WorldatWork Journal 06 24...sation, benefits, work-life and integrated total rewards to attract, motivate and retain a talented workforce. Founded in 1955, WorldatWork provides a network

3Q | 2011 $79.95

Competency Based Pay: A Modular, Flexible and Scalable Business SolutionVictoria Fuehrer, CCP, SPHR | Portico Consulting

Incentive Pay Research: The Devil Is in the Details Frank Giancola

Communicating Rewards Strategies to Employees: Informing, Influencing and InspiringRobert J. Greene, Ph.D., CCP, CBP, GRP,

GPHR, CPHRC | Reward Systems Inc.

Goal Setting: What Has Gone Wrong and What Can Be Done?Thomas B. Wilson | Wilson Group Inc.

Talent Management and Rewards Robert H. Meehan, Ph.D., CCP, CBP |

Compass HR Consulting

The Public-Sector Pension Debate RevisitedJohn G. Kilgour, Ph.D. | California State University,

East Bay

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Mission

WorldatWork Journal strives to:

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z Contribute to business-strategy development that leads to superior organizational performance.

z Provide an outlet for scholarly total rewards writing and research.

Executive Committee of the Board of Directors

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Vice Chair I Jeff Chambers, WLCP, Chief Human Resources Officer, University Health Systems

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Editorial

Publisher I Anne C. Ruddy, CCP, CPCU

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Contributing Editors I Jim Fickess, Michelle Kowalski

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Design

Senior Manager, Marketing, Communications and Creative Services I Barry Oleksak

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Circulation

Circulation Manager I Barbara Krebaum

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WorldatWork Journal (ISSN 1529-9457) is published quarterly by WorldatWork, 14040 N. Northsight Blvd., Scottsdale, AZ 85260, as a benefit to members, who receive an annual subscription with their membership. POSTMASTER: Send address changes to WorldatWork Journal, 14040 N. Northsight Blvd., Scottsdale, AZ 85260; 480/951-9191. Canada Post (CPC) publication #40823004.

WorldatWork neither endorses any of the products, services or companies ref er enced in this publication nor does it attest to their quality. The views ex pressed in this pub li ca tion are those of the authors and should not be as cribed to the officers, mem bers or other spon sors of WorldatWork or its staff. Noth ing herein is to be construed as an at tempt to aid or hinder the adoption of any pending legislation, regulation or in ter pre tive rule, or as legal, ac count ing, actuarial or oth er such pro fes sion al ad vice.

Copyright © 2011 WorldatWork. All rights reserved. WorldatWork: Registered Trademark ® Marca Registrada. Printed in U.S.A. No portion of this publication may be reproduced in any form without express written permis-sion from WorldatWork.

Rejection Rate: In the first half of 2011, the rejection rate for papers submitted to WorldatWork Journal was 57.6 percent.

Reprints: For bulk reprints contact: Gail Hallman at 800-352-2210, Ext. 8175, or [email protected].

Manuscripts: WorldatWork Journal welcomes manuscripts. See guidelines and review process at www.worldatwork.org, or contact any member of the editorial staff.

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WorldatWork (www.worldatwork.org) is a global human resources association focused on compen-sation, benefits, work-life and

integrated total rewards to attract, motivate and retain a talented workforce. Founded in 1955, WorldatWork provides a network of nearly 30,000 members in more than 100 countries with training, certification, research, conferences and community. It has offices in Scottsdale, Arizona and Washington, D.C.

The WorldatWork group of registered marks includes: WorldatWork®, WorldatWork Society of Certified Professionals®, Alliance for Work-Life Progress® or AWLP®, Certified Compensation Professional® or CCP®, Certified Benefits Professional® or CBP, Global Remuneration Professional or GRP®, Work-Life Certified Professional™ or WLCP®, Certified Sales Compensation Professional™ or CSCP™, Certified Executive Compensation Professional or CECP™, workspan®, WorldatWork® Journal and Compensation Conundrum®.

WorldatWork Management Team

President I Anne C. Ruddy, CCP, CPCU

Vice President, Publishing and Community Ryan M. Johnson, CCP

Vice President, Professional Development Bonnie Kabin, CCP

Director, Human Resources I Kip Kipley, CBP, SPHR

Executive Director, AWLP I Kathie Lingle, WLCP

Vice President and CFO I Greg Nelson, CCP, CPA

Managing Director, Washington, D.C. Office and Conference Center I Paul Rowson, CCP, CBP, WLCP

Vice President, Marketing and Channel Management Betty Scharfman

WorldatWork Advisory Board Chairs

WorldatWork advisory boards identify current and future strategic issues and topics in compensation, benefits and the work experience. Their suggestions, as well as input from other sources, help determine the technical content of WorldatWork products and programs such as conferences, forums, seminars and publications.

Benefits Advisory Board I Kathy McGrath, CCP, CEBS, Vice President, Total Global Rewards, The Hershey Co.

Compensation Advisory Board I Ann S. Kraus, CCP, Vice President Comp & Benefits, The Guardian Insurance Co.

Executive Rewards Advisory Board I Brynn Evanson, CCP, Director Compensation, JC Penney

Global Advisory Board I Steven P. Seltz, CCP Vice President, Compensation and Benefits, US/Americas, Siemens Corp.

Reviewers

WorldatWork Journal thanks the following individuals for reviewing manuscripts during the editorial cycle for the Third Quarter 2011 issue. Subject-matter experts, including members of WorldatWork’s advisory boards, review all manuscripts.

Chad Atwell, CCP, GRP I Aon Hewitt

Gary Bergel I Restructuring Associates

Charles Bigelow, CCP, GRP I University of Iowa Health Care

Steve Bloomfield, CCP, SPHR I Syclo LLC

Tami Boedigheimer I Boedigheimer Consulting

Scott Busch, CCP, GRP, CHRP I Loblaw Companies Ltd.

William Clampitt, DBA, CCP I Clampitt Associates

Brandon Conkle, CCP, CBP, GRP I The Weather Channel

Robin Denninger, CCP I RTD Consulting

Tory Drakeford I Tenet Healthcare

Mark Englizian, CCP, GRP I Amazon.com

Michelle Frink, CCP, GRP I MITRE Corp.

James Gandurski, CCP I Grant Thornton LLP

Adam Greetis I Seyfarth Shaw LLP

Ann Hatcher, CCP I HCA Inc.

Todd Henderson, CCP I HSBC Bank USA

Deborah Jacques, CCP I Dunkin’ Brands Inc.

Angie Keller, CCP, SPHR I Cox Communications

Michael Markowich, DPA I Markowich Consulting Group

Deborah Marsh, CBP, CCP, CEBS I Nautilus Inc.

Mercedes McBride-Walker, CCP I Panasonic Avionics

William McPeck, WLCP I Employee Health & Safety

Robert Miller, CCP, CBP, GRP I The Gordon and Betty Moore Foundation

James Mittler I JE Mittler & Co.

Edilberto Montemayor, Ph.D. I Michigan State University

Daniel Moynihan, CCP I Hay Group

Fernand Ouellette, CCP I NB Power Nuclear

Mark Pittel, CCP I Sullivan Cotter & Associates Inc.

Marc Proudford, CCP, SPHR I Office of HR, Maryland

John Rubino, CCP, CBP, GRP, WLCP I Rubino Consulting Services

Doug Sayed, CCP, GRP, SPHR I Applied HR Strategies Inc.

Ron Seifert I Hay Group

Cimi Silverberg I Frederic W. Cook & Co.

Sara Snoy, CCP, GRP, SPHR I SJS Consulting

Gary Stoskopf I Deloitte Consulting LLP

Jerri Thomas

Robert Tursky, CCP, CEBS, SPHR I Volvo Business Services

Paul Wilson, CCP I Polycom Inc.

Linda Zong, CCP, CBP, GRP I Morgan Stanley

Executive SummariesThird Quarter 2011 | Volume 20 | No. 3

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Competency Based Pay: A Modular, Flexible and Scalable Business SolutionBy Victoria Fuehrer, CCP, SPHR, Portico Consulting

From call centers and printing processors to transportation logistics and museums,

companies are converting traditional, job-based pay systems to cross-trained,

modular, work and pay approaches that drive versatility and flexibility. Competency

based work and pay approaches can help assure that organizations have the right

skills at the right time to support service delivery. This article differentiates behavioral

and technical competency design, establishes the business case for competency

based pay (CBP), offers real-life insights into competency pay systems and shares

10 steps to building a CBP approach.

Incentive Pay Research: The Devil Is in the Details By Frank Giancola

Research fails to provide clear and convincing evidence that financial incentives are

effective in motivating key behaviors for all levels of employees. This paper analyzes

and summarizes the results of frequently cited financial incentives research studies

so compensation professionals can understand the complexity and nuance of the

research and make their own decision about whether it applies to their organiza-

tion. The article also offers a resource that may help determine the effectiveness of a

company’s incentive plan.

Communicating Rewards Strategies to Employees: Informing, Influencing and InspiringBy Robert J. Greene, Ph.D., CCP, CBP, GRP, SPHR, GPHR, CPHRC, Reward Systems Inc.

How effective an organization’s rewards strategy is will depend on whether it is sound

and a good fit to the organization’s context. But its effectiveness also will be impacted

by how it is perceived by employees. If they understand why the strategy was chosen

and that it results in fair, competitive and appropriate treatment, and if they are inspired

to contribute their best efforts on behalf of the organization, the workforce will be more

likely to be dedicated and effective. If any or all of these key components are missing,

workforce effectiveness will decline. This paper explores reward strategy communication

and includes a case study showing one organization’s success in this area.

© 2011 WorldatWork. All Rights Reserved. For information about reprints/re-use,

email [email protected] | www.worldatwork.org | 877-951-9191

Third Quarter 2011

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Goal Setting: What Has Gone Wrong and What Can Be Done?By Thomas B. Wilson, Wilson Group Inc.

Goal setting is critical to every variable pay and performance management system. It

focuses performance and forms the basis on which millions of dollars are spent. However,

few executives are satisfied with their goals. The framework of SMART goals (Specific,

Meaningful, Achievable, Relevant and Timely) provides limited guidance. This paper takes

SMART goals one step further. It describes the 10 tasks critical to establishing effective

goals. This paper provides that extra guidance needed to make goals truly clear and

meaningful and form the foundation for strong performance and real rewards.

Talent Management and Rewards By Robert H. Meehan, Ph.D., CCP, CBP, Compass HR Consulting

This paper discusses the several approaches to building links between talent manage-

ment and compensation in the context of economic change, organizational challenges,

and increased globalization. Specific links with talent management and compensation

programs and other HR functions such as talent acquisition, performance management,

and training are illustrated. The paper also discusses the implications for corporate

governance and the talent pipeline in global firms.

The Public-Sector Pension Debate RevisitedBy John G. Kilgour, Ph.D., California State University, East Bay

An earlier paper examined the major public-sector pension plans of the 10 largest

states by population. This paper revisits the subject by addressing the debate’s more

recent aspects, including the current arguments about the appropriate discount rate

and amortization period. There are 2,550 public-employee retirement systems, 218

administered by states and 2,332 by local governments. The general pattern is for a

state to have one system for state and some local employees and a separate plan for

teachers. Numerous counties and cities operate their own plans independent of the

state plans.

Published Research in Total RewardsA review of total rewards, compensation, benefits and HR-management research reports.

A s companies have down-sized, right-sized and

re-engineered work processes to survive and

compete in today’s global economy, organiza-

tions are changing the way work gets done and how

employees are paid. Companies are converting tradi-

tional, job-based pay systems to cross-trained, modular,

work and pay approaches that drive versatility and

flexibility. These scalable systems can improve produc-

tivity, minimize wait time, decrease overtime, maximize

quality and offer job progression in otherwise repeti-

tive work. In addition, competency based work and pay

approaches can help assure that organizations have the

right skills at the right time to support service delivery

(Fuehrer 2008). This article differentiates behavioral and

technical competency design, establishes the business

case for competency based pay (CBP), offers real-life

insights into competency pay systems, and shares 10

steps to building a CBP approach.

DEFINING THE MANY FACES OF COMPETENCIES

Recently, much has been written about competencies

to drive talent management (Crisman 2008). Compe-

tency based talent management has come into its own

and is thought by many to be a pragmatic method of

establishing a common performance language and set

of behavioral expectations (competencies) that help inte-

grate talent processes (Assess Systems 2010).

Victoria Fuehrer,

CCP, SPHR

Portico Consulting

Competency Based Pay:A Modular, Flexible and Scalable Business Solution



Third Quarter 2011


Competencies used in this regard typically represent behaviors that “individuals

are doing to contribute to the organization – not what they produce” (WorldatWork

2011). These behavioral or socio competencies may include categories such as team

work, building relationships and valuing diversity (Fuehrer 1994). Socio competen-

cies typically include “behavioral descriptors or anchors that help determine the

proficiency standard that outlines the expertise needed in a given job” (Crisman

2008). Behavioral competencies are customized for a given organization, some-

times statistically validated for specific jobs, and used for varying purposes such

as performance management and succession planning. (See Figure 1).

Although behavioral competencies have fully made their debut as the foundation

of talent management systems, their counterparts, technical competencies, have

not yet been fully harnessed to create alternative work and reward systems based

on results. Technical competencies are job specific, reflect the essential job func-

tions of a role, represent “technical expertise and are close to the organizations

core competencies” (Zingheim & Schuster 2009). Depending on their application,

technical competencies may or may not include performance criteria in the form

of performance metrics or certification criteria. (See Figure 2).

COMPLETING THE TALENT MANAGEMENT LANDSCAPE

Behavioral and technical competencies encompass the two primary types of results

that make up work outcomes. These results can then be configured in multiple ways

to support the talent-management components of selection, job progression, employee

development, performance management, succession planning and pay. Other compo-

nents that comprise the building blocks of an integrated talent-management system

FIGURE 1 Example of a Behavioral Competency

Demonstrates Team Work

❙ Willingly shares knowledge, time and talent.

❙ Respects and affirms the dignity of others.

❙ Anticipates when other employees need help; offers help to share the workload.

❙ Patiently listens to other’s ideas; asks for clarification to assure mutual understanding.

❙ Promotes a positive and friendly team environment.

❙ Resolves individual differences and conflicts in a positive and friendly way.

FIGURE 2 Example of a Technical Competency

Competency: Inspects Truck, Trailer and Tarp Before and After Trips

❙ Inspects truck and trailer for defects at the beginning of shift.

❙ Accurately documents defects using the post-trip and pre-trip form within 15 minutes of trip start.

❙ Submits the pre-trip and post-trip form to office within one hour of end of trip.

❙ Notifies Maintenance and Dispatch within 15 minutes of an identified defect.

8 WorldatWork Journal

include knowledge, skills and abilities and other qualifications that define job speci-

fications – baseline employment criteria. However, the concepts of “competency”

and “skill” may be particularly confusing (Zaim 2007). For purposes of this article,

the author proposes that competencies are categories of results that are required

from employees in the workplace and include technical competencies and behavioral

competencies. Knowledge, skills and abilities (KSAs), on the other hand, are common

job specifications. According to the WorldatatWork Glossary of Terms, knowledge

refers to acquired mental information necessary to do the job; skills refer to acquired

manual measureable behaviors; and abilities, to natural talents or acquired dexterity.

KSAs, along with other qualifications, such as education, experience, certifications,

ability to travel, etc., all serve as the baseline employment criteria for a job. (See

Figure 3). In summary, the talent-management components of behavioral and tech-

nical competencies, KSAs and other qualifications make up the fabric that weaves

the talent-management system together.

DEFINING COMPETENCY BASED PAY

The term “competency based pay” has been used in literature and by organizations

with a wide range of meanings. To define CBP for this article, and to distinguish

CBP from skill-based pay (SBP) and operationalize it as a business solution, the

author defines CBP below.

SBP paved the way for organizations to think differently about how to design and

pay for work. SBP focuses on building a pay system around the acquisition and

demonstration of skills. Although still used by some organizations today, a possible

flaw in SBP is the potential of incenting and rewarding employees to continually

learn new skills even though the organization may not have a business need for

FIGURE 3 Example of Baseline Employment Criteria (Job Specifications)

COMPETENCY: INSPECTS TRUCK, TRAILER AND TARP BEFORE AND AFTER TRIPS

Required KSAs(Cognitive Skills)

Required KSAs(Physical Skills)

Required(Other Qualifications)

❙ Communication skills: Ability to

listen and communicate tech-

nical information

❙ English language skills

❙ Trouble shooting skills: Ability

to diagnose problems, consider

alternatives and deliver

solutions

❙ Writing/Basic: Ability to write

basic coherent sentences with

appropriate grammar

and punctuation

❙ Writing/Reports: Ability to write/

complete pre-trip and post-trip

form, using applicable/technical

terms.

❙ Climbing

❙ Crawling

❙ Crouching/stooping

❙ Reaching

❙ Twisting

❙ Standing

❙ Walking

(See definitions in Competency Manual).

❙ CDL

❙ Local and regional endorsements

❙ Current on all required company

training

❙ Ability to travel up to 3 days at

one time.


given skills. This characteristic may result in a pile up at the top of the skill hierarchy

of too many highly paid employees without ample opportunities for employees to

demonstrate the skills and commensurate results for the organization in the form

of productivity, revenue and margin increases.

CBP, on the other hand, focuses on building a work and pay system around

individual technical competencies (essential job functions) that comprise the

work. Unbundling technical competencies from jobs, identifying each compe-

tency in its most basic form and measuring the complexity of each competency

are all key components of building a CBP. Based on business need, employees

learn and produce results in various combinations of competencies and accu-

mulate points that place them in a pay range. A CBP system may or may not

include performance metrics and/or certification criteria. The CBP creates both

vertical progression opportunities (via points that potentially translate into

higher pay) as well as horizontal progression (via potential pay for perfor-

mance). The objectives of a CBP system include, but may not be limited to:

configuring technical competencies into work systems that support business

needs; providing employees with development and progression opportuni-

ties; cost-effectively rewarding employees commensurate with results; and

perpetuating a workforce that is versatile and flexible and can deliver the

right results at the right time. A CBP system can help attract and retain a

high-performing workforce.

ESTABLISHING THE BUSINESS CASE FOR COMPETENCY BASED PAY

As one of the most rapidly growing pay innovations in the last two decades, the

popularity of CBP is due to a number of forces (Zaim 2007). The strong emphasis

on streamlining and re-engineering business processes to support business objec-

tives provides much of the rationale for CBP. In addition, the transition from

traditional to cellular manufacturing has given impetus to CBP. In most cellular

manufacturing environments, a work team is rallied around a product or process

with self-managed cross-trained team members driving results. To assure that the

reward system is aligned with the cross-trained work system, employees must be

encouraged and rewarded for the right things. Continuing to reward employees

for performing a singular job while the work system requires learning multiple

jobs is like forcing a square peg in a round hole.

And yet another compelling business case for implementing CBP relates to

the unparalleled upward trend of workplace absences resulting in direct and

indirect costs (of all major absence categories) averaging an astounding 35

percent of payroll for 2010 (Mercer and Kronos 2010). Workplace absences,

combined with the unprecedented downsizing, layoffs and the doubling up

of employees in jobs has resulted in the need for organizations to simply do

more with less. Cross training employees to broaden and deepen their skills

and competencies has become a workplace necessity.


Another force behind CBP is the need for organizations to improve service

delivery. Many organizations tolerate conspicuous work system constraints that

impede throughput and productivity as well as increase overtime and down

time. These inefficiencies result in interrupted service delivery and negative

customer satisfaction. In 2009 when overtime was mounting while service

delivery was waning, Metro Companies in New Port, Minnesota, piloted a

competency based work and pay system in its truck maintenance department.

Prior to converting its work system to a cross-trained CBP approach, Metro

experienced reoccurring productivity issues with unnecessary overtime. While

lower-skilled maintenance technicians stood around with little to do, a few

highly skilled employees performed the most complex truck maintenance work

and racked up hours of excessive overtime each week. In essence, a couple

of employees were the constraint. Since the implementation of a CBP system,

Jennifer Hohneke, Metro’s HR director, said that employees are encouraged to

learn and become certified in additional technical competencies resulting in a

versatile and flexible workforce with improved customer satisfaction.

Finally, as some think the U. S. economy is slowly transitioning out of the

economic downturn, retaining high performing talent may become more chal-

lenging during the next few years. As companies have reduced their budgets

for training and development, managers are looking for ways to introduce job

growth to otherwise mundane and repetitive work. “Learning and growing isn’t

just about buying training – it’s about helping employees to continue to grow

in their jobs, and there are many ways to do that outside the training budget”

(Robison 2010). When there is a business need for re-engineering work systems

to include cross-training opportunities for employees to broaden and deepen

their skills and competencies, CBP is a valid business solution that can propel

employee productivity and retention to new levels.

DESIGNING A COMPETENCY PAY SYSTEM — THE BUILDING BLOCKS

Gaining Leadership Backing

While designing work and pay around the concept of competencies was a new

concept to West and Laurie Houle, owners of Metro Companies, once explained,

they readily embraced the idea. After analyzing payroll and overtime records, and

exploring employee interest in cross training, CEO Laurie Houle embraced the

CBP concept. Once a competency model was developed, she directed her HR

and consulting team to begin the design process, and she supported the initia-

tive from start to finish. With periodic resistance from a few employees wanting

to hold tight to their “Lone-Ranger” work habits, Houle’s backing of the project

prevailed through implementation.

Not only is a solid business case needed for moving to a competency based

work and pay system, but leadership’s endorsement and support is also essential to

begin the culture change required by CBP. In a recent study relating to “replacing


jobs with people’s competencies and skills as the foundation for HR practices”

conducted in 20 large publicly traded private, nonprofit and government organi-

zations, authors Zingheim and Schuster document the importance of leadership

support for the change process. The authors found that “leadership made it a

priority and consistently championed and sponsored the change process; sponsor-

ship came from the CEO and other senior leadership team members” (Zingheim

and Schuster 2009).

Paving the Way for Employee Buy-in

The degree to which an organizational change initiative is understood and accepted

by employees is directly related to their level of involvement in the transformation

process. This is equally as important in implementing and maintaining the CBP

approach. Contrast the degree of employee acceptance of a CBP program imple-

mented in a large financial call center and one implemented at Metro Companies.

With consultants spearheading the project at the call center and developing the

competencies with little employee input, after several years, the CBP program in

the call center is minimally maintained and not well understood. Compare this

situation to the employee involvement used at Metro Companies. During project

planning and launch in 2009, several employees were invited to participate in the

design process which garnered some pre-implementation buy-in from the work-

force. As the system was implemented, care was taken to communicate system

characteristics to groups of employees with ample opportunities for questions.

Shortly thereafter, one-on-one employee meetings were held to share details

about how competencies were defined for each individual and how the system

translated into pay and pay changes.

As Metro’s CBP program unfolded during the next year, word spread to other

employee groups about the system. One year later, that system was expanded to

include all line functions and locations of the organization and added in driver

and heavy equipment operator positions to the maintenance technician workforce

talent pool. Because of employee participation, a pilot approach and effective

communications, employee buy-in was positive.

Determining Jobs/Competencies to Include and Exclude in the CBP

Selecting the jobs to include in the CBP system is one of the first steps to devel-

oping the program. Several variables are considered in making this decision and

ultimately answer important questions such as: which jobs and/or work processes

would benefit from a cross-trained work team? Which jobs are constraints to

productivity, throughput, quality and on-time delivery? Which jobs are currently

dead-end, low paid, low morale and/or high training cost? For which jobs do we

have unreasonably high overtime?

For Metro Companies, the decision of which jobs to include in its competency

base work and reward system was driven by the realities and seasonality of


the business. The decision to (ultimately) include all three of their main job

categories — drivers, maintenance technicians and equipment operators — into

the CBP system was precipitated by several over-arching objectives. To provide

work to loyal employees during seasonal downtimes, the company wanted to

encourage cross training into other work that required compatible skills. In addi-

tion, Metro sought to provide job progression opportunities for high-performing

and multi-skilled employees. Other business objectives included reducing overtime,

eliminating productivity bottlenecks, creating ample backup bench strength to

accommodate high-volume work demand, and removing every possible constraint

to growing the business. Metro viewed the CBP approach as not only a business

solution, but also as a scalable tool to enhance their capability to attract and retain

high-performing talent through acquisition and organically driven growth. In addi-

tion, the company demonstrated the foresight that versatile and high-performing

employees should simply be paid more than employees who had limited skill sets.

The company undertook the CBP initiative as a combination business solution with

the intent to pay for performance in the future.

An optional feature in the design of a CBP system is to include competencies

that are considered baseline and/or a mandatory feature of an orientation process

and supportive of culture. For Medical Arts Press, a Minneapolis-based printing

company (later acquired by Staples), it was a unique opportunity to build the

“basement” of its CBP program by including technical competencies relating to

Safety, Lean and Team Process. These technical competencies required focused

training and were required learning during the first few weeks of orientation,

but were not included in CBP point/pay system. The inclusion of these “base-

ment competencies” into the CBP system assured that all employees developed

common capabilities that supported business expectations and desired culture.

Unbundling and Rebundling Work

Once decisions are made around the job groups to include in the CBP system,

the next step is to unbundle technical competencies from each other and then,

if necessary, to rebundle some based on the realities of how they are performed.

Because the work system, and ultimately the pay system, will be based on the

point value (and thus the monetary value) of individual and combinations of

technical competencies, it is essential that technical competencies are stripped

of excess activities and are defined in their purest sense. A way to look at this

design feature is to consider the business need. If the business need is to always

perform two related technical competencies in combination with each other, then

the two related competencies should be written and defined as one. Conversely,

if there is a possible business need for two currently combined competencies

to be performed separately, then they should be unbundled into two separate

units. (Please go to www.worldatwork.org/worldatworkjournal for an example of

unbundling one technical competency into two competencies.)


A favorable byproduct of the competency bundling and unbundling process

during CBP development is the “opportunity to clean up jobs” (Crisman 2008).

In three organizations for which a CBP system was designed, including Metro

Companies, Medical Arts Press and the Minneapolis Star Tribune, during the

process of developing a CBP system, care was taken to study the work and to

eliminate unnecessary job tasks, steps and activities.

Documenting Competencies Using a Customized Model

Another important stage of developing a CBP system is establishing a model

for documenting technical competencies. The desired end results of this design

stage include:

❚ Establishing the uses for technical competencies such as legally compliant baseline

employment criteria, performance management, certification, etc. The ultimate uses

of the competencies should drive the model used for documenting competencies.

❚ Assuring consistency in how technical competency statements are written.

It is impossible within this article to describe all models for writing competency

statements. Figure 4 shows a model that was used to design the CBP system for

a residential and commercial building company. This particular model embodies

many elements of the entire talent-management process. It includes a description

of the technical competency in terms of certification criteria reflecting adequate

achievement of the competency during training and initial certification. The

certification criteria in this example also doubles as performance criteria used

to evaluate ongoing performance. The example incorporates methods of certi-

fication such as work samples, supervisory training and team assessment. The

model also documents “required cognitive and physical skills” as well as “other

qualification” criteria that are used as baseline employment criteria during the

selection process.

Other technical competency models may be simplified from the example.

Figure 5 demonstrates a model used to develop the competencies for an inside

sales and service call center for a large news organization. This model integrates

the technical competency, the certification criteria and ongoing performance

evaluation into an all-in-one approach.

Relative to the design step of customizing a competency model, it is important

that the uses of technical competencies are established upfront so that the best

model can be selected to document competencies. Once the competency model

is in place, it is essential that all identified competencies are written in the same

format using the same model. This practice ensures continuity, validity and integ-

rity of the future system.

Valuing Competencies

Valuing technical competencies is the first step of building a pay system around

technical competencies. Within this article, it is not realistic to describe the array


of methods for valuing competencies. In the author’s opinion, the valuation method

that creates the most scalable and flexible foundation for adding, subtracting and

modifying competencies is a simple competency point evaluation method. This valu-

ation approach uses straightforward evaluation criteria as displayed in Figure 6. Key

considerations in developing the evaluation criteria include:

❚ The number of evaluation levels needed

❚ The nature of the technical competencies (e.g., call center, museum, manufac-

turing, continuous process, etc.)

❚ The degree to which more technical competencies will be added to the system

over time because of expansion and/or acquisition

❚ Ease of application and understanding of the criteria.

Related to establishing a method for valuing the competencies is the number of

evaluation levels needed within the system. Broadly, the more technical competen-

cies that are included in the CBP system, along with the variation in complexity

of competencies, the greater the number of evaluation levels required. There are

six evaluation levels in the example in Figure 6.

Another variable in valuing competencies is the label and definition used to

describe each evaluation level. Degree of complexity is the label that is used in

the example plan displayed here. Other label/definitions may be level of account-

ability, scope and level of difficulty. The evaluation criteria labels and definitions

Technical Competency: Sheet Rocking

Technical Competency

Required Cognitive and Physical Skills

OtherRequired

Qualifications

Sheet Rocking 1. Basic Math

2. Use and care of common hand tools such as tape

measures, level, hammer, miter saw, circular saw

and cordless drill

3. Use and care of specialty hand tools such as

planer, router, jointer.

4. Ability to climb, crawl, stoop, reach, twist, turn and

bend.

Driver’s License

Ability to drive among job sites

Certification Documentation By: ____________________________________ Date: _________________________

Approved By: ________________________________________________ Date: _______________________________

Comments:

FIGURE 4 Technical Competency Model for Residential & Commercial Building Company


Certification Criteria and Performance Measurement Criteria Embedded into the

Technical CompetencyCertification

Method

Degree to which Performance Meets Standards

Meets Some

Standards

Meets

Standards

Exceeds

Standards

1. Applies framing lumber resulting

in plumb and smooth surface.

2. Insulates between layers of wood

resulting in continual layers.

3. Applies sheet rock neatly and straight

resulting in straight lines, less than 1/8”

joints and screws and nails flush with wall

4. Tapes joints resulting in smooth, even and

continuous joints.

5. Sands over the tape, using sufficient pres-

sure resulting in flat unbroken surfaces

6. Applies mud evenly over the joints using

adequate pressure resulting in smooth

surface requiring minimal sanding.

1. Work samples

2. Supervisor

rating

3. Peer evaluation

4. Team

assessment

FIGURE 5 Technical Competency Model for an Inside Sales and Service Call Center

Technical Competency: Marketing and Retention Strategies

Technical CompetencyCertification Criteria and Performance Measurement Criteria Embedded into the Technical Competency

Marketing Acquisition and

Retention Strategies

1. Advise customers of other product

and service enhancements available

such as gift subscriptions and vacation

packs to actively market products.

2. Upsell accounts to customers by

suggesting options and providing

information such as available offers

and benefits of products and services.

3. Use retention techniques such

as It’s Your Win, It’s Your Success.

4. Demonstrate email, digital or Internet

marketing promotions.

1. Home delivery customers agree to purchase additional

home delivery services in 39 percent of the available

potential opportunities to upsell.

2. Customers wishing to discontinue partial or full home

delivery services are retained at their existing level in

29.5 percent of cases.

3. Transactions into the platform system are made within

the weekly assigned shift.

4. 28.5 percent of discontinued customers are retained

at .5 service level via follow-up email marketing

communications.

5. Final bills are generated the date the account

becomes inactive.

6. Delivery service issues are communicated to the

Team Leader within 45 minutes following completion

of the customer’s call.


should be determined by considering the nature of the technical competencies, the

culture of an organization and other variables. In the system displayed in Figure

6, initially, only labels were defined. During the evaluation committee meetings,

members expressed that definitions would be helpful in evaluating the differences

in complexity among technical competencies after which definitions were developed.

The last step associated with valuing competencies is to assign points to each

complexity level. Again, Figure 6 shows an example of varying the points from a

low of 1 associated with the least complex level to a high of 11 points associated

with the “highly diverse and highly complex” level. CBP systems with a greater

number of competencies and greater diversity in complexity of competencies

may require more points per evaluation levels as well as more total points in the

ultimate point spread table discussed below.

Evaluating the Competencies

Once the evaluation criteria are established, technical competencies must be

evaluated; this process may be the most crucial step of the CBP process. To

FIGURE 6 Competency Point Evaluation Chart

ComplexityLevel Description/Definition Points

6 Highly Diverse and Highly Complex:

The work is highly diverse and very complex most of the time. Problems and

opportunities are not apparent. The work requires planning for, anticipating,

identifying and solving numerous interrelated and unrelated problems and

opportunities. Critical judgment is always required.

11

5 Very Diverse and Considerably Complex:

The work is very diverse and considerably complex. Problems and

opportunities are not apparent. Often, new approaches to solving problems

must be devised while resources and/or precedents are sometimes not

available. Considerable on-going judgment is required.

9

4 Diverse and Complex:

The work is diverse and the tasks are complex at times. Problems and

opportunities are frequently not apparent. Must interpret a variety of

alternatives and assess ramifications of each option before decisions

can be made and problems resolved. On-going judgment is required.

7

3 Noticeably Diverse and Semi-Complex:

The work is somewhat diverse and offers some complexity in tasks.

Problems are not always clearly defined and/or opportunities are not always

apparent. Must interpret some established references and precedents to

solve problems. Some on-going judgment is required.

5

2 Minimally Diverse and Minimally Complex:

The work is routine but not highly repetitive and offers minimal complexity

in tasks. Problems and/or opportunities are readily apparent. There are a

few choices of alternative references and/or precedents defined by standard

practice and/or instruction to aid in solving problems. Occasional and

minimal judgment may be required.

3

1 Not Diverse and Not Complex:

The work is routine and repetitive with no diversity in tasks. The tasks offer

no complexity at all. The work presents few, if any problems to be resolved.

1


assure credibility and integrity of the evaluation results, a cross section of

knowledgeable employees and leaders from applicable jobs should be involved

in evaluating competencies. A committee lead or consultant should orient the

committee members to the evaluation criteria assuring their understanding

of meaning and content. It is important that the committee leader tightly

facilitate the evaluation process, diplomatically deal with bias and reposition

competencies that may be influenced by the halo effect. If gridlocks occur in

making decisions about the complexity level/point value of each competency,

the committee leader should have full authority to make the final decisions.

Competencies should be reviewed, one by one, and evaluated on their own

merits using the competency point evaluation chart. The team leader should

facilitate ample discussion around each competency and then guide the team

to a final competency evaluation. Experience demonstrates that all competen-

cies should be evaluated in one session and not picked up and put down over

separate days.

Hohneke of Metro Companies suggests that Metro’s competency evaluation

process went smoothly because HR leaders “locked ourselves in a room for

hours on end, evaluated all the competencies, with some heated discussions

and then let it sit for a few days.” Later, the team regrouped and made some

adjustments with guidance from the consultant. The Metro committee included

both office positions as well as employees who had previous experience

as drivers, maintenance technicians and/or heavy equipment operators. All

members of the Metro CBP team would agree that having definitions attached

to the complexity levels helped move the process along as well as provide a

leader to guide the process and a consultant to challenge the results.

Building the Pay System

Once the competencies are evaluated resulting in a point value for each compe-

tency, a pay structure is designed with traditional pay ranges, broad pay bands

or a hybrid configuration thereof. Although, a CBP system is not built around

jobs — rather built around technical competencies — jobs must, initially, be

priced. The creativity comes in how the job-pricing data is configured to build

the pay structure that houses the competencies. There are several methodolo-

gies that can be used to develop the pay structure around a CBP approach

depending on many variables. Regardless of the method, there are a number of

over-arching concepts that apply.

First, it is important to remember that pay will ultimately be determined by the

number and combination of competencies that an employee is certified in and for

which the business has a need for them to perform. Thus, competencies are not

ordered in any given hierarchy like jobs are ordered or leveled. Second, assuming

that the greater number of competencies learned, in combination with their

respective complexity, the greater the pay opportunity. Third, the pay structure


should encompass a rational pay progression of pay levels (ranges), from low to

high, that embody competencies from applicable jobs. And lastly, the resulting

pay structure will need to achieve a balance between paying for competencies

while assuring a competitive pay structure that ultimately encompasses technical

competencies from jobs in the market – from the lowest paid jobs to the highest

paid jobs from the job group(s) covered by the CBP program.

As in developing any pay system, compensation strategy must be established.

Facilitating leadership to assess strategy relating to industry and geographic

area to compare, size and sales as well as other scope criteria applicable to

various jobs is essential before jobs are priced. In addition, determining the

survey statistic to use and the percent by which survey data will be updated

and projected will assure consistent and valid data.

Although there are a number of methods used to develop the pay structure

around a technical competency system, one method is summarized here. As

Figure 7 demonstrates, this method considers all of the jobs within the CBP

system as well as experience levels for respective jobs. Depending on the

culture and pay strategy, experience may or may not be a criteria. For Metro

Companies’ CBP system, a diverse array of jobs was priced. Within this example,

the lowest level job of “helper” was priced at the 25th, 50th and 75th percentile.

The 25th percentile hourly rate of the “helper” job provides the anchor point for

Grade 1 at the low end of the pay structure. Jobs that embodied the highest

valued competencies were also priced. In this example, the heavy equipment

operator at the 75th percentile at the 20-plus years of experience level serves as

an approximate anchor point for Grade 5 at the upper end of the pay structure.

As Figure 7 shows, other jobs at various experience levels were also priced to

result in an array of job-pricing data representative of the jobs from which the

competencies are derived. In this example, a simple calculation demonstrates

that the top compensation rate of the highest job/experience level is approxi-

mately three times the compensation rate of the lowest job/experience level in

the system, $8.70 to $26.00 per hour.

A companion step to pricing jobs is to determine the maximum number

of evaluation points in the system as well as how these maximum points

will be subdivided into a grade/cluster system as well as the style/width of

the ultimate pay ranges. Similar to the design of job evaluation systems, the

maximum number of points in a CBP system relates to the number and diversity

in complexity of competencies as well as the diversity in compensation from

low-valued to high-valued competencies in the market place. The greater the

percent difference in compensation, from low to high of the jobs priced, along

with the greater diversity among the jobs, the more points required within the

CBP system to house all of the competencies. Based on the current number

of competencies in the Metro CBP system along with their respective evalua-

tions, currently the total possible number of points is approximately 300. To


accommodate the potential addition of future competencies resulting from job

expansion and to assure that the system is scalable based on business require-

ments, the total point capability should be greater than the current total possible

points in the system today. In summary, a total of 300-plus points were needed

to accommodate the future anticipated situation of Metro.

Another step in designing the CBP structure is to subdivide the total number

of possible points into a specific number of grades. A starting point to estab-

lishing the point spread for the lowest grade is to identify the lowest possible

combination of competencies/points that the business would realistically require

and that an employee may realistically possess. At Metro, the lowest possible

points were somewhere between 5 and 10 resulting in the first point spread of

1 – 10. A multiplier of 2.2 was then used to calculate subsequent point spreads

ending at a threshold of 274 points for Grade 6, e.g., 25 × 2.2 = 55, etc. A

subsequent decision was made to create a structure of no more than six grades

with the highest grade reserved for employees who were not only certified in

most technical competencies across all job groups but were also proficient in

various “lead” competencies. Most of the lead competencies are highly valued

at 9 or 11 points each. All of these concepts were simultaneously considered in

subdividing the 300-plus points into the point-spread table displayed in Figure 8

Finally, the pay range for Grade 6 was developed by using an approximate

10-percent midpoint differential from Grade 5 midpoint and using a 45-percent

salary range spread to arrive at the pay range minimum and maximum. Market

data for lead type roles were reviewed to ensure that this added pay range

was market competitive and affordable. Other considerations in developing a

CBP structure include determining the style and width of pay ranges. Based

on the type of work/jobs within the Metro system, in combination with a pay-

progression strategy, Metro chose to use more traditional range spreads on their

pay ranges including gradually increasing the spread from Grades 1 through 6.

The resulting CBP structure is displayed in Figure 9.

FIGURE 7 Competency Point Evaluation Chart

Experience Level

Maintenance Technician Driver Heavy Equipment Operator

25th 50th 75th 25th 50th 75th 25th 50th 75th

Helper $8.68 $12.21 $21.03

1 – 2 yrs $14.02 $15.34 $16.82 $13.89 $15.55 $17.45 $13.44 $15.39 $18.19

2 – 3 yrs $15.24 $16.56 $18.03 $14.79 $16.45 $18.34 $13.70 $15.65 $18.22

3 – 5 yrs $15.95 $17.27 $18.73 $15.40 $17.11 $19.02 $14.30 $16.34 $18.99

5 – 8 yrs $17.34 $18.74 $20.27 $16.09 $17.88 $19.88 $15.51 $17.75 $20.71

8 – 13 yrs $18.37 $20.06 $21.89 $16.58 $18.46 $20.55 $16.48 $18.84 $21.95

13 – 20 yrs $19.13 $20.87 $22.73 $16.96 $18.84 $20.92 $17.73 $20.22 $23.51

20 + yrs $20.38 $22.87 $25.38 $17.21 $19.21 $21.45 $18.74 $21.63 $25.39


Driving Vertical Job Growth and Paying for Performance

One of the advantages of a CBP system, if designed properly, is that it can be

an all-in-one system. CBP can drive vertical and horizontal growth. Employees

can experience vertical growth through developing and being rewarded for the

acquisition of new and progressively more complex skills and competencies.

Employees can see a job progression based on the degree to which they acquire

more complex skills that translate into higher valued competencies. At the same

time, employees can experience horizontal growth in pay within their base pay

range by continually improving performance and delivering higher level results

in their same learned competencies.

While many companies have reduced their budgets for training and education

resulting in managers having less discretionary income to allocate to employee

training programs, CBP can offer a win-win for employers and employees. According

to author Jennifer Robison, “Learning and growing isn’t just about buying training —

it’s about helping employees to continue to grow in their jobs, and there are many

ways to do that outside the training budget. Providing employees with meaningful

opportunities to learn and grow starts with getting to know each person one on one,

thinking about their strengths and thinking about the ways they learn best” (2010).

Many would agree that companies should start building career pathing efforts with

competencies as the foundation (Crisman 2008).

Incorporating a pay for performance feature in the CBP is the frosting on the

cake. A recent “Compensation Practices Survey” sponsored by PayScale confirms

the highly sought after complementary goal of blending both a merit-based pay

plan with learning and growth opportunities for employees. Survey results demon-

strate that the majority of companies plan to reward and retain high-performing

employees through a merit-based pay plan; the next most common approach is to

provide learning and developmental opportunities as rewards, 45 percent (2011).

The Competency Based Work and Reward model nicely integrates both of these

confirmed survey results. Pay for performance can be successfully integrated into

CBP provided that job-related performance criteria exists, there is a culture of

coaching and feedback and a practice of rewarding for results.

FIGURE 8

Point Spread Table

Grade Point Spread

6 274+

5 124 – 273

4 56 – 123

3 25 – 55 2 11 – 24

1 1 – 10


Administering the CBP System

A CBP system must be rigorously maintained or it will become quickly outdated,

will lose credibility and will not provide the scalability that it was designed to

achieve based on additions and deletions of applicable competencies. Organiza-

tions that are successfully using CBP develop and maintain a set of administrative

parameters as well as incorporate a “keeper of the system” to stay on top of

administering and communicating the system. Administrative parameters include

processes for adding, subtracting and re-evaluating competencies and processes for

hiring and/or training into competencies. Sound administrative parameters along

with a cohesive compensation strategy assure that CBP systems are expandable

and contractible; these features promote ultimate flexibility and scalability to

support changes in the business. This makes the CBP tool a valuable organiza-

tional asset that supports business strategy.

Certifying and Recertifying Competencies

“A competency certification process (relative to CBP) is similar to a performance

appraisal in the traditional pay for performance systems,” said Halil Zaim (2007).

The purpose of certification is to determine the degree to which an employee has

acquired the competency and can adequately apply it to his/her work. Organiza-

tions can include competency certification during the initial implementation of the

system and/or require periodic recertification on an ongoing basis. The inclusion

FIGURE 9

2010 Base Compensation Structure — CBP SystemDrivers, Heavy Equipment Operators & Maintenance Technicians

Grade

Base Compensation Range

Minimum – Midpoint – Maximum Pay Range Spread

6 $20.00 – $24.50 – $29.00 45%

Lower Third Middle Third Upper Third

$20.00 – $23.00 $23.01 – 26.01 $26.02 – $29.00

5 $18.60 – $22.30 – $26.00 40%


$18.60 – $21.06 $21.07 – 23.53 $23.54 – $26.00

4 $16.70 – $20.00 – $23.35 40%


$16.70 – $18.91 $18.92 – $21.13 $21.14 – $23.35

3 $14.25 – $17.10 – $19.95 40%


$14.25 – $16.15 $16.16 – $18.06 $18.07 – $19.95

2 $11.85 – $14.20 – $16.60 40%


$11.85 – $13.43 $13.44 – $15.02 $15.03 – $16.60

1 $8.70 – $10.20 – $11.80 35%


$8.70 – $9.73 $9.74 – $10.77 $10.78 – $11.80


and nature of the certification process and tools may be highly influenced

by the degree to which industry regulatory agencies require certification. For

example, the transportation industry requires various certifications to support

DOT regulations, handling hazardous material, drug and alcohol testing and

updated commercial driver licensures.

Relative to certification methods, an employee’s proficiency in a competency

can be determined in many ways and using various tools such as work samples,

written tests, peer evaluation, supervisor rating, team assessment and self assess-

ment (Zaim 2007). Whatever method is used to certify or recertify competencies

within a CBP system, assessments should be conducted by credible methods and

sources that are knowledgeable about the work involved.

Although certification may be a critical component of CBP systems, the reality

is that it takes significant time to design certification criteria and consistently

administer it. It is best to first design and implement the foundational components

of the CBP system, build a measurement culture and then come back one to two

years later and develop the certification component using employee participation.

Figure 4 demonstrates the components of certification approach. A compromise

to including full scale certification criteria is to write the technical competencies

to include some measurement criteria. Figure 5 demonstrates this approach.

Putting it All Together

Work and reward systems have evolved to include cross-trained work teams,

cellular manufacturing, traditional job-based pay systems, SBP, CBP, broad

banding as well as other hybrid methods of integrating work and rewards. To

survive and reposition for growth, organizations have had to restructure to

align business goals and results. During the recent recession, companies have

improved productivity, streamlined processes, combined and downsized jobs

and controlled labor costs. While corporate America has been repositioning

for growth, employees have become less engaged, fatigued and stressed. Being

able to attract and retain high performers is at the top of leaders’ priorities

today. While there is no one-size-fits-all compensation approach, it appears

that CBP is a creative and cost-effective solution to the realities of work design

and a viable approach to addressing emerging problems of traditional compen-

sation programs. The critical success factors of CBP include: establishing the

business case for CBP, gaining leadership backing and employee buy-in and

following the design steps outlined in this article. In developing a CBP system,

a goal is to leverage all talent management components including technical and

behavioral competencies, KSAs, certification criteria, performance management

and pay for performance. There is growing evidence that CBP can provide a

creative, cost-effective, flexible and scalable solution to effectively integrating

work and reward systems and can play a role in attracting and retaining high-

performing employees. ❚


AUTHOR

Victoria Fuehrer, CCP, SPHR, is a business and HR consultant residing in St. Paul, Minn. She can be reached

at 612-414-7629, [email protected] or at www.porticopossibilities.com.

REFERENCES

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Management: Creating a Unique Talent Brand.” June.

Crisman, D. 2008. “Using Competencies to Drive Talent Management.” workspan September, 74.

Fuehrer, V. 1994. “Total Reward Strategy: A Prescription for Organizational Survival.” Compensation & Benefits

Review. January – February, 48.

Hallenbeck, G. and S. Connell. 2009. “Ready. Set. Recovery. Are You Ready for the Hiring Realities of 2010?”

Korn/Ferry International, 8.

Mazer, M. and W. Nicholson. 2004. “Variable Competency Banding: Combining Variable Pay, Competencies

and Broadbanding.” workspan, May.

PayScale. 2011. “Outlook for Employers in 2011. PayScale’s Compensation Practices Survey.” Seattle: Payscale.

Tucker, S. 1994. “Flattened Organizations Using Competency Pay”. ACA News. July.

“Unplanned Absence Costs Organizations 8.7 Percent of Payroll, More than Half the Cost of Healthcare,

According to New Mercer Study Sponsored by Kronos.” June 28, 2010. Kronos.

WorldatWork Glossary of Terms. 2011. http://www.workatwork.org. Viewed: July 5, 2011.

WorldatWork. 2011. Upturn of Economy Signals Employees to Leave, New Survey Reveals. Scottsdale. http://

www.worldatwork.org/waw/adimComment?id=47196. Viewed on July 5, 2011.

Zaim, H. 2007. “Competency Based Pay – A New Approach to Compensation Policy.” Journal of Academic

Studies 9(32): 115 – 133.

Zingheim, P.K. and J.R. Schuster. 2009. “Competencies Replacing Jobs as the Compensation HR Foundation.”

Worldatwork Journal Vol. 18 (3).

M ost compensation professionals would like

to believe their organization’s compensation

policies and practices are based on sound

findings from the behavioral sciences. A close analysis of

the research indicates that many cannot safely make that

assumption if they use financial incentives to improve

employee performance. The research support for using

incentives has major deficiencies and limitations that are

not widely publicized. As a result, some compensation

professionals could be misled by reports from compen-

sation scholars and others that portray the research in

the most favorable light to support using incentives or

perhaps to lead us to believe they have done their part

in proving that incentives work.

DEFINITION AND INCIDENCE

Except as noted, the financial incentives that are

discussed here are short-term cash awards to employees

based on individual performance, excluding sales

commission plans.

Mercer’s “2009/2010 Compensation Planning”

survey of 1,100 organizations shows the incidence

of short-term incentive plans by employee category

(More Employers 2009).

❚ Executive — 86 percent

❚ Managerial — 82 percent

❚ Professional non-sales — 68 percent

❚ Office, clerical and technical — 55 percent

❚ Trades, production and service — 47 percent.

Frank Giancola

Incentive Pay Research: The Devil Is in the Details



Third Quarter 2011


Research Reports

Several well-known research studies that summarize individual studies are used

by scholars and others to justify using financial incentives. Compensation profes-

sionals are told that an analysis of them shows that the application of financial

incentives results in substantial performance improvements. An improvement of

about 30 percent is commonly mentioned.

In a number of instances, the reports do not adequately explain the weaknesses

of the research. Some sources fail to mention the lack of scientific rigor in the

methods used to conduct the individual studies and to prepare the summary

studies. Others fail to mention, or cover in the fine print, the significant limitations

of the research, such as its age or probable inapplicability to professional and

managerial employees. In some cases, the authors report the research results that

support their viewpoint and downplay the non-supporting ones. For decades, the

effectiveness of money as a motivator has been questioned by some psychologists

and high-profile business writers (Locke et al. 1980; Milkovich, Newman, and

Gerhart 2011; Gerhart and Rynes 2003).

This paper analyzes and summarizes the results of frequently cited financial

incentives research studies so that compensation professionals can clearly see

the complexity and nuance of the research and make their own decision about

whether it applies to their organization.

SUMMARY STUDIES

Researchers have tried to examine the effectiveness of financial rewards by

summarizing a large body of studies instead of relying on the results of one or

several studies or reports of company success stories. Five frequently mentioned

summary incentives research studies are reviewed here. Two use simple math-

ematical calculations, such as simple averages and percentages, and three

use advanced statistical or meta-analytical methods to analyze other studies.

Meta-analytical studies usually offer the most compelling research evidence.

Meta-analytical methods provide researchers with a systematic method for

quantitatively summarizing a large number of individual research studies on a

particular concept, such as organizational commitment, or technique, such as

job evaluation. In this procedure, the results of studies are weighted according

to the number of subjects.

In meta-analysis, effect sizes, which are quantified estimates of the impact

that an intervention, such as incentive payments has on another variable such

as task performance, are calculated and combined by weight. Effect sizes are

generally expressed with a number that reflects the difference between the

mean of the experimental group (the one receiving an incentive) and the mean

of the control group (the one not receiving an incentive) on a measure such as

task performance, with the difference divided by the standard deviation of the

data associated with the groups. The number can be converted to a correlation


coefficient. In simple terms, meta-analysis is a sophisticated and controlled

method of describing the effect of one variable on another in many studies on

weighted basis.

Generally, meta-analysis enables researchers to draw overall, sound conclusions

to support a concept with more credibility than by using simple arithmetic and

narrative to summarize the results of individual studies to support their conclu-

sions. One respected organizational psychologist, Fred Luthans, claims that the

conclusions state principles of organizational behavior. (Luthans 2005; Guzzo,

Jette, and Katzell 1985) The method is not foolproof since it depends heavily on

the number, quality and comparability of the individual studies and other factors

(Locke et al. 1980).

The Effectiveness of Four Methods of Motivating Employee Performance (1980)

The first, and arguably most frequently, cited summary research study involving

financial incentives is The Relative Effectiveness of Four Methods of Motivating

Employee Performance (Locke, et al. 1980). It has been cited by several noted

compensation scholars (Milkovich, Newman, and Gerhart 2011; Kanfer, Chen, and

Pritchard 2008; Scott 2007; Gerhart and Rynes 2003; Rynes, Gerhart, and Parks

2005). This non-meta-analytical study summarizes 56 field and simulated field

studies that compare the effects of four motivational techniques on individual

employee performance. The four techniques and the percent of performance

improvement were:

❚ Financial incentives — 30 percent improvement (median)

❚ Goal setting — 16 percent improvement

❚ Job enrichment — 8.75-17 percent improvement

❚ Participation in decision-making — 0.5 percent improvement.

The study of financial incentives reviewed the results of 10 field or simulated

field studies published from 1934 through 1978. A close examination indicates

weaknesses and limitations that seriously detract from its value as supporting

evidence for the broad use of financial incentives. First, the study is not a true

meta-analytical study, as some claim, where the effect of one variable on another

is measured across all of the studies, and the number of subjects within the

samples is considered, to arrive at a weighted figure (Milkovich, Newman, and

Gerhart 2011; Kanfer, Chen, and Pritchard 2008; Rynes, Gerhart, and Parks 2005).

For example, according to the researchers, a survey of 400 companies was treated

as one study. Instead, what is reported is the median performance improvement

for the 10 studies, 30 percent, with a range of from 3 percent to 49 percent. True

meta-analytical studies report statistically adjusted weighted averages.

Second, none of the 10 incentive studies employed the most advanced experi-

mental design, according to the researchers. Four were surveys and five used an

experimental design with no control or comparison group to strengthen the claim

that the change in performance was due to the introduction of incentives and not


other factors in the work setting. In four of the 10 studies where detail is readily

available, the number of subjects is small — 12, 14, 15 and 20.

One of the studies, a simulated field study published in 1972 that showed an

increase in performance of 36 percent, used incentives that seem to bear no

connection to the real world of employee compensation. In the first, non-incentive

phase of the study, one group of 15 subjects was hired to perform a simple clerical

task (scoring and recording 25-question, multiple-choice test answer sheets). Each

subject was paid $1.50 per hour for five hours of work. In 1972, the minimum

wage was $1.60 per hour.

In the five-hour incentive phase, the subjects continued to receive the same

base pay, plus incentive pay of 25 cents for each test correctly scored. Their total

pay in this phase was $74.25, versus $7.50 in the non-incentive phase. While the

productivity of this group improved 36 percent in the incentive phase, the same

number of tests would have been scored if the employees had worked an addi-

tional 1.8 hours without incentives at a cost of $2.70 (Yukl, Wexlel, and Seymour

1972). One possible reason for this outcome is that psychologists in this and other

incentive studies tend to focus on the variations in incentive payment conditions

(continuous and variable payments), and not on whether performance-based pay,

per se, raises performance (Jenkins 1986).

Third, the 10 studies were conducted from 33 to 78 years ago, which raises the

question of how applicable the results are to the current workforce in terms of

the jobs studied and the value people place on money.

Fourth, the studies involve individual piecework pay plans with low-paid hourly

employees, which raise the obvious question of whether the results apply to

workers whose work is less amenable to piecework pay, such as professional and

managerial employees. The studies show that incentives improved performance by

a remarkable 30 percent. Does that mean that the performance of today’s technical,

professional and managerial employees can be improved by that amount by using

incentives? At about the time these studies were conducted, two incentive experts

stated that hourly employees worked, on average, at 65 to 70 percent of efficiency

without incentives, based on their skill and effort level (Lieber and Taylor 1972).

Many, and probably all, of these hourly employees were not paid under a merit

pay plan like many of today’s salaried employees, which would seem to limit the

opportunity to realize a 30 percent performance improvement.

In summary, the underlying studies on average showed a substantial effect

of incentives on performance, but did not follow a standard scientific research

design, involved small numbers of research subjects in many cases, and were

conducted in the distant past with hourly workers paid under a piece work pay

plan. These factors cast doubt on their validity and widespread relevance in the

current workforce. In addition, the summary study did not use standard meta-

analytical methods to determine a weighted average to calculate performance

improvement across all of the studies (Bloom 2008).


Financial Incentive Studies in the Laboratory and Field (1986)

Another important summary study of 1986, Financial Incentives, reported on the

consistency of results between research settings — laboratory and field studies.

The study dealt with the effects financial incentives have on individual perfor-

mance (Jenkins 1986). Laboratory studies can be more tightly controlled, but are

thought to have less applicability to the real world. The subjects frequently are

college students performing simple tasks over short time frames.

Field studies have more in common with the real world because the subjects

are employees performing real tasks in situations that could last months, and the

setting is the actual workplace. While field studies have more realism, it is hard

to control the effects of outside influences on the results, such as the behavioral

influences of co-workers. Experimental field studies are used to take advantage

of the controls available in the laboratory and the realism of the field. In this

review, the researcher, G. Douglas Jenkins, combined experimental field studies

with laboratory studies

In the introduction to his research, Jenkins registered surprise at discovering

how little scientific information is available on compensation, given its centrality

to the work experience. Only one of the 28 studies in his review focused exclu-

sively on the impact of financial rewards on task performance. As noted in a later

study by him and others, only nine studies on financial incentives of interest to

meta-analytical researchers were published between his first study in 1986 and

the second, reported later, in 1998 (Jenkins et al. 1998).

Jenkins went beyond showing the correspondence between the two types of

experiments to describe how his findings apply in the real world. His research is

referenced by other researchers as a starting point for further investigation on the

effects of incentives (Jenkins et al. 1998).

Using non-meta-analytical methods, he found that there is agreement between

laboratory and field studies, which were done between 1960 and 1985, but that

generalizing from the laboratory to the field is tentative, due to the limited number

of available studies (20 laboratory and eight field). Seventy percent of the laboratory

studies and 87.5 percent of the field studies showed an increase in performance

quantity when financial incentives were applied. Five of the 10 studies summa-

rized by Locke and others, in the research noted previously, were excluded from

Jenkins’ analysis because they were survey reports and not scientific experiments.

Jenkins’ other findings and observations are of interest. First, the studies show

greater support for positive effects, than for negative or no effects, of incentives

on performance quantity and no effect on performance quality. The latter finding

was qualified because only five studies specifically addressed performance quality

and none made rewards contingent upon performance quality. The research shows

only that quantity-contingent pay does not improve quality.

Second, because of the magnitude of the performance increases in the lab

studies (28.4 percent) and field studies (between 27 and 33 percent), Jenkins


stated that it was reasonable to conclude that linking pay to performance will

lead to a performance improvement of 30 percent, as noted in the first study by

Locke and others. He overlooked the fact that of the 28 studies in his review,

five were also used by Locke, which would contribute to a common result. The

five showed performance improvements of 3 percent, 13 percent, 38 percent,

43 percent and 49 percent.

Third, he noted that of the 14 laboratory studies showing a performance

improvement, nine involved physical and clerical tasks. Of the six that showed

no performance improvement, four involved problem-solving skills. None of the

relevant field experiments were of a heavy cognitive nature — the subjects were

beaver trappers, tree planters and quality checkers. Based on this analysis, he

concluded that regardless of the setting, performance effects of financial incen-

tives are more likely to occur when physical or clerical tasks are involved. He

stated that our knowledge of the effects of financial incentives is limited to clerical

and production jobs. Fourth, he stated that the dearth of empirical studies may

be partly due to the fact that in many organizations in which field studies could

be conducted, the power of financial incentives is assumed by management and

that it is probably unnecessary to argue that money is a valued outcome to most

workers. Psychologists, he stated, are sometimes accused of trying to prove the

obvious. He also noted that pay is such a sensitive topic in many organizations

that most managers would shy away from experimenting with it.

This study is important because it tends to confirm the substantial impact of

financial incentives on performance, but states an important qualification − its

impact mainly applies to production and clerical jobs. As indicated previously,

some compensation experts cite the 30 percent effect of financial incentives

on performance without noting its limitation to certain groups of workers

who were employed from 1934 through 1978. Jenkins posed a question that

goes unanswered today: Do highly cognitive tasks possess properties that

obey different laws with respect to the impact of financial incentives than do

production tasks?

Effects of Financial Incentives on Performance: A Meta-Analysis (1998)

The first true meta-analytical study of financial rewards and performance was

Are Financial Incentives Related to Performance? A Meta-Analytic Review of

Empirical Research ( Jenkins et al. 1998). In part, it was done to supply scien-

tific rigor to the question of how much financial incentives affect employee

performance. The researchers selected 39 studies done from 1965 through 1995

to examine the relationship between incentives and performance. There were

47 relationships between financial incentives and performance quantity (41)

and quality (6), based on a subject count of 3,124. The researchers found that

financial incentives were not related to performance quality but had a correlated

coefficient of 0.34 with performance quantity.


Scott (2007) has interpreted the research to support the use of incentives as

follows: “Jenkins, Gupta, Mitra and Shaw examined 39 individual incentive plans

with meta-analysis and found, on average, performance quantity increased a

whopping 34 percent, but quality did not increase significantly.” The researchers,

however, reported their findings in more muted tones: “The conclusion that finan-

cial incentives are related to performance quantity is validated by our results, and

the effect size is estimated to be 0.34.” Other experts’ accounts of the results follow

that of the researchers (Gerhart and Rynes 2003; Bloom 2008).

One statistical expert gives the following guidelines for the evaluation of effect

sizes (coefficient of correlations in this case) in the social sciences: small effect

size, r = 0.1 − 0.23; medium, r = 0.24 − 0.36; large, r = 0.37 or larger (Cohen 1988).

Bloom (2008) noted the a majority (65 percent) of the 47 studies included in the

meta-analysis were laboratory studies and most involved simple, highly prescribed

tasks, such as sorting index cards, punching IBM cards and assembling toys. In

the eight field studies where the correlation was 0.46, the subjects were unionized

mountain beaver trappers (2), tree planters (2), retail clerks, South African auto

component assemblers, U.S. Air Force enlisted trainees and scientists/engineers.

Only the final study provides some comfort that the experiments would translate

well to today’s technical, professional and managerial employees. Interestingly, no

significant difference existed between the performance of scientists/engineers who

received a 3.5 percent to 9 percent annual monetary bonus for improving their

performance and a group that received only private recognition (Latham, Mitchell,

and Dossett 1978).

The publication date of the studies in the meta-analysis ranged from

1965 through 1995, with 80 percent being published before 1990. That raises

the question of whether the findings would be the same if conducted with

21st Century workers.

The Effects of Intervention Programs on Worker Productivity:

A Meta-Analysis (1985)

Another commonly cited meta-analytical research study dealing with financial

incentives and other motivational programs, The Effects of Psychologically Based

Intervention Programs on Worker Productivity: A Meta-Analysis, analyzed the

results of 98 field studies (330 effect sizes) published from 1971 through 1981. It

studied the effects on worker productivity of 11 types of psychologically based

intervention programs (Guzzo, Jette, and Katzel 1985). Those program types

included training; appraisal and feedback; goal setting; management by objectives;

and monetary rewards based on individual, group, and organization-wide perfor-

mance. (The three previous studies were focused solely on the individual level.)

Three aspects of worker productivity were measured: output, including quantity,

quality and cost effectiveness; withdrawal, typically turnover and absenteeism;

and disruption, including accidents and strikes.


The results show that financial incentives ranked fifth in terms of their posi-

tive effects on productivity, but the result was not statistically significant because

of enormous variation in the results of studies. When a result is not statistically

significant, one cannot rule out the possibility that it was due to chance, making

it prudent to reserve judgment on the outcome (Freund and Simon 1995). Some

studies showed powerful effects and others showed negligible ones. Based on

output alone, financial incentives were by far the most effective intervention and

the result was statistically significant.

In interpreting the results, several authors seem to confuse the productivity and

output results: “Financial incentives had by far the largest effect on productivity of

all interventions. For example, pay was four times more effective than interventions

designed to make work more interesting” (Rynes, Gerhart, and Minette 2004).

The research report clearly shows that the effects of financial incentives were

the fifth most effective intervention method for improving productivity, behind

training, goal setting, and others, without being statistically significant, and were

by far the most effective intervention for improving output. Other authors have

focused on the instability of the impact of financial incentives on productivity and

not commented on its stable effect on output (Levine and O’Neill 2011).

The nine underlying financial studies related to performance output have many of

the same faults as the earlier studies. All were conducted 30 to 37 years ago. Three

were used in the previously described studies. Some had no or non-equivalent

control groups, small sample sizes (five had sample sizes below 15), and arguably

limited potential to be generalized (Katzell et al. 1977; Guzzo and Bondy 1983).

Behavior Modification and Financial Rewards: A Meta-Analysis (1997)

Another commonly cited meta-analytical research study dealing with financial

incentives, A Meta-Analysis of the Effects of Organizational Behavior Modification

on Task Performance, analyzed the results of 19 studies having 2,818 partici-

pants in manufacturing and service organizations (Stajkovic and Luthans 1997). A

detailed description of the studies, showing the type of employees, level of focus

(individual or group) and intervention tool, is not provided. Seventy-nine percent

were conducted in the 1970s and 1980s. Its primary purpose was to analyze the

effects on employee behavior of several types of organizational behavior modi-

fication approaches. The organizational behavior modification model provides

a five-step process for identifying, measuring, analyzing, intervening in, and

evaluating employees’ task-related behaviors, aimed at performance improvement.

The model’s most important foundation is positive reinforcement. In this study,

reinforcement techniques were financial (e.g., cash payments), nonfinancial (gener-

ally some form of performance feedback), social (e.g., recognition and praise) or

some combination of the three.

By applying statistical techniques to the study’s meta-analytical results, Luthans

(2005) stated that there is an 83 percent probability that a financial incentives plan


will increase employee task performance more than those who do not use this

approach in manufacturing organizations, and a 62 percent probability for service

organizations. However, the detailed research report provides important information

that compares the use of financial and nonfinancial interventions, as noted below:

❚ “First, organizational behavior modification produces stronger effects in manufac-

turing than in service organizations. In manufacturing organizations, intervention

packages (simultaneous use of several types of reinforcement) and financial

reinforcement both have significant effects, but they do not produce effects that

are significantly different from those of nonfinancial interventions. Thus, the use

of nonfinancial interventions is recommended because it does not appear to be

beneficial for the managements of these organizations to spend extra resources

for financially based rewards (money or valued prizes) or to spend extra time

and effort to apply intervention packages that combine financial and nonfinan-

cial rewards, when the application of nonfinancial interventions alone basically

produces the same results.”

❚ “Second, in service organizations, financial reinforcers seem to result in significantly

stronger effects than nonfinancial interventions. However, if social reinforcement

is applied in combination with nonfinancial interventions (e.g., performance

feedback), the effect magnitude increases slightly beyond that of the monetary

rewards used alone. The practical contingency guideline in this case would be

that in service organizations, as well as in manufacturing ones, there appears

to be a favorable probability that the same positive effects (even slightly higher

effects) on task performance can be obtained by applying nonfinancial − in this

case social rewards, as opposed to costly financial interventions” (Stajkovic and

Luthans 1997).

In sum, although the research shows that the use of financial incentives plans

clearly improves the chances of increasing performance, it also shows that nonfi-

nancial methods − performance feedback in manufacturing organizations and

performance feedback and recognition together in service organizations − produce

higher levels of performance than financial incentives alone. Some experts raise

a question about the sustained effectiveness of the non-financial rewards if they

do not lead to financial rewards of higher pay or promotion, but fail to point out

the disadvantages of using financial rewards (Gerhart and Rynes 2003).

SUMMARY

The research studies of financial incentives have several common features. First,

the summary studies generally show a substantial positive effect of financial

incentives on performance of about 30 percent. This result must be tempered

because two summary studies are based on many of the same individual studies.

Second, the variance in effects is likely to be wide. There are some situations

where the effects of incentives are very powerful and others where they are

negligible. Apparently, the effects depend heavily on the circumstances and


methods in applying them. As Lawler (2002) has stated, it is one thing to say

that financial incentives are a great idea, and it is quite another to design an

effective delivery system.

Third, most of the research was done in the distant past, leaving open the

possibility that workers’ attitudes about money and reward systems are different

today. Three of the summary studies were published before 1987, and 80 percent

of the studies in the 1997 and 1998 meta-analyses were published before 1990.

Fourth, the results typically apply to employees performing simple tasks in

laboratory and field settings. We do not know if the results would be different for

technical, professional and managerial employees. One knowledgeable observer,

Matthew Bloom, a business professor at Notre Dame University, put the matter in

some perspective in his article, “A Century of Compensation Research” (Bloom

2008). He stated that, “Unfortunately, significant gaps remain in our understanding

of the motivational effects of incentives, especially when work is complex, difficult

to prescribe, and dynamic, such as is often the case with professionals, knowledge

and creative workers, and the like.” After reviewing several of the above studies,

two compensation scholars said much the same thing: “As such, the underlying

studies examine only a subset of all jobs, particularly in today’s skilled and

knowledge-based economy” (Gerhart and Rynes 2003).

In 1966, two psychologists wrote an important article to assess research support

for financial compensation (Opsahl and Dunnette 1966). With regard to incentives,

they stated: “Without knowledge of the range of behaviors susceptible to incen-

tives or the degree to which they are susceptible, we cannot make optimal use of

them in any specific situation. Should we make use of incentives for maintaining

or improving leadership behavior? And how about jobs which are highly chal-

lenging and intrinsically rewarding? ... Of course, we do not know; and even more

unfortunately, little research seems to be underway to test assumptions implicitly

made by many firms’ present compensation policies.” Little has been done by

researchers to answer these questions conclusively in the past 45 years.

Fifth, in two studies, the effectiveness of non-financial programs on task

performance and productivity is better than for financial incentives. This raises

questions about the necessity and cost-effectiveness of using financial incen-

tives, areas that need further research to fully assess. Sixth, in two of the

studies, when researchers tried to connect financial incentives with the quality

of performance, no positive or negative relationship was found. The studies

lacked statistical significance and rewards were not directly linked to quality

performance, making this another area where further study is needed before

sound conclusions can be made about motivating behaviors beyond the quan-

tity of performance. Seventh, the frequently cited study of incentives by Locke

et al. is not a true meta-analytical study, as some claim.

In summary, results from research studies do not provide clear and convincing

evidence that financial incentives are effective in motivating key behaviors for all


levels of employees. The studies are often out-of-date, unscientific, duplicative, and

limited in scope to blue-collar workers and quantity of output. Some even show

that non-financial incentives are as effective as financial ones. Consequently, when

developing compensation strategies, compensation practitioners must consider the

limitations of these studies, regard with skepticism unqualified general statements

about the effectiveness of financial rewards, and explore other alternatives to find

support for the use of incentives,

A SENSIBLE ALTERNATIVE

In the 1990s, compensation scholars observed that many organizational

psychologists apparently had lost interest in the topic of employee compen-

sation (Rynes and Gerhart 2000). The lack of interest also exists today. In a

June 9, 2011 telephone conversation with the author, Jenny Baker, publications

manager for the Society for Industrial & Organizational Psychology (SIOP),

said that only 24 of the society’s more than 8,000 members have a primary

interest in the field of pay and compensation. A review of SIOP’s 2011 annual

conference program indicates that only two of the more than 300 sessions

dealt with pay or compensation and none with the subject at hand.

Given the small chance of seeing scientific studies about financial rewards

from organizational psychologists in the near future, compensation practitio-

ners should explore other sources. The director of Cornell University’s Institute

for Compensation Studies (ICS) has suggested one that merits consideration

(Hallock 2011). He states that the center’s academic researchers would welcome

an opportunity to assist organizations in testing the effectiveness of reward

practices through field studies.

ICS is an interdisciplinary incubator and clearinghouse for new insights,

research data and knowledge that advances decision making and discourse on

compensation. It serves students, academics, business leaders, compensation

practitioners and others. It takes advantage of the research and thinking of

scholars from six disciplines, including human resources, labor economics,

labor relations, and organizational behavior (Institute for Compensation

Studies 2011).

ICS’s director cites the example of Safelite AutoGlass as one organization that

has successfully determined the effects of a new piecework pay system on the

productivity of its service representatives by comparing it with a traditional

hourly pay plan. Although lacking in scientific rigor, these “before-and-after”

studies have some credibility since they can be evidence-based and are

specific to an organization. They will give some compensation practitioners

more comfort in using incentives than the aforementioned flawed and limited

summary studies.

Some scholars think that even though scientific research is lacking, it is

hard to believe that incentive pay does not work. They believe the key to


understanding it lies in identifying the circumstances and methods that make

it effective (Bloom 2008; Guzzo, Jette, and Katzell 1985). A joint effort with

ICS offers an opportunity to discover what those methods are and at the same

time to determine the effectiveness of a company’s incentive plan. ❚

ABOUT THE AUTHOR

Frank Giancola ([email protected]) has more than 40 years of HR experience, 25 years with Ford

Motor Co. , primarily in various compensation and benefits positions, and 23 years with active and reserve

components of the United States Air Forces as a personnel officer. Giancola has taught HR and compensation-

management courses at several colleges. He graduated from the University of Michigan with a bachelor’s

degree in psychology-sociology and received a master’s degree in business administration and a master’s

degree in industrial relations from Wayne State University in Detroit. He is a regular contributor to WorldatWork

publications and Online Community.

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How effective an organization’s rewards strategy

is will depend on whether it is sound and a

good fit to the organization’s context. But its

effectiveness also will be impacted by how it is perceived

by employees. If they understand why the strategy was

chosen and that it results in fair, competitive and appro-

priate treatment, and if they are inspired to contribute

their best efforts on behalf of the organization, the work-

force will be more likely to be dedicated and effective. If

any or all of these key components are missing, work-

force effectiveness will decline.

Communication is key to promoting an understanding

of the strategy and the reasons why it is what it is.

Communication also can inspire employees to focus

on organizational objectives and to contribute to

its performance.

INFORMING

In recent graduate-level courses leading to an MSHR

degree, the students were asked about their organiza-

tions’ HR strategy. They all were working, most for large,

sophisticated organizations, and several were in human

resources. Their answers varied from “I don’t know” to

fragmented responses such as “to hire the best,” “to pay at

market average” and “to develop employees in a manner

Robert J. Greene, Ph.D.,

CCP, CBP, GRP, SPHR,

GPHR, CPHRC

Reward Systems Inc.

Communicating Rewards: Strategies to EmployeesInforming, Influencing and Inspiring



Third Quarter 2011


that enables them to be all they can be.” The responses indicated that many organi-

zations do not ensure that there is a clear and widely understood HR strategy. The

participants in the courses were able to at least identify programs that were aimed

at building and sustaining a viable workforce, but were less sure of how they fit

together in support of the overall HR strategy.

A follow-up question produced even more puzzled looks: “Why did the orga-

nization choose the current strategy?” Several respondents believed the strategy

was developed by benchmarking against “respected” or “successful” or “best to

work for” organizations, which would increase the chances that it would result in

similar levels of success (or that was the reasoning behind using this approach).

Others believed it had been arrived at through a trial-and-error process. Fewer

stated that the strategy was based on alignment with the business strategy and/

or the organizational context. The discussion then turned to the question, “What

do the employees think the strategy is and how do they think it was arrived at?”

There was an almost total consensus that the employees did not have a clue.

These responses were not unexpected as they were consistent with the

author’s experience over more than three decades of consulting with all types

of organizations. There generally is a complete lack of understanding on the

part of employees as far as rewards strategy goes. But research has told us that

a critical prerequisite for building a positive employee-organization relationship

is to ensure that employees understand what the organization’s strategy is and

why it was adopted. This is particularly true when it comes to performance and

rewards management strategies.

“What you measure and reward you will surely get more of” is a widely

accepted premise. Behavioral research has demonstrated that when employees

do not know and have to guess they tend to believe that things are worse than

they are (Cascio 2005). For example, if a supervisor does not know what anyone

else’s pay rate is, the guesses will be that the supervisor’s boss makes less, peers

make more and subordinates make more than they actually do. This can lead

to a perception of inequity that is not accurate, or that at least is more negative

than it should be. And if an employee believes the organization pays less than

competitor organizations, it matters little what the actual competitive posture is

since perception is reality to employees. If the organization does not clear up

misperceptions, it must deal with the consequences of employee beliefs.

Few employees are stirred emotionally by general statements such as “ABC

believes our employees are our most important asset and we strive to hire the

best, invest in employee development and recognize and reward performance.”

Employees are more concerned about the policies and practices that impact them

on a day-to-day basis. How promotional decisions are made; how pay levels

compare to those in other organizations; how performance is defined, measured

and rewarded; what determines who will be the next victims of downsizing –

these are the questions they need to know the answers to. And what they think


of the answers will determine their level of effort, what they focus their efforts

on and whether they plan to remain with the organization.

How the Rewards Strategy Was Selected

Few organizations would admit to copying the strategy used by competitors.

On the other hand, it is not inappropriate to study the practices of successful

organizations, seeking clues about what seems to be effective. But one organiza-

tion’s success can be another’s disaster (Greene 2007). Admittedly there are only

so many options and many organizations are bound to adopt similar strategies.

For example, the vast majority intends to pay “at market” or “above market by X

percent” (the author knows of no organization that openly admits to deliberately

paying below market average). The question each organization must answer is

whether a strategy is a good fit to its context and whether it is economically

viable. Banks, which typically have two-thirds or more of their controllable costs

in the form of workforce costs, cannot compete with capital-intensive organiza-

tions when it comes to setting pay levels. An oil refinery has 1 percent or less

of its controllable costs in people, so doubling the pay of office personnel will

have virtually no impact on the bottom line. A similar strategy would decimate a

bank’s profitability. So if the bank adopts a strategy of paying “at market” it must

be careful how it defines the market.

Many employees will believe that their organization pays as little as it can get away

with. One of the ways to moderate the negative impact of their beliefs is to tell them

the truth as to why the organization defines the market in the manner it does and

how its pay levels compare to that market. One of the best forms of communication

is to inform employees about the realities of the organization’s business. If it was

pointed out that raising pay levels would necessitate cutting staff levels, this option

may not be as appealing to employees. But the case must be made that economic

necessity makes the competitive strategy mandatory. So ensuring that employees

understand why the strategy was adopted can help convince them the organization

is basing its decisions on sound economic principles.

How the Rewards Strategy Was Implemented

Even if employees accept that the organization is using sound business judgment

by attempting to pay at prevailing market levels, they can still suspect that an inap-

propriate sample of organizations was used in determining market pay levels. One

of the best strategies for demonstrating that an appropriate sample was used is to

share with employees what organizations participate in the survey sources used.

This might still result in initial protests that the sample was inappropriate (included

low-paying companies but left out high-paying competitors). But if an opportunity

for dialogue is created, it is up to the rewards practitioner to sell the comparator

sample as justified. Tough stuff, but necessary if employees are expected to believe

that the pay system is competitive, as claimed in the typical pay policy.


Even if the employees accept that the pay structures are competitive, they

also will question whether the pay structures and pay rates are equitable within

the organization (Greene 2010). After all, they have heard “internally equitable

and externally competitive” as being a characteristic of the organization’s pay

program. Many organizations have created multiple pay structures to ensure that

each occupational classification or employee category is aligned with market

levels. This shifts the emphasis from internal equity to external competitiveness,

and it is incumbent upon the organization to share the rationale underlying this

approach with employees.

Critical-care nurses in a hospital may disagree that the programmers in IT

should be paid as much as or more than they are since they believe their work

is central to the primary purpose of the hospital and critical to its performance,

while IT is an administrative support function. But if the organization believes

it is a sound business approach, the relationship between the pay targets for the

two occupational groups needs to be sold on that basis. No organization can be

indifferent to internal equity implications when it bases pay levels on external

competitiveness considerations. But a dialogue must occur if employees are to

accept that the pay program is justified. There is no easy way out of this dilemma,

but communication can at least provide employees with accurate information

and the rationale underlying the strategy.

Although few organizations post everyone’s salary on the bulletin board, there

needs to be communication about pay structures, pay rates and pay adjustments

in order to avoid the distortion that occurs when employees guess what others

make. Making the pay structure (job grade assignments and pay ranges) public

can help dispel unfounded beliefs. This should be done carefully and the inevi-

table dialogue following this action will no doubt be emotionally charged. It pays

to listen to employee protests about internal relationships so that they can be

examined and realigned when necessary. Additional communication about such

issues as actual performance rating distributions and average pay increases tied

to each of the ratings may also create some angst initially. But disclosure can

minimize the “I wanted to give you 6 percent but HR would only let me give

you 3 percent” cop-outs that managers frequently are guilty of.

INFLUENCING

Once employees are informed about what the rewards strategy is, why it was

adopted and how it was implemented, it is up to management to convince the

workforce that the strategy is sound and that the analysis of competitive data is

fair and relevant to the organization. The case study illustrates how employees

can be engaged in the process of evaluating prevailing market levels.

The use of employee participation in gaining acceptance of current practice

is not manipulative. It is an opportunity for the organization to understand how

the employees view policies and practices and to attempt to develop a mutually


acceptable strategy. Failing to do so allows the dissatisfaction to persist and

perhaps escalate into undesirable results, such as turnover or reduced motivation.

INSPIRING

The ultimate objective of communication is to develop understanding and to

inspire employees to put forth their best efforts on behalf of the organization. It is

a lofty objective but it is at least partially achievable. It is unlikely that employees

will be adrenaline-charged like the football team after a rousing motivational

speech by a skilled coach. But they likely will accept that they have been treated

respectfully and engaged in an open dialogue. The payback on this becomes

apparent in difficult economic times (2008 to 2010), when funds for pay adjust-

ments are scarce or non-existent. When an organization has opened the channels

of communication and used these channels regularly to inform employees, it will

be easier to gain acceptance of news that is not good.

CASE STUDY

A Chicago-based financial organization called the author to ask for his assistance in convincing

its top IT manager and his staff that the organization was paying competitively. The organiza-

tion had been basing its decisions on data from the standard reporting categories in the survey

(national average, Chicago average, and average for its type of IT system). This had left the door

open to challenges by the IT staff, based on their suspicion that a lot of “little, unsophisticated”

IT units were included in the data, which resulted in inappropriately low survey averages. An

in-depth analysis of the survey database was conducted to determine the appropriate competitor

sample for the organization, and it convinced the firm’s HR department to use a revised sample

of participating organizations to produce the most relevant competitive averages.

In anticipation of continued skepticism on the part of IT personnel about the relevance of the

numbers, knowledgeable employees were engaged in the process of selecting the competitor

list. Based on that dialogue, a select group of about 50 organizations was identified. The deci-

sion was based on the location of the organizations, their size and relative sophistication in IT,

their industries, and even their reputation “on the street.” At the last minute, a group of software

designers suggested that perhaps the comparison base should change across organizational

specialties (systems analysis, software programming, applications programming and computer

operations). They pointed out that some organizations had very large IT installations that were not

very sophisticated since they primarily did data storage and routing, while other organizations were

primarily software designers. In order to deal with this issue, managers from each of the functional

areas within IT reviewed the selected competitor sample and made appropriate modifications.

The participation of employees in this analysis gave them a full understanding of what was behind

the numbers reported in the survey, thereby lessening suspicions that there was manipulation

involved. The gesture of including employees in the analysis of the pay survey data also demon-

strated a respect for the employees and communicated to them the willingness to conduct an

open dialogue about how the organization compared itself to prevailing rates in each relevant

labor market. This level of engagement had a positive impact on employee understanding of the

research used by the organization and contributed to their acceptance of survey results. The

samples that each of the functional areas within IT selected produced numbers that differed only

slightly from the results that the HR department had been using. But the acceptance by the IT

staff increased dramatically.


The freezing of pay rates and even pay rate reductions can be accepted by

employees if they know the prevailing market rates have not moved during an

economic downturn. If the organization’s pay structure and pay rates were compet-

itive before they will remain competitive during the lull in the markets, and the

employees should be able to accept that fact. The difficulty is that some rates,

particularly in occupations that are both critical and in short supply, will go up

even in a down economy. This raises another issue: Does the organization adjust

ranges and rates for these occupations in order to remain competitive? Such a

move is more likely to be accepted by employees if they have been engaged in

a continuous and open dialogue. Those who do not benefit from the selective

adjustments are not going to be happy but they may grudgingly respect the need

for this approach.

Rethinking Rewards Strategies

One of the challenges faced by many organizations is that they deliver all direct

compensation in the form of base pay for the majority of employees. Base pay

rates tend to be flexible in one direction − upward. Although pay cuts are an

option in dire times, they certainly are not the best way to maintain morale.

Employees establish their standard of living based on an income stream they

assume will be consistent. When base pay rates are cut, it is often viewed as a

violation of an implied contract. For this reason, the “all base pay” strategy should

be rethought.

Executives and direct sales personnel are used to variability in their direct

compensation. Support personnel typically are not. By changing the rewards

strategy to link at least an appropriate portion of direct compensation to the

performance of the organization, a different scenario can be created. If the reasons

for making variable compensation a part of direct compensation are conveyed

using a two-way communication process, reduced total direct compensation levels

in a down year are more likely to be understood and accepted. Profit sharing,

performance sharing and individual and group incentive plans all tie rewards to

performance at one or more levels. These plans can provide a “shared destiny” if

linked to organization-wide performance. And they can better allocate whatever

funds are available based on relative contribution.

Another form of reward that is widely used in some types of organizations is

long-term, equity-based incentives. There has been a great deal of rethinking

about tools such as broad-based stock options due to the change in the way they

are treated in accounting statements, and also because of dramatic drops in stock

prices over the past few years. One of the failures of those who communicate

rewards strategies has been to try to sell stock options as a “get-rich-quick” scheme.

Even though Microsoft, Apple and Google have been successful in making option

holders a lot better off financially, at times they also have unintentionally deluded

employees into believing that movement into the leisure class is guaranteed to all.


Employees who view stock options (or grants or purchases) as a short-term strategy

are prone to turning into manic-depressives because of the inevitable variation in

prices of their stock. Attempting to raise one’s standard of living based on false

assumptions can lead to disaster, particularly for employees who are challenged

to meet their financial obligations on a month-by-month basis. Therefore, when a

tool such as options is added to the rewards package, the burden is increased for

those responsible for communications. Somehow they must convince employees

that any gains from options will be long term and far less certain than base pay

adjustments or short-term cash incentive awards. In fact, if the message cannot

be effectively delivered to, and internalized by, option recipients, the use of the

tool should be rethought.

CONCLUSION

Effective communication is one of the best tools rewards practitioners have. Informing,

influencing and inspiring employees is best done by ensuring they understand the

reasons for the rewards strategy and have the opportunity to surface their beliefs

about its soundness. Every employee wishes to be rewarded equitably, competitively

and appropriately. But if employees are left to guess what the rewards strategy is,

why it was selected and how it impacts everyone, discontent can be created by

their assuming things are worse than they are. Respecting the right of employees

to know how they and others will be rewarded can help clear up misperceptions

and convince employees that the organization is acting appropriately. ❚

AUTHORRobert J. Greene, Ph.D., CCP, CBP, GRP, GPHR, CPHRC, is the CEO of Reward Systems Inc. in Glenview, Ill. He has

published more than 100 articles and book chapters and was awarded the first Keystone Award for attaining the highest

level of excellence in the field. He has designed and taught certification courses and seminars for numerous professional

associations around the world and his book Rewarding Performance was published in April 2010.

REFERENCES

Cascio, W. 2005. Applied Psychology In Human Resource Management, 6th Ed. Upper Saddle River, N.J.:

Pearson Education.

Greene, R. 2007. “Benchmarking May be Common Practice, But is it Sound Practice?” workspan, August, 68-71.

Greene, R. 2010. “Internal Equity and External Competitiveness: Critical Components Of Effective Rewards

Strategies.” WorldatWork Journal 19 (3): 52-61.

Thomas B. Wilson

Wilson Group Inc.

Goal Setting:What Has Gone Wrong and What Can Be Done?

One does not need to read a great deal in the

media to understand that many companies

have made large bonus payouts for results that

were of questionable value. Many bonus or incentive pay

plans have become entitlements. Sometimes employees

receive performance ratings or bonus payouts that do

not reflect their actual performance or that of the orga-

nization. And frequently performance ratings show that

most people are “above average,” even when business

unit or organizational performance does not justify

this rating. Goals are dictated to people in some orga-

nizations with little involvement or basis on realistic

business conditions. Organizations that are concerned

about losing talent frequently provide performance

ratings or bonus payouts despite the performance facts.

It is no wonder that when performance reviews, merit

increases or bonus payouts are made in this context,

goal setting lacks real credibility with the employees

these processes are intended to inspire.

This paper examines the tasks that lead to effective (or

ineffective) goal setting for organizations and individuals.

There is a great deal of research now available on goal

setting and the factors that make it effective. Unfortunately,

many managers, executives and board members have



Third Quarter 2011


their own beliefs about what makes goal setting effective. This is often based on their

prior experience with little understanding of the reasons why a particular experience

was successful or unsuccessful. Therefore, this paper also examines the fundamental

principles that create best practices and reviews some of the common practices in

the marketplace regarding goal setting. It is time to employ a process of goal setting

that will result in strong commitment and high performance. This paper can serve as

a guide for developing the approach that will enable employees and the organization

to create strong competitive advantages and achieve high performance.

10 KEY TASKS

When one examines goal setting and seeks to improve the process, there are 10 key

tasks to make it effective. These tasks are based on well-documented and researched

principles of human motivation and performance. Following are the 10 key tasks:

1 | Determine the most meaningful measures on which goals will be based.

There were times when the only measures used by companies were financial

results – revenues and profits. Over time, the types of measures have expanded

to include the long-term value created by the results and the actions that produce

these results. Long-term metrics reflect the value of the enterprise in the market or

to its mission over time. Measures such as total shareholder return (TSR), return on

invested capital and growth in marketshare are some of the most common. They

reflect how an organization utilizes its resources and assets to expand its market

leadership, improve its profitability and increase the value to shareholders and

other stakeholders. Further, by understanding the determinants of financial results,

companies are better able to focus on measures that are leading determinants of

desired performance. Profits reflect what was done in the past. To improve the

results, people need to understand and focus on the most important drivers of

financial success, such as customer satisfaction, employee engagement, operating

or gross margins, on-time-delivery or lead time, quality, productivity, etc. By

focusing only on end result financial measures such as revenues and profitability,

the drivers of this performance are generally left unmanaged.

Table 1 shows the types of measures used by organizations for different levels of

employees (Mercer 2008-2009). It shows both the types of measures that are used

and the relative weighting of them to determine bonus payouts.

The measurement and goal setting process needs to define what needs to be

achieved, how it should be done and why this performance is important — it

creates a path from mission and strategy to milestones and actions.

2 | Identify the frame of reference for setting goals.

Perhaps one of the most difficult aspects of setting goals is to determine what

should be the actual goal. At the heart of this issue is the level of confi-

dence people have in achieving the goal and the level of desired performance


improvement. Successful companies define the basis for the goals (actually and

philosophically) as:

❚ Improvements in performance from the prior year (or period)

❚ A comparison to external benchmarks, such as peer companies or objective

standards as one finds with industry standards

❚ Forecasts of expected revenues, spending plans, cost, etc.

❚ What people believe is important and achievable (bottom up plans)

❚ Strategic, long-term requirements (top down plans), milestones or other perfor-

mance requirements to meet long-term goals.

There is little data on which reference point is most prevalent or reliable.

This depends on the type of measures used, the level in the organization for

which the goal is being set and the availability and relevance of existing data.

The important message here is to identify and understand the comparisons and

assumptions that are used to establish the goal. Much conflict and confusion

can be avoided by clarifying this task.

3 | Establish the framework and mechanism for measuring goal performance.

The simplest form of goal is a “binary goal” — Did you meet this goal, yes or

no? This means that only one level of performance needs to be established, and

if one does not meet this goal, there is no payout. Further, if one exceeds the

goal, then there is no additional payout. The rules are simple and clear, but

ineffective. Defining the desired performance often requires critical thought and

an understanding of the context — strategy, current priorities, interdependencies

and capabilities. If the measure has a range of goals associated with it, then the

pressure to manipulate the level of challenge or the assessment of performance

can be minimized. This means, however, that a range of goals needs to be

discussed and different payout opportunities need to be determined based on the

importance, probability of achievement and reliability of the measure.

4 | Determine the level of “stretch” required by the goal.

The important principle that underlies this task is the probability of achievement.

How likely is the goal to be achieved at X, Y or Z level? David McClellan, one

TABLE 1 Types of Measures

Employee CategoryFinancial Measures

Operational Measures

Customer Based Measures

People Based Measures

Senior Executives 94% 57% 30% 25%

Directors and Managers 92% 61% 31% 28%

Professional (non-sales) 88% 59% 29% 20%

Professional Sales 89% 50% 30% 14%

Office/Clerical and Administrative 85% 61% 32% 18%

Production/Service and Operational 84% 64% 33% 14%


of the early founders of modern theories on human motivation, concluded from

his research that the level of achievement desired for maximizing performance

is one where the goals were seen as both challenging and achievable (1961).

While this criterion is obvious, it reflects an important balance in the level of

difficulty of a goal. The most common practice of companies is one that utilizes

the following framework:

❚ Threshold — Minimum level of acceptable performance – 80 percent probability

of achievement

❚ Target — The desired level of performance – 60 percent to 70 percent probability

of achievement

❚ Exceptional — Performance that is clearly beyond established expectations and

reflects outstanding performance — 30 percent probability of achievement.

This provides a range of goals associated with a measure as described in the

previous task. So the question is: What is the probability of achieving each level

of performance? A study completed by Hewitt Associates found that 83 percent

of high performance company leaders believed their companies will achieve their

target performance, but only 54 percent of low performance companies felt their

goals were achievable (2003). Does the belief in target achievement lead to high-

performing companies or do low-performing companies have less confidence in

their ability to achieve their goals? Which is the cause and which is the effect?

The degree of difficulty often reflects a company’s culture, standards and experi-

ence with goal achievement. If goals are seen as too easy, achieved consistently

and require little extra effort, then they are simply not motivating. Employees

become complacent and the payouts become an entitlement. If the goals are seen

as unachievable, they create a different, but similar low-motivation environment.

Employees give up, see little chance for success and may set lower personal goals

they perceive as more realistic in order to gage their own performance. Or, they

may simply regard the goal-setting process as a useless exercise, further under-

mining the credibility of the organization’s leaders.

To reflect the likelihood of goal achievement, the Hewitt study noted above

found the following in companies that believed their target performance would

be achieved. (See Table 2).

Companies that see target performance as requiring a significant stretch (such

as less than 30 percent probability of achievement) should probably ignore goal

TABLE 2 Probability of Achievement

Likelihood of Target Achievement % of Companies

10% — 40% 4%

50% — 60% 30%

70% — 80% 42%

90% — 100% 24%

71% Overall Average


setting and find some other means to guide performance. They are not likely to be

a sustainable high-performance company. Equally, companies that set goals that are

easily and consistently achieved or exceeded are not challenging their employees

sufficiently; they will also not likely be a high performer in the marketplace.

5 | Determine if the goal is based on an absolute or relative level of achievement.

This task is similar to the frame of reference with an important difference. An

absolute type goal implies that if X is achieved, then $Y will be made as a payout.

It shows a clear quid-pro-quo relationship. The task then focuses on what is

measured and how reliable is the information on which assessment of perfor-

mance is based. A relative type goal implies that actual performance is based on

a comparison to an external index or reference to determine the level of perfor-

mance and payout. Examples of this are most common in executive and investment

management positions. For some executives, a portion of their variable pay (cash

or long-term incentive or equity awards) is based on how well the company’s

financial performance compares to a set of peer-group companies or a market

index, such as Standard & Poor’s 500 or Russell’s 2000 companies. In investment

management, a bonus may be earned if the returns on one’s investment portfolio

meet or exceed a comparable market index as opposed to an absolute return on

investment percentage. If the company does well, but so do similar organizations

in the same market, has the company truly achieved desired performance? If the

company’s profitability declines dramatically, but is higher than the comparator

group, did the company really fail in meeting its goals? Depending on who and

what measures are being considered, this issue may be important to consider

when setting goals.

6 | Determine the effective balance between quantitative and qualitative goals.

As discussed above, financial and operational metrics are usually very quantita-

tive. The level of achievement can be objectively determined, at least that is

the prevailing assumption. Qualitative goals are usually based on judgment and

require discussion and analysis. The primary issue here is what makes the goal

and the performance assessment verifiable? Most astute financial executives know

that financial results can be manipulated to reflect desired performance achieve-

ments. Although new Securities and Exchange Commission (SEC) regulations

have increased the transparency of financial reporting and placed significant

accountability on the CEO and CFO for the accuracy, financial and operational

results can often be interpreted. Further, if a group of independent individuals

examined certain qualitative information and reached the same conclusion about

performance, then isn’t the assessment reliable? Who (with the knowledge and

authority) can say the goal was not achieved?

The forces that influence the desire to manipulate results are usually related

to the level of risk of failure and the payout opportunity associated with the


results. If either is too high, then individuals are tempted to distort the results in

order to achieve a personal gain (or protection). Once again the principle is to

establish a series of goals that are meaningful and verifiable to the individuals

and organization. Goals should not be limited to only what can be counted;

they should define what the organization needs to do to be successful. This

enables the performance and the associated payouts to reflect the full picture

of performance of the organization, business unit and individual.

7 | Determine the right balance between individual and group performance.

One of the most challenging tasks that need to be resolved in setting goals is

the relationship between the performance of the individual employee and the

group — team, department, region and company. When individual goals are

emphasized, the organization creates a clear alignment between the perfor-

mance of the employee and his/her resulting rewards (e.g., bonus payouts). This

reinforces accountability and individual initiative. However, it discourages collab-

oration, communication and resource optimization. This approach creates silos;

employees may tend to engage others when they know that they have achieved

their own goals or these actions will benefit them personally. When group goals

are emphasized, the organization reinforces a common fate, collaboration and

optimization of shared resources. Desired performance is often achieved only

by the combined efforts and talents of many employees. However, the approach

reduces the ability to recognize and reward high-performing individuals, and

may discourage employees from taking initiatives or actions where they will see

little personal benefit. In fact, in some organizations employees that exercise

high personal initiative are treated as “rate busters.” Their behaviors will soon

return to the “norm” or the person will leave the organization.

One of the key elements of effective goal setting is to identify the unit for

which the performance goal is established: individual employee, department/

team, region/division or overall company, and the weight when assessing overall

performance. Most companies resolve this issue by using multiple measures or

funding mechanisms for bonus plans that reflect the appropriate balance. The

discussion of weighting these measures should determine the optimal balance.

Table 3 shows the percentage of companies in a recent Wilson Group survey

that uses measures from different segments of the organization by employee

group (2007-2008).

One interesting observation about this table is that is shows relatively few organi-

zations that focus their performance measures on business units and departments

or divisions, particularly at lower levels where employees would most likely have

the greatest impact. This survey data shows common practice, but is it best

practice? The important question for the organization seeking to improve the

goal-setting process is how to resolve the inherent paradox between measuring

and rewarding individual employee versus group performance. What is the right


balance of different business units that will encourage individuals to maximize

performance? How can different rewards be used to reinforce the company, group

and individual performance? Expecting a single bonus plan to create this balance

may be asking too much of this program. Perhaps the organization can utilize

a variety or portfolio of rewards systems, integrated with the different goals, to

create the desired balance for achieving optimal performance.

8 | Determine the right payout-to-performance ratio to be meaningful to the

individual and to provide the desired return on investment for the organization.

Goals that have little positive or negative consequences (e.g., bonus payouts, pay

increases, recognition awards, promotions or getting fired) associated with them,

often become ignored. Companies measure many things, only a few of them are

associated with rewards. There are often detailed financial metrics (e.g., cost per

unit, actual expenses to budget, etc.), operational metrics (e.g., on-time-delivery,

scrap ratios, productivity, safety, and quality, etc.) and customer satisfaction (e.g.,

customer retention, profitability and satisfaction, etc.). The goals that make a

difference in the bonus payout or other forms of rewards therefore, tend to get

the attention. Research (and experience) clearly shows that goals paired with

meaningful rewards have more influence on behavior than either the goals or

the rewards do independently (Milkovich 1992). The task is to define the right

rewards to be associated with the selected measures and desired performance.

There are many factors that influence this ratio. The primary factors are as follows:

❚ The level of influence one has on the factors that create desired results (the

reason executives and professional sales people have higher variable pay asso-

ciated with their compensation than others in an organization). This is often

referred to as the “line of sight.”

❚ The value of the performance achieved in relation to the amount of payouts

associated with the outcomes (i.e., the cost of the payouts in relation to the value

of the performance — the ROI).

❚ The level of risk associated with the performance and its importance to the

organization from short- and long-term perspectives.

TABLE 3 Weighting of Measures

Employee GroupCorporate Measures

Business Unit Measures

Dept/Div’l Measures

Individual Measures

Senior Executives 88% 19% 4% 38%

Directors and Managers 65% 31% 8% 38%

Professionals (non-sales) 50% 8% 4% 31%

Sales Professionals 12% 0% 0% 77%

Office/Clerical Administrative 35% 8% 0% 23%

Operational and Service 27% 12% 0% 19%

Production/Service and Operational 84% 64% 33% 14%


❚ The customary market practices associated with the compensation of these

jobs. The market practices often set the expectations of individuals the company

seeks to hire and what is generally known and acceptable by human resources,

corporate executives and the board of directors.

❚ The probability of achieving the target often reflects the level of payout one

will receive. If the payout is infrequent, then the payout needs to be higher than

standard practices so that the expected value — amount of award multiplied

by the percent probability of achievement — results in total compensation that

achieves the desired level of competitiveness.

When one establishes goals for a given position, one needs to understand the

ratio between the amount of the payout and the probability of the payout so

the opportunity for the additional income is meaningful to the employee. If the

expected value is low, the importance of the goal will be minimized. In contrast,

if the expected value is high, then the individual may focus more on that goal

than on other goals or accountabilities for which one is responsible. Further, the

bonus payouts that are paid need to reflect a meaningful ROI by the company. If

the company can achieve the same results without making this payment, then it

should simply do so. In most cases, it cannot. Therefore, the costs associated with

the bonus payouts need to be considered in relation to the value of the results –

hence the pay-to-performance ratio is a critical ingredient to effective goal setting.

Without the proper balance between goals and rewards, the organization risks it

ability to retain desired talent or motivate work that aligns with the strategy and

the desired culture of the organization. The simple message is that organizations

often get what they pay for in relationship to the expected value.

9 | Calibrate goals in order to reinforce accountability, initiative and

collaboration.

In traditional goal-setting practices, the individual and the manager reach agree-

ments (usually in private) on the goals for a given time period. This may be part of

the performance management or business planning process. In many organizations

the manager’s or company’s goals provide the context for setting individual goals,

and the goal-setting process cascades down through the organization. When done

effectively, this process both translates and aligns sub-unit goals (i.e., department,

team or individual) with the larger enterprise (e.g., division or overall company).

The challenge is to make sure the goals that are set for one group of employees

reflect a similar focus and challenge for other groups, particularly for those that

are related to each other. Public display and discussion of goals adds a powerful

self-correcting and quality assurance dynamic to the process. For example, some

companies use a planning process where managers discuss and calibrate the goals

in one’s area with peer or related groups. Imagine a meeting where a manager

of one department presents the goals he/she established for each individual in

the group and displays both the goals and the progress that is being made on a


monthly or quarterly basis. The discussion and display of goals fosters a more

disciplined approach to setting goals, better calibration of the goals (i.e., level of

stretch), and stronger interdependencies and collaboration where they are needed.

In short, the process of goal setting can often address many of the inequities and

issues that companies have with their goals.

10 | Learn from experience and continually improve the goal-setting process.

Like many systems in organizations, goal setting is a process. It is seldom perfect

and can always be improved. Even though organizations link important decisions

to the process – investment decisions, staffing, talent management, bonus awards,

merit pay decisions, etc. — the process has to be one that creates credible and

effective focus on performance. As information systems, individual and group capa-

bilities improve, so should the clarity, rigor, confidence and value of the goals. The

communication process should be frequent, engaging and fact-based. When goals

need to change, people understand why and by how much. When performance

issues need to be addressed, goals provide the focus for the discussion so that both

the “what” and “how” can be accurately, effectively determined. One only needs to

observe how goals, performance feedback and rewards (formal and informal) are

applied in highly effective sports teams to see the power of this process.

CONCLUSION

This paper has examined one critical element of the performance management

and variable compensation – the goal setting process. There are many attributes

of highly successful organizations, and the effectiveness of their goal setting is

but one of the common ingredients. There is substantial data on the importance

of effective goals and the association they have with meaningful rewards. Some

believe you get what you measure, but in reality, you get what you measure and

reward. It is the relationship between the nature of the goals and the positive

(or negative) consequences that are associated with them that influences human

behavior. People create performance by their actions. By utilizing goals that work

and rewards that work, an organization can achieve remarkable performance.

One of the primary challenges to executives and leaders of organizations is to

engage employees so they care as much about their individual and the organiza-

tion’s performance as the executives themselves do. This article provides some of

the factors that highly successful companies employ to achieve this culture. The

most important message is to understand the principles that create highly effective

goal setting, and employ the practices the organization needs to build the commit-

ment and discipline needed to be successful. The organization will then have

multiplied the power of talented people to focus on common goals and achieve

remarkable results. This provides personal rewards and creates outstanding value

for the organization and the customers and shareholders it serves. Yes, this is an

idealistic statement. Performance is the result of many things, and the effectiveness


of the goals is determined by how well principles outlined in this paper are

employed. This paper should enable one to identify where the strengths and

weaknesses exist and what can be done about them, so the organization and its

employees can truly do their very best. ❚

ABOUT THE AUTHOR

Thomas Wilson ([email protected]) is president and CEO of the Wilson Group, a consulting firm

based in Concord, Mass. He is the author of four books, the most recent are: Innovative Reward Systems for

the Changing Workplace and Rewards That Drive High Performance: Success Stories From Leading Organizations.

Wilson has also written more than 30 articles, book chapters and special features for Fortune and the Financial

Times. He leads the Wilson Group in working with executives and senior leaders regarding assessment of

executive total compensation, development of sales incentive compensation plans and developing innovative

total rewards programs for all employees of an organization.

REFERENCES

Hewitt Associates. 2003. Variable Compensation Management. Hewitt Associates, Lincolnshire.

McClellan, D. 1961. The Achieving Society. Princeton, NJ: Van Norstrand.

Mercer. 2008-2009. “U.S. Compensation Planning Survey.” Mercer LLC, Chicago: Mercer LLC.

Milkovich, G., and C. Milkovich. 1992. “Strenthening the Pay-Performance Relationship: The Research.”

Compensation and Benefits Review, November-December.

Wilson Group. 2007-2008. Changes in Variable Pay Plans – 2007-2008. Concord: Wilson Group.

It turns out the world is not exactly flat; it is actually

quite uneven and perhaps a bit lumpy. Global compa-

nies will acquire and develop technical, operational

and leadership talent locally and globally. Arbitraging

labor costs, moving work around the world chasing

the lowest cost, has its limits. Its benefits are derived

primarily, though not only, from low-skilled production

jobs. Two forces are driving the lumpiness. Products and

services are becoming increasingly sophisticated, driving

increased skill requirements. At the same time, firms are

finding the need to be closer to the customer. In an

age of dual-career families, underwater home values and

changing family roles, many countries and companies

do not have deep talent pools of professional staff and

leaders who are ready, willing and able to relocate around

the world, even if companies are willing to underwrite

the cost (Sirkin, Hemerling, and Bhattacharya 2008).

Wipro, the Indian global outsourcing company, launched

a consulting academy in the United States that produces

several hundred certified Wipro consultants annually

(Business Wire 2009). Wipro has more than 100,000

employees in 55 countries, including 9,000 in the United

Talent Management and Rewards

Robert H. Meehan, Ph.D., CCP, CBP

Compass HR Consulting



Third Quarter 2011


States (Haines and Burnett 2010). According to CEO Azim Premje, Wipro relocates

engineers from India to the U.S., paying prevailing U.S. salaries, due to a shortage

of sufficiently mobile talent within the U.S. (Haines and Burnett 2010).

The economic environment of the past several years has led to high unemploy-

ment in the U.S. and other countries, especially in the European Union. However,

a survey conducted by Towers Watson and WorldatWork found that “a vast majority

of companies worldwide are having difficulty attracting the critical-skill and

talented employees needed to help them rebound and prosper in the wake of the

economic crisis” (Majority 2010). The survey also noted that companies see the

need to focus their talent management initiatives in leadership, succession plan-

ning and career paths. Some companies constrain spending on traditional talent

management initiatives. That affords others an opportunity to take cost-efficient

actions linking talent management and other HR programs and processes in ways

that can produce long-term value.

This paper discusses the several approaches to building links between talent

management and compensation in the context of economic change, organizational

challenges and increased globalization. In the first example, “Rightsizing Affords

an Opportunity,” the links are both implicit and suggestive. In the other two,

“Responding to a Changing Market — Building Leadership Talent” and “Building

the Talent Pipeline,” specific links with talent management and compensation

programs and other HR functions, such as talent acquisition, performance manage-

ment and training, are illustrated. This article also discusses the implications for

corporate governance and the talent pipeline in global firms.

RIGHTSIZING AFFORDS AN OPPORTUNITY

From a business perspective, talent is the most difficult competitive advantage to

replicate. Technological and financial sources of competitive advantage, though

important, are at best temporary. The firm’s talent and leadership, which create

the technology and employ the financial resources, are the true sources of long-

term sustainable competitive advantage (Collins 2009 and 2001). This requires a

broad-based business focus on the development and management of HR talent. It

also requires a significant depth of general and industry-specific business knowl-

edge and acumen, process flow management and finance in addition to the HR

domain-specific knowledge.

In traditional downsizing, work is eliminated, outsourced or reassigned. This

situation affords the opportunity to reorganize the work focusing on value creation.

Administrative processes are outsourced or current outsourcing is increased. For

years, finance departments have been outsourcing accounts payable and employee

expense statement processing and HR departments have been outsourcing aspects

of benefits administration. Taking a more or less traditional approach, HR depart-

ments can look at outsourcing additional administration and compliance tasks

associated with recordkeeping, payroll, Human Resource Information Systems and


employee call center services. Other opportunities that may seem less traditional

include combining employment and compensation.

The broader challenge is to make the decision on outsourcing or reorganizing with

a view toward the future of the business and its talent needs. If HR staff members are

given challenging development opportunities during the tough times that build their

HR and business talents, they can be ready, able, and hopefully more committed,

to help grow the business. The result can be a more efficient and effective staffs

whose talents are focused on value creation. By outsourcing traditional administra-

tion and compliance tasks and even some talent acquisition roles, HR leaders are

focusing on high-value activities, such as strategic policy formulation and execution,

professional customer service excellence and vendor management (administrative

excellence). This is illustrated in the Human Resources Excellence Model. (See Figure

1). This allows HR leaders and staffs to work and contract with the business leaders

in sales, marketing, production, operations and other key internal units as well as

with external relationships required to build the firm’s talent advantage.

RESPONDING TO A CHANGING MARKET —

BUILDING LEADERSHIP TALENT

In another case, the organization was experiencing a period of market changes

and increasing competition that was significantly pressuring margins. Operating

efficiency, reliability, safety and solid financial results had become equally impor-

tant. As the CEO put it, “When you’re losing money on every unit sold, you can’t

make it up on volume.” Along with the more traditional cost-efficiency initiatives,

the organization felt a need for a change in leadership focus. For years it had been

focused on efficiently managing functional silos. A new model was developed

for the executive cadre. That model was focused on three core competency sets:

Strategy Business

Partner — Linking HR

to the Business

Administrative

Excellence —

Managing

Programs,

Processes &

Vendors

Customer Service

Excellence —

Quality is created

in each interaction

with Managers,

Employees &

Applicants

The Lynch Pin

FIGURE 1 Human Resources Effectiveness Model


❚ Leadership. This included: understanding situations, conditions, challenges and

opportunities; formulating a vision and strategy of how to seize opportunities;

building guiding coalitions and broad-based commitment; mobilizing the required

financial, technical and human resources; and implementing the plans of action

generating successes. Inherent in each was the understanding and communica-

tion of the organization’s values; doing things in the right way as well as leading

for results.

❚ Business acumen. This included understanding the value creation model and

policies in the context of the industry and the financial aspects such as sales

revenue, net income, ROI and working capital. It was no longer sufficient to

just understand one’s own role; it was necessary to understand how all of the

parts fit together. Developing broad business acumen was the most challenging

because in some cases it required leaders taking on senior roles in areas that

were different than their traditional career paths.

❚ Domain competency. This is traditionally the “comfortable competency.” If

you are in finance, engineering, production, sales, etc., you need to have the

competencies essential for that domain. However, as leaders moved to new

roles as part of their development, they moved outside their comfort zones and

had to develop competencies in multiple domains. This is not to suggest that

an operations manager had to become an engineer or an HR manager had to

become a CPA, but the manager had to become sufficiently proficient to lead

and represent the function.

The foundation upon which these competencies are developed is described in

the next section, “Building the Talent Pipeline.”

The compensation system for this group was restructured into four bands with

each band representing a key leadership level, such as CEO/COO, C-suite and

Executive Committee, division heads and department heads. A leader’s salary within

a band was based on the market rate (target) for the position and an assessment of

his/her competencies. A salary increase, if any, was predicated on a leader’s progress

in developing his/her competencies, contributions and the market rate at the time of

the review. For example, a leader who was assessed as fully competent in all three

competency domains would be paid at the market target for the job. Another who

was assessed as fully competent in two would expect to be paid below the market

target. Individuals who were transferred to a role in another competency domain

would be expected to develop those competencies rapidly.

BUILDING THE TALENT PIPELINE —

RESPONDING TO A CHANGING MARKET

Below the senior leadership level, talent development was based on a traditional

hierarchy of jobs, generic job descriptions and a career path. For example, the

engineer job family had a career ladder with six job levels in the hierarchy

leading to the senior engineer position, which generally resulted in a promotion


and pay increase about every two years. The inherent risk in the system was

that an unqualified individual could advance to the senior level without building

sufficient expertise.

The solution implemented was based on a competency model that spelled out

specific demonstrable competencies and behaviors required at each level. The

competency model was developed based on extensive structured interviews with

senior engineering managers.

Senior managers were able to articulate four clearly distinct levels of the compe-

tencies displayed by successful engineers. Two of the levels had second proficiency

levels. For example, the Level 3/4 was a career competency level where an indi-

vidual could remain the balance of his/her career. The higher level (Level 4) was

a recognized sufficient proficiency at which an individual could perform assign-

ments with the need for only limited supervision of progress and results as well as

mentor lower-level engineers. Level 5/6 senior engineers might never advance to

senior leadership level positions described above. Nevertheless, individuals needed

both a diversified knowledge of engineering and a strong business orientation to

provide operational supervision, project management and technical leadership, as

well as apply intensive and diversified knowledge of engineering principles and

practices. An understanding of corporate policies, values, operations and objec-

tives was needed to solve complex engineering problems and make technical

decisions on methods and obstacles that contributed to operating efficiency, reli-

ability, safety and financial results.

In addition to the competency requirements, each level was defined by its: general

characteristics; direction received (type and amount); and major responsibilities (type

and scale of projects or portions and types of solutions expected, if any.)

LEADERSHIP

BUSINESS ACUMEN

DOMAIN COMPETENCIES

THE FOUNDATION

Professional and management competencies developed during career growth.

FIGURE 2 The Leadership Competency Pyramid


Seven competencies emerged:

❚ Technical and theoretical knowledge, including data analysis

❚ Organization and industry perspective and knowledge breadth

❚ Communications

❚ Problem solving

❚ Planning and administration (project management)

❚ Leadership and influence

❚ Initiative and independence.

Departments had the ability to define and articulate department-specific require-

ments for each of the competencies. For example, electrical and mechanical

departments were able to articulate specific systems or analyses related to a

generic competency.

Progression through the hierarchy was based on managers and division heads

stating that the individual being promoted possessed the competencies required

for the new level. This helped ensure that the organization was getting the value

for which it was paying. Another criticism of the old process was that in order

to advance beyond Level 3, one had to become a manager. The negative conse-

quences, such as great engineers being promoted and becoming poor managers,

are well known. This was addressed by incorporating a dual career ladder in

which individuals could progress along an individual contributor/technical career

path, a managerial career path or between both to the Senior Engineer Level 6.

The common grades and salary ranges ensured common pay practices for both

individual contributor and managerial positions.

Relocation was an issue given the location of the organization’s plants, engi-

neering function and headquarters roles. Managing this expectation began during

hiring. Candidates were advised that advancement to senior engineering, mana-

gerial and senior leadership roles required a mix of staff engineering, plant and

headquarters experience. Positions in the various roles were located based on the

organization’s needs. An individual’s development could be inhibited by a reluc-

tance to move to where the career development opportunity and the need existed.

An understanding going in led to improved employee acceptance of “the deal.”

Both of these examples are based largely on employee development through job

and project assignments as well as mentoring and nurturing talent by managers.

Specific training programs could be developed and deployed based on needs

assessments within a department or across departments, such as the engineer-in-

training and professional engineer licensing requirements.

PLANNING THE TALENT SUPPLY CHAIN

Having considered several examples, the article’s focus now shifts to the implica-

tions for support processes. Many of the traditional talent management techniques

and processes go back several decades as organizations forecasted their talent

needs based on organization business growth plans and the estimated outflow of


TABLE 1 Sample Engineering Model (Electric Utility)

Competencies Assistant Engineer Associate Engineer Engineer I

General Characteristics

This is the entry level position for an engineer requiring no work experience and expertise beyond that required to attain a BS in Engineering from a school accredited by the Accreditation Board for Engineering and Technology (ABET). Experience, if any, would primarily be from internships while in school. Assignments are designed to develop practical engineering skills and applied competencies.

This is the second level for an engineer. This level differentiates from the entry level in that the incumbent is assigned slightly more complex engineering tasks and should be capable of recognizing abnormal variances of results. The incumbent should begin to develop a basic understanding of company generation, transmission systems and equipment. During his/her tenure at this level, the engineer involved in design work should sit for the EIT exam.

At this level, the incumbent is considered a fully qualified engineer. He/she will be able to handle all but the most complex engineering tasks. The incumbent will be expected to draw conclusions from data analyses and begin to make recommendations on courses of action. This level requires developmental experience in a professional position.

Direction Received

Works under close supervision, receiving advice and guidance from Engineers and Senior Engineers, as well as Managers/Directors. All work is checked while in progress and reviewed for accuracy and completeness.

The incumbent works with greater independence. However, projects are still assigned by Manager/Director or Senior Engineers. Works under moderate supervision, receiving advice and guidance from Senior Engineers. All work is reviewed for accuracy and completeness.

Works independently on routine engineering work. Tasks are delegated to the engineer by the Manager/Director and/or Senior Engineers. Although this position works independently, all work is checked by others.

Major Responsibilities

Performs a variety of routine tasks that are planned to provide experience and familiarize the engineer with his/her work group, engineering methods, practices and programs of the company. Tasks are limited in scope.

Using prescribed methods, performs specific and limited portions of an engineering project, which may include preparation of simple design specification, equipment testing, etc. Applies standard practices and techniques to engineering situations, analyzes data, recognizes discrepancies in results and follows operations through a series of detailed steps.

Performs work that applies engineering/scientific knowledge to conventional types of designs, systems, structures or equipment. Assignments usually include one or more of the following: equipment design and development, test of materials, preparation of specifications, process study, research investigations and report preparation.

Technical/Theoretical Knowledge

This position requires solid quantitative skills with the ability to analyze data and report results (e.g., load flow studies). This includes engineering theory, physics, calculus, basic statistics and computer skills. Incumbents should have an understanding of power system theory. Generally, it can be assumed that the individual has the academic qualifications to sit for the EIT exam (academic equivalent offsets as specified by the state).

The incumbent builds upon entry-level skills and starts to develop a better working knowledge of the company’s engineering and operating policies, practices and goals, and the electric utility industry. The incumbent runs computer analyses, such as transient stability and voltage analyses, and reports results. At this level, the incumbent must demonstrate proficiency using the company’s engineering software.

This position requires current expertise in the incumbent’s specific engineering discipline and how that discipline relates to the company’s mission, customers and operations. The individual should be knowledgeable in the various regulations and codes that apply to his/her specific discipline. The incumbent must have the ability to understand and write simple engineering specs. At this level, an engineer involved in design work should have passed the EIT exam.


Engineer II Senior Engineer I Senior Engineer II

Engineers at this level do not require a significantly different set of competencies than are required at the previous level. Minor differences exist in the competencies below:

At this level, substantial technical expertise is required. The incumbent must have both a diversified knowledge of engineering and a strong business orientation in order to provide technical leadership. Within the company, he/she may be the highest technical expert in a certain discipline. The incumbent applies intensive and diversified knowledge of engineering principles and practices, and an understanding of the company's policies, operations, and objectives, to solve complex engineering problems, and make technical decisions on methods and obstacles.

Engineers at this level do not require a significantly different set of competencies than required at the previous level. Differences exist in the competencies below:

Supervision and guidance are related largely to overall objectives, critical issues, and policy matters. Consults with Manager/Director concerning unusual problems and developments. Work is checked by others at a Senior Managerial level, although work is expected to be presented in a polished form.

Develops and evaluates plans and criteria for a variety of projects and activities. Assesses the feasibility and soundness of proposed engineering evaluation tests or equipment. Usually performs as a staff adviser and consultant. Represents the company at technical conferences and company meetings.

Engineers at this level may be licensed professionals. Generally, it is assumed that the individual has the qualifications to sit for Part II of the PE exam.

Develops and evaluates plans and criteria for a variety of projects and activities. Assesses the feasibility and soundness of proposed engineering evaluation tests or equipment. Usually performs as a staff adviser and consultant. Represents the company at technical conferences and company meetings.


TABLE 1 Sample Engineering Model (Electric Utility) continued


Organization/Industry Perspective & Knowledge Breadth

This position requires general engineering knowledge and a basic understanding of the utility industry. Perspective at this level is limited to engineering fundamentals.

This position requires general engineering knowledge and a basic understanding of the utility industry. Perspective at this level is limited to a specific engineering function with an awareness of the company’s related activities and operations. For example, at this level the incumbent should be familiar with a per unit system.

This position requires knowledge of the company’s policies and practices as well as industry-wide policies and practices. He/she must have an understanding of various laws and regulations and how they affect or can be applied to the company. This level also requires a solid understanding of related disciplines, divisions, and/or departments and their interaction with the incumbent’s assignments.

Communications Written communications skills must be at a level at which the incumbent can request data, summarize analysis findings and write routine internal memos. Basic oral communication skills are necessary to interact with others in the unit/department. These are considered foundation skills.

Same as Assistant level. Must be able to produce finished reports and specs that explain recommendations in a clear, concise and articulate fashion. These documents should require little or no editing by supervisors. It is important that the explanations of often complex data and concepts be in either detailed technical terms or “lay terms,” depending on the audience. In addition to excellent interpersonal skills, foundation level group presentation skills are required to handle in-house presentations. The Engineer will also begin dealing with external audiences (e.g., vendors, other utility engineers and committees).

Problem Solving Conclusions will be simple and based on data analyses. Engineers at this level are encouraged to make recommendations concerning data analysis procedures.

Conclusions will be simple and based on data analyses. Engineers at this level are encouraged to interpret results and, in some instances, make recommendations.

The incumbent must demonstrate the ability to view tasks logically, break them down into essential requirements and generate a solution applying accepted standards. Costs and time constraints must also be considered. The incumbent must recommend the best course of action to meet the project’s objectives. At this level, the individual must be able to complete a multi-aspect or multi-phase project.

Planning & Administration

Planning is limited to that which is required on a day-to-day, assignment-to-assignment basis. The incumbent must meet deadlines set by Manager/Director or Senior Engineers.

Planning is limited to that which is required on an assignment-to-assignment basis. The incumbent must meet deadlines set by Manager/Director or Senior Engineers.

At this level, the incumbent will assist higher level engineers in long term project planning and scheduling. Deadlines are set by Manager/Director or Senior Engineers.



Must be aware of changes and advancements in the industry and develop industry-wide expertise. For example, the individual may work with other utilities and/or vendors to solve common equipment or design problems, or with customers to better address their needs. At this level, the incumbent should understand how the company interacts with outside organizations, including other utilities and regulatory agencies, and with its customers. Additionally, the individual must be familiar with the company’s budgets, costs, rate structures and policies.

The incumbent must have a broader perspective across multiple engineering disciplines. In addition to a thorough knowledge of the electrical utility industry, both technical and business perspectives are required.

Oral and written communication with external parties increases in frequency as the engineer negotiates with clients and vendors. The incumbent can be called upon to participate in an external task force.

At this level, the incumbent must have excellent interpersonal skills. An engineer at this level will be called upon to give both internal and external presentations that are logical, smooth and influential (e.g., Capital Review Committee presentations). He/she may be called upon to give expert testimony on behalf of the company and may chair an external task force. Strong negotiating skills are also critical at this level. Written reports at this level can include research papers, analytical studies and equipment reviews (e.g., IEEE papers, interrogatives, job scopes). These reports should be of high quality and ready for final submission, and appropriate for the intended audience.

Engineers at this level should be focusing on the results of data rather than on the data analysis procedures. In some cases, these “problems” may be associated with the company’s generation and transmission of electricity safely, at the lowest cost, or in developing expanded capabilities and services for customers. They must have the ability to investigate what is not intuitive and to develop solutions to non-routine problems (e.g., complex 765 KV problems). He/she must be able to handle a project from start to finish with only major decisions being brought to the Manager/Director.

At this level, the incumbent will begin independently planning and scheduling short-term projects.

Because the incumbent may plan and manage long-term projects, strong project management skills are required. When given a leadership role, the engineer will coordinate the activities of other engineers by creating project schedules and job scopes.

The incumbent may be called upon to assist the Director in various managerial tasks (budgeting, scheduling, etc.).


talent (Meehan and Ahmed 1990). Those forecasts formed the basis for staffing

plans and assignments, training programs, recruiting plans for replacements,

increased staffing and associated budgets. As business conditions changed, plans

were revised to reflect the firm’s response.

These traditional approaches are context-specific and work well within a specific

setting, such as a company or division of a company within a country. The

processes may be deployed globally at the leadership level and are traditionally

context-specific at the operational level. These planning and forecasting models

were based on historical data and growth projects, but were generally static and

revised with changing circumstances. HR professionals need to adapt dynamic

tools used in supply-chain management, such as overstock and out-of-stock

measurement, dislocation of talent, scenario analysis and sensitivity modeling.

Plans can then have a probability based on high- and low-staffing demand levels

that are business-driven and talent-specific. Those plans feed into an overall plan-

ning process. Decisions can then be made as to the level(s) to manage talent and

the extent to which talent demands can, or should be, met by regular employees,

contractors or outsourcing vendors.

These methods will help HR staff and business leaders identify the potential

costs of inefficiencies and inaccuracies in the planning process and measure the

effects of past inefficiencies and the effectiveness and responsiveness of new

programs. Talent management becomes a just-in-time process that is better able

to supply the right talent in the right place at the right time. An inherent compo-

nent is the design structure of the compensation system, i.e., how competencies,

TABLE 1 Sample Engineering Model (Electric Utility) continued


Leadership & Influence

None at this level. None at this level. The incumbent must begin to show the ability to influence others to combine resources so that project deadlines can be met. The Engineer I is expected to act as a role model and provide technical guidance to entry level engineers.

Initiative & Independence

Receives specific and detailed instructions about required tasks and expected results.

Incumbent should be able to complete tasks with minimal supervision.

The incumbent must recognize problems that arise during analysis procedures or in analysis results. The incumbent should provide potential alternatives to Manager/Director or Senior Engineers.


contributions and advancement are recognized. While competitive position in

the market (“how much we pay”) is important, the basis (“what we pay for”) is

equally important at a strategic level.

REWARDS, TALENT MANAGEMENT AND CORPORATE GOVERNANCE

In managing talent in a global firm, the respective roles of local and corporate

leaders needs to be clarified as does the firm’s focus and mindset. (Sirkin, Hemer-

ling, and Bhattacharya 2008). It requires identifying the desired outcomes, the

right thinking (values), and the right behaviors in order to demonstrate the right

competencies. It follows that implementation requires the right role models, apoc-

ryphal stories, training and development, performance measures, and rewards and

consequences to communicate and embed the values and goals in the workforce.

Values, competencies and results are linked with each other and to the rewards

system, especially performance-based pay.

A firm whose value chain is distributed in different continents, regions and

countries is in the tricky situation of needing enough glue or stickiness (corporate

control and risk management) to prevent it from flying apart but not so much as to

“bind up the works,” making it inflexible and insufficiently responsive to globally

dispersed threats and opportunities. For each firm there is an appropriate balance

between a rigid chain-of-command and too much delegation.

The global financial crisis of 2008-2010 illustrates the loss of a critical focus on

customers, a failure to consider sustainability in managing risk and a system of

rewards and consequences that was highly focused on short-term profits and greed.


The Engineer II is expected to lead ad hoc teams and internal task forces. The incumbent will take a leadership role on less critical projects.

The Senior Engineer must be persuasive and have strong negotiating skills. Guidance and motivation should be provided to junior engineers.

As the staff-level engineer ultimately responsible for technical content, much of the unit’s work will be reviewed by the incumbent prior to being forwarded to the Manager/Director. At this level, the incumbent must be prepared to assume the Director’s role in his/her absence. The individual must be ready to represent the company externally by chairing task forces or providing expert testimony. He/she should be able to provide technical leadership in an area of expertise across the company, including to Senior Management.

Incumbents at this level are expected to take a more proactive approach toward identifying and solving problems.

Must be able to identify problems and solutions, as well as efficiency improvement opportunities, when they arise, without waiting for direction.


It also illustrates the importance of properly linking talent management and rewards

systems. Rewards and consequences are important to achieving a balance between

prudent risk-taking, which is necessary for success, and moral hazard, which inap-

propriately reduces the consequences of failure. Developing, managing and rewarding

talent and outcomes in synch with the firm’s focus and mindset contributes to creating

the appropriate balance of stickiness and flexibility. The financial crisis also illustrates

the importance of developing and selecting talented individuals who are focused on

the desired outcomes, right thinking and right behaviors.

One of the lessons learned is that a comprehensive talent management compe-

tency model is important for building a sustainable business. Such a model must

incorporate: leadership competencies including doing the right things for the right

reasons; business acumen, including risk management and a broad understanding

of financial and operational sustainability; and competencies for several domains.

Tools such as the balanced business scorecard and competency models afford

firms the opportunity to establish HR objectives that integrate HR initiatives such

as rewards and talent management with financial, sales and operational goals.

It is not enough to have robust competency definitions used solely for selection

and employee development. They also need to be linked with the firm’s values

(doing the right things) and with outcomes and results (doing things right), which

contribute to long-term value creation, particularly for leadership positions and espe-

cially for executive leadership positions. A common set of competencies and a global

job-leveling process provide a platform to integrate compensation and rewards

systems with values and results. Figure 3 illustrates the relationship between values

Performance Assessment on Results LOW

FIGURE 3 Results Matrix

Pe

rfo

rma

nc

e A

sse

ssm

en

t o

n V

alu

es

LO

W

High on Values — High on Results

High on Values — Low on Results

Low on Values — High on Results

Low on Values — Low on Results


and results. Those leaders in the upper right quadrant with a “high commitment

to values and high results” are doing the right things well and should be rewarded

accordingly. Those in the lower left with a “low commitment to values and low

performance” are candidates for being removed from their positions, particularly if

they have previously been in that classification. While it can be tempting to accept

those who have “high performance on results but a low commitment to values,”

they are often the most problematic. Too often these leaders produce results at the

expense of employee morale and commitment to the organization’s values; they

fail to provide appropriate role models; and often undermine the firm’s credibility

in the community.

If the “right values” facing competencies are not developed early in an indi-

vidual’s career, they are difficult to develop later. It is more likely that those in

the “high commitment to values and underperforming on results” quadrant can be

developed with solid coaching, competency development and appropriate assign-

ments (Tichy 1997).

Competencies (leadership, business acumen and domain-related), a common/

global job leveling process, and the Values − Results Matrix facilitate the devel-

opment and operation of globally consistent programs. Those programs include

short- and long-term incentives, employee and leadership development, career

paths, workforce planning, staffing and succession management.

IMPLICATIONS FOR GLOBAL FIRMS

The challenge becomes more complex when the firm is using a globally distributed

value chain. In that context, the organization may have multiple profit centers

functioning locally in numerous countries or it may have a single country customer

base, but in either case have a global value chain. An example of the latter is

a U.S.-based electronics component firm that sources components from Asia

and has a call center in Europe. This introduces complexity (having to relate to

multiple economies, multiple labor markets and global cultural diversity) into the

compensation and talent management system.

Multiple Economies and Labor Markets

As companies expand their global reach and establish operations in multiple

regions and countries, they increasingly require a method for establishing the

internal value of jobs. This need not be a cumbersome and highly rigid job

evaluation process of the past; it can, and needs to, be a responsive process.

Nevertheless, a common job-leveling process is needed to support a global talent

management process. As companies move people around the world, it is important

to be able to compare available jobs and appropriately match talent. It is unfor-

tunate, expensive and de-motivating when someone is moved to a development

opportunity half way around to the world that is later determined to be several

levels below the person’s current level.


Compensation for jobs needs to be localized to ensure that pay is competi-

tive, appropriately designed and cost-efficient for the particular market. There

are, however, some programs, such as equity plans, where awards/grants are

based on job level, thus making the common structure of jobs and grades

important. Before the world became flat and lumpy, it was sufficient to limit

global job-leveling plans to senior management positions. A common set of

competencies and job-leveling scheme are needed to facilitate equity awards and

bonus plans as companies move employees at various stages of talent develop-

ment from country to country to fill critical vacancies when they cannot find

local candidates with the required competencies (Haines and Burnett 2010). The

competency model in Table 1 is an example.

Cultural Diversity — the Global Mindset

As the value chain becomes more globally distributed, the organization’s vision,

its overriding desired outcomes and the right thinking (values) need to be

global. The “home country” culture cannot simply be rolled out globally. The

Values – Results Matrix can be applied to local as well as global circumstances

to ensure core values are not sacrificed and provide a guide for all. (See

Figure 3). Rewards and consequences also need to be adapted to the local

situation in ways that focus employee effort toward the desired outcomes. For

HR leaders, a core competency becomes helping business leaders and staff in

A PROJECT PLAN FOR TALENT MANAGEMENT AND COMPENSATION

1. Determine the organization’s talent requirements to achieve the business plan, including the

time line.

2. Determine best practice approaches:

a. The appropriate competency development approaches such as competency models, skill-

based plan and job enrichment, remembering that multiple approaches can be

used concurrently.

b. The appropriate reward systems to support talent management initiatives such as skill-

based pay and competency-based promotions.

3. Develop an implementation and action plan to design and implement the talent development

and compensation tools including developing and communicating the business case.

4. Define, Develop and Link Programs

a. Define the competencies and skills required to achieve the talent management goals.

This can include interviews with managers and employees, questionnaires and job

observations. Communication of the business case and the project should be included.

b. Integrate talent-management initiatives with the Values − Results Matrix, incorporating

performance management, rewards and recognition processes, tools and systems that

link talent management, results and compensation.

5. Implement the strategy and programs communicating the business case as well as plans,

programs and processes.


the organization’s home country and in local country units understand and

adapt the implementation of the organization’s core values and develop a

global mindset.

It is generally understood that compensation trends and practices vary from one

culture to another; some are more egalitarian and communal while others more

individualistic with respect to rewards and recognition. From the perspective of

linking compensation and talent management, the competencies need to include

a cultural awareness competency that covers the cultural differences affecting

leadership performance and the competencies required at different career

levels. For example, an engineering team member needs to have an awareness

of, sensitivity to, and respect for the cultural differences and employ behaviors

that demonstrate such to fellow team members. A more senior-level position may

require the incumbent to be able to adapt to effectively living and working in other

countries and cultures. Competencies required of leaders with global responsibilities

include: understanding different business, political and cultural contexts; creating

trans-cultural visions; and communicating to implement those visions (Gomez-Mejia,

Balkin, and Cardy 2010). The global effectiveness competencies incorporated in

the competency model provide a clear set of development steps to develop leaders

who can reconcile the various economic, social and cultural dilemmas in the global

context consistent with the organization’s values and results paradigm, which can be

a dilemma itself. The ultimate payback is that diversity and resolving the inherent

dilemmas tap into the creativity and innovation of a talented and diverse workforce.

“Global Mindset” becomes a core competency.

CONCLUSION

Even in the economic environment of the past several years with its high unem-

ployment, companies are experiencing shortages of critical-skill employees. Those

that make investments in talent management and rewards through programs

such as those described in this article have an opportunity to seize competitive

advantage by developing and rewarding their talent. Moreover, they have the

opportunity to build a strong relationship between doing the right things in the

right ways for the right reasons and their talent management and reward systems.

Highly competent individuals producing excellent results and being appropriately

recognized and rewarded are critical to creating sustainable business. This article

has pointed out some concepts and tools to help in realizing those goals. ❚

AUTHOR

Robert H. Meehan, Ph.D., CCP, CBP, ([email protected]) is a managing partner at

Compass HR Consulting. He focuses on assisting clients develop and implement reward systems that improve

business value and the employment value proposition. Meehan has held leadership positions in compensation

and benefits in high technology, financial services, consumer products, and utilities industries. He is also on

the faculty at Grand Canyon University’s Ken Blanchard College of Business. Meehan’s Ph.D. is from Pace

University’s Lubin School of Business.


REFERENCES

Business Wire. Aug. 31, 2009. Viewed; Sept. 1, 2009.

Collins, J. (2001). Good to Great: Why Some Companies Make the Leap…and Others Don’t. New York: Harper

Collins.

Collins, J. (2009). How the Mighty Fall and Why Some Companies Never Give In. New York: Harper Collins.

Gomez-Mejia, L. R., D.B. Balkin, and R.L. Cardy( 2010). Human Resources, 6th ed. Upper Saddle River, NJ:

Prentice Hall.

Haines, M. and E. Burnett. “Wipro Trading Near All-Time High: Interview with Azim Premji, CEO Wipro.” CNBC.com,

Oct. 14, 2010. Viewed: Retrieved Oct 30, 2010.

“Majority of Companies Worldwide Have Difficulty Attracting Critical-Skill, Talented Employees.” WorldatWork

Newsline, Sept. 8, 2010. Viewed: July 12, 2011.

Meehan, R.H. and S.B. Ahmed. 1990. “Forecasting Human Resources Requirements: A Demand Model.”

Human Resources Planning, 297-308.

Sirkin, H., J.W. Hemerling, and A.K. Bhattacharya. 2008. Globality: Competing with Everyone from Everywhere

for Everything. New York: Business Plus.

Tichy, N.M. 1997. The Leadership Engine. New York: Harper Business.

An earlier paper examined the major public-sector

pension plans of the 10 largest states by popu-

lation (Kilgour 2007). This paper revisits the

subject. It addresses the debate’s more recent aspects,

including the current arguments about the appropriate

discount rate and amortization period. Not discussed

is the larger problem of Other Post-retirement Employ-

ment Benefits (OPEB) funding. That was done elsewhere

(Kilgour 2010).

The U.S. Census Bureau reports there are 2,550 public-

employee retirement systems, 218 administered by states

and 2,332 by local governments (U.S. Census Bureau

2010a). The general pattern is for a state to have one

system for state and some local employees and a separate

plan for teachers. Variations and exceptions exist. Police

officers and firefighters are usually in a separate pension

plan or in a separate category within a larger state or

local plan. Many state plans provide retirement services

to contracting local governments and school districts (for

nonteaching employees). Numerous counties and cities

operate their own plans independent of the state plans.

HOW THEY WORK

Public-sector pension plans are funded by a combi-

nation of member (employee) contributions, employer

John G. Kilgour, Ph.D.

California State University, East Bay

The Public-Sector Pension Debate Revisited



Third Quarter 2011


contributions and earnings on invested assets. The accumulated assets are the

balance of receipts (employee and employer contributions) minus expenditures

(benefits paid and administrative expenses).

Employee contributions are usually fixed by statute at a percent of earnings. They

continue to be paid at the prescribed rate regardless of the plan’s funded status.

Employer contributions vary with the plan’s funded status which is measured by

the funded ratio (assets ÷ present value of liabilities).

Assets are measured as actuarial value of assets (AVA) or market value of assets

(MVA). AVA is smoothed (averaged) over a number of years to mitigate year-to-year

fluctuations in employer’s annual required contributions (ARC) also known as

“minimum required contribution.” MVA is a “snapshot” of the value of assets as of

the valuation date and can be volatile. The AVA and the MVA funded ratios can

be different. The longer the period of asset smoothing, the greater that difference.

Measuring liabilities is more complicated. As they are the cost of providing a

stream of promised future benefits, their measurement (estimate) is based on a

number of actuarial assumption including labor turnover rates, disability rates,

expected retirement age, participant and beneficiary age-specific life expectancy

(mortality), wage and salary increases, the assumption that plan provisions and

funding arrangements will remain unchanged, and assumed interest and discount

rates (earnings on investments and present value calculations of liabilities).

The actuarial value of liabilities (AVL) minus the actuarial value of assets (AVA)

equals the unfunded actuarial accrued liabilities (UAAL). A negative value for

UAAL represents a surplus.

The funded ratio is a measure of the percent of plan liabilities discounted to

present value covered by plan assets (AVA ÷ AVL). A funded ratio more than 100

indicates a surplus. Anything less than 100 represents a deficit and the extent

of under-funding.

BACKGROUND

Governmental pension plans benefited from the economic expansion of the

1990s. By the late 1990s, most public funds were in excellent shape. The boon

years resulted in pension-benefit enhancements based on the expectation that

the good times would continue and that the improvements were already funded

and would cost nothing.

In 2001, the “dot.com bubble” burst and the economy contracted sharply. As

a result, asset values and funded ratios declined dramatically, which increased

employer ARC just as revenues shrank and other expenses soared. Many critics

concluded that the public sector should follow the private sector and replace its

traditional defined benefits (DB) plans with defined contribution (DC) or with

hybrid DB/DC plans.

By 2004, traditional public-pension funds were on the mend and by 2007 they

were generally in good shape. However, in late 2008 the real-estate bubble burst


and the Great Recession began. The Dow Jones Industrial Average (DJIA) fell from

over 11,000 in 2008 to 6,547 in March 2009.

Most pension-data available at this time is from Fiscal Year (FY) 2009. The Great

Recession resurrected the attacks on public-pension plans with a vengeance. As in

2001, the contraction decimated pension-asset values, reduced tax revenues and

increased the needs for other government programs and services.

ORIGINS

State and local pension plans were adopted largely in the 1920s through the 1940s

as a result of the civil-service reforms made earlier in the century. The spoils or

patronage system was replaced by civil-service regulations that protected govern-

ment jobs from the undue influence of elected officials and political parties, but it

fostered little motivation for superannuated employees to move on. The solution

was a government pension plan encouraging retirement at a reasonable age (State

of California Little Hoover Commission 2011).

In the absence of collective bargaining, the private sector has no comparable system

of job protection. Indeed, many states have a policy of “employment at will.”

Private-sector pensions as a mass phenomenon followed the 1949 Supreme Court

decision (Inland Steel co. v National Labor Relations Board) holding that pensions

and other employee benefits were mandatory subjects of bargaining under the

Labor Management Relations Act’s Section 8(d) (1949). The labor movement

demanded employer-provided retirement plans and the employers acquiesced.

Nonunion employers followed to remain nonunion.

In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA)

creating minimum standards for private-sector pension plans in the areas of partici-

pation, vesting, fiduciary responsibility reporting and disclosure and funding. Before

ERISA, private-sector pension plans were universally underfunded, due in part to

the granting of retroactive benefits to current employees and amortizing the cost

over many years. When an employer failed, it usually took the underfunded pension

plan down with it leaving the participants and beneficiaries with nothing.

ERISA also created the Pension Benefit Guaranty Corporation (PBGC) to insure

the vested benefits of private-sector DB pension plans. When a sponsoring

employer fails, the PBGC assumes control of the plan and pays its vested benefits

(within limits).

To protect the PBGC, Congress attempted to require that pension plans be

fully funded. It repeatedly strengthened employer funding requirements, most

recently by the Pension Protection Act of 2006 (PPA). Due, in large part, to these

increasingly stringent funding requirements, private-sector employers shifted from

traditional DB pension plans to 401(k) and cash balance (CB) plans. Table 1

addresses the extent of this shift.

One dimension of the public-pension funding debate hinges on the idea that full

funding is as necessary in the public sector as it is in the private. In the public


sector there is no need for the PBGC or for benefit insurance. Governments do

not go out of business.

A governmental pension that is 80 percent or more funded is generally consid-

ered acceptable (U.S. Government Accountability Office and the Committee on

Finance, U.S. Senate 2008). If, however, all deficiencies below full (100 percent)

funding are aggregated, they sum to a large number that may be used to support

outrageous claims and cause unwarranted alarm. If the calculations are based on

the MVA during or following a recession and a reduced amortization period, it

appears even more alarming.

DISCOUNT RATES

Debate leading to the PPA’s passage involved the appropriate discount rate to be

used by private-sector pension plans. The outcome was a three-sector yield curve.

A yield curve relates interest rates to maturity dates. The PPA requires different

rates for liabilities due in less than five years, from six to 20 years, and more than

20 years. In general, private sector-plans are required to use a discount rate of

approximately 5 percent.

Most public-pension plans use 7.5 to 8.5 percent based on the historic rate of

earnings on invested assets for approximately the past 20 years. This is the number

used to discount future liabilities (promised benefit payments) to “present value”

(or the amount of money it would take to pay the liability in full today). The higher

the discount rate, the less the present value of future liabilities and the less the

employer must contribute in today’s dollars.

An alternate theory of recent vintage posits that because pension benefits are

guaranteed to the participants and beneficiaries, they should be backed by a “risk

free” interest rate based on long-term U.S. government bonds, typically 4 percent to 5

percent. The leading academic proponents of this approach, Robert Novy-Marx and

TABLE 1 The Private-Sector Shift from DB to DC Pension Plans, 1985–2008. (Plans in thousands, participants in millions).

ALL PLANS DEFINED BENEFIT DEFINED CONTRIBUTION

Year PlansActive

Participants PlansActive

Participants PlansActive

Participants

1985 632 62 170 29 462 33

1990 712 62 113 26 599 35

1995 693 66 69 23 624 42

2000 736 73 49 22 687 51

2005* 679 83 48 21 631 62

2006 695 86 49 20 646 66

2007 708 86 49 19 659 67

2008 718 86 48 19 669 67

*Beginning 2005, “active participants” include employees eligible to participate but chose not to contribute and former nonvested employees. This

was made necessary by the elimination of Schedule T from Form 5500.

(Source: U.S. Department of Labor, Employee Benefits Security Administration, 2010)


Joshua Rauh (2009 and 2010), premise their position on “standard financial theory.”

If adopted, the risk-free rate would make state and local pension funds appear to be

much more underfunded and significantly increase required employer contributions.

It should be mentioned that adopting a risk-free discount rate has no implications

for a pension fund’s investment policies (Boston College 2010a).

Thus far, the public-pension community and the Government Accounting

Standards Board (GASB) have not warmed to the risk-free rate idea. They do

not accept its logic and recognize that it would make the underfunding problem

appear much worse. However, in June 2010, the GASB issued its Preliminary Views

on Pension Accounting and Financial Reporting by Employers. The document

proposes state and local governments report their pension-plan liabilities in their

financial statements (which most already do). In regard to the discount rates, GASB

has chosen a middle course between the traditional approach and that favored by

economists. It would effectively require plans to use their expected earnings on

investments for actual assets in plan portfolios. For unfunded liabilities, the rate

should be the employer’s borrowing cost as measured by a tax-exempt high-quality

municipal bond rate (about 5 percent in today’s market).

AMORTIZATION

When pension plans were established, benefits were usually made available retro-

actively to employees. Consequently, pension plans began life with large unfunded

liabilities. Unfunded liabilities also result from plan improvements, revised actu-

arial assumptions, employer failure to contribute the full ARC, poor plan design

and, especially, investment losses.

In the private sector, ERISA initially required existing plans to become fully

funded in 40 years. New plans and improvements to existing plans had 30 years.

Other categories of underfunding had shorter amortization periods.

Beginning in 1986, the allowable private-sector amortization period was

reduced a number of times. Most recently, the PPA established that pension

plans should become fully funded in seven years. The schedule was 92 percent

funded for 2008, then increasing by 2 percent per year, until reaching 100

percent funded in 2011.

Tightening of the amortization standard contributed to the private-sector shift

from traditional DB plans to 401(k) and CB plans. DC and CB plans are, by defi-

nition, fully funded. The PPA requirement will be the coup de grace for many of

the remaining traditional private-sector DB pension plans.

Before 2000, unfunded public-sector pension liabilities attracted little attention.

GASB initially allowed unfunded liabilities of state and local government plans to

be amortized for up to 40 years, reduced to 30 years in 2006. It was not until the

1990s that the GASB adopted full funding as a goal. Given that most public funds

are now half way to their full funding date, based on a 30-year amortization period;

it is not surprising that some underfunding remains (Boston College 2010b).


GASB’s Preliminary Views would reduce the amortization period to the remaining

service lives of the plan’s participants, typically 12 to 15 years.

If GASB lowers the allowable discount rate and shortens the amortization period,

it will increase underfunding and significantly increase required employer contri-

bution. It should be mentioned that GASB has no power to require pension plans

to do anything. However, many state and local governments mandate that their

plans comply with Generally Accepted Accounting Practices (GAAP), which incor-

porates GASB standards.

DEMOGRAPHICS

The Baby Boomers have gotten old. Their leading edge attained age 65 in 2011.

However, the relationship between the Baby Boom and public retirement plans

is not as direct as often portrayed.

Government employment doubled between the early 1960 and mid-1970s (Boston

College 2010b), due in part to the need to provide services and education to the

swell of Baby Boomers. It was also driven by new and expanded government

laws and programs. While the federal government initiated much of this expan-

sion, such laws and programs usually required state counterparts or state-level

activities and reporting.

Most American public-sector pension plans experienced a decline in the ratio of

active workers per annuitant (retirees, survivors and disabilitants). Table 2 shows

that the ratio dropped steadily from 1984 to 2008. This downward trend will

continue as more Boomers retire and as state and local governments continue to

reduce employment.

Most active public employees contribute to their pension plans. Annuitants do

not. As the ratio of actives to annuitants continues to deteriorate, it worsens the

funded status and will further increase employer-required contributions.

“OVERLY GENEROUS” BENEFITS

The term “pension envy” emerged to depict the attitude that many private-sector

workers have toward government retirement benefits. Some taxpayers are also

convinced that they, as taxpayers, pay for all these benefits.

Any objective assessment of the generosity of public-pension benefits must

recognize three important facts. First: Most state and local government pensions

are “contributory.” Public employees typically pay for a large portion of their

pension benefit with a payroll deduction throughout their careers. Nationwide,

state and local government employees pay for about one-third of their pension

plans (as a percentage of total contributions) (U.S. Census Bureau 2010b). This

varies considerably from state to state.

Second, about 30 percent of state and local government employees are not

covered by Social Security. Further, noncovered public employees who are married

to a covered employee or who have Social Security covered earnings of their


own, are subject to the Government Pension Offset and the Windfall Elimination

Provision which significantly reduce any Social Security benefits to which they

would be otherwise entitled (Kilgour 2009).

Third, state and local retirement benefits are not as generous as one would

gather from the media, given the years of service of the retirees involved. Public-

safety employees are often used as an example of overly generous benefits. Their

pension plans are designed to encourage retirement at an early age because of the

demands of their jobs. Most police officers and fire fighters begin their careers in

their 20s and stay with the same employer until retirement due to their jurisdiction-

specific seniority systems.

FRAUD AND ABUSE

Fueling criticism of state and local pension plans is the recurrent reporting of

fraud and abuse giving the impression that fraud and abuse are widespread and

out of control. Cases of outright fraud by participants and beneficiaries are rare.

The employer and the plan have all of the data and do the benefit calculations.

What is not rare are examples of “spiking” and other abuses although most of this

is in accord with the pension plan’s provisions and administration.

Spiking takes a number of forms. One is the inclusion of overtime pay, unused

sick leave, vacation pay and compensatory time off in final average salary (FAS)

in the calculations of pension benefits. These items, that may have been earned

years earlier at a lower rate of pay, are converted to FAS at the higher pay rate at

the time of retirement. Unused sick leave may be converted to additional partici-

pation (months of service) rather that added to FAS. The practice of including

overtime pay in FAS may be exacerbated by permitting employees to work

TABLE 2 Active Members Per Annuitant in Public Pension Plans 1984–2008

Year Actives Annuitants Ratio

1984 8,347,568 2,266,600 3.86

1986 8,285,133 2,414,448 3.42

1988 8,572,034 2,692,178 3.18

1990 8,929,950 2,973,311 3

1992 9,418,550 3,197,962 2.95

1994 9,816,610 3,464,845 2.83

1996 10,120,817 3,770,252 2.89

1998* NA NA NA

2000 10,940,985 4,337,227 2.52

2002 11,609,149 4,868,526 2.38

2004 11,786,641 5,252,322 2.4

2006 12,092,132 5,646,026 2.14

2008 12,029,028 6,002,982 2

*No Comparative Study published in 1998.

(Source: Wisconsin Legislative Council 1985-2009)


additional overtime in their last year(s) before retirement. Ideally, only regular

salary should be included in FAS. The others should be cashed out at the time

of retirement or earlier. Another abuse is to promote or transfer employees to

higher paying jobs shortly before retirement.

Still another form of abuse involves disability retirement. CalPERS reports that

local police officers and firefighters, and especially the California Highway Patrol

(CHP), have a huge increase in disability retirements at or shortly after attaining

age 50 (California Public Employee Retirement System 2010).

THE BLAME GAME

Critics of public pensions often claim or imply that government employees

and their unions are at fault for all or most underfunding. It is generally taken

for granted that all employees operate to get as much as they can from the

employment relationship (as do most employers). Unions exist to further the

interests of their members.

Ignoring for the moment the issues of the appropriate discount rate and

amortization period, and recognizing that 2009 MVA and funded ratios were

temporarily depressed due to the Great Recession, and that AVA will remain low

for a while due to actuarial smoothing, what accounts for any residual long-term

underfunding? There are a number of suspects.

One is the “contribution holidays” taken by employers in the late 1990s. At

that time, many public employers reduced or even stopped their contributions.

In hindsight, that was a mistake.

A second, and related factor, is that many public-pension plans enhanced

benefit formulas at about the same time. Employees and their representa-

tives argued that because employers were contributing little or nothing, while

employees continued to contribute at their prescribed rates, fairness justified

such improvements. This too was a mistake. Given that in many states it is diffi-

cult or impossible to rescind a pension improvement once made for incumbent

workers, the cost of these mistakes may be with us for a long time.

A third cause of underfunding is that public employers often contribute less

than their full required contribution. Some states constitutionally or statutorily

require public employers to pay their full ARC. In others, this is not the case

and some employers have a history of not paying in full. Table 3 reports

the percentage of ARC actually paid by employers in 2008 in the 10 largest

states. Illinois, Pennsylvania, New Jersey, and to a lesser extent California, were

delinquent.

When a public employer does not make its full required contribution, it is

the equivalent of borrowing from future taxpayers at the plans assumed rate

of interest.

New Jersey is effectively borrowing from the future at 8.25 percent and Illinois

at 8.5 percent. By doing this, the pension funds are denied the compounded


growth in asset values that they would have had, if the contributions been

made in full.

EXPERIENCE OF SPECIFIC PLANS

Table 4 reports data on the 22 major plans of the 10 largest states for 2004 and

2009/10. Such data usually contain entries from different plan years. In addi-

tion, the measurement or valuation date is often different from the end of the

fiscal year. Table 4 includes plan fiscal years and valuation dates. Given that the

Great Recession began in the fourth quarter of 2008 and that the stock market

bottomed in March 2009, the valuation date is of considerable importance. In

this 22-plan sample, the range of valuation dates is from September 30, 2008

(Michigan) to August 31, 2010 (Texas).

The data presented for 2004 and 2009/10 show a rather mixed picture.

All plans experienced an increase in their AVA; however, this was over-

whelmed in all but one case (New York) by a larger increase in AVL. This

is ref lected by significant increases in UAAL and corresponding decreases

in AVA funded ratios.

Note the amount of diversity among the states and plans. New York is in good

shape. Illinois and New Jersey are in trouble.

IT’S ALL RELATIVE

Absolute measures of UAAL can be misleading. Even among the 10 largest

states, huge differences exist in population and, hence, in per capita unfunded

pension liabilities. Standard & Poor’s publishes funded ratios, UAAL and per

capita UAAL by state. Table 5 reports these data for 2004 and 2008. This

table is based on an aggregation of multiple state plans and is not compa-

rable with Table 4. Standard & Poor’s assesses the credit worthiness of the

TABLE 3 Percent of ARC Actually Contributed by States, 2008

State Funded Ratio Liability ARCPercentage of

ARC PaidInterest Rate Assumption

CA 86.9 $454.00 $12.40 84.60% 7.75%

TX 90.7 148.6 1.90 99.10 8.00

NY 107.4 141.3 2.60 100.00 8.00

FL 101.4 129.2 3.00 104.20 7.75

IL 54.3 119.1 3.70 57.80 8.50

MI 83.6 70.4 1.20 111.40 8.00

PA 86.9 105.3 2.40 40.50 8.00

OH NA* NA* 2.30 100.00 8.00

GA 91.6 75.9 1.30 100.00 7.50

NJ 72.3 NA* 3.70 57.10 8.25

*Missing data

(Source: PEW Center on the States 2010)


states. Unfunded pension liabilities are one factor taken in to account. The

S&P funded ratios are based on Market Value of Assets.

Of most interest in Table 5 is the per capita UAAL. It represents the amount of

money everyone in the state owes to the public-pension system. The range is from

a surplus (negative UAAL) of $362 for Florida to a staggering $3,779 for New Jersey,

up from $1,377 in 2004. California, which has the larges UAAL by far, due to its

larger population, is in better (or less bad) shape than Illinois, Ohio or New Jersey.

All 10 of the states experienced a worsening of their UAAL.

The bottom line is that it is difficult to generalize that all public-pension plans

are in trouble and in need of a major overhaul. Some are, of course, but many

are not. The solution to a state or plan’s funding problem should be tailored to

TABLE 4 Funded Status of Pension Plans of 10 Largest States, 2004 and 2009/2010. (billions)

Actuarial Value of Assets

Actuarial Value of Liabilities

Unfunded Actuarial Accrued

LiabilitiesAVA Funded

Ratio

Fiscal Year

EndingValuation

Date

2004 2009/10 2004 2009/10 2004 2009/10 2004 2009/10

CA PERS $158.6 $233.3 $180.9 $294.0 $22.3 $49.1 87.7 83.3 6/30/10 6/30/09

TRS 114.1 145.1 138.3 185.7 24.2 40.5 82.5 78.2 6/30/10 6/30/09

TX ERS 20.0 23.6 20.6 27.7 0.6 4.0 97.2 85.4 8/31/10 8/31/10

TRS 88.8 111.3 96.7 125.1 7.9 22.9 91.8 82.9 8/31/10 8/31/10

MRS 11.6 16.3 14.0 21.5 2.4 5.2 82.8 75.8 12/31/09 12/31/09

NY ERS 107.6 126.4 107.6 125.1 0.0 -1.3* 100.0 101.0 3/31/10 4/01/09

TRS 71.8 88.8 72.2 86.1 0.4 -2.7* 99.4 103.2 6/30/10 6/30/09

FL ERS** 106.7 118.8 95.2 136.4 -11.5* 17.6 112.1 87.1 6/30/09 7/01/09

IL SERS 10.0 11.0 18.4 25.3 8.5 14.3 54.2 43.5 6/30/09 6/30/08

TRS 31.5 37.4 50.9 77.3 19.4 39.9 61.9 48.4 6/30/10 6/30/10

MRF 18.3 22.8 19.4 27.3 1.1 4.6 94.3 83.2 12/31/09 12/31/09

PA SERS 26.9 30.2 28.1 35.8 1.1 5.6 96.1 84.4 12/31/09 12/31/09

SPERS 52.9 59.8 54.4 75.5 1.5 15.7 97.2 79.2 6/30/10 6/30/09

OH PERS 46.7 55.3 54.8 73.5 8.0 2.6 85.3 75.3 12/31/09 12/31/08

STRS 52.3 55.9 69.9 94.7 17.6 38.8 74.8 59.1 6/30/10 6/30/10

MI SERS 10.4 11.4 11.8 13.8 1.3 2.4 88.8 82.8 9/30/09 9/30/08

PSERS 38.7 45.7 44.8 54.6 6.0 8.9 86.5 83.6 9/30/09 9/30/08

MRF 4.5 6.2 5.7 8.3 1.2 2.1 78.7 75.0 12/31/09 12/31/08

GA ERS 12.8 13.6 13.2 15.9 0.4 2.3 97.0 85.7 6/30/09 6/30/09

TRS 42.4 54.8 41.9 62.9 -4.7 8.1 101.1 91.9 6/30/10 6/30/09

NJ PERS 27.4 28.7 29.9 46.4 2.5 17.6 91.5 62.0 6/30/10 6/30/10

TPAF 34.6 33.1 40.4 56.6 5.8 23.5 85.6 58.6 6/30/10 6/30/10

*A negative value for UAAL represents a surplus.

**Teachers included.

***Nonteaching employees of public schools included.

Beginning 2005, “active participants” include employees eligible to participate but chose not to contribute and former nonvested employees. This

was made necessary by the elimination of Schedule T from Form 5500.

(Source: Brainard 2005)


the situation. In many cases, the extent of underfunding will improve as the

financial markets recover.

RECENT DEVELOPMENTS

It should not be thought that public-pension plans have remained static. Since

2001, at least 39 states have made changes to their pension plans: 14 have reduced

benefits, six have increased employee contributions and 19 have done both.

In 2008, eight states addressed their pension underfunding through benefit reduc-

tions or increasing employee contributions. In 2009, 11 states made changes and

in the first 10 months of 2010, 18 had (PEW Center on the States 2010). No doubt,

additional improvements were made in the remainder of 2010 and in 2011. Nine

of the 10 largest states have made or are about to make changes.

FEDERAL GOVERNMENT INTEREST

Some members of Congress have an interest in the pension-funding problems of

state and local governments. In early 2011, the Public Employee Pension Transpar-

ency Act (PEPTA) was re-introduced as H.R. 567 by Representative Devin Nunes

(R-Calif.) with 50 co-sponsors (49 Republicans and one Democrat). A companion

bill, S. 347, has been introduced in the Senate.

PEPTA would require public-pension plans to disclose their funding data, actu-

arial assumptions, market value of assets and their liabilities using discount rates

based on Treasury yield curves. State and local governments not complying with

the provisions of the bill would not be allowed issue tax-preferred bonds.

On May 5, 2011, the United States House Ways and Means Committee, Subcommittee

on Oversight held a one-day hearing on the matter. Interested parties are invited

TABLE 5 Aggregate Unfunded Actuarial Accrued Liability Per Capita in 10 Largest States, 2004 and 2008

Funded RatioUnfunded Actuarial

Accrued Liability (billions $) Per Capita UAAL ($)

2004 2008 2004 2008 2004 2008

CA 85.3 87.0 48.9 57.8 1,361 1,572

TX 92.7 90.9 8.5 13.4 378 551

FL 112.1 105.3 -11.5 -6.6 -662 -362

IL 59.9 53.4 27.9 43.0 2,191 3,337

PA 92.8 87.0 6.1 13.7 492 1,103

OH 79.2 77.8 28.2 38.8 2,463 3,382

MI 83.9 83.5 0.9 11.3 928 1,129

GA 101.0 91.4 -0.5 6.4 -60 665

NJ 87.0 73.0 12.0 32.8 1,377 3,779

U.S. Mean 83.5 80.5 5.4 8.7 1,183 1,809

U.S. Median 85.4 80.0 3.1 6.5 964 1,629

Note: A negative value for UAAL or Per Capita UAAL indicates a surplus

(Source: Standard & Poor’s 2006 and 2010)


to submit written testimony and at least one witness pointed out that, with few

exceptions, state and local government pension plans are now in good shape and

that various changes have been adopted to ensure their long-run sustainability. It

was also pointed out that the concern of the bill’s sponsors were based on 2009

data that is misleading (Plan Sponsor 2011).

H.R. 567 may make it through the Republican-controlled House of Representatives.

However, it is unlikely that S. 347 will be approved by the Senate during this

(112th) Congress. However, the bills do reflect the degree of concern existing

toward public-pension plans in some circles. Should the 2012 elections result in

Republican control of both Houses of Congress, PEPTA could present state and

local government pension plans with serious problems.

CONCLUSION

No information in this paper is intended to imply that state and local government

pension plans have no problems or that the changes that have been adopted are

all that needs to be done. There are problems and additional reform is needed.

However, the picture is not nearly as universally bleak and dire as the critics

would have us believe.

Much of the rhetoric directed against public-sector pension plans is based on

market value of assets subjected to risk-free discount rates (and, sometimes, to

shorter amortization periods). Of course, this produces disturbing results; and

when those results are aggregated for a large number of plans, the numbers appear

alarming. However, employer-required contributions are driven by AVA, not MVA

and the risk-free discount rate is not going to be adopted. The equity market has

recovered as have asset values. For example, CalPERS assets as of May 2011 were

$240.5 billion, up from $178.9 in 2009 (California Public Employees’ Retirement

System 2011). Moreover, numerous reforms have already been made and more

are on the way.

True, the blended discount rate of about 5 percent and the shortened amortiza-

tion period of 12 to 15 years contained in GASB’s Preliminary Views will likely be

adopted. That will be phased in over several years. The plans will have time to

adjust. The proposed changes do not present an immediate problem and certainly

should not be used to justify drastic changes at this time.

Similarly, it is not helpful to dwell on the relatively small number of overly

generous benefits and cases of abuse and present them as typical. They are not.

Most examples cited are matters of plan design and administration that can be (or

have been) corrected with relatively minor changes that do not do grievous harm

to an otherwise sound pension system.

To compare public-sector pension plans to the private sector and then laud the

latter as an example to be followed is to ignore the fact that the private-sector

retirement income system is in shambles. To pretend that 401(k) and cash-balance

plans are a desirable substitute for traditional defined-benefit pension plans (for


anyone but the employer) is nonsense. This is not to say that hybrid DB/DC

plans do not have a place in the public sector. However, they should be carefully

designed and implemented with care so as not to shift too much cost and risk to

those who can least afford it. When adopted, they should be accompanied by a

well-planned system of participant education.

In sum, state and local pension plans are in better shape than many of their

critics and their followers in the media proclaim. ❚

AUTHOR

John G. Kilgour, Ph.D., ( [email protected]) is professor emeritus in the Department of Management

and Finance at California State University, East Bay. He holds a bachelor of arts in economics from the

University of Connecticut and a Master of Industrial and Labor Relations (MILR) degree and Ph.D. in industrial

and labor relations from Cornell University. Dr. Kilgour has published two books and numerous articles on

transportation, labor-management relations, and various compensation and benefits topics. He is a long-time

WorldatWork member.

REFERENCES

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June 30, 2010” and “CalPERS eNews of May 4, 2011. Exhibit A., p.115.www.calpers.ca.gov Viewed: May

1, 2011.

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ca.gov. Viewed: April 17, 2011.

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Inland Steel Co. v. National Labor Relations Board. 336 U.S. 960, 1949.

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States.” November 2010. www.pewcebteronthestates.org. Viewed: March 28, 2011.

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www.plansponsor.com.Viewed: May 9, 2011.

Standard & Poor’s. 2006. “Rising U.S. State Unfunded Pension Liabilities Are Causing Budgetary Stress.” Feb.

22, 2006. https:www.latrobefinancialmanagement.com. Viewed: March 18, 2011.

Standard & Poor’s. 2010. “Pension Funding And Policy Challenges Loom For U.S. States.” July 8, 2010.

www.standardandpoors.com/ratingsdirect.Viewed: March 18, 2011.


State of California Little Hoover Commission. 2011. Public Pensions for Retirement Security. Sacramento,

Calif.: State of California, 2011.

U.S. Census Bureau. 2010a. Number and Membership of State and Local Public Employee Retirement Systems

by State: Fiscal Year 2008. Table 5a. http://www.census.gov/govs/retire/2008ret05a.html. Viewed: July 2,

2011.

U.S. Census Bureau. 2010b. “Table 2a. Revenues of State and Local Government Employee Retirement

Systems Fiscal Year 2008.”http://www.census.gov/govs/retire/2008ret02a.html.Viewed: July 2, 2011.

U.S. Department of Labor, Employee Benefits Security Administration.2010.”Private Pension Plan Bulletin

Historical Tables and Graphs.” December 2010. Tables E1 and E8 and Appendix B.

http://www.dol.gov/. Viewed: March 7, 2011.

U.S. Government Accountability Office and the Committee on Finance, U.S. Senate. State and Local

Government Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for

Funding Future Costs. GAO-07-1156. www.goa.gov. Viewed: July 3, 2008.

U.S. House of Representatives, Committee on Ways and Means, Hearing Advisory, April 28, 2011.

http://waysandmeans.house.gov. Viewed:May 7, 2011.

Wisconsin Legislative Council. 1985-2009. Comparative Study of Major Public Employee Retirement Systems

1984-2008. Studies from 2000 and after available at www.legis.wisconsin.gov.

Published Research in Total RewardsA review of total rewards, compensation, benefits and HR-management research reports.

(Compiled by the editors from the WorldatWork Newsline column at www.worldatwork.org.)

Global Survey Finds Best Countries for Flex Work

A global survey of more than 7,700 businesses in 39 countries by global accounting organization

Grant Thornton International found Finland, Sweden and Australia as the countries with the highest

percentage of companies offering flexible work arrangements, while Japan, Greece and Armenia

were the lowest.

Despite More Frequent Use, Survey Finds First Decline in Number of Teleworkers

The total number of people who worked from home or another remote location for an entire day at

least once a month has declined, according to a special report released by WorldatWork. For the first

time since the association began measuring telework in 2003, the teleworking population in 2010 was

26.2 million, down from 33.7 million in 2008. This number, 26.2 million, represents nearly 20 percent

of the U.S. adult working population in 2010.

Released in “Telework 2011: A Special Report from WorldatWork,” the report reveals barriers for both

employers and employees that have more to do with psychological factors than technology.

Number of Americans with Employer-Sponsored Health Insurance Dropped Significantly in Past Decade

There has been significant erosion in employer-sponsored insurance in the past decade, according

to two reports released by the Robert Wood Johnson Foundation (RWJF). But the reports also state

that the Affordable Care Act (ACA) is expected to help reverse the trend among small employers.

A report from the State Health Access Data Assistance Center (SHADAC) at the University of Minne-

sota shows the percentage of nonelderly Americans who get their health insurance through their jobs

declined 8 percentage points in a decade — from 69 percent in 1999-2000 to 61 percent in 2008-

2009, the most recent years data are available — with low- and moderate-income families hardest hit.

Recent analysis from the Urban Institute finds that the ACA will likely help stem this decline, especially

among small businesses.

Global Economic Uncertainty Makes Affordable Health Care a Universal Challenge for Consumers

Rising health-care costs coupled with the current economy have prompted many consumers across

the globe to delay care, change household spending, and worry about their ability to pay for future

health-care costs, according to the 4th annual Deloitte Center for Health Solutions “2011 Survey of

Health Care Consumers.”

In the United States, 3 in 4 (75 percent) consumers say the economic slowdown has affected their

health-care spending. Four in 10 (41 percent) are being more cautious about it, 20 percent cut back

on spending, and 13 percent have reduced it considerably. In addition, 63 percent say their monthly

health-care spending limits their household’s ability to purchase other essentials (e.g., housing,

groceries, fuel, education).

Deloitte surveyed more than 1,500 health-care consumers in 12 countries — Belgium, Brazil, Canada,

China, France, Germany, Luxembourg, Mexico, Portugal, Switzerland, the United Kingdom and the

United States during April and May.



Third Quarter 2011


UK Employers Need to Better Train, Performance Manage Older Workers

Older UK workers often are neglected when it comes to training and performance management,

according to the results of a survey released by the Chartered Institute of Personnel and Develop-

ment (CIPD). The results of this survey are released as the Pensions Bill makes its way through The

Commons, and they highlight the need for employers to ensure they are managing the performance

of all employees effectively — particularly before the final phase out of the Default Retirement

Age (DRA).

The “Employee Outlook: Focus on an Aging Workforce” survey of 2,000 employees finds that less than

half of workers (46 percent) ages 65 and older report they have had a formal performance appraisal

either once a year or more frequently, compared to 65 percent of all employees. In all, 44 percent of

employees ages 65 and older have not had a formal performance appraisal in the past two years or

never, compared to a survey average of 27 percent.

One in Two U.S. Employees Looking to Leave or Are Checked Out on the Job

Half of all U.S. employees are really unhappy, according to Mercer’s “What’s Working” survey,

conducted over the past two quarters among nearly 30,000 workers in 17 countries, including 2,400

U.S. workers.

Nearly 1 in 3 (32 percent) U.S. workers is seriously considering leaving his/her organization right now,

up sharply from 23 percent in 2005. Meanwhile, another 21 percent are not looking to leave, but view

their employers unfavorably and have rock-bottom scores on key measures of engagement, a term

that describes a combination of an employee’s loyalty, commitment and motivation.

More Employers Using Third-Party Managers to Save on Drug Programs Costs

A new nationwide survey shows that a majority of employers are using third-party pharmacy

benefit managers (PBMs) to process and pay prescription drug claims. The survey, released by

Buck Consultants, a Xerox Co., indicates companies are turning to PBMs because they offer

better drug prices.

The survey indicates 57 percent of employers are now using PBMs compared to 47 percent in 2009.

With 67 percent of respondents citing pricing as “highly important,” this rates as the top reason

employers opt for PBMs — which are able to offer discounts and rebates from pharmaceutical manu-

facturers. PBM customer service is rated “highly important” among 65 percent of survey respondents.

Buck’s “Prescription Drug Benefit Survey” is the firm’s third survey on this topic. The survey

identifies strategies employers use to manage their prescription drug benefits and costs. More

than 220 organizations participated in the survey, representing a broad range of industries and

more than 2.5 million full-time employees.

One in Five Companies Awards Promotions Without Raises

A corner office doesn’t always come with a bigger paycheck. While most HR managers surveyed in

a recent OfficeTeam survey said their firms rarely or never offer an employee a promotion without

a salary increase, one in five (22 percent) respondents revealed this practice is at least somewhat

common at their companies.

That won’t stop most professionals from reaching for the next rung on the career ladder: Fifty-five

percent of workers polled said they would be willing to accept a promotion that doesn’t include

a raise.

Responses came from 508 HR managers at companies with 20 or more employees and 433 workers

18 years of age or older and employed in office environments.


Employers Stress Healthier Habits and Behavior Change in an Effort to Lower Health-Care Costs

Employers are beginning to rely more on employees to stem the tide of rising health-care costs, but

the inability to motivate and change habits has prompted concern, according to Aon Hewitt.

Aon Hewitt surveyed 1,028 employers nationwide in its “2011 Health Care Survey” and found that

the top health-care outcomes organizations would like to achieve this year are improving employee

health habits (56 percent), lowering the health-care cost trend (49 percent), decreasing worker health

risk (44 percent), increasing participant awareness of health issues (37 percent) and enhancing

participation in health improvement/disease management programs (37 percent). The survey

suggests, however, that success may be difficult. Fifty-six percent of respondents say motivating

participants to change unhealthy behaviors is the most significant challenge to accomplishing 2011

health-care program goals.

Health-Care Salaries on the Rise

Health-care jobs are hot and their demand shows no signs of slowing. Salaries are also on the rise

for many of the most in-demand positions in the industry, according to the “2011 Compensation

Data Healthcare” survey results from Compdata Surveys. The average base salary for occupational

therapists has increased from $65,000 in 2009 to $69,700 in 2011, representing a 6.3 percent increase.

Physical therapy assistants have seen salary increases of nearly 6 percent since 2009, while EMTs

have seen a spike in pay of 5.3 percent. The pay for staff nurses has steadily continued increasing,

going from 455,300 in 2009 to $57,600 in 2011. Staff pharmacist salaries have risen from $106,200

to $111,400, which is an increase of 4.9 percent. Medical assistants, though highly in demand, have

seen pay increases of less than 1 percent since 2009.

Financial Services HR Leaders Focus on Risk, Pay

More than 40 percent of senior HR professionals in the financial services industry identified risk

adjustments to financials or incentive pools as the most expected shift in pay policies in the next 12

months, according to a Towers Watson poll. The shift represents a stronger focus on pay issues rather

than other changes such as linkage of deferred vehicles to business unit performance (16 percent) or

longer vesting periods (15 percent).

The poll, which involved 130 senior HR professionals from more than 60 of the largest global banking

and financial services organizations, also indicated that more than a third viewed pay issues as the

most important HR priority, followed by talent acquisition (23 percent) and the redesign of the employee

value proposition or “deal” (20 percent). In addition, two-thirds of the group believes that the public

officer executive base salary levels have not yet stabilized, while there was general agreement that

base salary levels for lower-level employees have stabilized.

Employers Track Absence Data, But Don’t Use the Information to Lower Costs

Employers fail to leverage the absence data they collect to manage the bottom-line effects of

employees being away from work, according to the results of a Liberty Mutual survey of 300 HR and

benefits professionals.

When asked to rank absence-related issues of concern for their organizations, 53 percent of respon-

dents ranked compliance with state and federal leave laws as the greatest concern, yet almost half

didn’t know the cost of absence in their respective companies. Even among employers that outsource

Family and Medical Leave Act (FMLA) administration, 46 percent did not know the cost of absence.

Women also reported a difference in the amount of recognition given to members of the opposite sex.

Just over 35 percent of women reported that men receive more recognition for their accomplishments

than women do within their organizations.


Executive Mobility Remains High; Lateral Moves Expected

The BlueSteps “2011 Executive Mobility Report” shows that 73 percent of employed senior executives

are actively seeking new job opportunities this year, but the majority expects it to be a lateral move.

In marked contrast to the “2009 Executive Mobility Report,” where 53 percent of executives expected

to stay at their level for just one to two years before progressing upward, 65 percent of executives are

now saying they plan to stay at their current level for the next three to five years.

The global job market for senior executives, while picking up dramatically since the global recession

of 2008, varies greatly by region. Executives in Europe, the Middle East, Africa and Asia Pacific report

having more opportunities than they had five years ago while respondents in the Americas said they

now have fewer.

Global Survey Shows Age Is Major Factor in Workplace Happiness; Mid-Career Workers Least Happy

Lumesse, formerly StepStone Solutions, in its “Inspiring Talent” survey found that the oldest and

youngest workers were the happiest, with employees starting work and nearing retirement consistently

reporting higher levels of workplace satisfaction than their stressed-out, mid-career colleagues.

Differences in pay raises, training opportunities and job satisfaction between men and women were

still common, suggesting that not all employers have made good progress in equalizing the workplace

experience between the sexes in recent years.

Sourced from almost 4,000 employees in larger companies in 14 countries worldwide (Australia,

Belgium, China, Denmark, France, Germany, Hong Kong, Italy, the Netherlands, Norway, Singapore,

Sweden, the UK and the U.S.), the survey reveals the different attitudes to work and employers among

older and younger workers, men and women, and different regions.

Documents

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