive to change

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Effectiveness and Risk

• Effectiveness can be defined as
• Producing a decided, decisive, or desired result

Risk can be defined as

• Issues that impede an organizations ability to
  achieve its objectives
• The tendency of a system or function to have
  problems
• Not necessarily a known problem, but could be
• Red flag or warning

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Why Is It Important to Know Your Risk?

• To determine if you are in legal compliance
• To focus on best practices
• To determine if your systems and processes follow
  your strategic plan
• To identify and concentrate on specific areas
  that have high risk that also have a high impact
  on the organization

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State Auditors Office Risk Model
Financial Is money being spent as intended?
Service Are services effectively and efficiently
delivered?
Business Is the agency meeting its strategies
and goals?
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Risks in Compensation Systems

• Business Risk
• Disconnect between organizations mission and
  goals and its compensation programs
• Financial Risk
• Large expenditures for pay and benefits
• Potential for lawsuits
• Service Risk
• Inability to attract qualified employees
• Increased workloads due to turnover or low
  productivity

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Steps to Address Risk
Map Objectives

• Understand organizational goals
• Consider timing and business impact
• Prioritize critical objectives

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Presentation Overview

• Increase the effectiveness of compensation
  systems by decreasing risk in the following
  areas
• Compensation Philosophy
• Job Analysis and Job Descriptions
• Employee Pay
• Pay for Performance
• Todays area of focus
• Why care?
• Why worry?
• What is the risk?
• Things to consider
• Tools

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Compensation PhilosophyWhy Care?

• Because
• A large percentage of organizational cost is
  related to compensation
• It provides a foundation for decisions related to
  pay and benefits
• It impacts your ability to facilitate
  organizational strategic objectives
• It impacts your ability to attract, retain, and
  motivate good employees
• It impacts your ability to consistently
  administer pay programs
• It provides a way to communicate pay philosophy
  to employees and applicants

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Compensation PhilosophyWhy Worry?

• Without a compensation philosophy
• You have no guidance when dealing with the
  administration and maintenance of the pay system
• Pay decisions may be made in isolation
• You are unable to communicate compensation
  expectations to applicants and employees
• You are unable to define market position
  expectations
• Pay may not be aligned with organizational
  objectives

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Compensation PhilosophyWhat is the Risk?

• Lack of a compensation philosophy (or poorly
  designed ones) may
• Hinder the organizations ability to achieve
  organizational objectives
• Lead to inconsistency and equity issues in the
  organizations reward system
• Decrease employee satisfaction
• Promote lack of accountability for pay decisions
• Provide little support to defend the organization
  in legal situations
• Increase the likelihood that pay decisions are
  made on an individual level versus
  organization-wide

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Compensation PhilosophyThings to Consider

• Written philosophies indicate that senior
  management understands and is committed to
  aligning business strategy and pay
• Documented philosophies are evidence that
  management is communicating their business and
  compensation strategies to employees
• Well designed philosophies require
• Collaboration from all parties (executives,
  managers, and HR)
• Managerial fortitude
• Accountability from all parties

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Compensation Philosophy Tools

• The Knowledge of Pay Study, E-mails from the
  Front Line. World_at_Work, 2002
• Linking Compensation Policies and Programs to
  Organizational Effectiveness, Hay Group 2003
• World_at_Work membership required
• www.worldatwork.org
• SHRM membership required
• www.shrm.org
• Workforce - requires registration
• www.workforce.com

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Job Analysis and Job DescriptionsWhy Care?

• Used
• To determine job functions and KSAs required
• To help determine appropriate compensation
• To set performance criteria
• To develop training plans
• For recruiting
• For HR planning
• Used to comply with legal requirements
• Equal employment
• Equal pay
• Overtime eligibility

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Job Analysis and Job DescriptionsWhy Worry?

• Without them
• You may be paying too much or too little for the
  job
• You may be violating FLSA
• You may not know how to recruit for the right set
  of skills
• You may not be able to develop appropriate
  training plans
• You may not be able to set appropriate
  performance standards
• You may not have consistency in reviewing
  positions throughout your organization

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Job Analysis and Job DescriptionsWhat is the
Risk?

• Without a job analysis, human resources is a stab
  in the dark, at best, and probably a waste of
  time and money
• Lack of documentation regarding the jobs in your
  organization makes it difficult to determine
  appropriate compensation
• Lack of the identification of the essential job
  functions may cause problems if you are sued
  under ADA
• Without them, you may be unable to determine FLSA
  status and thus you could have wage and hour
  issues

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Job Analysis and Job DescriptionsThings to
Consider

• Job analysis should be performed to document the
  duties of the job
• Job analysis is necessary to determine the FLSA
  status of jobs (nonexempt or exempt)
• Every job in your organization should have a job
  description
• It should contain the jobs essential functions
• It should be periodically reviewed and updated
  through an evaluation procedure

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Job Analysis and Job Descriptions Tools

• Job Analysis Internet Guide
• http//www.job-analysis.net/
• Simple Job Analysis by HRZone
• http//www.hrzone.com/topics/joba.html
• Department of Labor
• http//www.dol.gov/odep/pubs/fact/analysis.htm
• SCO Job Description Reference Guide
• http//www.hr.state.tx.us/Compensation/Conversion/
  JobDescriptionReferenceGuide01.html

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Employee PayWhy Care?

• Because
• Legal risks associated with pay issues are high
• Pay plans need to be tied to the organizations
  mission and goals
• Organizations should ensure employees are paid
  appropriately for their work
• You need policies and practices in place to
  determine employees base pay
• In order to budget for pay expenditures,
  compensation costs must be clearly identified
• Employees need to understand how their pay can
  change over time

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Employee PayWhy Worry?

• Because
• Pay practices can create internal equity issues
  (e.g., compression)
• We need to ensure there is no salary
  discrimination (Title VII, Equal Pay Act, ADEA)
• Initial placement in a pay plan determines future
  pay progression
• Inappropriate classification impacts the employee
  pay
• Organizations may not view pay equity as a
  priority
• Organizations audited by DOL typically have no
  individuals ensuring non-discrimination in
  compensation

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Employee PayWhat is the Risk?

• If we do not pay attention to employee pay
• We risk losing top performing employees to other
  employers
• We could find ourselves subject to lawsuits
• We may find that our pay plan is not market
  competitive or internally equitable
• Employees may feel less motivated to perform if
  there is no consistent policy or process in place
• Organizations have minimal defense against
  discrimination lawsuits

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Employee PayThings to Consider

• There is a gap in understanding the key
  considerations that go into determining pay
• Employees want you to translate the pay structure
  to what their opportunities are for pay increases
  and promotions
• Employees who understand pay are more satisfied
  with their pay and are
• More likely to stay with the organization
• More committed and loyal
• More trusting of management

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Employee PayTools

• EEOC Compliance Guide
• http//www.eeoc.gov/policy/compliance.html
• HR-Guide.Com
• http//www.hr-guide.com/compensation.htm
• State of Colorado
• http//colorado.gov/dpa/dhr/rules/docs/mgrpay.pdf
• The Managers Electronic Resource Center -
  Developing a Salary Policy
• http//erc.msh.org/newpages/english/toolkit/DSP_en
  glish.pdf

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Pay for PerformanceWhy Care?

• Because
• Top performers can impact the bottom line
• Top performers enhance the organizations ability
  to achieve its mission and goals
• It can help maximize return if used appropriately
• It puts limited compensation dollars into the
  hands of key talent
• The performance system establishes uniform
  standards on which you can measure employee
  performance

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Pay for PerformanceWhy Worry?

• Because
• The reward can become an expectation if the
  performance system is not managed correctly
• Funding may be limited
• It requires managers to manage
• You want to ensure that your top performers are
  rewarded more than those whose performance does
  not meet standards

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Pay for PerformanceWhat is the Risk?

• Performance system is not tied to organizational
  mission and goals. If you work for a state
  agency, this process is required by state law.
• Inability to differentiate pay enough to
  adequately reward and motivate key performers
• Lack of adequate funding
• Lack of adequate training and documentation of
  the system
• Managers who do not apply standards consistently

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Pay for PerformanceThings to Consider

• A good pay for performance system must
• Have executive support
• Be linked to organizational mission and goals
• Be communicated effectively
• Have measurable differences in performance levels
• Have a viable salary increase budget
• Be administered effectively by managers and
  supervisors

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Pay for PerformanceTools

• Office of Personnel Management
• http//www.opm.gov/perform/
• Management Help.Org
• http//www.managementhelp.org/perf_mng/perf_mng.ht
  m
• BNET Business White Papers
• www.bnet.com/index.aspx

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Wrap-Up

• Decreasing risk and measuring the effectiveness
  of your compensation plan is important because
• You can identify issues and take action before
  they become expensive and avoid time-consuming
  lawsuits
• Compensation audits may show that your
  organization has made a good faith effort to
  comply with federal and state laws
• By fine tuning your comp plan to be more user
  friendly you send the message that you care to
  your employees
• You may find that certain locations, departments,
  or managers have come up with effective ways to
  handle certain situations

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Compensation Risk Assessment

• Provides questions that help you assess your
  current compensation system
• Helps you identify areas of risk
• Electronic copy on HR Website
• www.hr.state.tx.us
• Electronic version tallies scores
• Questions?