Alternative Compensation Plans – Creative Options in a Down Economy

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Paula M. Singer, PhD and Laura Francisco
Originally published in IPMA HR News, January 2010

In a recession, creativity is critical in giving employees incentives that recognize excellence, keep them engaged and motivated and keep the budget balanced. While the tendency during tough economic times might be to do nothing related to compensation, that is, in fact, opposite of what should be done. Employees, while aware and even understanding of the budget situation that their organizations are facing during the recession, are still human, and need to be challenged, motivated, and, yes, rewarded. These high-performing and committed employees will then become your best and most loyal employees after the recession.

The results of a recent study by Right Management, published in the Nov. 27-Dec. 4, 2009 issue of IPMA-HR’s HR Bulletin, indicated that 60 percent of employees intend to leave their current employers as the economy improves in 2010. The following are some ways you can work to avoid this in your organization.

Skills/Knowledge-Based Pay
Employees in a system that grants skills- and knowledge-based pay are encouraged to learn as much as they can about their jobs and their careers. Using such a system, the county or city government compensates employees for learning new skills related to their jobs and the organization as a whole. The employee’s pay is linked to the number and type of skills the employee is qualified to perform or to the competencies acquired.

This type of system can be designed and implemented for all employees, for certain positions, or to reward skill enrichment of incumbents. However, skills-based pay is expensive if used at all levels. It can be cost effective when offset by higher productivity; the need for less staff; and higher quality, more productive, and more flexible employees. If a county or city is having difficulty recruiting employees with certain skills, this type of program may also be structured so employees can be recruited internally. Employees who have a high potential to learn but who may not currently have minimum qualifications to enter the difficult-to-recruit position can have the opportunity to develop needed skills.

One example of skills-based pay was demonstrated in a local municipal government. The public works department devised a system by which water/wastewater operators, equipment operators and mechanics were eligible for incremental pay increases (while remaining in the same classification) for achievement of blocks of continuing education units toward the various required licenses and for mastering the use of new and more complex types of machinery and equipment. This system varies from a traditional tiered system of equipment operator I, II, III, for example, in that there were not time-in-position requirements for achievement of the goals set out by the department director.

A knowledge-based pay system focuses on adding knowledge and ability to an identified group of positions and could be facilitated by the design of the local government’s job descriptions. One organization included three levels of knowledge, skills and abilities in each position that was included in the knowledge-based pay plan. Job descriptions were divided into three parts, with the employee beginning at the entry-level of the position. Once the person learned the skills and acquired the knowledge required of a highly functional and full performance level, she or he would move into the second third of the pay range and receive an increase to reflect the higher levels duties and responsibilities. Similarly, as the employee became increasingly proficient in the intermediate skills and knowledge and began to acquire senior, highly complex and even supervisory/management knowledge, she or he would move into the final third of the pay range. This type of system could be easily adopted in positions where job families are often used, for instance, accountants, HR staff, management assistants, engineers, planners and others.

Gain Sharing/Success Sharing
Gain or success sharing is any unit-wide or organization-wide incentive designed to reward all members for improved performance. The city or county government measures “gains,” or real dollar savings that resulted from the performance of the unit or organization and shares these savings with all employees based on a predetermined formula incorporating the savings. Gain-sharing programs focus on improving quality and productivity, increasing the pace of service, reducing costs, and improving employee relations. Employee involvement and information sharing are critical components of gain sharing.

The focus on “green,” or ecologically sound initiatives provides many opportunities for gain sharing programs that can benefit employees, local government and the environment. Examples include employees researching and developing recommendations on green lighting, additional recycling opportunities, solar panel installation and other programs that can offer potential savings for the government involved.

Temporary or Supplemental Pay
Temporary or supplemental pay is compensation that is in addition to, but not part of base pay. It is designated for a period of time for “hot” skills or special project work. Included are employees that have been assigned a task of higher scope and responsibility level, who should be given “acting” pay while in that role, in a separate check that is not attached to base pay. In this economy, temporary pay or a separate salary scale is often recommended for positions requiring “hot skills.” Project pay is rarely as generous as temporary pay for the skill of the day. When ranges are wider and realistically reflect the market, when employees are expected to work flexibly and not stay within the four corners of a narrow job description, working on special projects becomes an important part of many jobs.

This leads to one of the concept’s two major shortcomings. First, it is hard to demarcate and justify when the extra project falls into the employee’s regular job versus being “special.” This can be a difficult and disagreeable task if the employee or his or her manager disagree. Second, the “add on” to base salary often results in an expensive, permanent pay raise because sometimes management is reluctant to take away salary, even if it has been discussed beforehand.

During the 1990s, for example, compensation IT positions shot up quickly and exponentially. Local governments often found themselves in bidding wars for talented IT professionals, and often increased their valued incumbents’ base pay as a form of retention bonus. Unfortunately, while the market value of those positions returned to reality during the earlier in this decade, those organizations who had added to IT employees’ base pay found themselves paying those higher rates for the foreseeable future (until retirement or other separation and a lesser-compensated candidate could be hired). If those employees had been given add-ons or lump-sum increases, the base pay would have remained the same and would not be out of line with the rest of the salary structure at this point.

Broadbanding
Broadbanding is a concept that has been in existence for approximately 25 years, and was developed for use in two U.S. Navy laboratories in California. It was created in the early 1980s and used at the Navy’s China Lake Air System Command and at the San Diego Weapons Lab, and called the “Demonstration Project Pay for Performance Plan.” Broadbanding refers to the combining of existing job classifications and ranges into wider pay bands. While more commonly adopted in the private sector, several public jurisdictions, parts of the federal government, and several institutes of higher education have designed their salary structures with much broader salary ranges or bands encompassing more diverse jobs with appreciably different pay levels. While broadbanded ranges in the private sector are often 100 percent or more from minimum to maximum, they are usually quite a bit less in the public sector and higher education realms. The ranges are designed this way to encourage lateral transfers instead of promotions, facilitate the ability of employees to enrich and enlarge their jobs without the necessity of a reclassification or promotion, and improve recruitment and retention efforts, especially when competing with the private sector. Broadbanding has also been combined with skills- and knowledge-based pay to provide room for salary growth in a pay range or band for learning the skills required to perform new tasks.

A number of governments, universities, libraries, and colleges have customized modified broadbanded systems: pay plans with fewer grades, wider ranges (allowing for recognition without reclassification or promotion), and the ability to develop people via horizontal movement. Plans for career progression can be made available through broader job descriptions that are designed around key activities or results categorized as basic, intermediate, and advanced. Flexible policies are written and managers are empowered to make pay decisions to move employees through pay ranges based on equity, competency, market, and budget.

As a tool, broadbanding should be implemented to respond to a need. It can be implemented to encompass your entire structure, to support an organization redesign to a multifunctional team-based structure, to use in combination with skills-based pay, or to respond to challenges in recruiting and retaining employees.

There are a number of drawbacks to broadbanded systems. Most of them revolve around the difficulty inherent in their administration. While jobs are slotted into a “target range” within the broadband, employees often believe that regardless of their position and its duties, tasks, and responsibilities, they will be eligible to earn up to the maximum of the range. Managers also find these systems difficult to administer because they often are not trained to make these types of pay decisions and find it hard to “just say no.” Training and education for managers and employees are critical when implementing a broadbanded system.

Alternative Pay for Performance
While the trend is that some private sector companies are leaving pay for performance in favor of incentive pay plans, many public organizations are just beginning to take it seriously. While managers in companies are accustomed to holding the accountability that goes with making pay decisions within open ranges or broadbands, most traditional public sector plans are steeped in the traditions of awarding automatic step and cost-of-living or other increases, which, even if called “merit” increases are not truly reflective of performance. Pay for performance is a more objective and systematic method of awarding merit increases based on continuous improvement.

Today more governments are moving toward “performance management” by modifying or overhauling their traditional performance evaluation systems. Performance management systems embody the following six key characteristics:

  1. Individual performance objectives are tailored to each employee’s job.
  2. Objectives show appropriate linkage to department or overall organization goals.
  3. Interim performance discussions occur between the employee and supervisor.
  4. Organization-specific competencies are in place that describe the behavioral expectations for all employees.
  5. An internal or external customer feedback feature may be included as a feature of the new performance management system.
  6. An employee development plan builds on the employee’s career and professional interests.

The linkage (from the results of employee contributions through the performance management plan) to pay is clear and more objectively determined than in traditional compensation systems.

In all of these examples of alternative pay, training and education are indispensable—before, during and after such programs are rolled out. Providing ways to compensate employees beyond the typical step or across-the-board increases can help organizations manage HR budgets during a recession while keeping employees engaged and motivated.

This article has been adapted from a two-part article published in Library Worklife, an American Library Association Publication, Volume 1, numbers 3 and 4, March and April 2004, by Paula Singer and Laura Francisco.

The Singer Group is a management consulting firm that helps public, private and social sector organizations reach full potential through forward-thinking human resources and organizational development strategies that get results.

To schedule a complimentary consultation, contact Paula Singer at 410-561-7561 or email pmsinger@singergrp.com.

 

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