Developing
an Employee Compensation Program (L4L)
Employee compensation programs must be continually reviewed and fine-tuned in order to meet the changing needs of the organization. They can help assure that quality public service is provided to the community. Neglect or poor management of compensation programs can decrease the effectiveness of the organization and diminish employee satisfaction and productivity.
Public libraries must also remember that they need to work with the municipality in developing a compensation program. While the library board sets compensation for library staff, the municipality's personnel policy may be applicable to the staff as municipal employees. In addition, the municipality may administer certain programs, e.g., retirement, social security, and insurance. Sometimes it is possible to adopt or modify much of the municipal program and policy for library staff.
A number of steps should be followed in order to develop an employee compensation program.
- Define your objectives.
What is it that you want to accomplish with your compensation program? Is your objective to keep the doors open and answer the telephone, regardless of the kind of service that is provided? Is your objective to provide high quality service using the best possible staff, regardless of cost? Is your objective to see that employees are compensated fairly and equitably in comparison with other public employees? Is your objective to attract new employees or to retain and motivate current employees? Is your objective to reduce turnover since turnover can be costly and result in continually poor service?
All organizations need to plan; they must have an idea of what they want to do. Compensation objectives should be identified and articulated as part of the overall planning process. They should be in tune with the organization's other goals and objectives and should result in a staff that is appropriate for carrying out the organization's plan.
For example, an organization's compensation objective may be to have in place a cost-effective program that will attract, motivate, and retain quality employees.
- Review and document
your situation.
After you have determined compensation objectives, the next step is to look at how well your current program or current practices meet the objectives. Are you accomplishing what you want to accomplish?
Are there any problems with the current program or practices? Have there been problems recruiting satisfactory employees? Has there been a high rate of employee turnover? Is there employee dissatisfaction with the pay when it is compared to that of other area employers? Is there dissatisfaction with the internal pay structure? Is the organization in compliance with the Fair Labor Standards Act, pay equity laws, or other requirements?
The strengths and weaknesses of the current compensation practices must be assessed in order to know what issues to address in developing a new or better program.
- Define and describe
jobs.
Well-defined job descriptions are central to any compensation program because they provide the basic data for job comparison and evaluation. Job descriptions also provide guidelines for recruitment, selection, and supervision, and they provide the employee with a sense of direction and purpose. They should broadly outline the job's tasks and responsibilities and should not contain details that might make the job inflexible. Job descriptions should be regularly reviewed so that they conform with employees' actual tasks, responsibilities, and priorities.
The format and formality of job descriptions can vary considerably from agency to agency. In fact, it is often appropriate to use two formats within the same organization: a task oriented job description for support personnel and a general narrative that emphasizes level of responsibility and accountability for administrators and professionals. Some experts suggest that job descriptions contain six to eight brief task statements that identify the basic responsibilities of the position.
Regardless of the format chosen, job descriptions should contain information about duties and tasks performed, supervision received, supervision given, education and experience required, and the skills necessary to perform the job. To comply with the American Disabilities Act of 1990 they must describe the essential functions of the job and any physical requirements such as the "ability to lift 50 pounds" or the "ability to perform sustained work at a computer." Job descriptions should not contain work schedules, procedures, or methods that might make them inflexible over time and changing circumstances.
- Evaluate jobs
relative to one another.
It is necessary to compare positions internally in order to establish their relative value and the relationships between them. Generally, jobs are measured against common standards and ranked accordingly. Almost all of the methods for comparing jobs involve looking at the skills required, effort needed, responsibility involved, and working conditions.
In order to insure equity, the standards must be well-defined and applied only to the jobs, not to the person in the position. Individual performance evaluation is a different process that should not be considered when attempting to determine the relative value of positions.
A simple method of evaluating jobs is to review each position against common standards and assign every position a rank. This method, which compares entire jobs to other jobs, can be fairly easy and effective for organizations in which distinctions between positions are easily discernible. It is possible to engage in more formal job evaluation that can use sophisticated techniques to bridge the gap between dissimilar jobs, but a discussion of any of these is beyond the scope of this article.
- Evaluate jobs
relative to other employers.
In order to develop a compensation program that is logical and competitive, it is necessary to collect data about other employers.
External data collection involves looking at the outside labor market. Obviously, it is not necessary to look at the entire labor market. Organizations need to identify their competitors in the labor market and look at how they compare with them.
Who the organization competes with for employees varies from community to community and varies from level to level. Each employer must determine who the competition is for employees at the various levels. Generally, competition for administrative, professional, and technical employees is from similar organizations. The competition may be located in other geographic areas.
The competition for lower level employees is likely to come from other employers in the community. The competition may be local banks, schools, manufacturers, retailers, or fast food restaurants, depending on the position.
Once the competition is identified, the organization needs to look at the compensation practices of these competing employers. The organization must first match its positions with those of competing employers in order to compare compensation for similar positions. Matching, or determining equivalent positions, is an extremely difficult task. It may be useful to look at areas of responsibility, supervisory responsibilities, supervision received, education required, skills necessary, etc.
Information must be gathered from competing employers about comparable positions. Salary and fringe benefit surveys published by various government, professional, and business organizations are a relatively easy way to collect data from other employers that may compete for the same employees. Information from competing employers in the community can also be gathered by conducting your own survey. The necessary data may be possible to collect with just a few strategically placed telephone calls.
How does compensation compare for the matched positions? What are the pay ranges for the matched positions? Are most current employees at the bottom or top of the pay ranges? Fringe benefits are difficult to quantify, but how does the total benefit program compare? Are you in the ballpark with fringe benefits? These are the kinds of questions that need to be asked.
- Establish a structure.
At this point you are ready to establish a compensation structure. The first element of any compensation structure is a compensation policy, which should be a general statement about what the organization's compensation program is intended to accomplish and where the organization wants to be compared to the market place.
A policy can be adopted to meet any objectives that are deemed appropriate. The important thing is for the policy to be a conscious choice. Although it is probably not a good idea, the organization could choose to enact a policy which states that as little money as possible will be spent on staff, regardless of the policy's effect on recruitment, turnover, morale, and service. Regardless of any other objectives that are addressed by a policy, every organization's policy should be to compensate employees equitably throughout the organization.
Another element of a compensation structure is salary ranges. Depending on the number of jobs and the similarity between them, it may be necessary to first establish salary groups or grades. This is done by placing positions into logical groupings after reviewing the information that resulted from job evaluations. In a small organization with few, dissimilar positions, a unique salary range may be set for each position.
Salary ranges should be selected for each job group or grade that motivate performance and reward value. The base and maximum in each range should be consistent with your compensation policy. Most employers opt for salaries that are average for the local labor market. However, if your objective and policy is to compensate employees at the low end of the market, base levels would be set at or below those of your competitors and maximum levels would be fairly close to the bases. If your objective and policy is to compensate employees the same as other competing employers in the market, bases and maximums should be approximately the same as for other employees. If your objective and policy is to attract and retain the best available employees, bases would be set at the high end of the market and maximums would be set to allow substantial growth of wages over the bases.
Salary ranges should be established that allow increases for the individual, but recognize that there is a limit to the dollar value of each job. Generally, the range should be broad enough to encourage some longevity and prevent too much internal compression, i.e., ranges should continue to recognize the differing value of different jobs. It is also important to recognize that the labor market is very dynamic and that salary ranges need to be adjusted regularly. These adjustments should occur whether or not individual increases are given.
After salary ranges have been determined, a method for determining individual wage increases must be selected. A number of different methods are possible, and the method selected should be based on the amount of budgetary flexibility the organization can absorb and the ability of the supervisory staff to conduct objective performance evaluations that are tied to pay increases.
One popular method involves setting up an exact salary scale with prescribed steps. Employees performing satisfactorily would receive a one step increase annually until the top of the scale is reached. This system is very easy to administer and control. However, it does not take into account individual performance and cannot reward employees for outstanding performance.
Another popular method is to increase salaries by a percentage determined by a performance review. This method is simple and flexible, and it can reward individual performance or merit; but it can be more difficult to administer, budget, and control. To maintain equity, it is necessary for supervisors to have a common understanding of performance standards and the correlation between these standards and the percent increase. It is not advisable to use this method unless you are really committed to doing it well.
Either method can incorporate many variations to tailor the plan to the particular needs of the organization. There are many books and articles available that describe wage increase methods in detail.
The final step in establishing a compensation structure is to determine the fringe benefits. Although fringe benefits should be competitive, they have traditionally been less important than wages in influencing recruitment, motivation, and employees. Numerous studies have shown that employees consistently underestimate the value of fringe benefits, and they rarely consider the value of increased benefits as part of an annual compensation increase. In recent years this has changed somewhat as health insurance at a relatively small cost to the individual has become more and more significant. Professionals are likely to value good vacation packages. It is important for the organization to communicate the actual dollar value of fringe benefits to employees regularly so that they can realistically evaluate their compensation. If fringe benefits are above average for the local labor market and wages are below average, it is especially necessary for employees and prospective employees to place an accurate value on the total compensation program.
The fringe benefit program can include a wide variety of benefits such as vacation leave, sick leave, health and life insurance, tuition reimbursement, retirement programs, deferred compensation, etc. Whatever benefits are selected, they must be chosen to meet the compensation policy and objectives established by the organization. The organization must also be aware of regulations and requirements regarding participation in various public employee benefit programs.
- Administer the
program.
The final step in a complete compensation program is to administer the program. A formal policy should spell out who is responsible for administering what parts of the program. When will various activities, such as performance evaluations, occur? Who has the responsibility for reviewing the program and how often will it be done?
It is important to have policies regarding compensation so that the program is applied uniformly to all employees. By formalizing the procedures and standards to be employed, capricious or unfair personnel decisions can be avoided. Decisions that are not based on the uniform application of policy will create dissatisfaction among employees that will be detrimental to morale and could result in charges of discrimination.
Finally, it is important to communicate all aspects of the compensation program to all affected parties. Employees, supervisors, administrators, and governing bodies should all have a thorough understanding of the program to avoid any future misunderstandings.
Obviously, employee compensation is a complicated, and sometimes delicate, subject. We have tried to outline the steps involved in establishing a compensation program, but any point in our outline could be given a much more detailed treatment.
Written by Rick Krumwiede and Greta Thompson, May 2001
Supporting public libraries in Outagamie and Waupaca counties