Competitive pay data comes in two forms: tangible and intangible, or "real" and "gut feel," whatever your preference. The reality is that any one job can be paid at any rate. There are so many variables that go into developing a rate of pay for a job, that determining pay rates has become an art, rather than a science. However, as compensation professionals we are forced, on a daily basis, to provide rationality and veracity to the data that we provide. It pulls at the core of the profession to be able to prove the worth of a job, while maintaining a balance among the outside variables.
Pay levels are a key element for attracting and retaining key personnel. Pay is important, but so are other issues. People rarely leave a job for money alone. Rather, many reasons contribute to a person's decision to leave his/her job. These include: better opportunity for career advancement, lack of technical or career challenge, communication reasons, lack of appreciation by company, inability to have an impact, or lack of job security.
Managing pay is about controlling costs, and getting the most "bang for the buck". This is best accomplished with an agile compensation system that tracks costs, ensures pay equity, is simple to understand, and keeps in touch with employee desires and changes in organizational needs. By effectively managing pay equity, an organization can successfully manage employee perception. Unfortunately, we know from many studies that "perception becomes reality". This means, fair or not, if employees believe the pay system is not competitive, then that is their reality.
We need competitive data for various reasons. These include making sure that we are able to manage both internal equity and external equity. An employee is much more likely to know the salary of the person in the office next to him or her, than the salary of a person at another company. Also, the employee will have a better basis for salary comparison because he or she has a better idea of what that employee's job and job performance is. All this creates a much higher potential for morale problems and turnover. Internal equity is managed by paying people within a salary range, and by paying for performance. Sometimes, internal equity will dictate that an employee not be given a salary increase, but business necessity (the employee has a critical skill and is threatening to leave) supports a salary increase. In the short run, this may be the right answer, but in the long run it can be costly.
Those employees who perform their jobs better than average should receive larger salary increases than those who do not. A recent survey indicated that about 80% of managers and employees believe there should be a link between pay and performance. Yet the majority (55%) thought their company did a poor job of rewarding good performance and 75% thought that bad performance was poorly managed. There are several reasons for this perception. First is the poor quality of many performance evaluation systems. Second is the limited performance input that a manager receives. (A 360-degree performance assessment program can help by including other valuable perspectives in the performance evaluation process.) Third, is that there are other factors that must be considered when determining pay increases, such as difficulty of the job assignment and how much the employee is currently paid, etc. Fourth, employee perception is usually more severe than reality. It's an uphill battle. What an organization needs to do is establish an adequate performance appraisal system tied to an effective merit pay system. There are many good examples of Pay-for-Performance systems in the marketplace ranging from structured to informal.
A competitive pay practice that is firmly entrenched in other industries which is beginning to attract considerable attention in the healthcare industry is the use of some form of variable compensation. Traditionally, the healthcare industry rewarded employees primarily on length of service, or with general, across-the-board increases. The move to the variable pay concept places the emphasis on how well employees do their job, not how long they've been doing their jobs. Variable pay systems continue to grow in popularity; they can provide an excellent link between pay and job performance. It should be noted, however, that there are some individuals, particularly supporters of the quality movement, who advocate disassociating pay from performance. They reason that linking individual pay with performance erodes teamwork. As an endeavor, focusing only on one aspect of a situation will almost invariably lead to potential problems and abuses. Quality is synonymous with healthcare, or at least is should be. Therefore, the design of any variable pay system that places a premium on increased productivity must balance such activities with quality measures. The problem is how to successfully measure quality, including the establishment of appropriate performance standards. This is an extremely important issue that lends itself to another article.
As we proceed with the development of any pay delivery system that truly reflects the competitive market, we must address one very important issue - how do we get the data we need?
The first step is to compile a solid job description or job summary. It is a mistake to attempt to price a job based solely on its job title. Actual duties and responsibilities may and typically do vary from organization to organization, and therefore titles alone can be very misleading in relation to pay rates. A job description should include all the vital information you need to price the job. This includes an overview of the position, scope of responsibility, key duties, reporting relationships, and years of experience. Once you have collected this data, you are now ready to evaluate the position. The organization's philosophy regarding pay should also be considered. This is vital to determining which data to collect.
The classic pay philosophy is to provide wages that will attract and retain qualified employees. The strategy needed to accomplish this typically consists of paying equal to the market or, in some cases, ahead of the market. As part of the Pay-for-Performance concept, we have found that an increasing number of healthcare organizations have begun to emphasize total compensation, consisting of salary and variable cash compensation (such as bonuses and even benefits). The total compensation pay these organizations offer are, many times, equal to or better than other companies in their market (even though their salaries may not be).
Paying all employees higher than the market would seem to be a pay strategy that would attract the best employees. However, there are several drawbacks to this approach. Employees who are paid high relative to the market may be less willing to do the necessary, more menial tasks of a job function. In addition, if all employees are paid at the high end of the pay scale, there is less room for salary differentiation between the best performers and average performers. If a highly paid employee performs poorly and termination becomes necessary, it can become a problem for the organization. Terminating highly paid employees can sometimes be more difficult than terminating employees who are not highly paid. It is harder for the employee to find another job with comparable pay and they may, therefore, resist termination. This strategy makes labor costs higher than competitors. In a typical labor-intensive healthcare environment, with ever-tightening sources of funding, this becomes a major issue.
I would argue that it is probably best to provide a pay program that is equal to the market (on the average), allowing for a differentiation of skills and styles, distinguishing in pay between the best performers and less valued performers, and providing career advancement opportunities for all.
Job pricing involves the establishment of wage rates for jobs within an organization, by using a job evaluation method. Historically, many organizations relied upon more formal systems. While these methods provided a useful way of insuring internal equity, they often ignored or at least under valued external competitiveness. In addition, these job evaluation methodologies were much better suited to large commercial enterprises with full administrative capacities in their Human Resource Departments.
Market pricing is the most common method of valuing jobs. Over 80% of companies use market pricing as their primary job evaluation tool. Using this method, job rates are set based on the organization's best estimate of the typical compensation paid in the external market place for that job. You don't have to follow what the market does. For example, your organization's philosophy may be to pay more aggressively for some jobs than others, based on your view of the criticality of a particular job, its vulnerability to turnover, and its importance to your organization. A word to the wise here is warranted. If you determine that your organization's compensation philosophy is going to provide above market levels of compensation, then make sure that you have the mechanisms in place to select better qualified people and get higher levels of productivity. If you don't, you will merely be paying more for the same level of worth. That's simply not smart business.
Information on wage rates from the external market place can be obtained from many sources. Published salary surveys are a reliable source of information on competitive pay rates. Many commercial salary surveys are available, and cover a wide range of employee groupings executive, administrative, etc.). If you are not sure which to purchase or in which to participate, ask your local competitors for input. The Internet is a popular source for data, and there are several sites that provide salary information. A search for "salary survey" on one of the popular search engines will provide you with results. Private, third-party independent surveys and newspaper ads offer additional resources for pay data. Pay information obtained from recruiters and resumes received by your organization should not be relied upon as solid data.
Being aware of the prevailing wage rates and total compensation levels in your market place is critical to your ability to create a highly competitive compensation program, and ultimately to the success of your organization. If wage rates become too high relative to the market, the organization may become less cost competitive than its competitors. If wage rates become too low relative to the market, the company may experience the loss of qualified employees to organizations that pay a higher rate.
The degree of communication that is appropriate for your group will vary based on how employees have perceived the pay program in the past, and the amount of change that you anticipate making. Remember that employees in general don't like change, and will become very suspicious if it's not logical and adequately explained. Most companies don't do a good job in communicating how pay works. It is often left up to managers who are often reluctant to say too much for fear that they will build up expectations incorrectly, or that they will have to justify some perceived pay inequity (every organization has some pay inequities - it's inevitable). Yet saying nothing results in employees relying on the rumor mill, which is always more severe than reality. There isn't an easy solution. What's most important is for employees to understand how their salary increase was determined, why it was that amount, and what they can do to earn more.
We have come full circle from the need to reform the current compensation program and make sense out of a system (I'm being polite) that doesn't meet the current organizational needs. Clearly, the starting point is to establish an overall pay philosophy that is suitable for your organization. Then you must collect sufficient and reliable market data, using good sources and based on real information about your organization's jobs.
When you are ready to institute the changes, your plan should be well thought out and thoroughly communicated to all appropriate individuals. The overall approach must be logical, fair, consistent with your newly minted philosophy, consistently applied, competitive with your market place, and easy to administer. It isn't easy, but this new program, which pays for performance and offers highly competitive compensation, should have a significant impact on your organization's ability to achieve its stated goals.
