Fair Labor Standards Act (FLSA) Regulations Update

On May 18, 2016, the final ruling was released, updating regulations defining which white collar workers are considered protected by the FLSA’s minimum wage and overtime standards.

Key Provisions of the Final Rule

The final rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative, and Professional workers to be classified as exempt.  Specifically, the final rule

1. Sets the standard salary level at the 40^th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker);
2. Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90^th percentile of full-time salaried workers nationally ($134,004); and
3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

Additionally, the final rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

The effective date of the final rule is December 1, 2016. The initial increases to the standard salary level (from $455 to $913 per week) and HCE total annual compensation requirement (from $100,000 to $134,004 per year) will be effective on that date. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.

Compensation 101: Why Should Organizations Utilize Pay Ranges?

At Astronology® we like to explore all angles of a situation. In the past we’ve written articles on compensation related topics like green circle rates (employees paid below the minimum of the pay range) and red circle rates (employees paid above the maximum of the pay range). This article examines why organizations should make the effort to set pay ranges in the first place, and what value these ranges add to an organization. 

The term “pay range” is not one that is succinctly explained. The human resources section of About.com describes a pay range as: “…the range of pay established by employers to pay to employees performing a particular job or function. Salary range generally has a minimum pay rate, a maximum pay rate, and a series of mid-range opportunities for pay increases.” While this definition is foundational, it begins to direct us towards the goal of figuring out the how of the pay range question, but not really the why.

Erisa Ojimba, in a Salary.com article, explains that “a company’s pay structure is the method of administering its pay philosophy.” If developed logically and communicated successfully, the pay structure will strongly reflect your organization’s pay philosophy and give confidence to employees. A 2014 survey from SHRM noted that “employees ranked compensation / pay above job security as the most important contributor to job satisfaction.” Clearly, it is important for pay structures to be organized and strongly demonstrate competitive compensation in order to attract and retain employees. 

When developing a pay structure the following needs to be determined:

• Relevant data for establishing the relative value of a particular job to your organization. 
• Relevant pay range for a job with the stated value to your organization. 
• The value of each job position within the allotted pay range.

Once you have developed a pay structure, an on-going challenge is determining your organization's annual compensation budget. When set correctly, pay ranges can help you determine if you’re paying employees too little or too much.

When making the choice of how to structure pay ranges for your organization, the most important factors to consider, according to Jennifer Loftus, National Director of Astron Solutions, are the following:

• Your organization’s size
• Your organization’s fiscal constraints
• Your organization’s culture
• The size of your HR department
• Your compensation philosophy    

 
According to Jennifer, "while similar in concept, compensation structures are uniquely different for each organization. What works successfully in one company may be disastrous in another. Your organization must balance the five items above to determine the best suited structure for achieving your unique organizational goals. Without some type of pay system, however, your organization may end up underpaying and overpaying some employees, sacrificing fiscal controls, losing your star employees, and rewarding behaviors or competencies that don't achieve organization's strategic goals." The up-front time and effort required to develop a pay structure will provide you and your organization with a positive return on investment in both the short - and long-terms.

Incentive Plans: Individual vs. Team- Based

               When creating an incentive compensation plan, an organization needs to first consider if its work environment can support an individual or team-based program. There are advantages and disadvantages with both.  Depending on the mix of industry and position types, certain organizations thrive on one form of incentive over another. In this issue of Astronology®, we’ll discuss the advantages and disadvantages of both individual and team-based incentives.

Individual Incentives

              An advantage of an individual incentive program is the recognition it gives individuals for their efforts. Such recognition motivates the top performer to keep it up…and can serve to motivate others. By storytelling how the top performer achieved his / her goal, underachievers may have inspiration as to how they too can become better.

Naturally, individual incentives also have their fair share of problems. An overly competitive environment can be created.  Workers may even be pushed to cross boundaries and make questionable ethical decisions in order to reach goals. To curb these possible challenges, a hybrid incentive plan allows for employees who individually go above and beyond to be awarded while simultaneously recognizing group efforts and values.  Additionally, the hybrid approach gives other employees an opportunity to gain some recognition for what they do for the whole collective. This lowers the chances of an overly competitive environment developing. Careful monitoring and transparent reporting can also slow possible negative competition and dishonesty in order to achieve goals.

Team-Based (Group) Incentives

              An advantage to group incentives is positive peer pressure. Lisa McQuerry, in an article on the Houston Chronicle’s website, mentioned that employees are often motivated by the fear of letting down their team members. While each team member brings his / her own unique skill set and experience, these differences can possibly balance a team and motivate everyone to do their best in their assigned roles.

In the best case scenario, group incentives will cause employees to work harmoniously. In the worst case scenario, the exact opposite could happen. Possible infighting with unmotivated or outright defiant employees can cause a hostile work environment to develop. Low performing employees can possibly feel overwhelmed with pressure to perform at levels for which they are not ready. A potential solution to combat these possible negative outcomes is to implement individual and group progress reports. These reports can serve as a tool for troubleshooting, allowing time to remove potential issues before they become larger concerns.  As discussed earlier, other organizations have considered hybrid incentive plans that include an overall group incentive as well as individual incentives for top performers.

When it comes to incentives, organizations want to strike the right balance. The incentive should be one that encourages work-friendly competition in order to motivate the employee to do his / her best. Every organization is different, so it is important to spend time auditing and observing the type of work environment your organization possesses. Depending on the industry, installing a performance management program can be helpful in managing performance tied to incentives.

Astronology® asked Michael Maciekowich, Astron Solutions’ National Director, for his take on the difference between the two types of plans.  Mike shares with us that the difference between “individual and team-based incentives relates to defining the outcomes and ensuring there is clear ‘line of sight’ regarding controlling the achievement of those outcomes. Individual incentives focus on each employee in his / her efforts to meet job related outcomes and / or special projects. Individual incentives tend to use goals that follow the SMART acronym (Specific, Measurable, Achievable, Realistic, and Time-Bound).  Success in achieving team-based goals is dependent upon accurately defining the team that will be included in the plan, such as a unit, department, or organization.  In this case, the focus is on defining outcomes that require collective efforts to achieve. Rewards are often shared equally among the team members. The most successful hybrid plans are those that are established as a team-based plan with outcomes requiring collective efforts, and with the distribution of awards based on individual performance in contributing to that collective effort.”

Does your organization use individual or group-based incentives? If so, do you think it helps the work environment and achieves the organization’s overall goals? Please share your thoughts with us and we may feature your insights in a future Astronology® issue!