What About Step-Based Pay? Good in Some Situations

John A. Rubino, who is the founder and president of Rubino Consulting Services in Pound Ridge, NY, offered his tips at a recent BLR®-sponsored webinar.

Rubino’s Variable Pay Program ‘Framework’

The target opportunity of performance is what the person would receive as a percent of his or her base salary if all goals are achieved.

Rubino suggests 8 percent as the minimum, and he doesn’t like to go below 5 percent. That’s not substantial enough for him. However, amounts do have to be based on market data and what you can afford, he adds.

The range of potential awards includes a 150% upside and, of course, a downside of zero.

Then there is a weighting of three types: corporate (we all share in corporate performance), departmental, and individual. As can be seen from the table, the officer level is 70 percent based on corporate and only 10 percent on individual, whereas  down at tier 5, 70 percent is based on individual goals, but the person still shares in the corporate goals.

These weights need to be talked about and aligned to your organization, says Rubino. For example, you may want to add a team column. There are many ways to slice this cheese, he says.

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What About Step-Based Pay?

Step-based pay (under which employees get set raises every year in established amounts) is highly organized and very strict, says Rubino.

Rubino’s 5 Top Reasons for Implementing a Step-Based System

1. Strict management and administration of compensation expenses (if control of expenses is very important).
2. Majority of jobs are routine and task-oriented (rote) doing the same thing every day.
3. Performance/skill variation levels of most jobs are minimal—in other words, it’s difficult to tell the difference between someone doing extremely well and average. Often these jobs are either you do it or you don’t do it, says Rubino.
4. Management cannot make appropriate distinctions among employee performance/skill levels for most jobs.
5. Use of alternative reward vehicles, such as comprehensive variable pay, is available.

You often see this kind of structure in a union contract, for example, says Rubino. A 5-year contract may call for $X the first year, then have defined increases for the next 4 years. Of course, he adds, you can build this whether you are unionized or not.

Disadvantages of Step-Based Pay

Disadvantages of step-based pay are obvious, says Rubino.  All you have to do is breathe and be there every day, and you will get your step rate increase. Performance beyond meeting minimum standards is not considered.

The most important consideration for comp managers is to be sure that the system is market-based.

Step based plus variable? Merit? Compensation and benefits are never as easy as you wish they were. Even the most basic challenge—wage and hour—should be simple, but it’s just not. Complying with the Fair Labor Standards Act (FLSA) is one of the most confusing and challenging things comp pros have to do.

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• $4.75 million: Hospital in Thousand Oaks, California, settles wage and hour lawsuit over miscalculated overtime pay and failing to compensate workers for missed meal and rest periods.
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• $976,327: New Mexico aerospace company settles with 900 employees who were routinely required to work through lunch breaks without compensation.
• $340,400: New Jersey convenience store agrees to pay back wages and damages for violations of overtime and recordkeeping.
• $84,541: New York physical therapist agrees to pay 22 employees for minimum wage violations.
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