Designing an Effective Pay Program by D. Joseph Powell In order for a pay program to be successful, it must be designed to meet both the needs of employees and the objectives of management. An effective and equitable pay program unquestionably contributes to the success of any enterprise. It promotes morale and general efficiency, and provides management w i t h the tools to motivate employees properly w h i l e accurately controlling payroll costs. Faced w i t h these simple truths, it is amazing to f i n d, in today's enlightened society, a large number of organizations that go to great lengths to foster good employee relations in other matters, while adopting a casual, even careless attitude in dealing w i t h the compensation of their employees. As a result, a number of organizations face a variety of major compensation problems. For example: 1. Pay differences that are indefensible, and are often the result of bad judgment o n the part of supervisors. 2. Pay review procedures that fail to recognize individual performance. 3. Pressure f r o m dissatisfied employees to make constant pay adjustments. 4. Lack of progression paths to stimulate employee development and longevity of employment. 5. Increases granted to marginal employees, w i t h o u t t h o u g h t t o their development or termination. 6. Continually recurring employee turnover, w i t h related costs and inefficiencies. 7. Inability to compete favorably in the labor market. 8. A feeling among employees that too much of D. Joseph Powell is a Director of Compensation, Benefits, and Services, Needham Heights, Massachusetts. 18 on 9 May 218 their economic fate depends on their supervisors. 9. A feeling among supervisors that they are caught up in a constant turmoil between frustrated employees and confused management. Laying the Foundation O n e of the chief obstacles to establishing a sound pay plan is the lack of a clearly defined policy. Unless top management defines its stand on salaries, it is impossible to design a satisfactory salary administration plan. Policy statements on salaries vary greatly f r o m one organization to another, but a policy statement which most organizations could subscribe to is the following: "The objectives of our pay program are: To attract, retain, and motivate qualified employees To insure that our wages and salaries are competitive with prevailing rates for jobs of comparable value in our competitive labor market To establish the value of each position based on its relative w o r t h to the company To pay for performance on an individual basis, with proper distribution of wage and salary budgets To review all employees on an individual basis and insure that each employee is measured and paid on personal p e r f o r m a n c e. " The stated salary policy of an organization is the base from which those w h o are developing and administering the pay plan must w o r k in conceiving the plan design. There are several necessary steps in designing a well-rounded pay program. 1. Management should insure that program cepts encompass their established policies objectives. 2. A t h o r o u g h examination should be made of and current pay practices, so that if change be made, impact can be assessed. conand past is to
3. A complete inventory of all existing positions must be performed and documented. 4. Organization charts should be established on a departmental and overall basis, incorporating all jobs and incumbents. 5. Reporting relationships, job families, and ascension paths should be identified and clarified. 6. All jobs must be carefully described, following a standard format which includes factors that are generally c o m m o n to all jobs and are measurable. 7. When job descriptions are completed, they should be reviewed to establish proper job classifications (titles), job family arrangements, and to discern the applicability of c o m m o n descriptions in multiple departments. 8. Completed descriptions should then be evaluated, using a comprehensive evaluation system to assign point values to each job factor. 9. W o r k i n g from total point values, all jobs can be assigned to a numerically graded structure, thereby identifying and structuring the internal worth of all jobs. 1. Job specifications should be developed, outlining the skills, education, experience, and other specific qualifications required for an individual to successfully perform the j o b. In other words, the job description describes the job to be performed, and the job specification describes the type of person required to do the job. Once policy has been clearly defined, and all facets of the internal groundwork have been completed, the foundation has been laid for conducting a comprehensive salary survey. The Survey A salary survey must be conducted to provide the necessary information to develop salary ranges for all classifications. Salary ranges are a key element of a workable and accurate pay plan. They must be competitive with existing ranges in the local community, or on a regional or national basis as the nature of the jobs to be surveyed dictates. The mechanics of conducting a salary survey are very straightforward and relatively uncomplicated. Appropriate survey sources must be selected. Survey participants should include organizations that employ people in comparable classifications. Organizations are usually willing to participate in salary surveys when confidentiality is guaranteed, and they are to receive copies of the summarized survey report. The main objectives of a salary survey should be to ascertain prevailing starting ranges for new em- ployees; low, high, and average rates actually paid; and salary range structure minimums and maximums where they exist. It is also extremely important to plot historical salary adjustment trends w i t h i n the area, as well as projected salary increases w i t h i n the area for the next six to 12 months. The ideal survey covers every job which can be compared to like and similar jobs in other organizations. These job classifications are often referred to as " b e n c h m a r k s. " Frequently, jobs exist which are peculiar to the needs of one organization. Therefore, they have no survey counterpart. In such cases, reliance must be placed on accurate job evaluation for measuring job values compared with other jobs which can be surveyed. It is not sufficient to obtain salary data based upon job names only; data must coveroccupations of comparable duties and responsibilities. If the jobs to be surveyed are carefully selected and reasonably well dispersed f r o m low to high relative w o r t h, a salary curve can be constructed along which the remaining jobs will fit. For worthwhile results, the survey should be carried out in direct contact with representatives w h o are in a position to discuss the occupations and to provide data for accurate comparison of duties; mail questionnaires are less effective. Direct surveys may be supplemented by salary data f r o m other sources, such as newspaper want ads, records of salaries requested by applicants, government salary structures, and trade survey publications. Placement agencies will also provide information on current salaries, although they may quote the maximum rate. Many professional associations have conducted salary surveys for their particular occupations, and will usually make this information available to employers upon written request. Salary Ranges and Range Structures When survey data have been compiled and analyzed, competitive salary ranges can be constructed. A salary range is bounded by the lowest salary to be paid to a beginner and the highest salary which w o u l d be paid to an incumbent w h o performs at the highest possible level of efficiency. Every job has a certain market value, which is usually the average salary paid for comparable jobs. However, no two individuals perform a job with the same degree of effectiveness. Some are newly assigned and are learning portions of the j o b ; others are above average due to their natural ability or previous experience. Therefore, a fixed or single rate for a job is not sufficient to allow for proper recognition of these performance differences. A salary range for each job is the solution. LABORATORY MEDICINE VOL 7, NO. 11, NOVEMBER 1976 on 9 May 218 19
There are a number of issues to be considered in the design of a viable salary range. To develop a salary range, the average salary rate must be established, the rate which w o u l d be paid to an incumbent w h o fulfills all requirements of the job. This rate is called the midpoint. The per cent differences between the lowest rate (range minimum) and the highest rate (range maximum) is the range spread. This range spread provides for salary progression, based upon performance, for individuals performing a particular job. The range m i n i m u m s a n d maximums provide controls to avoid underpaying or overpaying for a particular j o b. W h e n a formal job evaluation system is used, it is practical to group different jobs of approximately equal difficulty or importance into the same salary range. When salary ranges are grouped in ascending order, the result is called a range structure. The term salary grade is then applied to a range when it is part of a range structure. The total number of grades required depends upon the size and scope of the total organization. The number of grades used in the structure should also be a product of pay increase and promotion policies to insure that the structure will permit practical application of these policies. Since there are fewer promotional opportunities as an employee climbs the organizational ladder, an incumbent usually stays in the more responsible job longer, requiring a wider grade spread. Grade spreads should increase for jobs which are more responsible to allow for proper salary progression during longer training and experience periods. Wider spreads tend to eliminate improper promotions as excuses for granting deserved pay increases. Percentage spreads between grade minimums and maximums, and the percentage spreads between the grade midpoints vary f r o m one company to another, and f r o m one geographical area to another. Experience over the past 25 years in a wide variety of organizations has shown grade spreads gradually increase from 25 to 3% at the low end of the structure to 5 to 55% at the high e n d. Performance Appraisal W h e n all jobs have been slotted into an appropriate pay grade in a competitive salary structure, the framework of the program is completed. The success of a pay program is dependent not only upon the sound framework of job measurement and j o b values, but upon the dynamics of objectively assessing the comparative value of employees w h o perform the jobs on a continuing basis, and accurately setting and maintaining individual rates of pay. This introduces the need for the appraisal of individual performance. A comprehensive program 2 on 9 May 218 of performance appraisal must provide for measurement of individual performance against opportunities, expectations, objectives and standards. Performance appraisal programs place different emphasis on the various factors to be evaluated, depending upon the use for which they are designed. W h e n appraisals are used for employee development and skills inventory, emphasis is placed on the employee's potential as reflected through backg r o u n d, experience, and qualifications. W h e n used for salary administration purposes, emphasis is placed on an evaluation of performance in the current job performance over a specific period of time. A practical approach to performance appraisal is to design a program which meets the combined objectives of employee development and salary administration. Based upon the results of the appraisal, immediate action will be taken which will directly affect the salary of the employee concerned. When used for employee development or skills inventory purposes, the effect is both immediate and long range. In support of combined appraisal objectives, there is no better time to determine equitable salaries for employees than w h e n a careful analysis has been completed in which both their present and potential value to the organization is considered. Here again, management must clearly establish its policy on the objectives of performance appraisal, in order for the program to achieve meaningful results. As in the case of salary policies, performance appraisal policies vary widely in different organizations. The following is a practical example: "The objectives of our employee development and performance appraisal program are: To set forth the requirements and responsibilities governing the personal and professional development of our employees To promote employees from w i t h i n whenever possible To direct and improve employee performance through performance evaluation To establish realistic goals and expectations w i t h each employee, and to reach mutual understanding To identify exceptional performers, immediately promotable employees, and employees w h o are not performing at acceptable levels To discern needs for training and development To develop specific programs to meet development needs To support the equitable distribution of wages and salaries based upon individual performance."
The objective appraisal of individual performance on a regular periodic basis is an invaluable tool for g u i d i n g a n d counselingemployees, and encouraging their self-development. As a two-way communicat i o n, the appraisal allows the employee and the supervisor to understand what each expects f r o m the other, and to establish mutually agreed to objectives. As areas of strengths and limitations are identified, the supervisor has the o p p o r t u n i t y to stimulate and encourage improved performance and expanded capabilities. W h e n problems are the fault of the supervisor, corrections can be made. tools for performance appraisal and employee development are designed, salary administration guidelines can be formulated. Salary administration deals with establishing and controlling the rates of pay of individuals assigned to specific j o b classifications w i t h i n the salary structure. Performance appraisal can be called an applied skill of management. Appraisal is a management t o o l, and like any t o o l, the best appraisal program may be worthless w i t h o u t full understanding and knowledge of its use. Managers and supervisors must be thoroughly trained in the conduct and application of appraisals. Desired results will only be achieved by methods and procedures which have been developed through careful thought and study, and which everyone responsible for their application fully understands. Clearly spell out guidelines for making decisions on starting rates, probationary reviews, merit increases, salary actions at time of transfer, p r o m o tion increases, demotions, and adjustment of inequities. Establish procedures for the re-evaluation of jobs when changes in j o b content occur, and for the evaluation of new jobs as required. Set forth rules to be followed regarding periodic area surveys, and related adjustments to the salary structure to insure that the program remains competitive. Regulate p r e m i u m payments such as shift premiums, overtime premiums, and premiums for special temporary assignments. Include interpretation of the legal definitions of non-exempt and exempt employee categories for the purposes of establishing eligibility for payment of premium pay for overtime. State the timing and procedures for periodic performance appraisals and salary reviews. Outline specific information which is to be disseminated to employees affected by the program. Provide a basis for determining individual rates of pay and amounts of salary increases. There are a number of methods of performance appraisal in use today, ranging from charts containing very specific factors of traits, skills, and performance, to purely narrative statements on strengths, limitations, accomplishments, and potential. Regardless of the method selected, the appraisal should include an overall summary rating of the employee's performance. The performance summary rating should be expressed on a scale, for example, f r o m one to five, to enable supervisors to ultimately convert appraisals into individual salary adjustment decisions. For example: 1. Unsatisfactory: Performance low due to newness in position or definite weakness. 2. Results below standard: Making satisfactory progress w i t h performance approaching expected standards, or is performing below standard due to a definite weakness. 3. Results at standard: Performance satisfactory. Generally produces tangible results and meets overall performance requirements. 4. Results above standard: Performance generally above standards. Consistently meets and exceeds overall performance requirements. 5. Exceptional results: Performance exceptional. Substantially exceeds overall performance requirements. Salary Administration Once the overall objectives of the pay program are clearly stated, its framework is constructed, and the Salary administration guidelines should be designed as tools for managers and supervisors to insure equitable, u n i f o r m, and consistent application of t o p management's philosophies and objectives. They should: W i t h job evaluations and area survey data at hand, the proper salary range for a job can be accurately determined. Area average paid rates can be compared to corresponding internal paid rates, and disparities in total average paid rates for the various classifications can be identified. General pay adjustments w i t h o u t regard to merit can be made at the time of program implementation to insure that all employees are paid at least the m i n i m u m of their salary grade. Merit increase budgets can be established to achieve and maintain parity with the area. Concern must now be given to individual salary changes, or in other words, movement w i t h i n the range. O n e of the most important elements in a pay program is the means to translate a supervisor's judgment of an individual's performance into an equitable decision on a pay increase; this element is often missing in formal pay programs. The amount of LABORATORY MEDICINE VOL 7, NO. 11, NOVEMBER 1976 on 9 May 218 21
salary increase for merit in a pay-for-performance program should be determined by a comparison of an individual's personal performance level to the position of their current salary in the salary range. A merit increase distribution grid should be used. The grid should be designed to distribute equitably the established merit increase budget among all eligible employees. Grid construction should provide for acceleration of increases for employees w h o are progressing to the range midpoint. It should also provide for deceleration of increases for employees w h o are above the midpoint and are progressing toward the range maximum. This allows for rapid advancement of lower paid employees to the competitive midpoint rate, while keeping deserving employees w h o are paid above the midpoint ahead of competitive area averages. The grid should also provide for larger increases for employees with higher performance ratings, supporting management's policy of pay for performance. The following illustrates this combined approach: Merit Increase Grid < Appraised Performance Level 1 2 3 3-5% > 4 - " 5._.. 11-13% 11-13% 13-15% A, maximum; B, midpoint; C, minimum. To determine the proper amount of an individual merit increase, the supervisor w o u l d : Complete the performance appraisal, and assign a summary performance rating (from one to five) Determine the quartile position of the employee's current salary in the appropriate salary grade Refer to the Merit Increase Grid, and select the increase percentage spread Determine and recommend the appropriate increase. The amount of the actual percentages to be used in a Merit Increase Grid w o u l d, of course, depend on a number of economic and policy factors. The percentage increases allowed by the grid may be adjusted as circumstances dictate from one period to another. However, regardless of changes in controlling factors on percentage amounts, this method of salary determination properly applied will provide a means to systematically distribute the budgeted merit dollars. 22 on 9 May 218 The Merit Increase Grid is uniformly applicable to all grades in the salary structure. Therefore, w h e n an employee is p r o m o t e d to a job in a higher salary grade, the same equitable distribution of merit increases will continue to apply. Control One of the major objectives of a sound compensation program is control seeing that compensation in practice achieves desired results. Control can be described as the continuous process of correlating compensation results with compensation goals. In a situation of constant change, the control process carries a heavier burden. Compensation programs and practices must continually adjust to changes in jobs and employees. With changing technology and methods of organizing w o r k, jobs change. New jobs are created, and old jobs disappear. Similarly, an organization's w o r k force is constantly changing. Employees leave and are replaced by n e w o n e s. Present employees change in abilities, skills, and performance. Program elements must be continually evaluated to insure that they adjust to changing conditions and still achieve objectives. Compensation policies and objectives are often stated in nonoperational terms, making control impossible. Policy statements must be sufficiently specific to provide standards for control. For example, policies should be specific regarding general increases, pay relationships between broad employee groups, fixed amount increases versus percentage increases, merit and promotion increases and performance reviews. Specific policies on hiring rates, amount and frequency of merit increases, employee classification and job re-evaluation should be furnished managers and supervisors to guide them in pay decisions. Such policies become control standards only when communicated to those w h o must make decisions and those affected by the decisions. For fiscal control of compensation, elements of a sound pay program yield data which can be forged into useful tools for analyzing compensation costs, budgets, compensation ratios, manpower loading, and manpower resources. In addition to providing management with planning tools and control data, the total compensation program itself will control payroll costs. The protection of the most important asset of any enterprise, its people, must be a primary objective of management. People must know that they are being paid equitably, and control of payroll costs is a parallel goal. Only through a sound compensation program can these combined objectives be realized. KB