Pay Equity in the Workplace: Do Gender Based Disparities Still Exist?

The American Association of University Women released its Fall 2017 Gender Pay Gap report/guide with statistics regarding the pay disparity between women and men. In this issue of Astronology®, we look into how broad these pay disparities truly are and how this situation impacts Human Resources.

According to the American Association of University Women (AAUW), women earned 80% of what men earned. The smallest pay gap was found in New York, where women earned 89% of what men earned. California came in second at close to 88%, with Florida third at 87%. The largest pay gaps were Utah and Louisiana at 70%. Some writers highlight that the AAUW’s findings do not take into account personal choices with respect to careers. These choices or factors include college major, occupation, industry, hours worked, workplace flexibility, and experiences.

Yet in AAUW’s recent research findings, unexplained pay gaps still exist even when men and women have the same level of education. For instance, women with a Bachelor’s degree make 74% of what their male counterparts with the same education earn. Women with a high school graduation level education made 78% of what their male counterparts earned.

In regards to industry, there is research that notes a few fields were women make more than their male counterparts. These fields tend to be historically male-dominated fields such as riggers, small engine mechanics, and non-oil & no-gas drillers. For many industries, however, a gender pay gap exists, with male counterparts making more. In some cases, the gaps are closer than others. These findings, plus additional research & speculation, lead many to believe that personal choices can’t fully account for the gender pay gap. Adding to the importance of the discussion, a Pew Research Center report finds that 40% of all households with children under the age of 18 include mothers who are either the sole or primary source of income for the family.

What can HR departments do to prevent gender-based pay disparity? Keeping accurate records is an important step. The AAUW urges employers to “conduct salary audits to proactively monitor and address gender-based pay differences.” Astron Solutions offers an array of packages to support organizations in the quest for fair and equitable compensation programs. We encourage you to learn more about how we can be your trusted partner in this critical and sensitive matter! If you do not use an outside consultant, however, closely watching your organization’s internal salary increases, salaries for new hires, and salary changes associated with promotions is critical in eliminating gender-based pay gaps in your organization. An ounce of prevention today is worth a pound of cure tomorrow.

Unpaid Internships: The Return

2014 saw an explosion in lawsuits surrounding the proper identification and payment of interns. In January 2014, Elite Model Management settled with former unpaid interns. Months later in October, NBC Universal closed a $6.4 million settlement with its unpaid interns. Then in November, Condé Nast settled with its former unpaid interns for $5.8 million. This lawsuit also resulted in Condé Nast terminating its unpaid internship program.

For some time, it was anticipated that the existence of unpaid internships would decline. Most of the lawsuits mentioned here revealed each employer’s inability to meet the U.S. Department of Labor’s (DOL) six factor test for unpaid internships.

On January 8, 2018, however, the DOL announced adjustments, thereby updating the guidelines for “The Test for Unpaid Interns and Students.” The updated fact sheet explains that “Courts have used the ‘primary beneficiary test’ to determine whether an intern or student is, in fact an employee under the FLSA (Fair Labor Standards Act). In short, this test allows courts to examine the ‘economic reality’ of the intern-employer relationship to determine which party is the ‘primary beneficiary’ of the relationship.” A concern for many courts with the original test was determining whether “the employer doesn’t gain an immediate advantage from the intern’s activities.”

What are the new seven factors for determining a lawful unpaid internship? Do these adjustments make it easier for organizations to provide meaningful unpaid internships?

The Seven New Factors

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4.  The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

With the inclusion of the possible academic credit / formal education tie in, the new test is more flexible than the previous one. Determination on whether an employee should be paid is now based on an overall view of the circumstances. This makes it possible for organizations to meet the standard. It is still suggested, however, that employers ensure the intent and design of their internship programs are primarily beneficial to the interns.

Reactions, of course, vary. For example, Eric Glatt was a plaintiff from a lawsuit involving his unpaid internship with Fox Searchlight. In a comment to Bloomberg Business online, Glatt mentioned that “I don’t like the legal implications of this new test…but the practical implications may make the kinds of internships I did [entry-level jobs disguised as educational opportunities] go away.” Some labor advocates worry that these new guidelines may permit an organization to justify any program as benefitting an intern. On the other hand, due to the wave of lawsuits in previous years the on-going trend has been for employers to be safe and pay minimum wage. We look forward to seeing how organizations and future interns utilize these new adjustments.

What about your organization? Have you hosted an unpaid internship program? Have such programs been discontinued in recent years? Share your thoughts in our comments section below!

2018 Compensation Budgeting Forecast Part 3: Trends in Non-Profit Compensation

The world of non-profit compensation continues to see radical changes from the past. Previously, it was assumed that non-profits, due to the limitations placed on their abilities to generate revenue, were in the position of compensating their employees much below the market.  In the past, it was assumed that time off packages and benefits would make up for low wages. But this mindset has changed in the past few years, and will continue to change into 2018. The following are key trends in non-profit compensation design Astronology® readers need to know.

Trend #1: Strategic Planning. The first trend is the increased use of the strategic planning process by non-profits.  What was once considered a normal part of for-profit planning is being adopted by non-profits. According to the National Council on Nonprofits:

A strategic planning process identifies strategies so that a nonprofit will achieve its mission. Ideally, as staff and board engage in the process, they become committed to measurable goals, approve priorities for implementation, and also commit to revisiting the organization’s strategies on an ongoing basis as the organization’s internal and external environments change. Many nonprofits start the process by identifying the nonprofit’s strengths, weaknesses, opportunities, and threats, in what is commonly called a “SWOT” analysis. Looking at external as well as internal factors (such as your own nonprofit’s staff capacity to accomplish its goals) is important.

This is an important change, as having a formal strategic planning process allows for the creation of a formal “compensation strategy” necessary to focus employee efforts in support of the strategic plan.

Trend #2: Compensation Philosophy Statements.  The second trend is the increase in formal compensation philosophy statements at non-profit organizations. With the advent of strategic planning, we are now finding more non-profits establishing a formal “compensation philosophy” that acts as a blueprint in compensation design and administration activities.  According to Payscale,

A compensation philosophy explains the role of compensation in your organization and tells your employees how you believe people should be paid, while your compensation strategy explains how you will achieve this philosophy. There are three things to look for when it comes to creating a strong compensation strategy in the nonprofit sector. Who do you compete with for talent? Nonprofits aren’t only competing with other nonprofits, so consider all of your competitors for talent in your compensation strategy. Think about specific departments and how they might differ. For example, are you drawing talent for your Finance department from the for-profit sector or specific industries? What about your Development team? How competitive do you want to be in your market? Do you want to pay at the median of the market and target the 50th percentile? Or do you want to be an organization leading the market and targeting higher? Consider targeting higher in your market for key departments and areas that are critical to your organization.  Do your compensation philosophy and strategy support your organization’s mission? If your organization’s mission is focused on social justice, yet employees are struggling financially due to low pay, there might be a disconnect between your mission and compensation philosophy. Be sure your pay practices are aligned with your vision & values to attract and retain the best talent.

Astron Solutions finds that the majority of our non-profit clients now have formal compensation philosophies and strategies to ensure compensation programs are aligned with organizational strategic initiatives.

Trend #3: Creative Compensation. The third trend is the increase in creativity in pay-for-performance and incentive compensation strategies. Many non-profit boards have concerns regarding providing incentives to employees and leadership, in that these programs may be taking funds away from the services provided by the non-profit to its constituents. The IRS provides clear guidelines regarding the use of incentives in non-profit organizations:

A 501(c) tax-exempt organization may award a bonus to an employee if the employee’s total compensation package:

• Is established by an independent board of directors or by an independent compensation committee;

• Is reasonable in terms of the employee’s specialty and geographic locale

• The result of arms’ length bargaining

• Includes a ceiling or reasonable maximum

• Does not have the potential to reduce the charitable services or benefits the organization would otherwise provide

• Takes into account measures of the employee’s performance

• Keeps the organization within budget without charging more for services

• Does not transform the principal activity of the organization into a joint venture between it and the employee

• Is not merely a device to distribute all or a portion of the organization’s surplus to persons who are in control of the organization

• Serves a real and discernable business purpose of the exempt organization

• Does not result in abuse or unwarranted benefits

• Rewards the employee based on services the employee actually performs 

In establishing an incentive plan in a non-profit organization, Astron Solutions recommends that

1. The program be self-funded, with the maximum potential incentive payout part of the compensation budget for the entire fiscal year.
2. The program incorporate a “balanced scorecard approach,” in which key elements of the strategic plan be assigned a value weight and the portion of the incentive payout.
3. Each strategic objective be measured based on a threshold measure (50% payout), target measure (75% payout), and optimum measure (100% payout).

Trend #4: Sophistication Surrounding Executive Compensation.  The fourth trend is the sophistication of Boards and Compensation Committees as related to executive compensation. For years, non-profit boards ignored IRS regulations regarding executive compensation.  However, the IRS tells us that

A key to intermediate sanctions compliance is to create a “rebuttable presumption of reasonableness.” In short, if the organization creates this presumption, then the burden of proving that compensation is unreasonable falls back to the IRS and includes the following: Generally, all compensation transactions for disqualified persons must be approved by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. Prior to making its determination, the authorized body obtained and relied upon appropriate data as to comparability, and adequately documents the basis for its determination concurrently with making that determination. The authorized body, or its representative, then needs to sufficiently document, including a listing of persons present during deliberations and signatures of those authorized to approve the decision.

Astron Solutions’ Perspective
Astron Solutions will continue to monitor these four trends in non-profit compensation throughout 2018. As non-profits find themselves in a battle for talent with the for-profit market, there will be increased pressures to find ways to be creative with the compensation programs needed to compete for essential talent, and to maintain compliance with financial & regulatory restrictions.

2018 Compensation Budgeting Forecast Part 2: Trends in Incentive Compensation

Astron Solutions has been tracking the increase in organizations instituting short- and long-term incentive plans among our client organizations over the past year. This trend is in direct response to the frustration with and the failure of traditional merit pay programs to impact employee behavior. In addition, organizations are discovering that traditional merit pay programs have little or no impact on retaining and motivating their new millennial workforce.

Employee Engagement and its Impact on Total Rewards
Of most importance to organizations today is the need to have better reward systems to enhance employee engagement. The following is from a 2017 study conducted by Deloitte on the concern of employee engagement:

• Organizational culture, engagement, and employee brand proposition remain top priorities in 2017; employee experience ranks as a major trend again this year.
• Nearly 80 percent of executives rated employee experience very important (42%) or important (38%), but only 22% reported that their organizations were excellent at building a differentiated employee experience.
• Fifty-nine percent of survey respondents reported they were not ready or only somewhat ready to address the employee experience challenge.

A key total rewards strategy is to develop short- and / or long-term incentives that focus on employee behaviors exemplifying the organization’s values.

Current Use of Bonus / Incentives
According to BLR’s recently published 2017–2018 Pay Budget and Variable Pay Survey, incentive / bonus practices in 2017 and projected for 2018 appear as follows:

For 2017:

• On average, 50.4% of organizations paid bonuses to their exempt employees in 2017, down from 54.3% last year.  18.4%, up from 15.7% last year, offered amounts of 5% or less.  31.2% awarded amounts greater than 5%.
• On average, 31.5% of those surveyed awarded bonuses to their hourly workers, down from 37.9% last year.  21.6% offered 5% or less.  9.9% awarded amounts above 5%.
• On average, 30.8% gave their senior management team members bonuses above 10% of base pay, down from 37.2% of organizations last year.  21.2% awarded the remainder of their management team members at that level, down from 24.5% of organizations last year.  8.6% rewarded their non-management exempt employees with bonuses at the same level, down from 10.6% of organizations last year.
• Only 3.4% awarded their hourly office employees bonuses above 10%.  2.4% of survey participants who answered the question awarded their hourly nonoffice employees bonuses above 10% of their base pay.
• 40.4% paid bonuses in addition to salary increases, up from 38.9% of organizations last year.  In 2017, 21.0%, down from 24.5% last year, awarded some of both, depending on employee pay type.
• Though the majority (56.9%) isn’t providing them in 2017, lump sum payments are an option for some employers.  13.1% offer up to 5% of base pay.  Another 3% offer from 5.01% to 10% on average across all employee groups.

Projected for 2018:

• A little over one-third (34%) of survey participants provided information regarding their plans for bonuses in 2018. Of those who did, on average across all employee types, 8% plan to offer bonuses of up to 2.5% of base pay.  Another 9.8% plan to offer 2.51% to 5%.  Another 6.9% plan bonus amounts in 2018 of 5.01% to 10%.  Bonus amounts of 10.01% to 25% are planned for an average of 10.1% of the survey participants who answered this question.
• Senior management will receive bonuses of 10.01% to 30% of base pay at 19.5% of organizations.  9.2% will receive bonuses of 30% or more.
• Though 5.5% plan to award bonuses in lieu of pay increases, 36% will award bonuses in addition to salary increases.  23.5% plan some of both, depending on employee type.
• Although 81% have no plans to offer them in 2018, lump sum payments are on tap for some employers.  12.3% plan to offer up to 5% of base pay.  1.9% plan to offer from 5.01% to 10% on average across all employee groups.

Incentive / Bonus Budgeting for 2018

Regardless of how an organization decides to design its incentive / bonus program, there remains the question of how to budget and account for this variable salary expense.  For not-for-profits, the issue is clearer in that in order to retain nonprofit status in the eyes of the IRS these organizations are required to pre-budget the maximum potential payout.

However, there is still the issue of accounting for this expense. From Accounting Tools, we find the following general recommendations:

• Historical-basis bonus. If a bonus is essentially a roll-forward of the organization’s performance from the preceding period into the budget period, the recipient of the bonus plan presumably only has to copy existing performance to achieve the bonus. In this case, the payment is probable, so you should budget for the bonus expense.
• Attainable bonus. If the bonus is based on an improvement in the organization’s present performance, you should base the decision to record the bonus on a qualitative estimate of how difficult it will be to attain the bonus. If it is more likely than not that the recipient of the bonus plan will be paid the bonus expense.
• Theoretically attainable bonus. If the bonus is only paid if one or more extremely difficult targets are met, then do not budget for the bonus expense. In these cases, the bonus is based on the achievement of targets that may only be theoretically possible, such as running a production facility at 100% of its capacity. Given the low probability of success, there is no reason to budget for the bonus expense.

Astron Solutions’ Perspective
Astron Solutions finds that our client organizations are focusing more on how to enhance employee engagement through their total rewards programs, rather than specific compensation plan elements. Most clients now find that traditional “merit” and / or “pay for performance” programs are inadequate in reinforcing the behaviors expected of employees, in terms of both employee engagement and meeting strategic objectives. Client organizations now look to variable compensation programs as a more effective answer.

2018 Compensation Budgeting Forecast Part 1: Base Pay Adjustments

As we move towards Labor Day, Astron Solutions is getting more and more requests for information regarding 2018 compensation budgeting. This is part one of a three part review of 2018 compensation planning projections.  Part 1 focuses on base pay, and includes a review of the impact of 2018 minimum wage changes.

2018 U.S. Economy
It is always important to put into perspective compensation adjustment projections given general economic predictions for the same time period.  According to the Economic Research Institute (http://www.erieri.com/), the following are projections on key economic indicators for 2018:

• Gross domestic product in the U.S. is expected to increase by 2.5 percent next year, up from 2.3 percent in 2017 and 1.6 percent in 2016 — an improvement, but below the Trump administration’s goal of 3 percent growth for the economy.
• Inflation is forecast to slow to 2.4 percent, down from 2.7 percent this year but higher than the 1.3 percent reported for 2016.
• The unemployment rate is predicted to fall slightly to 4.6 percent, down from 4.7 percent this year and 4.9 percent in 2016.

2018 Minimum Wage Changes
Will your organization’s operating location(s) experience a minimum wage change in 2018?  Following is a summary of anticipated changes in the coming year (www.thebalance.com/2017-federal-state-minimum-wage-rates-2061043).  Note that states, cities, or territories following the Federal minimum wage of $7.25 are not listed in this summary.

• Alaska: $9.80 (Annual indexing has begun)
• Arizona: $10.00 (Raised to $12.00 through Indexed Annual Increases between 1/1/2018 to 1/1/2020)
• Arkansas: $8.50
• California: $10.50  ($11.00 to $15.00 in $1.00 Indexed Annual Increases between 1/1/2018 to 1/1/2022)
• Colorado: $9.30* ($9.30 to $12.00 in $0.90 Indexed Annual Increases between 1/1/2018 and 1/1/2020)
• Connecticut: $10.10
• Delaware: $8.25
• District of Columbia: $12.50 (Increases to $15 with Indexed Annual Increases between 7/1/2018 and 7/1/2020)  Florida: $8.10*
• Georgia: $5.15 if not covered by Federal Regulations otherwise $7.25 (Federal Minimum Wage)
• Guam: $8.25
• Hawaii: $9.25, $10.10 by 1/1/2018
• Illinois: $8.25
• Chicago $11.00 July 2017, $12.00 July 2018, $13.00 July 2019
• Maine: $9.00 ($10.00 to $12.00 in $1.00 annual Increases between 1/1/2018 to 1/1/2020) (Indexed annual increases will begin on 1/1/2021)
• Maryland: $9.25,  Increases to $10.10 7/1/2018
• Massachusetts: $11.00  ($3.75 for tipped employees), $16.50 per hour for working on a Sunday
• Michigan: $8.90, $9.25 by 1/12018 (Indexed annual increases will begin on 4/1/2019)
• Minnesota: Large employers are required to pay workers $9.50/hour and small employers (less than 500k in annual sales) $7.75 (Indexed Annual increases will begin on 1/1/2018)
• Missouri: $7.70
• Montana: $8.15 ($4.00 for businesses with gross annual sales of $110,000 or less) (Annual indexing has begun)
• Nebraska: $9.00
• Nevada: $8.25 Nevada’s minimum wage is set at $1.00 above the federal minimum wage for firms not providing health insurance. The minimum may be increased more than $1.00 above the federal minimum wage if cumulative inflation, as measured by the CPI-U, is larger than the percentage change in the federal minimum wage since December 31, 2004.
• New Jersey: $8.44 (Annual indexing has begun)
• New Mexico: $7.50
• New York: $9.70 ($10.40 by 12/31/2017 with $0.70 Indexed Annual Increases from 12/31/2017 to $12.50 by 12/31/2020. Starting 1/1/2021, the rate will be adjusted annually for inflation until it reaches $15 an hour)
• More information on New York minimum wage increases.
• Ohio: $8.15* ($7:25 for employers with gross sales of $283,000 or less) (Annual indexing has begun)
• Oregon: $10.25  (From $10.75 to $13.50 from 7/1/2018 to 7/1/2022)
• Rhode Island: $9.60
• South Dakota: $8.65  (Annual indexing has begun)
• Vermont: $10, $10.50 by 1/1/2018, Annual indexing begins 1/1/2019
• Virgin Islands: $9.50($4.30 for employers grossing $150,000 or less), $10.50, 6/1/18
• Washington: $11.00 (From $11.50 to $13.50 from 1/1/2018- 1/1/2020)
• West Virginia: $8.75

Remember to follow and account for current minimum wage legislation changes in your location(s), as the cost of minimum wage adjustments often are not included in compensation budgeting projections.  These changes may very well have a domino effect throughout an organization’s formal pay structure.

Summary of 2018 Projections
The following is a summary of compensation budgeting projections from the Economic Research Institute (www.erieri.com) and WorldatWork (www.worldatwork.org).

Economic Research Institute:

WorldatWork:

Total U.S. Salary Budget Increases by Employee Category

Employee Category	Actual 2017 Mean	Actual 2017 Median	Projected 2018 Mean	Projected 2018 Median
Nonexempt Hourly Non-Union	3.0%	3.0%	3.1%	3.0%
Nonexempt Salaried	3.0%	3.0%	3.1%	3.0%
Exempt Salaried	3.0%	3.0%	3.2%	3.0%
Officers/Executives	3.0%	3.0%	3.2%	3.0%
All	3.0%	3.0%	3.1%	3.0%

Astron Solutions’ General Conclusions

1. It appears that we are continuing with an approximate 3% compensation budgeting factor moving into 2018.
2. All organizations need to be cognizant of their state and / or local minimum wage changes, and build into their budgets the direct & indirect impact of these legislative changes.
3. Astron Solutions has noticed a marked increase in career path development to meet the retention needs surrounding millennials in the workforce. These career-based promotions also need to be incorporated into base pay compensation adjustments. Astron recommends moving these positions out of the mainstream salary structure, in order to better track the impact(s) of career-based adjustments.
4. Organizations also need to be aware of potential federal and approved state minimum pay for overtime exemptions, and the potential budgetary impact of making additional adjustments in exempt / non-exempt classification.
5. Organizations also need to be sensitive to the impact of recruiting and retaining “mission critical” positions, and isolate these positions in order for appropriate compensation levels to be accounted for in the 2018 budget.

Please stay tuned for more!  Our next issue of Astronology® explores trends in incentive compensation in 2018.

The Challenge of Misclassification in the Gig Economy

According to a 2016 Pew Research survey, some 24% of American adults have used some sort of digital commerce platform to earn money. This approach to earning a living is considered part of the gig employment phenomenon. In a 2016 study conducted by Harvard’s Lawrence Katz and Princeton’s Alan Krueger, 16% of American workers work for a temporary help agency, contract as independent contractors, or hold an on-call position. Current trends anticipate the gig economy to comprise more of the workforce in the future. In this issue of Astronology®, we look into the recent trend of gig employment and a critical challenge surrounding it.

In 2015, the Economic Policy Institute (EPI) reported that workers misclassified as independent contractors had grown considerably. Also stated in the report was that “New ‘sharing economy’ [also known as gig economy] businesses create cause for concern about misclassification because it is unclear how ‘autonomous’ these workers really are.” The report further expresses, “Employers who misclassify avoid paying payroll taxes and workers’ compensation insurance, are not responsible for providing health insurance, and are able to bypass requirements of the Fair Labor Standards Act, as well as the 1986 Immigration Reform and Control Act.”

A direct result of this misclassification is gig workers being forced to pay the full ACA tax or purchase their own health insurance. However, these costs may not be within their gig incomes. These conditions have given rise to lawsuits alongside the rise of gig-like jobs. For instance, Lyft recently settled a $27 million class-action lawsuit brought by drivers seeking to be classified as employees. Currently, Uber is in court for a similar class-action lawsuit. In light of this, the next question to consider is if labor laws will ever catch up to the rise of the gig industry.

Some employers have lobbied state legislatures to assist in legal coverage. In response, 28 states have legalized ride-hailing services, such as Uber and Lyft, labeling their workers as independent contractors. In Arizona, all workers using online labor platforms for work are considered independent contractors. This means that, while workers will find it hard to file successful claims for state-run benefit programs, gig workers still retain the right to sue over benefits and protections owed to employees under federal law. In New York and Washington, portable benefits, an encompassing benefit program designed for independent workers, are being considered.

As the workforce continues to change and more independent workers comprise our labor force, it will be important to see how legislatures continue to react. Do you work for an organization that supports or has some form of independent workers? How large a part of your organization are gig workers? How does your organization support gig workers? Please share your thoughts in our comments section below!

Five Steps to Simplify Your Compensation Program

As compensation professionals we are often asked if there are alternatives to simplify the method by which compensation decisions are made and communicated within an organization. This has become especially important when Human Resources is required to provide services with reduced staff. The following are five basic ways to simplify the complexities of compensation.

Step 1: Consolidate job titles and descriptions based on broader criteria & common activities, and move to a “job classification” pay system.

Job classifications describe the primary functions, typical responsibilities, judgment required, qualifications, personal interactions, and degree of confidentiality required of a family of positions. Job classifications are used to place positions in the proper salary range and compare salaries to those of other organizations in the labor market. Broad job descriptions are used to describe a group of jobs. This system is typically found in the public sector and higher education.

An effective example of this type of program can be found in the State of Nebraska. The program identifies a number of broad classifications including the following:

• Officers and Administrators
• Professionals
• Technicians
• Protective Service Workers
• Para Professionals
• Administrative Support
• Skilled Craft Workers
• Service Maintenance

Competencies and complexities are established within each broad classification level based on required skills. Employees are placed into the classification and level based upon their competency levels and ability to perform the complexity required.

Step 2: Reduce the number of pay grades and salary ranges by moving to a “Broadbanded” pay system. 

Broadbanding links directly to the use of classification systems. Broadbanding allows for more flexibility in determining individual compensation based on the combination of individual skill & competency as well as the complexity of the job.

According to research from Stern & Associates, “broadbanding is the consolidation of traditional pay structures, consisting of many, narrow pay ranges into a few, wide ranges or bands.” Broadbanding support responsive, swift-moving organizational cultures.

Organizations with competency-, longevity-, and performance–based pay systems find broadbands are essential to their programs.

Before moving to broadbanding, however, Stern & Associates suggests organizations consider the following:

• Broadbanding demands that managers are aware of, and can interpret, market pay data.
• Broadband control points are not precise for individual jobs.
• Broadbanding increases the potential for employees to float to the top of the band, and receive pay rates way out of sync with the market.
• Broadbands lack the automatic cost-control mechanism inherent in narrow pay ranges.
• Broadbanding eliminates the possibility for precise job analysis / evaluation.

Step 3: Develop performance appraisal methodologies that focus on job competency and individual contribution.

Another method of simplification is to move away from generic performance systems, and move towards competency-based performance management systems. The design of a competency-based performance management system is for employers to reward their employees for their knowledge, skills, and competencies. There is no straightforward calibration in determining if an organization is well fit for a competency-based management system. There are three factors to consider, however, that further explain why competency-based plans are worth the attention:

1. The decline of the job as we know it today (i.e., many employers increasingly view the job as an anachronism — a dated concept);
2. Many organizations that have successfully built skill-based pay plans for non-exempt workers have gone on to build skill-based pay plans for knowledge workers; and,
3. Competency-based pay fits the strategic focus on core competencies, i.e., the linking of core competencies and business strategy for business success.

Step 4: Eliminate merit or pay-for-performance programs tied to base pay and instead allow for a bonus / incentive system that focuses more on outcomes and results.

Moving to a pay-for-performance system that rewards employees using bonuses or flat dollar amounts based on their performance for a specific period of time is one way to simplify the difficult process of determine pay adjustments based on individual performance. According to research from the U.S. Merit Systems Protection Board Report to the President and Congress on merit pay,

“pay for performance can encompass a variety of rewards for above average performance. The two most common are bonuses, which are one-time cash payments, and performance-based pay, which provides a permanent increase to base pay.

Bonuses represent an amount of pay that is ‘at risk’ every year. In contrast to base pay, which is stable and primarily reflects an employee’s market value, bonuses should depend purely on performance and are not guaranteed. Employees in these types of systems frequently receive base pay that is considered comparable to average market rate to facilitate recruitment and retention of a high-quality workforce, but additional dollars are distributed (often annually) on the basis of performance during the rating period. As a result, employees are guaranteed a certain salary, with the potential for earning more. The amount generally depends on a variety of factors, such as the available funding and the evaluation of the individual’s contributions, but the organization retains discretion over how much to spend each year.”

Be careful before implementing a bonus or incentive plan, however. If base pay levels are not fully competitive, reliance on bonuses as a reward may increase turnover.

Step 5: Step up employee / management HR committees to discuss new programs and to provide assistance in straight-forward communication.

A key to the success of any program redesign, regardless of how much the end product has been simplified, is the ability to effectively communicate with those impacted by the program. The most effective way is to meet with a task force of employees & managers to review program changes and to clarify the communication prior to dissemination. However, there have been concerns over the years regarding the legality of this communication methodology. Some suggested steps to take in communicating new programs can include the following:

1. Be thorough in your communication – Make sure employees at all levels clearly understand the changes and how the changes will affect their individual pay.
2. Focus on answering the question “What in it (the changes) for me?” – Since this is affecting something personal (pay), it is best to be able to explain thoroughly what will affect employees personally.
3. Use a variety of means to communicate – There are various forms of media to use when communicating adjustments. Use one or two to address the changes…for some, an e-mail will work, for others one on one meetings, or “town meetings” will be needed. Remember that individuals generally need to hear a message three times before they remember and understand the information provided.
4. Ask for and listen to employee feedback – Besides giving you a gauge on how the adjustments are being received, this also will communicate to employees that you care about their thoughts on the changes, promoting positive organizational culture.

However, as Astron Solutions National Director Michael Maciekowich reminds us, there are rules regarding the use of employee participation committees when discussing topics such as compensation. As per the National Labor Relations Board, “Section 8(a)(2) of the National Labor Relations Act (“NLRA”) makes it unlawful for an employer to establish certain employee participation programs or employee committees. It is important that the makeup of the committee include management and should be reviewed by legal counsel prior to meeting.” Before launching an employee participation committee, be sure to check with counsel to ensure legal compliance.

FLSA Overtime Rules Delayed

Prior to November 22, 2016, many in the Human Resources field had been abuzz about the enactment of the Fair Labor Standards Act (FLSA) Final Rule. For some organizations, months of preparation for the December 1st change included reviewing job descriptions, in order to determine the position’s exemption status, and making changes to employee salaries vis-à-vis the new exempt threshold. However, on November 22, 2016, Judge Amos Mazzant III enacted an injunction, successfully halting activation of the new FLSA rules. The preliminary injunction is based off the challenge by several states, business groups, and the U.S. Chamber of Commerce. The plaintiffs claim the DOL has overstepped its authority by raising the salary threshold for exempt status excessively high. Of course, this injunction raises new questions. What is the Department of Labor’s (DOL) response? What do organizations do in the meantime?

The DOL’s official response to injunction was as follows: “The Department strongly disagrees with the decision by the court, which has the effect of delaying a fair day's pay for a long day's work for millions of hardworking Americans. The Department’s Overtime Final Rule is the result of a comprehensive, inclusive rule-making process, and we remain confident in the legality of all aspects of the rule. We are currently considering all of our legal options.”

So what do organizations do in the meantime? While some may speculate that with a Trump administration taking office soon, this mandate may disappear. However, it may not be safe to assume so. The attempt to rollback this rule may not happen right away. There is also the possibility that the Trump administration could issue a smaller increase to the salary threshold than the one initially included in the Final Rule.

Notwithstanding these developments, Michael Maciekowich of Astron Solutions reminds us that the FLSA tests for determining position exemptions have not changed. It is better to be safe than sorry, as a previous court case in Kinkead v. Humana, Inc. demonstrates.

The court case involved a final rule to extend minimum wage and overtime protections to workers who work in live-in domestic services or companion services beginning January 2015. In very similar fashion to the current FLSA overtime adjustments, the companionship exemption enactment was postponed in January 2015, as a federal judge from D.C. struck the rule down, charging that the DOL was overstepping its authority. However, in October of 2015 the U.S. Court of Appeals for the District of Columbia reversed this district court order. Humana argued that they shouldn’t be liable during the period the companionship exemption had been vacated. The courts decided Humanawas liable.

Another aspect to consider is your city and /or state regulations. If adjustments for your organization’s city or state are equal to or higher than the Final Rule’s regulations, organizations would still need to be in compliance with the law that’s most generous to the employee. As always, it is best for organizations to seek legal counsel in order to assuage any concerns from both employers and employees.

What was your organization’s reaction to the late initiated injunction? We look forward to hearing our readers share their input and thoughts on this late-breaking news!