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Pay compression


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Pay compression

  1. 1. PAY Compression: The Human Resource Nightmare Michael F. Maciekowich National Director
  2. 2. Acknowledgements • WorldatWork ( • SHRM ( • PayScale ( • Pearl Myer ( • Business & Legal Reports ( • US Legal ( • Sibson Consulting/The Segal Group
  3. 3. Understanding Pay Compression
  4. 4. Pay Compression Defined • Pay compression is the situation that occurs when there is only a small difference in pay between employees regardless of their skills or experience. It is also referred to as salary compression. • Pay compression is often the result of the market- rate for a given job outpacing the increases historically given by the organization to high tenure employees. Therefore, newcomers can only be recruited by offering them as much or more than senior professionals.
  5. 5. Pay Compression: Root Causes • Pay rates of new hires are greater than pay rates of incumbents. • Subordinate pay is greater than supervisor pay. (This typically occurs when the subordinate is overtime eligible.) • Inefficient merit-pay programs. (In a true merit-based program, the merit pay received should be significantly higher for top performers. In many organizations, that difference is not significant enough to prevent pay compression.) • Pay grade overlap is too great due to overlapping pay ranges and small midpoint progressions.
  6. 6. Pay Compression: Root Causes • If an organization is unionized, there is a greater chance of pay compression based on the structure (and number) of unionized contracts. • If midpoint differentials (the difference in wage rates paid at the midpoints of two adjacent grades) are too close together, the potential for pay compression increases. • Supply and demand is out of sync, when the need for a particular skill set exceeds the availability. System Engineers come to mind as recent examples. • The internal compensation structure becomes stale and out of alignment with the external market data.
  7. 7. Consequences of Pay Compression The obvious problem with compression is the negative impact it has on the morale of your work force. Who wants to welcome a new hire to the team when you learn that that person is already earning more than you? Who wants to fully share company knowledge and have that co-worker successful if resentment over pay is an issue? Too many organizations have been relying on high unemployment rates as their de facto retention strategy. As the economy picks up, if you have not addressed compression issues, it will be your best performers, not your mediocre or troublesome ones, who race to join your competitors. Pay compression can lead to potential Equal Pay and other Labor Law violations (Age Act, Title VII, etc) if it is discovered that the organization has discriminated against a protected class in pay administration.
  8. 8. 8 Overview of Federal Legislation Impacting Compensation Key Federal Legislation FLSA Equal Pay Act Equal Pay Between Sexes for Equal Work Title VII Civil Rights Act Apply Equal Pay Provisions Among Protected Classes Race, Religion National Origin Age Act Apply Equal Pay Provisions To Over 40 – 70 Years Old Americans With Disabilities Act APPLY Provisions of Equal Pay Act to Disabled Americans Lilly Ledbetter Pay Equity Act
  9. 9. First Step: Auditing Your Compensation System
  10. 10. 10 Recognize all Parts of Total Rewards External Position Equity Internal Position Equity Employee Pay and Recognition Equity Total “Non-Cash” Compensation – Benefits/ Retirement Ability to Fund all Aspects of the Program • Competitiveness in terms of Geography. • Competitiveness in terms of industry. • Level of competitiveness by organization and position. •Recruitment and Retention Trends. • Determine organizational value of positions regardless of market value. •Determine value of positions not matched to the market. •Determine the differences among “families” of jobs. • Determine internal pay levels of employees based on seniority, performance, or other methods. • Determine appropriate methods to recognize employee performance and contributions. • Understanding the impact of “Generations” in compensation decisions. • Addressing the rising cost of insurance in plan design. • The need to have more employee cost sharing. •Understanding pressures from organized labor. •The need for flexibility in addressing “generational” differences in both benefit and pension design. •Impact of fluctuating stock market on pension design strategies. •Funding all aspects of the program understanding the impact of current industry trends. •Determining the “ROI” of all programs to demonstrate the impact on effective recruitment and retention of staff required for the organization to succeed. •Proactively developing strategies that reduce cost impacts while remaining effective.
  11. 11. Key Steps in an Effective Compensation Audit • Accurately assess the situation. • Determine the specific positions that seem to have experienced the compression. • Was the compression created by under-paying current employees, overpaying new hires, or did the market truly move significantly enough to cause the compression? • Then, evaluate your compensation mix. Are you relying too much on base compensation? Compression is much more common in organizations with little variable or incentive pay -- as a percentage of total compensation -- in the compensation mix. • Finally, reconsider skill requirements. Do you really need a multi- skilled, home run-hitting renaissance man (or woman)? If not, make sure you are comparing apples to apples when you compare new hires to existing employee
  12. 12. Astron Solution’s Process in Auditing for Compression • A typical compression analysis includes analyzing each employee’s pay as it relates to a fixed point in a pay range. • Assumption can be made that the midpoint of a pay range equates to 10 Years of job related experience. • In a 50% range spread the midpoint is 25% above the maximum of the range. This equates to 2.5% above the minimum for each year of job related experience. (10 Years x 2.5% = 25% or the midpoint). • Most compression studies only focus on issues between the minimum and the midpoint of the range. • A simple spreadsheet analysis can be used to determine if the current incumbent’s pay is appropriate for their job related experience. • A simple formula can determine the cost to place the incumbent at the right level in the pay range in relation to the range midpoint.
  13. 13. Auditing for Salary Compression-Another Approach (Sibson Consulting, a division of Segal) Review the compa-ratios within each salary grade or band by the employees’ time in position. While time in a position is not the only factor that moves an employee through a salary range, it is a good proxy to start testing for compression within a specific salary grade or band. When shorter-service employees appear deeper in the range (e.g., the third or fourth quartiles) and longer- service employees appear at the beginning of the range (e.g., the first and second quartiles), it is a sign for closer examination. Note: An internal compa-ratio identifies the relationship of an incumbent’s salary relative to the salary range midpoint. It is calculated as the employee's current salary divided by the salary range midpoint for the job the employee occupies. Compression-Lid.aspx
  14. 14. Auditing for Salary Compression-Another Approach (Sibson Consulting, a division of Segal)
  15. 15. Challenges in Auditing for Pay Compression • Lack of employee historical data on job experience. • Time an expense in creating a comprehensive database. • Deciding how far in the pay range to look at for compression. – 1st Quarter of the range – Midpoint – 3rd Quarter of the Range – Maximum • Determine which jobs are to be focused on. – All – Mission Critical – Large population • Morale issues if compression is not completely addressed
  16. 16. Second Step: Potential Solutions
  17. 17. 9 Basic Solutions (Business & Legal Reports) 1) Revisit/rebuild “grade structure.” The first thing we can do is to rebuild our grade structure, which may be responsible for “structural compression.” More often than not a major contributor to existence of pay compression rests with the nature of the pay ranges themselves, specifically, that they are too narrow from grade to grade. 2) Make “equity adjustments” to accelerate pay. When you look at a group of employees at the low or high end of the range, identify people whose performance level and rate are not in the proper relationship. Those are the candidates for equity adjustments, 3) Make sure your ranges are pegged to the market. You want to adjust pay ranges on a regular basis; my recommendation is to adjust every year. If you can’t do that, it’s likely that you are falling behind the market, at least structurally. 4) Improve your pay administration. Study rates, attach names, experience levels, and performance levels. Compared to “relevant others,” are employees paid fairly? 5) Consider promoting employees. When concerned about those clustered at the top of the range, ask, is this a person that we can move out and up to another pay grade 6) Consider “re-assessing” some employees. If you have underperformers, people whose performance contribution is less than it should be, consider freezing compensation. Generally, we don‘t take pay away, but we can freeze. 7) Rewrite job descriptions. Perhaps you need to reclassify employees as duties change. 8 ) Consider merit bonuses instead of raises. This is not a solution per se, but you can use merit bonuses to avoid aggravating the pay relationships in compression situations. The obvious benefit is that you can allow some rates to float up, and others to remain the same to “disperse” the bunched pay rates, all without building increases into base pay rates. 9) Take care setting pay rates for new employees! compression/#sthash.sCCivFcf.dpuf
  18. 18. 18 Developmental/ Learning Fully Competent for the Level Expert Competency in all Aspects of the Level Post 12 Month – 18 Month Rate (Level III) $------------------------$ $14.00 $------------------------$ $14.50 $--------------Maximum $15.00 3 Month – 12 Month Rate (Level II) $------------------------$ $12.50 $-------Midpoint-------$ $13.50 90 Day Rate (Level I) Minimum---------------$ $12.00 Consider Establishing “Inter-Grade” Career Paths
  19. 19. 19 Consider a Simplified Incentive Program Financial Performance •Utilization of Resources • Outcome or Result • $ Value Customer Performance •Customer Interactions • Outcome or Result • $ Value Quality Performance •Process • Outcome or Result • $ Value Growth Performance •Process Improvement • Innovation • Outcome or Result • $ Value Organization Success Human Resources Performance •Teamwork/Interaction • Outcome or Result • $ Value
  20. 20. Case Study: Engineering Organization • Step 1: Updates the Current Pay/Grade Structure. – Establish “Job Families” – Establish Wide (50%) Ranges from Minimum to Maximum – Widen the Midpoint Progression Percentage to at least 20% • Step 2: Prioritize Job Families Based on a “Mission Critical” Need • Step 3: Based on Priority Review Current Data on employee Current and Past Tenure in their Position – Conduct a Data Audit of Current Employee Files – Conduct a Survey of Managers – Conduct a Survey of Employees • Step 4: Update the Employee Tenure History Database • Step 5: Conduct Current to Project Salary Rate Analysis – Assume 10 Years to Midpoint, 20 Years to Maximum – Place Selected Employees into the Range Based on Adjusted Tenure – Determine the Financial Impact of Making Adjustments
  21. 21. Case Study: Engineering Organization • Results: – HR was given a “Compression Budget of 1% of Payroll” – Determination was made that Two of Five Job Families Could be Focused on – Determination was made to “Cap” Compression Adjustments to the Range Midpoint – New Hire Policy Set to Mirror Compression Formula in Jobs Impacted – HR given .5% of Payroll to Address, on a Case by Case Basis, Compression in Non-Impacted job Families – Extensive Management and Employee Communication Conducted on the Entire Compensation Program and Compression Results
  22. 22. About Astron Solutions 505 8th Ave Suite 2200 New York, NY 10018 800.520.3889
  23. 23. About Astron Solutions, LLC Astron Solutions offers compensation and human resource consulting services including: – Compensation Outsourcing – Compensation Strategy Design – Internal Pay Strategy Design – External Pay Strategy Design – Sales Compensation Design – Self-Funded Incentive Compensation Programs – Performance Management Design – Web-Based Talent Management Solutions For additional information please contact: Michael Maciekowich Astron Solutions 800-520-3889
  24. 24. Michael F. Maciekowich Michael F. Maciekowich is a National Director for Astron Solutions. His areas of expertise include the development, design, and implementation of executive, physician, and employee base pay, short and long term incentive programs, sales incentive programs and performance management systems in all industries. His primary focus is the integration of compensation and human resource strategies with organization-specific missions, visions, values, and strategic operating plans. Michael has over twenty-five years of consulting and industry compensation experience. Prior to Astron, Michael was the National Director of Healthcare Rewards Consulting and the Metro New York Operations Manager for Rewards Consulting for the Hay Group. He was also compensation consultant with a number of consulting firms, including Towers Perrin (Senior Consultant), Hartstein Associates (Vice President), Adams, Nash & Haskell (Vice President), The Omni Group (Vice President and Partner), and Modern Management (Senior Consultant). In these roles, he focused on the role compensation plays in human resources and labor avoidance strategies. He has assisted hundreds organizations in his twenty plus years of consulting. Prior to his consulting career, Michael was responsible for compensation services at the American Hospital Association, Honeywell International, and Zenith Electronics. Michael is a sought-after speaker in compensation program design. He is a regular speaker for the national conference of the American Society of Healthcare Human Resource Administration (ASHHRA) regarding healthcare compensation and performance management strategies. In addition, he has presented to numerous local ASHHRA and Society for Human Resource Management (SHRM) chapters. Michael is an active member of WorldatWork (former American Compensation Association), American Society of Healthcare Human Resource Administration, Society for Human Resource Management, and SHRM’s Consultants Forum. He is also a member of various local and state human resource associations in Massachusetts, Connecticut, Upstate New York, Greater New York City, and Louisiana. Michael is a member of the International Who’s Who of Professionals. He received a lifetime achievement award from WorldatWork. Michael received bachelor’s degrees in political science and philosophy and a master’s degree in industrial relations from the Loyola University of Chicago.