Even with pay for performance, says Epps, managing partner of EP2S Compensation Solutions, LLC, many companies are promoting the wrong people and granting raises for the wrong reasons.
Promotional raises increase labor costs, but don’t necessarily help the company perform better.
“Whether the company’s performance is good or poor doesn’t make much difference in labor costs,” says Epps. “Your labor costs continue to go through the roof because you’re promoting and rewarding people for the wrong reasons. Sometimes, you’re giving general wage increases, or cost-of-living adjustments. Often, you’re promoting—and therefore increasing pay—based on acquired knowledge, skills, degrees, and experience.
“Those things look good on employees’ résumés and may deserve credit in an academic environment, but they add little or no value to an organization and are not the best reason to grant promotions in the real world.”
Historically, Epps says, companies have used one of a small number of methods to determine pay ranges and promotability.
“Traditional job evaluation methods, such as job point factors, market pricing, skills-based analysis, and broadbanding, are designed to structure, rank, and evaluate jobs based on acquired levels of knowledge, skills, experience, degrees, and certifications, as well as project size, budget size, staff size, and other job-related factors.
Employees are promoted, and their pay increases based on their ability to acquire these job factors,” Epps explains.
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Looking for Ways to Trim Costs
Unfortunately, at the same time employees (and their pay) are rising within the organization, management is seeking ways to reduce the cost of labor.
And how do they do that? They cut staff. The best and brightest employees—the ones you’ll need in place as the economy turns around—are not necessarily protected from these cuts. (And even if they survive the cuts, they’ll be on the lookout for a better opportunity.)
“Management spends many thousands of dollars recruiting and training their best people,” Epps says. “And in order to cut costs, they kick them out the back door? That’s not prudent use of human resources.”
“Whether you’re talking about pay or benefits, management wants programs that meet four goals,” Epps says.
- They want programs that support their strategic business objectives.
- They want the programs to have a positive impact on the company’s bottom line.
- They want to be able to demonstrate a positive return on any HR investments, in terms of money or efficiency.
- They want to provide quality service to their HR customers.
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Traditional Systems Don’t Meet Goals
“How do the traditional systems stack up against these goals? They tend to have a negative impact on the company’s growth and bottom line because the costs continue to rise even if employees don’t demonstrate abilities for their next promotion,” Epps continues.
The increases in labor costs result in companies paying more for labor—sometimes a lot more—than is competitively necessary.
The company experiences increased labor costs with little or no return on the HR investment, Epps says. All in all, these outdated methods of setting pay structure can force companies into layoffs, pay cuts, and other undesirable cost-saving measures.
In tomorrow’s Advisor, what Epps on competency-based compensation, plus an introduction to the “Compensation Bible,” Employee Compensation in [Your State].
I’ll never understand why some businesses give raises based solely on acquired knowledge (e.g., earning a degree). Unless the employee is applying that knowledge to accomplish things he or she wasn’t previously doing, what’s the point? On-the-job accomplishments are what should count.