Broadbanding Objectives

Transcription

1 Broadbanding Objectives Narrow pay grades are associated with centrally controlled salary management and job evaluation procedures that focus on narrowly defined duties and responsibilities rather than on an employee s contribution, measure.precise. Distinctions between many levels of work, and are designed to ensure internal equity. While these salary management practices were well suited to static organizations they no longer meet the needs of public or private-sector organizations that have to operate in fast changing and highly competitive business environments. The need to simplify a complex and rigid classification and compensation system and delegate more authority to managers was the driving force behind three federal Broadbanding experiments. As one former federal executive commented,.the current classification system allows the manager to be precisely wrong. What the manager needs is the opportunity to be roughly right (NAPA, 1995). Broadbanding objectives have evolved during the past 8 years from an earlier focus on simplifying salary administration to its current objective of driving cultural change. The various objectives are listed below: -Simplify job classification and job evaluation by reducing the number of distinctions between levels of work and reduce the need for promotion actions -Establish broader pay ranges and change the basis for pay progression from longevity to value-added, i.e., pay for performance, skills or competencies -Delegate classification authority and responsibility for cost control from the human resource function to line managers, thus reducing conflict over job upgrades -Support a rank-in-person system and dual career ladders for experts and supervisors -Increase organizational flexibility and drive culture change -Facilitate organizational delayering -Encourage lateral mobility -Encourage growth and horizontal skill development. Broadbanding in the Public Sector Broadbanding, accompanied by streamlined job evaluation procedures and new performance management approaches, was pioneered by the federal government in 1980 as part of a personnel management demonstration project in two naval research, development, test and evaluation (RDT&E) laboratories at China Lake and San Diego, California. In 1988, two more Broadbanding experiments were implemented: one at the National Institute of Standards and Technology (NIST), formerly the National Bureau of Standards, in Gaithersburg, Maryland, and Boulder, Colorado; and the Pacer Share

2 demonstration project at the Sacramento Air Logistics Center, McClellan Air Force Base, California. A comprehensive longitudinal evaluation of these projects was issued by the U.S. Office of Personnel Management (Schay, Simons, Guerra & Caldwell, 1992; Schay, 1993) and updated results were published in the ACA Journal (Schay, 1996). The demonstration project results have also been discussed in terms of the challenges inherent in designing effective pay-for-performance systems and as a model for future salary programs (Schay 1993; Risher & Schay 1994). Broadbanding has also been implemented in federal agencies that are not subject to the personnel rules and regulations of Title 5 United States Code and the Code of Federal Regulations. These include the Government Accounting Office (GAO), the Central Intelligence Agency, the non-appropriated fund (NAF) installations (post exchanges, clubs and restaurants, lodging and recreational facilities) of the Department of Defense, and the Department of Veterans Affairs whose nurses are covered by Broadbanding. While Broadbanding in the Federal Government is permitted only on a limited basis, through demonstration projects, or available only to agencies exempt from Title 5 U.S.C., several state and local governments have made or are undertaking the legislative and regulatory changes necessary to replace their current classification and pay systems with Broadbanding. These include the states of California, Michigan, Minnesota, and Wisconsin. Examples of local governments that have implemented Broadbanding include the City of Charlotte, North Carolina, the City of Virginia Beach and Loudoun County, Virginia. IPMA s own 1996 Personnel Program Inventory survey of its members, showed that of the 270 agencies that returned the survey, ten percent indicated their agency used Broadbanding. OPM s study of federal Broadbanding systems was preceded by a 1991 report by the National Academy of Public Administration (NAPA), Modernizing Federal Classification: An Opportunity for Excellence. The study advocated Broadbanding as an alternative to a job classification system viewed by federal managers as outdated, burdensome, rigid and time-consuming. Another call for Broadbanding was issued by Vice President Gore s National Performance Review in its September 1993 report recommending legislative changes in the federal job classification statutes to permit Broadbanding government wide. And, in 1995, NAPA issued its second report, Modernizing Federal Classification: Operational Broadbanding Systems Alternatives, offering various design options to federal agencies interested in implementing banding, pending passage of legislation. To date, Congress has been reluctant to approve any permanent changes in the federal job classification statutes. Instead, Congress has moved incrementally by authorizing Broadbanding for DoD s research laboratories in 1994 under an open-ended demonstration authority shared by OPM and DoD, and by making permanent both the Navy and NIST demonstration projects in 1994 and 1996, respectively. Strengths and Weaknesses of Broadbanding Systems Broadbanding by itself is merely a change in compensation structure and is not likely to accomplish much unless it is combined with other HR system changes. As one company manager stated, banding is not simply a compensation intervention or a way that.our receptionist can earn $100,000 because she is in a Broadband (LeBlanc & Ellis, 1995, p. 55). Broadbanding has to have clearly articulated objectives that add value to the

3 organization and should not be viewed as a panacea for all organizational ills. When Broadbanding is implemented as a strategic HR system that integrates key HR functions, such as performance management, classification, career development and organizational design, the results can be very positive. The general strengths and weaknesses of Broadbanding can be summarized as follows. Broadbanding Strengths -Provides a simplified, more flexible compensation and job evaluation system -Facilitates pay for performance and competency-based pay -Supports dual career ladders for technical experts and supervisors -Facilitates employee career development and lateral mobility -Supports more flexible and less hierarchical organizations -Aligns delayered organization with a matching pay structure Disadvantages of Broadbanding -Requires extensive planning, careful design and commitment from the top -Requires extensive communication and training -Results in fewer vertical promotional opportunities -May result in slower salary progression at entry level due to fewer promotions -May make cost control more difficult as pay ranges expand -Requires an effective performance management system -Makes it more difficult to establish external pay equity due to lack of accurate salary survey data for broader job categories -Inconsistent pay decisions by managers may result in loss of internal pay equity -Favoritism and subjective judgment may undermine Broadbanding

4 -Likely to be opposed by unions if linked with individual pay-for-performance systems. Cost Control One of the concerns raised by Broadbanding systems is the potential of rising salary costs since the broader salary ranges provide increased pay potential for employees. While cost has been a major concern in the federal government, the 1994 ACA study reported increased payroll costs for only 8 percent of broad-banding participants. In the 1996 study of 7 British organizations, Broadbanding was implemented on a cost-neutral basis. A study by Mercer Inc. modeling the impact of proposed and actual Broadbanding designs, actually found that employees. Long-term earnings opportunities were reduced by 10 to 50 percent due to the failure to replace promotional increases with some other form of compensation (Jacobs, 1997). However, this study may have ignored market adjustments that would be made if pay is no longer competitive. The experience of one company, Northern Telecom, demonstrates that traditional salary planning tools, such as forced performance rating distributions, and position-in-range control can be used to avoid overspending. As reported by LeBlanc and McInerney (1995), payroll increase budgets were under spent by approximately $2 million during the first year of banding. Most of the savings came from the reduction in promotions. In the federal demonstration projects, salary costs were carefully tracked over time (14 years for Navy, 7 years for NIST and 5 years for Pacer Share, consistent with the duration of each of the projects). While salary growth tended to be slower for entry-level hires during the first five years, due to the reduced number of promotions, eventually average salaries increased under all three Broadbanding systems when compared to pay progression for similar employees under the General Schedule (GS) and Federal Wage System. The increases ranged from less than 3 percent after 14 years for the Navy demonstration project, to 18 percent for Pacer Share supervisors after 5 years. Cost Control Factors It should be pointed out that the cost increases under banding were the result of certain choices made by the designers of the demonstration projects. By carefully choosing among the various options, less costly banding systems could be designed. The OPM study identified six factors with important cost implications for Broadbanding systems: (1) method of conversion to bands (in two of the demonstration projects employees were given pro-rated base pay buyouts of upcoming step increases and or career ladder promotions); (2) size of salary and bonus budgets (these varied from 2.3 to 2.9 percent, plus annual comparability increases ranging from 2 to 3 percent, with the larger budgets leading to faster salary growth), (3) policy on starting salaries (use of cash recruitment bonuses vs. higher starting salaries), (4) system of performance management (magnitude of incentive pay increases linked to ratings); (5) choice of full performance-level band (banding full performance and senior expert levels together results in upward migration of all employees); and (6) overall position management (using an appropriate mix of professional staff and technical and support staff for lower level duties can save on total payroll costs). Salary Budgets and Pay Increase Guidelines

5 The most common way to control costs under banding is to convert employees at their current pay and to establish salary guidelines and budgets for pay increases. Table 1 shows the historic funding formulas used for base pay and variable pay increases in the federal Broadbanding demonstration projects during the 1980s, compared to the government wide merit pay system, which Congress allowed to sunset in The Navy demonstration formula resulted in lower cost increases than the NIST formula. Implementation of Broadbanding Many lessons have been learned by organizations that have implemented Broadbanding. These are summarized below, and some guidelines are provided as well. But it should be kept in mind that all organizations are unique and that there is no one way of implementing Broadbanding. Before discussing the various steps to implement Broadbanding programs, the concept of pay equity will be explained. Pay Equity The concept of equity is central to compensation theory and practice, and designers of Broadbanding systems should understand the distinctions among the three types of equity. Broad-banding systems can be designed to focus on any or all of the three types of pay equity: (1) Internal equity, (2) external equity, and (3) individual equity (Wallace & Fay, 1988). 1. Internal equity is a fairness criterion that involves setting pay rates for jobs that correspond to the relative internal value of each job. Internal equity refers to the value of the work performed on a job to the employer. Internal equity is unrelated to external equity. 2. External equity demands that an employer pay a rate that corresponds to rates prevailing in external markets for the employee s occupation. The federal pay system is more focused on internal than external equity and the federal government generally lags behind market rates. The size of the pay gap has been disputed, but according to pay surveys is around 30 percent. Annual comparability increases were designed to close the pay gap but have not kept pace. 3. Individual equity refers to the payment of wages or salaries based on variations in individual merit. Merit factors include job performance, tenure or experience, and skills or competencies. Design Teams and Coverage The most successful Broadbanding systems are designed jointly by HR specialists, compensation experts, and managers. In general, teams are formed that research Broadbanding and benchmark best practices. Since Broadbanding involves the entire HR system, individuals knowledgeable about compensation, job evaluation, performance management, employee development and labor relations should be involved. However, because of the need to design an integrated system, it is not a good idea to have subteams design separate job classification or performance management systems. In unionized environments, partnerships should be formed to ensure acceptance of the program. Even in non-unionized organizations employee involvement is advisable to build ownership of the new system.

6 Although Broadbanding is most often used with white-collar employees, one of the federal demonstration projects, Pacer Share, included unionized blue-collar employees. In the private sector, only 26 percent of the companies involved in Broadbanding reported covering hourly employees and none covered unionized employees. Since Broadbanding usually involves associated changes in performance management, the biggest obstacle is persuading unionized employees to accept pay-for-performance systems. A study of Broadbanding practices in Britain, which included a public sector corporation and companies with unionized employees, cited similar concerns..staff and union opposition to Broadbanding in the other companies was based on a lack of confidence in these performance management systems (Brown 1996, p. 46). In some of the new federal demonstration projects, unions have opposed the inclusion of the annual comparability increase in the incentive pay pool. These increases are currently guaranteed regardless of performance. As a result, only a small percentage of basic pay will be at risk, reducing the effectiveness of the pay-for-performance systems. Time to Develop Broadbanding According to the 1994 ACA study, the median time from initial discussions of Broadbanding to rollout was nine months, and the range was 2 months to 2 years. Federal demonstration projects, which involved waivers of law and regulation and two Federal Register notices tended to take 1 to 3 years. The ACA study found that in general, career bands took longer to design and implement than broad grades. Organizational Culture The 1994 ACA study, as well as OPM s evaluation, found that Broadbanding worked best in organizations that were delayering and/or trying to change their culture than in traditional hierarchical organizations. Employees in the Pacer Share demonstration project, which included 50 percent blue-collar employees, missed their promotions and sense of advancement through traditional career ladders. In contrast, employees in the federal research labs adapted well to banding and accepted the pay-for-performance systems that were implemented at the same time. Over time, these labs made the successful change from an entitlement culture to a performance culture. Training and Communication All Broadbanding systems require ongoing communication about the rationale for banding, and training and orientation of supervisors, HR specialists, and employees. Broadbanding, especially when accompanied by new job classification, performance management and career development systems, represents a cultural change, which is likely to be met with resistance from employees, at least in the beginning. The British study came to similar conclusions. Broadbanding initiatives can succeed only if they are instituted in an integrated, strategic manner and accompanied by high communications and involvement that is designed to reinforce the broader cultural changes necessary for long-term success (Brown, 1996, p. 45). Methods of communication should include the entire range of communication tools: newsletters, , WEB pages, oral briefings, videos, brochures and manuals. Results of demonstration project surveys have shown that regardless of the amount of communication, employees tend to report that they did not receive enough information. Therefore, it is best to over-communicate.

7 In federal demonstration projects, most of the training was conducted in-house without assistance from external consultants, usually by individuals who had been involved in the design teams and were able to answer employee questions. Because of the strong entitlement cultures that are so pervasive in public sector organizations, communication and the ability to answer all employee questions is critical to success. Included in the training should be information on the new system and how it operates, and employee and supervisor rights and responsibilities. Some agencies have provided employees with handbooks, which described the new system, and provided supervisors with guides that gave them information about how to use the new system and its automated procedures. Any changes in internal procedures generally need to be documented. Private-sector organizations have much greater flexibility to change their HR systems and can make their case based on business need. But communication from the top that focuses on the reasons for the change and benefits to the organization and its employees is critical for the success of any organizational change program. The ACA study strongly emphasized the importance of training and communication. Following are comments from company surveys after banding was implemented (Abosch & Hand, 1994): -Need better communication from top management showing support and commitment. -Tie communication directly to long-range corporate strategy. -More communication and involvement from front line; there was no real buy-in. -Much more communication to managers and employees. There were many negative rumors about the program. -Take more time to educate employees and leadership up front. -Spend more time designing the system with input from affected areas. -Would have spent more time up front communicating.why. we are implementing Broadbanding. Establish a more definitive salary administration program before implementation. The ACA study concluded that organizations that are considering Broadbanding need to give as much attention to their education and promotional efforts as they do to the design process. Companies that had been successful in implementing Broadbanding were proactive in communicating with employees and training managers. But even the successful companies felt that they should have spent more time preparing employees and managers for Broadbanding. Finally, it has to be realized that while Broadbanding systems are more flexible than the current pay schedules, they also require a much higher degree of sophistication because greater management discretion is replacing rigid rules and internal regulations. As managers take on many of the responsibilities previously carried out by HR specialists,

8 they need to gain a full understanding of the legal foundation of compensation programs (see later section on compensation laws). Management training in compensation management as well as involvement in the establishment of the new system are prerequisites for successful change. Placing Positions into Bands A thorough job analysis should precede the design of any banding system in order to provide a legally defensible basis for pay differences. A variety of job analysis procedures have been used: factor evaluation, point-factor evaluation, whole-job slotting and competency-based multi-purpose job analysis. Relying on existing, often outdated job evaluation or classification systems may perpetuate problems in those systems. To date all federal demonstration projects have banded the existing grade structure when beginning a demonstration project but developed new classification standards to classify future positions. Before banding positions, typical career progression for the targeted jobs was reviewed, as were existing grade distributions and grade clusters. Jobs were generally assigned to different career paths based on similarity of job requirements, such as education and experience, and four or 5 bands were chosen for each career path. An example of two typical Broadbanding schemes is shown below in Table 2. In contrast to the private sector, federal Broadbanding systems tended to have narrower ranges, typically from 50 to 80 percent. The ACA study defined bands as having minimum ranges of 75 percent. Table 2 Two Typical Broadbanding Schemes I Entry I Developmental II Developmental III Full Performance II Full Performance IV Expert/ Supervisor III Expert/ Supervisory V Managerial IV Managerial OPM s Personnel Resources and Development Center has developed a multi-purpose job analysis approach for white-collar jobs across the federal government. The tasks, competencies and benchmark levels can be used to design Broadbanding systems. Several state and local governments, including the State of California, have adopted the system to design their Broadbanding program. Most Broadbanding systems moved from series-specific classification standards to generic standards covering an entire occupational group, e.g., all scientists or all engineers. Drastic reductions in the number of job titles have also been achieved in many public-sector systems. Salary Survey Issues Some private-sector organizations have continued to rely on point-factor evaluation systems to design their bands (Brown 1996) while others have used market surveys to assign their jobs to bands. The question has been raised whether Broadbanding and the

9 fast changing nature of jobs -- some have even talked about the disappearance of jobs -- make salary surveys impossible to do. The problem with salary surveys is that they don t offer accurate job matches for broad banded jobs. Some experts predict that the levels of a job for which salary surveys gather data are likely to be reduced from five or six to just the entry level, professional level and senior professional level. Salary surveys will meet a continuing need for information that allows companies to be competitive and to maintain a legal basis for their pay decisions (Mays, 1997). The problem of how to survey for competencies has not yet been resolved. Some have suggested regression equations based on education, experience and level of competencies, but the lack of common competency definitions will make this unlikely for some time (McMahon, 1997). Organizations that have designed competency-based broadbands used competency profiles and new band descriptions to slot their jobs into bands. Pay Progression Strategies There are a number of options for moving employees through the bands. For a discussion of some of these options, see Alternative Pay Progression Strategies: Broadbanding Applications (U.S. OPM, 1996). Pay for Performance Successful Broadbanding systems have moved from longevity-based or seniority-based pay progression to performance-based systems. A typical approach is a 5-level rating system that is linked to incentive pay points for each rating level. Organizations usually design their own computer programs to administer the annual payouts, e.g., Navy and NIST. Although the Navy and NIST pay-for-performance systems have been accepted by the majority of employees, there is widespread dissatisfaction with pay-for-performance systems that rely on a single individual, the supervisor, to rate an employee s performance and determine that individual s pay. New systems are being designed incorporating multi-rater feedback or 360-degree appraisal to ensure greater rating reliability and employee acceptance. OPM s Personnel Resources and Development Center has developed a multi-purpose job analysis approach for white-collar jobs across the federal government. The tasks, competencies and benchmark levels can be used to design Broadbanding systems. Several state and local governments, including the State of California, have adopted the system to design their Broadbanding program. Most Broadbanding systems moved from series-specific classification standards to generic standards covering an entire occupational group, e.g., all scientists or all engineers. Drastic reductions in the number of job titles have also been achieved in many public-sector systems. Salary Survey Issues Some private-sector organizations have continued to rely on point-factor evaluation systems to design their bands (Brown 1996) while others have used market surveys to assign their jobs to bands. The question has been raised whether Broadbanding and the fast changing nature of jobs -- some have even talked about the disappearance of jobs -- make salary surveys impossible to do. The problem with salary surveys is that they don t offer accurate job matches for broad banded jobs. Some experts predict that the levels of a job for which salary surveys gather data are likely to be reduced from five or six to just

10 the entry level, professional level and senior professional level. Salary surveys will meet a continuing need for information that allows companies to be competitive and to maintain a legal basis for their pay decisions (Mays, 1997). The problem of how to survey for competencies has not yet been resolved. Some have suggested regression equations based on education, experience and level of competencies, but the lack of common competency definitions will make this unlikely for some time (McMahon, 1997). Organizations that have designed competency-based broadbands used competency profiles and new band descriptions to slot their jobs into bands. Pay Progression Strategies There are a number of options for moving employees through the bands. For a discussion of some of these options, see Alternative Pay Progression Strategies: Broadbanding Applications (U.S. OPM, 1996). Pay for Performance Successful Broadbanding systems have moved from longevity-based or seniority-based pay progression to performance-based systems. A typical approach is a 5-level rating system that is linked to incentive pay points for each rating level. Organizations usually design their own computer programs to administer the annual payouts, e.g., Navy and NIST. Although the Navy and NIST pay-for-performance systems have been accepted by the majority of employees, there is widespread dissatisfaction with pay-for-performance systems that rely on a single individual, the supervisor, to rate an employee s performance and determine that individual s pay. New systems are being designed incorporating multi-rater feedback or 360-degree appraisal to ensure greater rating reliability and employee acceptance.