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:
74% said that they
were not effective or only marginally effective in communicating information
about their pay system
68% said that they
were not effective or only marginally effective in the information shared
about pay
62% said that they
were not effective or only marginally effective in using their pay programs
to motivate employees
25% said that they
were not effective or only marginally effective in achieving internal equity
21% said that they
were not effective or only marginally effective in achieving external equity
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?
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.
