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Survey of Compensation Policies and Practices
March 2003

WorldatWork, Professor Dow Scott, and Hay Group, LLC

Introduction

To determine which compensation practices and policies are most commonly used, WorldatWork partnered with Dow Scott (Professor of Human Resources, Loyola University Chicago) and Hay Group, LLC to jointly develop and field a survey to members of WorldatWork. The questionnaire asked participants to describe and evaluate their managerial and professional pay policies and practices as they related to organizational:

  • Compensation philosophy and goals

  • Method of valuing work

  • Base salary structure design

  • Pay administration and communication

  • Impact of the pay system on company effectiveness.

The survey’s (and forthcoming study) primary goal is to determine the prevalence of “foundational” compensation policies and practices in use by organizations. For purposes of the survey and study, “foundational” compensation practices are defined in terms of:

  • How work is valued (i.e., job analysis, job evaluation, market pricing)

  • How the compensation system is structured (i.e., grades, bands, mix of reward elements)

  • How compensation programs are maintained and administered. 

Because the research team recognized that organizations may have multiple pay systems for multiple employee groups, a decision was made to focus the study on an organization’s most prevalent compensation system for management and professional employees.

The study’s second goal was to analyze the effectiveness of these most-prevalent programs.  Survey participants evaluated the perceived effectiveness of these programs. 

The research team will provide an analysis of prevalence of foundational compensation policies and practices by high performance organizations – based on reputation and on financial measures – at the 48th Annual WorldatWork conference in May 2003 and in a forthcoming in-depth report, which will be available in the summer of 2003.

Methodology

A representative sample of 9,991 WorldatWork members was sent a link to the electronic survey instrument in late December 2002. During a two-week period, a total of 1,226 members responded for a response rate of 13%. Respondent organizations represented a wide diversity of industries, company sizes and geography, indicating a good cross section of organizations. (See demographics).

Relevant descriptive statistics are provided for each survey item at the end of this report. Note that organizations with less than 100 employees and those not representative of a major industry group were excluded from the analysis, as compensation practices for these organizations could be atypical and, thus, could distort the findings.

Summary of Findings

The majority of the responding organizations reported fairly traditional, time-tested methodologies and techniques to manage the compensation programs of their managerial and professional employees. The methodologies/techniques reported frequently by respondents include:

  • Point factor or whole job comparison methods to determine internal job value

  • Paying near the middle of the labor market (i.e., 40th to 60th percentile)

  • Salary ranges that are between 30% to 70% wide

  • Adjusting salary ranges annually

  • Formally assessing individual performance and assigning performance ratings on a scale with three to five ratings

  • Having the human resources department play the dominant role in making decisions about evaluating positions and assigning pay ranges

  • Basing salary increases on assessment of individual performance

  • Providing minimal communications on the organization’s pay system and how employees are compensated.

This fairly traditional profile of the most prevalent attributes of the compensation program suggests that these are time tested and proven, rather than time worn, approaches.


Detailed Findings

Compensation Philosophy and Goals

  • In the survey’s first section, which queried about organizational compensation philosophy and goals, 91% of the survey respondents reported that their organizations have a compensation philosophy.  About 62% said their compensation philosophy is physically documented (i.e., written); 29% reported theirs is not written.

  • The majority of organizations (almost 63%) reported that “about half” or more of their professional and managerial employees do not understand the organization’s compensation philosophy.

  • The vast majority of organizations (81%) reported having a base salary target between the 40th and 60th percentiles compared to the relevant labor market.  Surprisingly, 72% reported believing that they are actually paying between the 40th and 60th percentiles.

  • In terms of total annual cash compensation, 56% reported “targeting” between the 40th and 60th percentiles, and 55% reported “actually paying” at the 40th to 60th percentile.

Data from the survey’s first section revealed that 91% of surveyed organizations have a compensation philosophy, but only about a third (34%) believe that most employees understand it.  Clearly, the creation of an organizational philosophy about compensation -- even having it written -- does not mean that it is widely communicated, let alone understood.

By definition, only 20% of organizations can pay between the 40th and 60th percentiles, yet 72% believe they are in that range for base salary. Further, 55% believe they are in that range for total annual cash.

Valuing Work

  • Most organizations (97%) have some job descriptions, but 33% admitted that many of their descriptions are out-of-date.

  • Ninety six percent of organizations use some form of job evaluation; the two most common methodologies are point factor (27%) and whole job comparison (23%).

  • When there are conflicts between job evaluation and market data results, an even 38% of respondents give priority to job evaluation over market pricing and 38% give priority to market pricing over job evaluation. Eleven percent determine job grade based on job evaluation and the salary range on market; only 6% change grades based to match market pricing.

  • The HR department alone is typically (60% of the time) accountable for assigning jobs to salary grades. In 28% of responding organizations, HR and line employees collaborate on assigning jobs to salary grades.

  • Review of job evaluations is typically done (60% of the time) in reaction to requests from line managers. Only 18% of respondents reported a program of proactive job evaluation reviews.

  • Fifty-three percent of the respondents believe that more than 60% of their jobs can be directly matched in the job market.

  • Sixty percent of organizations report a belief that at least 80% of their jobs are in the right salary ranges or grades.

The data indicate that the notion of job evaluation is very much alive and well in organizations today, contrary to some comments in contemporary literature.  For the vast majority of organizations, overall job value is based on a combination of internal value (job evaluation) and external value (market pricing).

Despite this combination of efforts to value jobs, approximately 40% of organizations report that a substantial percentage of jobs (more than 20%) are not in the appropriate salary range. This represents a significant cost to organizations because having jobs inappropriately valued will either increase compensation costs or increase unwanted turnover.

Line management has not apparently taken a leadership role in assigning jobs to salary grades, as much of the compensation literature suggests.

Performance Measurement and Linkage to Pay

  • Most organizations (80%) have performance appraisal processes resulting in a performance metric that is tied to a pay decision (66%).  Only 2% of organizations report not having a performance assessment program.

  • Pay increases are primarily determined by a combination of individual performance compared to job standards (68%), performance compared to objectives (50%), or the market value of the position (50%). Competency or skill acquisition impacts salary increases in 22% of organizations.

  • Forty three percent of respondents report performance ratings in a “bell-shaped” distribution. Nearly half report performance ratings are skewed higher than a normal distribution.

  • Top performers receive base salary increases that are two or more times as high as middle performers in 32% of organizations reporting. The majority of organizations (68%) reported variation of 1.5 times or less between top performers and middle performers. 

Most organizations try to maintain a fairly direct linkage between the performance management and compensation programs.

A high percentage of organizations pay for achievement against objectives in the base salary program versus a bonus/incentive program, and there is a relatively small percentage of organizations paying in base salary for competencies or skill acquisition, which are strong indicators of long-term performance.

The difference between increases for top performers and middle performers appears to be based on budget constraints and the desire to give most or all employees increases rather than on differences in contribution to the organization.

Pay Communications

  • As noted previously, 91% of respondents’ report having a written compensation philosophy, but most say that few managers or professional employees understand it.

  • Only slightly more than half of the managerial and professional employees know their own salary range.

  • Less than 25% of the respondents communicate base salary ranges for all pay grades or jobs.

  • Only 13% of respondents reported providing a considerable level of detail when communicating the rationale for individual pay increases.

Pay communications within organizations are very limited and respondents report that it is ineffective. Although the importance of communicating pay policies, practices and decisions has been emphasized a number of recent studies, pay communication is still apparently very limited in practice.

Effectiveness of Specific Salary Policies and Practices

  • Job analysis and job evaluation methodologies and processes are believed to be effective by 60% and 63% of respondents, respectively. According to respondents, the most effective job evaluation methodology is point factor evaluation, followed by functional job family modeling. Broad banding is viewed as the least effective methodology.

  • Most respondents thought that their market pricing processes were effective or very effective (84%).

  • Although aligning organization and individual performance goals is a core objective of most pay systems, only 44% of respondents rated their organizations as effective or very effective at achieving this goal.

  • Approximately 33% of the respondents evaluated their managerial and professional salary policies and practices as “not effective” or “marginally effective.” Only 5% evaluated their salary policies and practices as very effective.

  • Respondents were asked to evaluate the effectiveness of specific aspects of their pay programs for managerial and professional employees:

    1. 74% said that they were not effective or only marginally effective in communicating information about their pay system

    2. 68% said that they were not effective or only marginally effective in the information shared about pay

    3. 62% said that they were not effective or only marginally effective in using their pay programs to motivate employees

    4. 25% said that they were not effective or only marginally effective in achieving internal equity

    5. 21% said that they were not effective or only marginally effective in achieving external equity

    6. 19% said that they were not effective or only marginally effective in their ability to attract and retain talent

According to these evaluations, the effectiveness of pay policies and practices varies greatly both across organizations and across different compensation program aspects within organizations. In most cases, there seems to be considerable opportunity for improvement, especially with respect to motivating employees, aligning pay to performance and communicating about compensation – areas with the most opportunity to significantly leverage employee behavior.


Conclusions

This study indicates that base cash compensation for most employees is still administered under fairly traditional – perhaps time tested – methodologies and processes such as, point factor or whole job comparison job evaluation, traditional salary range structures, traditional performance assessment processes. According to the study, compensation professionals believe that these processes are generally effective, and are evident by their widespread use.

Program designs are generally given high marks for effectiveness by the respondents to this survey, but program implementation is not viewed as favorably. Relatively low marks are given for the effectiveness of the compensation programs’ motivational value for employees, its alignment with organizational objectives and how it is communicated to employees.

The effectiveness of compensation programs is ultimately based on how those programs contribute to the effectiveness of the organization. Implementation, therefore, seems to be where organizations report the need to focus in order to improve overall compensation program effectiveness.


Respondent Demographics

Organization Size (Number of Employees)

Organizational Unit

Industry

  Number of Respondents Percent
Manufacturing 225 19%
Healthcare 144 12%
High Tech 118 10%
Finance/Banking 106 9%
Wholesale/Retail Trade 82 7%
Insurance 69 6%
Business Services 46 4%
Utilities 40 3%
Communications 40 3%
Service - Non Profit 34 3%
Transportation 28 2%
Oil/Gas/Natural Resources 26 2%
Construction/Real Estate 19 2%
Government 16 1%
Education Services 15 1%
Publishing/Newspaper 11 1%
Other 156 13%
*may not add to 100 due to rounding


Data Tables

A. Compensation Philosophy and Goals

A1. Does your company have a compensation philosophy for paying management and professional employees?

We have a written compensation philosophy
62%
We have an unwritten compensation philosophy
29%
We do not have a compensation philosophy
7%
Other
2%

A2. To what extent do managerial and professional employees understand the company’s compensation philosophy?

Virtually none employees understand the compensation philosophy
6%
Most do not understand the compensation philosophy
32%
About half the employees understand the compensation philosophy
28%
Most employees understand the compensation philosophy
31%
Virtually all of the employees understand the compensation philosophy
4%

A3. What is your base salary target (or goal) compared to the relevant labor markets (i.e., salary surveys)?

To be substantially below the market (less than 25th percentile of the market)
0%
To be below the market (between 25th and 40th percentile of the market)
4%
To be at the market (between 40th and 60th %, or approximately the median
59%
To be EXACTLY at the market (50 percentile, or EXACTLY the median)
21%
To be above the market (between 60th and 75th percentile)
12%
To be substantially above the market (above 75th percentile)
1%
Do not have a base salary target relative to market
3%

A4. What is your base salary practice compared to the relevant labor markets (i.e., salary surveys)?

Is substantially below the market (less than 25th percentile of the market
1%
Is below the market (between 25th and 40th percentile of the market
10%
Is at the market (between 40th and 60th %, or approximately the median
61%
Is EXACTLY at the market (50 percentile, or EXACTLY the median)
10%
Is above the market (between 60th and 75th percentile)
14%
Is substantially above the market (above 75th percentile)
1%
Do not have a base salary practice relative to market 41
4%

A5. What is your total cash target or goal compared to the relevant labor markets?

To be substantially below the market (less than 25th percentile of the market)
0%
To be below the market (between 25th and 40th percentile of the market)
2%
To be at the market (between 40th & 60th %, or approximately the median)
43%
To be EXACTLY at the market (50 percentile, or EXACTLY the median)
12%
To be above the market (between 60th and 75th percentile)
25%
To be substantially above the market (above 75th percentile)
2%
Do not have a total cash target relative to market
14%

A6. What is your current total cash practice compared to the relevant labor markets?

Is substantially below the market (less than 25th percentile of the market)
1%
Is below the market (between 25th and 40th percentile of the market)
10%
Is at the market (between 40th and 60th %, or approximately the median)
49%
Is EXACTLY at the market (50 percentile, or EXACTLY the median)
6%
Is above the market (between 60th and 75th percentile)
22%
Is substantially above the market (above 75th percentile) 35
3%
Do not have a base salary practice relative to market 109
10%

B. Individual Base Salary Determination

B1. How are base salary increases typically determined for managerial and professional employees?

Individual performance against job standards
68%
Individual performance against MBO’s or similar personal objectives
50%
Skill or competency acquisition
22%
Years of service
9%
Market value of the position
50%
General increase – everyone receives the same increase
8%
Other
8%

B2. Do you have a formal employee performance rating system, resulting in a performance metric or score?

We have a rating system with a performance score that is tied to salary increases
66%
We have a rating system with a performance score that is not tied to salary increases (please skip to question B4)
14%
We assess performance, but do not have a performance score (please skip to section C)
18%
No, we don’t assess performance (please skip to section C)
2%

B3. If salary increases are based on performance, what is the typical variation in salary increases for 2002 among professional and managerial employees?

Base salary increase is not based on performance
1%
Everyone receives approximately the same increase
5%
Small variation (increase for top performers is 1.25 times the average)
20%
Moderate variation (increase for top performers is 1.5 times the average)
43%
Considerable variation (increase for top performers is 2 times the average)
28%
Extreme variation (increase for top performers is at least 3 times the average)
4%

B4. How many categories of performance levels do you use when assessing performance:

0 - 2 1%
3 18%
4 22%
5 50%
6 3%
7 1%
8 1%
9 2%
10-14 2%
15+ 1%

B5. How are people distributed across these performance categories?

Most people fall into the middle with a bell-shaped distribution around the middle
43%
Spread is skewed towards higher performance ratings
49%
Spread is skewed towards lower performance ratings
1%
Employees are spread approximately evenly across performance ratings
1%
Do not track this information
7%

C. Base Salary Structure Design

C1. How often do you typically adjust base salary structures for managerial and professional employees?

Not consistently adjusted – OR as needed based on market conditions
15%
Less than once every two years
3%
Once every two years
8%
Once a year
74%
Multiple times per year
1%

C2. How often do you assess the market pricing of jobs (i.e., pricing benchmarks or all jobs with salary survey data)?

Not consistent - As needed based on market conditions
18%
Never
1%
Less than once every two years
3%
Once every two years
10%
Once a year
60%
Multiple times per year
8%

C3. How wide are your typical salary ranges (difference between minimum and maximum) for professional and managerial jobs?

No salary ranges
9%
Less than 30%
5%
30-49%
20%
50-69%
47%
70-99%
11%
100%-149%
5%
150%-199%
3%
200% or greater
1%

C4. Do you have cases where a manager or supervisor (as opposed to a work leader) and subordinate are in the same job grade or band?

Don't know
2%
No
49%
Yes, this happens frequently
42%
Yes, this happens infrequently
6%

D. Valuing Work

D1. Are there up-to-date position, job, or role descriptions for employees?

Do not exist
3%
For a few jobs (0% to 40%)
12%
For some jobs (40% to 60%)
19%
For most jobs (60% to 90%)
35%
For virtually every job (90% to 100% of managerial and professional jobs
32%

D2. How are base salary ranges typically determined for jobs?

Individually market price all jobs (i.e., salary surveys)
21%
Lead with individual job-based market pricing, with consideration for internal job evaluation
38%
Equal balance of individual job-based market pricing/internal job evaluation
17%
Lead with internal job evaluation, with consideration given for market pricing
17%
Internal job evaluation only
2%
No set policy exists
3%
Other
2%

D3. How do you establish a base salary for a given job when market data and job evaluation data conflict?

Priority is given to internal job evaluation
38%
Priority is given to external market data
38%
Change the grade to fit market pricing
6%
Maintain the grade based on internal job evaluation and establish a special range based on external market data
11%
Do not use salary surveys
1%
Other:
6%

D4. Who is typically accountable for assigning jobs to salary grades?

Only human resources (including compensation professionals)
60%
Human resources and line management
29%
Line mgt. makes decision using HR guidelines & corporate benchmark
2%
Line management makes decision with input from HR as requested
1%
Only line management
0%
No formal process is followed
2%
Other:
6%

D5. What percentage of managerial and professional jobs in your company do you estimate have the correct salary range or market price?

Less than 20% 1%
20 - 39% 3%
40 - 59% 6%
60 - 79% 28%
80 - 100% 59%

D6. If you use some form of job evaluation, which is the most prevalent system you use?

Point factor job evaluation 27%
Whole job comparison (e.g., ranking or job classification) 23%
Skill-based salary or competency-based job leveling/evaluation 7%
Functional job family modeling 8%
Broad banding / career banding 9%
Other: 23%
Do not use 4%

D7. In general, how often are jobs revisited for evaluation?

Proactive audit/review every set number of months or years 18%
Only when job evaluation program is created or updated 4%
Case by case basis when appealed or a request for review is submitted 60%
Never 1%
No set policy exists 17%

D8. What percentage of professional and managerial jobs (not incumbents) can you directly match to survey model jobs?

Less than 20% 2%
20 - 39% 9%
40 - 59% 29%
60 - 79% 39%
80 - 100% 15%

E. Salary Program Communications and Employee Involvement

E1. How much information about the pay program is shared with managerial and professional employees about their individual salaries?

Minimal pay related information is shared 23%
Information regarding the design of the pay program (e.g., strategy, compensation markets, link to performance, etc.) 59%
Base salary range for the employee’s pay grade 57%
Base salary ranges for all pay grades or jobs 23%
Actual pay levels for all employees 3%
Other: 6%

E2. How do professional and managerial employees receive communications about their pay or the system under which they are paid?

Information is posted on a company web-site 31%
Employee meetings 34%
Memos, emails 41%
Employee handbook or orientation manual 34%
Individual discussions with their supervisor 86%
Individual discussions with human resources/compensation department 54%
Never receive pay communications 2%
Other: 5%

E3. How frequently do professional and managerial employees receive communications about their pay?

Never 2%
Rarely (Once per year) 52%
Seldom (2 or 3 times a year) 35%
Occasionally (4 to 6 times a year) 10%
Frequently (7 to 9 times a year 0%
Very often (more than 10 times a year) 1%

E4. The rationale for individual pay increases is

Never 2%
Briefly 40%
Explained in some detail 45%
Explained in considerable detail 13%

F. Evaluation of Salary Policies and Practices

F1. What is the approximate annual turnover for managers and professional employees?

0 - 5% 37%
6 - 10% 34%
11 - 15% 17%
16 - 20% 8.
21 - 16% 2%
27 - 40% 2%

F2. How does management determine if the salary program is effective? (check all that apply)

Business/operating results 34%
Employee productivity metrics 16%
Employee turnover or retention 69%
Employee satisfaction survey metrics 40%
Labor cost is controlled/lowered 26%
Senior leadership tells us that it is working 30%
Employees tell us that it is working 29%
Management does not evaluate salary program effectiveness 19%
Other 4%

Effectiveness Matrix

G. Specific Salary Policies and Practices

  Do Not Use Effectiveness of Policy or Practice
Not Effective
Marginal Effective
Effective
Very Effective
1. Job analysis and documentation processes 17% 2% 21% 51% 8%
2. Job evaluation or grading method 18% 1% 18% 53% 11%
3. Process for employees to appeal job grading or salary decisions 48% 4% 20% 26% 3%
4. Salary ranges 9% 2% 14% 58% 18%
5. Market pricing processes 3% 1% 12% 62% 22%
6. Merit pay (i.e., salary increases based on performance) 6% 4% 32% 49% 9%
7. Individual performance appraisal 2% 6% 33% 50% 9%
8. Alignment between organization and individual performance goals 7% 11% 38% 38% 7%

J. Overall Measures of Effectiveness

  Not Effective Marginal
Effective
Effective Very Effective
1. Overall success of salary policies and practices 2% 28% 65% 5%
2. Internal equity of compensation program 3% 22% 66% 9%
3. External competitiveness of compensation program 2% 19% 65% 15%
4. Ability to attract and retain talent 1% 18% 69% 12%
5. Motivational value of program 9% 53% 36% 2%
6. The frequency which we communicate information about pay 20% 53% 26% 1%
7. Information shared about pay 18% 50% 31% 1%

L. Into which of the categories below does your organization belong in terms of annual revenue?

Less than $250 million 22%
$250 million to $500 million 17%
$500 million to $1 billion 13%
$1 billion to $2 billion 13%
$2 billion to $5 billion 14%
$5 billion to $10 billion 8%
$10 billion to $25 billion 6%
$25 billion to $100 billion 5%
Over $100 billion 2%


The contents of this report are copyright ©2003 by WorldatWork.

About WorldatWork®

WorldatWork is the world's leading nonprofit association dedicated to compensation, benefits, total rewards and HR professionals. Founded in 1955, WorldatWork serves professionals who focus their work on attracting, retaining and motivating employees. In addition to providing professional affiliation, WorldatWork offers highly acclaimed certifications (CCP®, CBPTM and GRP®) and education programs, workspan® magazine, online information resources, surveys, publications, conferences, research and networking opportunities.

About Dow Scott

Dr. Dow Scott is both a Professor of Human Resources and the President of Performance Development International, Inc. (PDII).  His teaching, research and consulting have focused on creating effective teams, performance improvement strategies, equitable pay and performance enhancing incentive systems, and high performance organizations both in the U.S. and abroad. He often gets involved in evaluating incentive programs that are currently in use or designing new programs that will enhance employee commitment and productivity.  He has received national recognition both among academic and professional audiences for his research.

About Hay Group, LLC

Hay Group is a global Human Resources consulting firm that helps organizations get the most from their people by creating clarity, capability, and commitment. Founded in 1943 in Philadelphia, Hay works from 72 offices in 37 countries.

Hay’s areas of expertise include:

  • Organizational effectiveness, role clarity, work design, and assessment;
  • Selection and development;
  • Compensation, benefits, and performance management;
  • Executive remuneration and corporate governance; and,
  • Employee and customer attitude research.

Based on 60 years of specific, documented evidence that people, not strategies, drive long-term success, Hay Group has built a worldwide presence in assisting organizations to achieve their goals.

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