STRATEGIC COMPENSATION UPDATE

1. STRATEGIC COMPENSATION UPDATE

2. STRATEGIC COMPENSATION UPDATE • Strategic Compensation Initiative • The Process • Research Findings and Issues • Next Steps

3. STRATEGIC COMPENSATION UPDATE OPM Strategic Goals include developing: “a flexible, competitive and performance-oriented compensation and benefits environment that allows the Government to recruit, manage, and retain a quality Federal workforce.”

4. STRATEGIC COMPENSATION INITIATIVE Process • Research on compensation practices and issues • Outreach to Federal community to inform and involve • Cooperative development of possible changes with Federal stakeholders

5. Strategic Compensation Development Process History and Background Goals and Principles Stakeholders Stakeholders Strategic Compensation Policy Center with External Support Retirement and Insurance/Workforce Relations/Executive and Management Development/Employment Service Stakeholders Stakeholders Legislative & Regulatory Proposals Cost Management Equity Collective Bargaining Other Issue(s) Integrate Component Results Performance Management Draft Proposed Changes Structure Setting & Adjustment Job/Work Evaluation Pay Progression Strategies Variable Pay Premium/Special Pay Paid Time Off Other Strategic Rewards FY 1999 - FY 2002

6. STRATEGIC COMPENSATION UPDATE Research Findings • Private Sector • Non-Federal Public Sector • Federal Non-Title 5 agencies • Organized by 7 components • Job/Work Evaluation • Structure Setting and Adjustment • Pay Progression Strategies • Performance Management • Variable Pay • Premium/Special Pay • Paid Time Off

7. STRATEGIC COMPENSATION UPDATE Findings Private Sector • Companies tend to match competitors in salary & benefits; they vary considerably in bonuses/variable pay and stock options • External competitiveness more important than internal equity or affordability in setting compensation policy, although its relative importance may be tied to current market conditions • Most companies use some form of variable pay; of those who do not, most have bonus or stock option programs for managers or top performers

8. STRATEGIC COMPENSATION UPDATE Findings Private Sector • Compensation Competition in the marketplace is the major driver for making changes to compensation policy • Compensation practices in the private sector do not follow a “one-size-fits-all” model • Practices vary widely with companies designing their practices so they are aligned to meet their specific business needs, workforce needs, their culture/philosophy, and the needs of employees expressed through collective bargaining.

9. JOB/WORK EVALUATION Definition • Job evaluation is a formal process for: determining the relative value of various jobs within the organization, andassigning jobs to a grade structure or some other hierarchical index of job value • Work evaluation includes methods for valuing work that are not centered on job tasks. For example, work evaluation could be based on roles or competencies.

10. JOB/WORK EVALUATION Findings Private Sector • Market pricing and job slotting were most common approaches • A substantial minority used point factor systems • Firms without formal job evaluation system had monitoring and review mechanisms to ensure compliance with Equal Pay Act

11. JOB/WORK EVALUATION Findings Public Sector • OPM survey indicates states use formal job evaluation systems • States use job evaluation to identify qualification requirements, place jobs in salary structures, and maintain internal equity • Some states, job evaluation results are used in conjunction with market rates, internal salary relationships and other factors to assign a job to a grade or pay range

12. JOB/WORK EVALUATION Findings Non-Title 5 • Variety of methods, sometimes combined • Some use market-pricing for specific jobs • Often used with broad pay ranges • Some reference to GS structure or OPM standards

13. JOB/WORK EVALUATION Findings Demonstration projects • Some person-based approaches • Often used with broad pay ranges • Strong linkage to pay • Direct translation from GS grades to broad grades • Union agreement required

14. JOB/WORK EVALUATION Issues Should there be one job/work evaluation system or should approaches vary-- • position-based systems • person-based systems • skill or competency-based systems • hybrid systems

15. STRUCTURE SETTING AND ADJUSTMENT Definition • A pay structure is a collection of pay rates or ranges. • Structure setting and adjustment is the process of developing, adjusting, and maintaining a pay structure.

16. Findings Private Sector Market data -primary role Competitiveness is critical No external approval is required Public perception is not important Public Sector Market data - plays a limited role Affordability is critical Adjustments are subject to external (legislative ) approval Public perception is important STRUCTURE SETTING AND ADJUSTMENT

17. Private Sector 1-3 structures Structures divided by exempt; non-exempt; executive Occupation specific structures to address competition Grades & ranges-some broadbanding Geographic differentials limited to non-exempt positions Range width 40% of more Public Sector 1-10 or more structures Structures divided by occupational or bargaining unit lines Grades & ranges-broadbanding rare Geographical differentials uncommon, but broadly applied when used Range width of less than 40% STRUCTURE SETTING AND ADJUSTMENT Findings

18. STRUCTURE SETTING AND ADJUSTMENT Findings • Non-Title 5 • Single structures • Wider ranges • Market-based adjustments • Adjustments often performance-contingent • Demonstration Projects • Banding prevails • Adjustments sometimes performance-contingent • GS linkage continues (in practice) • Union agreement required

19. STRUCTURE SETTING AND ADJUSTMENT Issues • The number and coverage of schedules • The relationship between schedules • The size and variability of pay ranges • Whether the schedule(s) will be divided into discrete pay ranges and levels • How schedules will be developed and adjusted - role of negotiation, surveys, cost controls

20. STRUCTURE SETTING AND ADJUSTMENT Issues(continued) • Equity - what is the acceptable level of variation across employees, occupations, organizations • Cost control and accountability - will pay levels be affordable and defensible • Feasibility - what resources will be needed to maintain and administer the schedules

21. PAY PROGRESSION STRATEGIES Definition Pay progression refers to changes in basic pay, other than general adjustments or increases. Under the General Schedule, there are three primary means of pay progression: • “Career ladder” promotion • Competitive promotion • Performance-based increases, including the within-grade increases (WIG) and the quality step increase (QSI).

22. PAY PROGRESSION STRATEGIES Findings Private sector • pay progression based primarily on performance is a widespread practice • merit pay is common, particularly in large organizations • time-based pay progression (longevity increases) is much more common under collective bargaining agreements.

23. PAY PROGRESSION STRATEGIES Findings Public sector systems reflect values and objectives such as internal equity, cost control and an emphasis on experience and longevity. Such systems typically have: • limited progression potential • time-based pay progression, and • limited performance-based progression

24. PAY PROGRESSION STRATEGIES Issues Additional or alternate means of pay progression such as: • Progression on attainment of key skills or competencies • Progression based on specific accomplishments • Accelerated progression based on performance (over and above the QSI)

25. PAY PROGRESSION STRATEGIES Issues • Equity - are differing rates of pay progression acceptable? • Pay-at-risk vs. guarantees - is variability acceptable? • Performance management - how will performance be measured and linked to pay • Cost - how will pay increases be funded and budgeted • Accountability - how will pay increases be justified to the public

26. PERFORMANCE MANAGEMENT Definition • Performance management includes all activities associated with planning, monitoring, developing, rating and rewarding performance. • For purposes of compensation system development, “performance management” is limited to activities that inform compensation decisions.This component considers two aspects of performance management, employee development and performance rating.

27. PERFORMANCE MANAGEMENT Findings: • Private Sector • Pay-for Performance is a common element of corporate compensation philosophy, and • Many organizations use performance as a primary determinant of pay progression

28. PERFORMANCE MANAGEMENT Findings: • Public Sector • Most States have formal performance evaluation systems • Most States use summary ratings, following standard rating patterns and • Most States use pay and performance linkages similar to those in the Federal sector

29. PERFORMANCE MANAGEMENT Findings: • Non-Title 5: • Performance appraisal (Title 5) used for both merit pay and adverse action • Employees who receive ratings below fully successful do not receive merit pay increases • Demonstration Projects: • Link to pay • Systems beyond summary ratings

30. PERFORMANCE MANAGEMENT Issues • Level of performance management - individual, team or group, business unit, organization • Types of performance evaluated - outputs, results, behaviors or attributes, combinations • Methods - supervisory assessment, self-assessment, peer assessment, customer satisfaction, quantitative or qualitative measures • Outputs - narrative assessment, performance score or index, ranking and combinations • Uses - provide feedback, relate individual to organizational performance

31. VARIABLE PAY Definition Variable pay is non-recurring pay based on individual, group, or organizational performance.

32. VARIABLE PAY Findings Private Sector • Two-thirds of companies offer at least one variable pay plan for non-sales employees today, compared to about half in 1990 • Proportion of overall payroll expenses represented by variable pay has doubled from about 4 percent to about 8 percent • Most popular basic variable pay plans are incentive awards based on meeting organizational goals and individual employee recognition awards

33. VARIABLE PAY Findings Public Sector • Payment to individuals based on individual performance • Payment on top of base pay (no “pay-at-risk”) • Tight agency-imposed limits on individual award values, and • Limited managerial discretion to vary individual award values

34. VARIABLE PAY Findings • Non-Title 5 • “Add-on” rather than “at risk” • Similar to Title 5 • Demonstration Projects • Not a cornerstone • Most focus on base pay • Positioned as a partial alternative to base pay • Exception: Pacer Share (gainsharing)

35. VARIABLE PAY Issues • How much pay should be “guaranteed Governmentwide?” • How much “pay-at-risk” should be allowed in one agency versus another? What levels of individual total compensation are acceptable? • Should there be any budgetary limits on how much an agency can spend on directly compensating employees? • Could agencies be able to defend larger (and more varied) awards and total compensation to Congress and the public?

36. PREMIUM/SPECIAL PAY Definition Premium/Special pay is compensation, in addition to an employee’s normal salary or wage (basic pay), for extraordinary job demands or working conditions or to meet a special need of the organization (e.g., an allowance to retain needed staff).

37. PREMIUM/SPECIAL PAY Findings Private Sector • Private sector firms premium/special payments include: • Overtime • Shift differentials • Holiday and weekend work • Availability pay • Hazardous, dangerous or unpleasant work • Most private sector firms do not pay for special work conditions for white-collar employees

38. PREMIUM/SPECIAL PAY Findings Public Sector • State governments premium/special payments include: • Environmental differentials • Overtime • Sunday pay • Holiday pay • Shift differentials • Premium pay is either paid as a percentage of basic pay or a lump-sum premium payment

39. PREMIUM/SPECIAL PAY Findings Non-Title 5 • Supervisory duties - uses different (higher) set of bands, for each job category • Overtime -paid based on time worked in excess of scheduled tour-not keyed to day worked, or a set 24-hour period • May offer time-and-a-half as alternative to comp time • One agency eliminated biweekly and total annual pay caps, dual compensation restriction for military retirees • Compensatory time for exempt employees (with prior approval); use is limited • Night differential paid (relatively few employees covered)

40. PREMIUM/SPECIAL PAY Issues • What hazards, demands should be compensated • What segments of the workforce should be covered • Criteria for payment and form of payment • What constitutes fair compensation for job hazards and special demands? • Is it acceptable to allow cost or labor market considerations to influence premium pay policy? • Do provisions encourage agencies and employers to mitigate hazards?

41. PAID TIME OFF Definition Paid time off (PTO) refers to time off work with pay

42. PAID TIME OFF Findings Private Sector • Similar categories • some use of PTO banks • Service-based accrual • Limited carry-over • “Cash out” provisions common

43. PAID TIME OFF Findings Public Sector • Most similar to Federal • separate annual and sick leave • service-based annual leave accrual • no PTO banks

44. PAID TIME OFF Findings • Non-Title 5 Standard Federal accrual and use provisions • Demonstration Projects Not authorized to deviate from current leave structure

45. PAID TIME OFF Issues • Single or multiple types annual and sick leave vs. PTO banks • PTO to support employer goals • Volunteer work • Sabbaticals • Public policy (court, military leave) • Sharing/donation provisions

46. STRATEGIC COMPENSATION UPDATE NEXT STEPS • Work with Federal stakeholders underway • Webpage for research information • Begin developing proposed changes

47. STRATEGIC COMPENSATION UPDATE