Yesterday, consultant Eugene C. Epps pointed out some fallacies in traditional compensation thinking; today, what he thinks you should do. (Fortunately, it’s something that pleases the CFO and the CEO, he says.)
Rather than basing promotions and their associated salary increases on acquired knowledge and certifications, says Epps, who is managing partner of EP2S Compensation Solutions, LLC, base them on competencies.
A competency-based job evaluation system is a method of structuring and evaluating broadly defined jobs based on a demonstrated level of job complexity and job accountability, he explains.
Such a system also serves to enhance the company’s ability to manage employee career growth and administer pay.
Epps’s competency-based job evaluation system requires that employees demonstrate a grasp of the next level of job complexity and job accountability before they are promoted.
Using this kind of system, he believes, meets the four goals of management mentioned yesterday. And it contributes to a perception of HR as a strategic business partner, rather than merely administrative support.
Incentive pay plan essentials: Webinar coming next week! Learn more.
The Example of Sara and John
Contrast these two examples, says Epps. Sara received a promotion last year, based on the fact that she had been in her job for 8 years. An 8 percent pay increase accompanied the promotion. This year, Sara is anticipating another promotion because she will have earned a certification in her field.
According to the pay system the company uses, the promotion will bring with it an additional 8 percent pay increase.
When combined with the automatic 2 percent cost-of-living adjustment granted during each of the last 2 years, Sara will soon be earning 20 percent more than she was earning 2 years ago. Can she do the job two levels up from the one she held for so long? No one really knows.
On the other hand, John’s company bases promotions on performance rather than time, degrees, and certifications. His promotion comes when, recognizing his potential, his manager assigns him some higher-level work over a period of 2 months.
Having performed well at these senior-level tasks, John receives the promotion and the accompanying 8 percent salary increase. He and his management are confident he will perform well in his new position. (And they’ve saved considerable compensation dollars along the way.)
Using his competency-based pay system company-wide, Epps says, companies can save significant amounts of money, which they can then use to increase pay-for-performance rewards. As an example, he cites a 2,600-employee company with a $135 million payroll.
They expect promotions to increase their payroll by $2.7 million for the year. After analyzing their jobs, Epps found that increases based on competency would cost the company just $700,000 for the year, saving them $2 million.
Savings to Spot Bonuses
The CEO agreed to use $400,000 of the savings to fund spot bonuses and outstanding achievement awards, driving desired behavior and thereby benefiting the company’s bottom line.
While revamping the company’s compensation philosophy is no small task, Epps believes the return on investment to be well worth the effort. That’s the kind of thinking that pleases the CFO and CEO, he says.
Incentive Pay Plan Essentials: How to Select & Design Plans that Work
Live webinar coming Tuesday, September 9, 2014
10:30 a.m. to 12:00 noon Pacific
Deciding to use incentive compensation was difficult enough before the Great Recession, but the downturn wreaked havoc with merit budgets, workforce levels, and the psychological challenge of dealing with uncertainty in a tentative economic environment.
But now that the economy continues to improve, it’s time to consider incentive compensation plans to boost productivity and performance that may have declined in the past five years.
Technology has also changed how we work, and that’s changed the kinds of jobs and skillsets that employers need to fill. To attract top performers with these new skills, variable pay plans allow you to offer new kinds of incentives to this evolving group.
Join us for an in-depth webinar on September 9 to learn the key questions to answer if you are contemplating the use of incentive compensation, whether the conditions are right inside your organization, and, if so, what incentive plans to consider.
Our presenter, a seasoned compensation consultant, will provide a comprehensive overview on how to design, manage, and evaluate the success of incentive-based pay plans.
You’ll learn:
- When it’s right to use incentives, and a realistic list of incentive plans to consider
- Alternatives to using incentive compensation
- Why incentive plans can fail—and their success rate
- How technology is playing a role in variable pay plans
- Why companies seem to avoid using skill-based pay
- What makes gain-sharing plans work
- Whether goals and measures are possible to identify for every group incentive plan
- Mistakes to avoid in team-based plan designs
- And much more!
In just 90 minutes, you’ll learn how to design, manage, and evaluate the success of incentive-based pay plans.
Don’t miss it—claim your spot now!
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