Michigan Association CEO Compensation Grows With Size

The median base salary of a Michigan Association top paid executive is just over $172,000, with the middle 50% ranging from about $142,000 to $216,000.  As probably comes as no surprise to anyone familiar with executive compensation, the compensation of Michigan Association’s CEOs is correlated with the size of their organizations, as measured by total revenue.   Salaries make up the majority of the CEO “total direct compensation” package (more than 80%), with deferred compensation/retirement contributions (6.7%) and non-taxable benefits (6.5%) following closely.  Bonuses make up less than five percent of the total package (4.5%), and represent an average of about eight percent of salary.

Compensation information will likely make up the most popular part of Merces Consulting Group’s recent study of the IRS Form 990 tax filings of nearly 200 trade associations and professional societies, but the research points out important trends in governance as well that should give many organizations the impetus to look closely at not only “how much” they provide in compensation to their executives, but at “how they decide how much” to pay.

Reported “W-2” Compensation

When looking at executive compensation, it is crucial to ensure that comparisons are made between “apples and apples.”  Of the 200 organizations studied, 122 provided information on the compensation paid to their top executives, reporting the W-2 compensation paid for the most recent calendar year.  After adjusting for outliers, a simple linear regression model found a correlation coefficient (R Squared) of .445.  While not seeming to be compelling, when looking visually at the display of pay and revenue, clear patterns emerge.  The image below illustrates the “prediction” of W-2 Compensation based on association total revenue

Association CEO W-2

Pay increases as revenue increases, although given the fact that the range of revenue within the organizations studies is very narrow, there is a great deal of variance in the prediction.

Salaries and “Total Cash Compensation”

Given the nature of Form 990 reporting, there is less information on base salaries and incentive payments (which make up “total cash compensation,” or “TCC.”  As with W-2 compensation, base salaries increase with size:

  • Under $500,000: $147,100
  • $500,000 to $1,000,000: $153,300
  • $1,000,000 to $2,000,000: $159,900
  • $2,000,000 to $5,000,000: $164,900
  • Over $5,000,000: $211,400

Bonuses were paid to just over one third (37%) of the top executives studied.  For “bonus eligible” executives, the median bonus was just over 11%. Both the popularity of bonus programs and the percent of salary provided by bonuses increases with organization size.  The addition of incentive compensation to base salaries brings median “total cash compensation” in the industry to $177,300, or about 2.9%.  Accounting for size brings the following display of “total cash compensation.”

  • Under $500,000: sample too small
  • $500,000 to $1,000,000: $153,300
  • $1,000,000 to $2,000,000: $159,900
  • $2,000,000 to $5,000,000: $170,900
  • Over $5,000,000: $218,700

Total Direct Compensation

Total Direct Compensation (“TDC”) is the sum of all elements of compensation paid to an individual.  When dealing with Form 990 reporting, this measure reflects the sum of:

  • Base Salary
  • Bonus/Incentive Payments
  • Other W-2 Reportable Compensation
  • Retirement/Deferred Compensation Contributions
  • Non-Taxable Benefits

Overall TDC for the sample of Michigan Associations studied was $208,100, and is distributed as follows:

CEO Pie Chart

Since the incidence and levels of the various elements increases with size, the distribution of the various elements also increases.

Michigan Association Compensation Governance – A Candid Conversation

This spring, Merces reviewed the most recent IRS Form 990 filings of nearly 200 trade associations and professional societies in the state of Michigan.  Of these organizations, 122 had filed the full Form 990, with 76 also filing Schedule J, which provides detail on compensation, as well as information about the methods used to govern compensation.  Findings from the study will be published at this blog, and in full later this summer.  For more information, contact Merces’ research department.

Tools Don’t Substitute for a Compensation Program

Not too long ago I had the opportunity to spend several days with a nonprofit client working through a job evaluation exercise.  What makes this client somewhat unique is that the CEO has a human resources background, which certainly makes explaining compensation principles a lot easier.  What struck me, however, was that this CEO, despite a strong background in compensation, had never been exposed to job evaluation — an essential component not only of a “best practice” compensation program, but of any compensation program that is actually going to work.  If a top-notch HR executive hadn’t heard about this, what in the world is going on everywhere else? 

The truth is — the compensation profession has lost its focus on theory and method, and has fallen in love with tools.   That’s a problem, because the vast majority of nonprofits don’t have internal compensation professionals, and nonprofit HR folks are at the mercy of the vendors trying to get them to buy things to make their lives easier.  Don’t write a job description, use “DescriptionsRUs” to create one for you.  Don’t bother finding out what your people do, or what you need them to do — this cool piece of cut and paste software will let you create something hopelessly meaningless, but probably ADA-compliant.   You don’t need a salary structure, get “SurveySolvesAll” which will pinpoint to within four decimal points the appropriate pay for an individual by just typing in a zip code and a generic job title.  Last year I was invited to a seminar called “why your HR spreadsheets stink” which implied that using a spreadsheet was a horrible waste of time when a nice piece of I’m sure very expensive and quite generic software was available. The worst offense? A bulletin from World at Work announcing that most employers use market pricing as their method of job evaluation.  Why the worst?  Well, look it up, folks, market pricing is by definition excluded from the concept of job evaluation, which is a method for ascertaining the internal value of a job.

Let’s face it — in business today, we are all seemingly obsessed with tools, because tools make management “easy” — not effective, but easy.  Dashboards are cool — provided that all they are used for is to gather and report information on management decisions that have been made for the good of the organization.  Tools can be a crutch.  Just like an operating philosophy determines the organizations priorities and translates that into a staffing model, a compensation program must be driven by a compensation philosophy.  It must have components that measure how important jobs are to the organization, to ensure that equity and fairness are maintained, and that pay is consistent with the organization’s values. It must function in the real world, so it needs benchmark data from reputable sources to ground it.  It must properly assess performance so that the pay of individuals is fair — so that it allows the organization to attract, retain and motivate a workforce that will help the organization meet its mission.  If the organization has all of that, it can pick and choose the tools it needs support it.  It doesn’t work the other way around — you can’t replace a program with a tool.

Often I have heard organizations tell me that they need “a salary survey.”  They don’t need a “survey,” they need a “program.”  A salary survey is a tool.  It is a source of information.  Without context, it is meaningless. No salary survey product can substitute for an effective compensation program.  Salary surveys are subject to the bias of the people collecting the data, and to the understanding of the people using them.  To provide pinpoint accuracy (ouch, sorry, had to take a break to rinse my mouth of blood since I bit my tongue so hard)… people create models using survey data, and we know what models do.  For example, I just read an article that said that physician compensation had only increased at a rate of 1.5% or so over the last couple dozen years. What planet did this person live on, you may ask?  Well, you see, this PhD-type built a model with very impressive statistics, using the results of the organization’s models, which are based on a whole bunch of assumptions using data that is… modeled — a model of a model of a model… to come to a conclusion that is just, well, wrong.

Software is a tool.  It records, it calculates, it tabulates.  Software doesn’t think, and software cannot be substituted for judgment. About 20 years ago, a former employer started rolling out a fancy computerized job evaluation tool.  $50K or so plus consulting time for the big black box end-all (hey, those were 1990 dollars, and I have no idea how may zeroes to add to that now), that would eliminate subjectivity and provide pinpoint (ouch!) accuracy.  One night a consultant friend and I, a little loopy from too many long days and a beer or two from the office refrigerator, decided to test it on a job we will title (for the family audience of this blog) “CEO’s Mistress.”  Being truly honest and objective as possible, we completed the questionnaire and lo and behold, assigned it to the pay grade only a few slots below the CEO, in amongst the other Vice Presidents.  True objectivity at work.

Your compensation program isn’t the spreadsheet you use to record your data.  Your compensation program is the method that you use to translate your organization’s mission into action.  It is strategy.  It takes into account where you are, where you are trying to go, and what it will take to get there.  It cannot stand alone, and must be integrated with your operating philosophies and practices. More than anything else, it is a supportive program.  It cannot drive behavior, but it can support it.  It takes work.

You don’t need a “salary survey,” you need a “compensation program.”  Remember what tools are, and remember the difference between a tool and a program.  

For more information about compensation programs, contact the author at ebura@mercesconsulting.com or 248-507-4670.

[This post is reprinted from another Merces Consulting Group blog from February, 2014]

Compensation 101 – The Essentials

Certainly there are differences of opinion among human resources professionals about what is “essential” in a pay program, and certainly trends come and go, but common sense and decades of experience and observation will lead most practitioners (well, those without a lot of money invested in an alternative product they are trying to sell you)  to conclude that there are three components that are essential to an effective compensation management system:

  • an internal equity, or “job evaluation” process
  • a tie to the market through the use of competitive data
  • pay for individuals tied to the performance of their job duties

It is fair to also address up front some of the misunderstandings and misconceptions related to pay:

  • Using surveys only tackles part of the issue.  Market data does no good for jobs that don’t appear in surveys, or for jobs that are different than the surveys.  Market data is only as good as the people who conduct and complete the surveys, and frankly, a lot of it has little to no actual value.  Many of the survey products on the market today that are touted as end-all solutions aren’t surveys at all, but computer models of what pay “should” be.
  • Giving “across-the-board” increases (e.g., everyone gets 3%) is a bad idea, and it isn’t fair. Even if it was fair that everyone get the same increase, it presupposes that everyone was paid the right way before the increase.  These types of increases lock employees into the position that they were hired, does not reflect the reality of the labor market and do not fairly reward performance.
  • Step increases, and seniority-based pay programs, are fundamentally unfair.  First, they don’t reflect reality — people do not grow at the same rate, and some never grow. Second, seniority doesn’t guarantee higher levels of performance, it only gives you more time to show how you perform.  While there are aspects of seniority that provide value to employers, they pale compared to actual observed performance on the job. What these types of programs actually do is to make pay management easier — not better.
  • An organization should never have to pay more to a new employee than a good performer who is already in the organization — this isn’t “just something that is always going to happen” — its a prime characteristic of poorly managed pay.
  • The right way to deal with a job with two different sets of responsibilities is NOT to average the market rates for the two different jobs.  Here’s a hard fact about how the labor market works; you have to pay for a skill set 365 days a year, even if you only use it 10 days a year.
  • Adjusting pay to reflect the “cost of living” is both costly and ineffective.  While it may seem “fair,” since the beginning of recorded statistics, the cost of labor has always lagged the cost of living.  Why?  It’s very simple — organizations just can’t raise prices every time the BLS puts out its monthly guesstimate of the cost of new housing and appliances.
  • Managing pay the right way is not complicated or expensive, and neither is managing performance.  It just requires actual management.

It should come as little surprise that many if not most pay programs fall victim to one or more of the characteristics listed above.  If those are misconceptions, that what is the optimal solution, and why?

The first essential step, before looking at program design, is establishing a compensation philosophy.  A philosophy is a statement, similar to a mission statement, that clearly sets the position of the organization — how it is going to determine what to pay, what market it intends to compete with, and what position it plans to take to that market.  A well written compensation philosophy, which should be “Board-approved” can serve as a test for every proposed compensation program.

With a philosophy established, the pro-active organization will do the following:

  • use a job evaluation process to create internal equity, ensuring that jobs of similar value to the organization have similar pay opportunities;
  • use relevant and appropriate labor market data to establish pay ranges for each of the pay grades developed using job evaluation; and
  • ensure that each employee in a job is paid in the appropriate part of the pay range for their performance.

Internal Equity

Simply put, “internal equity” is achieved when an organization pays its employees based on their ability to contribute to the success of the organization.  Internal equity is achieved when the pay opportunities for individuals in jobs are linked to the importance of the job internally, rather than how the outside world values a job.

Internal equity is typically achieved through the use of a process called job evaluation. While there are different methods, what they all share is the idea that various characteristics of jobs can be assessed in an objective way — the sum of the various characteristics becomes the overall value.  This is the part the critics may say is “too expensive,” or “too complex,” both of which are simply false.  Most of these critics sell salary survey software.  The truth is that an internally administered job evaluation program will solve some of the biggest problems an organization faces when it comes to pay, such as:

  • How do we determine how to pay jobs that don’t appear in surveys?  Well, you may not know how others value the job, but you will know how YOU do.
  • What do we do with jobs with added levels of responsibility, or which have unusual combinations of duties?  You can’t just add an arbitrary percent to a market rate (frankly, because any attempt to do this is completely arbitrary).  You also shouldn’t fall into “averaging” trap mentioned above, because it doesn’t work.
  • How do we know how to pay a programmer vs. an accountant, or an IT Technician vs. a meeting planner? When you try to just hold them up against each other, you really can’t decide, but if you break the job into its elements or characteristics, its actually very simple.  Again, simply put, jobs can have the same overall value for different reasons.

While it does take a little time and effort at the start, once a job evaluation program is in place, it is easy to determine how to pay for new jobs, or what to do if a job is changed.

External Competitiveness

For all its effectiveness, job evaluation does not put the final price tag on a job.  For that, and to ensure an organization is competitive, it is necessary to link the internal values to the external market.  With the plethora of data out there, organizations need to identify which sources of data will give them the information they need.  Surveys should be from reputable publishers with no stake in the data, that is, nothing from recruiters, unions or educational institutions. Don’t use salary.com or similar “modeling” systems, or use internet “surveys” that rely on self-reported data from participants.

Key things to consider when looking at market data sources include:

  • Is the data for a geographic area relevant for the organization?  Pay for a job where employees are typically hired locally should be set based on local data whenever possible.
  • Will the data capture all the relevant competition from the industries in which employees can work.  While some jobs are “industry-specific,” people in accounting, HR, IT and many other functions can work anywhere.  Only looking at your own industry ignores all the other opportunities a current or prospective employee has.
  • Are the right types of employers (by size or scope) being considered?  The amount any organization can pay is limited by its resources.  The complexity of jobs is also tied to the size of the organization.  The job of a “controller” at a small organization with no other accounting staff is completely different than a controller at a Fortune 500 company with a department of hundreds.

It is better to only have a few good sources than a large number of sources of dubious validity. What is necessary is to have enough data on enough jobs to effectively tie the internal structure to the outside market.

Individual Pay Decisions

People want to be paid what they are worth.  Actually, they want to be paid based on what they feel they are worth, which is often something entirely different from reality. However, most performance appraisal processes are ineffective at measuring an individual employee’s actual contribution, and many are used simply to generate some sort of percentage increase.  The reality is that what an employee made last year is completely irrelevant to what he or she is worth this year – and that is the mistake far too many employers make.

It is so simple and so common sense, but I guess it needs to be stated.  We hire employees to do a job, and we should pay them based on how well they do it.  Take the job description, figure out how much of it they employee can do the way you want it done, tie that to a part of the pay range, and pay the employee whatever that is.  It doesn’t matter what the percentage increase is.  The organization has identified the price tag for that employee, and it is the same price tag as the labor market puts.  Other employers won’t care how much of a percentage increase it is — they just want to know what the cost will be.

– – – – – – – –

It sounds like a lot.  It isn’t.  Like most anything else, setting something up right in the first place makes subsequent decisions much easier.  In an existing organization, the process is exactly the same — it just takes more time to implement.  For more information, or for a copy of Merces’ guide to our approach to compensation program design, contact Ed Ura at 248-507-4670 or ebura@mercesconsulting.com

[This post originally appeared in another Merces Consulting Group Blog in September of 2014]

Quickly Ban any Bans on Talking About Salaries

A lot of “compensation tips” arrive in my inbox, from a lot of well-meaning folks, some of whom you probably consider to be “experts.”  One of today’s includes a tip cautioning employers about their rules banning talk about salaries.  Basically, they say that telling employees not to talk about pay is a waste of time, because with social media things get posted everywhere.  I agree, of course, but will also offer the following, much more specific, advice (normal caveat here that while I am an attorney, this is not intended to be, nor should it be construed as, legal advice concerning any specific situation):

1. Check your employee handbook and personnel policies for any language, no matter how vague, that tells or suggests to employees that they not talk about their wages, benefits or any other terms and conditions of employment.

2. Delete anything you find.

3. Make sure that all managers know that they should not be discouraging employees from discussing things related to their employment with other employees or anyone else.

Under well established law, in particular the National Labor Relations Act (NLRA), employees cannot be prohibited from discussing their wages, benefits, or anything else related to their terms or conditions of employment.  Having a specific policy banning such conversations is seen as being a direct violation of the Act and could very well subject the organization to an Unfair Labor Practice charge, with its incumbent fines and penalties. Please remember, the NLRA applies to all employees, whether or not they have a union representing them.

The current administration is focusing on strict enforcement of employment regulations, and the National Labor Relations Board is at the forefront of the efforts.  Some commentators suggest that the NLRB is overstepping their bounds,  but unfortunately, we won’t know until there are test cases.  In this case, it’s easy.  There is long standing case law and interpretation of the NLRA, and no one is fighting it.

You may not want to spend the money, but I strongly advise all organizations to have their human resources policies, and employee communications documents like handbooks, thoroughly reviewed by an attorney in your jurisdiction that has expertise in this area.  Once you get on the list of one regulatory agency, assume the others will be knocking on your door soon.  Stay off the lists.

[This post is reprinted from another Merces Consulting Group blog originally posted in September, 2013]

Compensation Information in Your Form 990 – A Brief Guide for Board Members

The IRS Form 990 is the tax return filed by not-for-profit organizations, and also a significant document for the disclosure of information concerning the policies and practices of the organization.  Far too often, not-for-profit Boards do not take the opportunity to review this document — not surprising, as it can get to be a very long document when all the schedules are included, and, frankly, much of it is somewhat arcane and the typical Board member would not know whether it was accurate.  However, Board members, particularly the Human Resources or Personnel Committee, should pay a great deal of attention to the information pertaining to the compensation of its CEO and employees.  In our experience, parts of the Form 990s are frequently completed by people outside the organization who really don’t know how you do things, often filled out incorrectly, and text answers often appear to be “copied and pasted” generic language intended to be a minimal disclosure, but not really an accurate disclosure.

Let’s start with the first page (we’ll be talking about the 2010 version of the Form, the last one with significant revisions).  Line 15 provides you with information on the total cost of salaries, other compensation, and employee benefits for the last two years.  Divide that by the total expenses (line 18) and you’ll get a percentage.  This can be compared to industry norms, to determine how you compare to similar organizations.

Whenever you are dealing with compensation issues, you want to make sure that you only have “disinterested” directors on the job; go to Part VI, Item 2, and see if you have anyone who might be “interested” because of a family or business relationship.

Here is a big one – Part VI, Item 15, asks if you have been correctly following the procedures for properly making decisions on executive compensation, that is, have you been setting up the “rebuttable presumption of reasonableness.”  The question reads “Did the process for determining compensation of the following persons include a review and approval by independent persons, comparability data, and contemporaneous substantiation of the deliberation and decision?”  As I type this, I am looking at an organization that answered “yes,” when in fact, they did not.  If you answered yes, there should be a thorough explanation in Schedule O of exactly what that process was.  Beware, accounting firms or software programs may have “stock” language that they insert here that may or may not be anywhere near what you actually do.  I have talked to a number of Board members who say that they have not been a part of any of the discussions described in their Form 990.

Part VII is the disclosure of the compensation paid to certain employees (as well as Board members).  At a minimum, the five highest paid employees must be listed, provided they earned at least $100,000 in total compensation (“highly compensated employees”).  Key employees must be listed, regardless of how much compensation they have earned.  Key employees include, by definition, at least the CEO and the top financial officer.  If you list an accountant as your CFO, even if he or she only earns $25,000, that person much be listed in Part VII.  When looking at these disclosures, make sure the numbers make sense to you.  Part VII lists total W-2 income, reportable compensation from related organizations (W-2 or 1099) as well as the estimated amount of other compensation.  If anyone reported in the schedule on Part VII earned income of more than $150,000, or receive income from another organization for services related to your organization, you much also file Schedule J, which includes  a great deal more disclosure.

Many not-for-profitss will also be required to file Schedule J, where the most significant disclosures are found.  This is the Schedule that every Board member should be familiar with.  This is the kind of information that members, donors or grant-makers will be interested in. Questions 1a and 2, for example, asks about “perqs” that might be provided to executives, such as first class travel.  These are the kind of things that might be legitimate, but represent payments that aren’t always “necessary’ — if they’re made, there should be a Board policy concerning them (Item 1(b) confirms whether this is true).  Merces’ first concern is always the check boxes on question 3.  The “big 6” questions relating to how the compensation of the CEO is established come next.  These boxes aren’t there for window dressing — these are the first clues as to whether your governance process is adequate and defensible.  These include: 1) maintaining a Compensation Committee; 2) using an Independent Compensation Consultant; 3) consulting the Form 990s of other organizations; 4) a written employment contract; 5) use of a compensation survey or study; and 6) approval by the Board or Compensation Committee. The more of these you have, the better.    In our view, items 1, 2, 5 and 6 are essentials to a “best practice” program.

There are some other interesting tidbits on the first page of Schedule J.  Question 4 tells you whether anyone received a severance payment or a change in control payment, and if anyone participates in a supplemental nonqualified retirement plan or an equity based compensation plan.  Merces believes that these questions, particularly 4(b) on a supplemental non-qualified retirement plan, are often answered incorrectly.  There are many types of retirement funding options that would fit in this definition, and we believe that many FQHCs are not reporting the formal and informal arrangements they have, simply because they don’t recognize them as being this type of plan.  Questions 5 and 6 are particularly touchy for 501(c)(3) organizations. Employees are not supposed to be paid directly based on the revenues or net earnings of the organization.  Checking yes here is not a good thing.  Of course, you should check the box if you did, but you shouldn’t be doing it.  Be very careful, as an organization, when you have any incentive plan that distributes net earnings.  I recently spoke to a CEO whose incentive compensation plan required that there be “net earnings” for the incentive to be paid.  My feeling was that this requirement (which is not atypical) could fit the definition of compensation contingent on net earnings, and therefore might be a red flag.

The table in Part II of Schedule J provides much more detail on compensation.  Unlike the disclosures in Part VII, which only deal with total W-2 earnings, Schedule J breaks the W-2 down into base salary, bonus/incentive, and “other” compensation, and also discloses retirement contribution and nontaxable benefits.  This is a very good “total direct compensation” figure for comparison purposes, providing you’re always comparing to the same numbers.  What Board members should be looking for here is a couple of simple things:

  • Does the base compensation (particularly for the CEO) look like the number you approved?  You should be able to find the approval of the base compensation in the minutes of your Board meeting.
  • If there is incentive compensation, does it look right for the plan that you have in place? If there is incentive compensation, it should be pursuant to a Board-approved incentive plan, and the plan should have identifiable goals and objectives, and should not have significant discretion.  I’m looking at a Form 990 that became highly problematic for the Board of the organization, and I see clearly a very large number in the bonus column, most of which had nothing to do with the bonus plan.  It is footnoted, but not correctly.
  • If you have items in “other reportable compensation,” you might want to ask what that is. Car allowances, club dues, some insurance products and the like may be reported here.  If the number is big, you might want to ask what it includes
  • Retirement and deferred compensation can be a large cost, but you should also be aware that it might not be additional cost to the organization.  If an executive voluntarily defers compensation into a retirement plan, it may be money that otherwise would have appeared in the “base compensation” line.  It may also include the executive’s contribution to a 401(k)/403(b) plan, the company’s match, and the purchase of life insurance.

There are a number of items that are either improperly or inadvertently put in the wrong place, and some where there might be a question.  For example, when paid time off is “cashed out,” some organizations put it in base compensation (which actually inflates that figure), and others put it in “other reportable compensation” (which is probably more accurate).

The ultimate big question, of course, is when should a number concern you.  Merces collects information on the range of reported compensation for all of the separate items reported in Schedule J for the top executive positions in many organizations.  The analyses always include the critical variable — the size of the organization.   If the numbers you see are exceeding what you have found in other research, you’re probably in a danger zone.

Last, but certainly not least, are the footnotes and “supplemental information” disclosed in Part III.  This is important.  You should be describing in detail any variation from the expected answers in Schedule J, and also how you govern your compensation program.  Depending on how your organization answered these questions, you may find the responses in Schedule O. Wherever you find them, make sure that these text answers accurately describe the process that you have in place.  If you don’t remember doing the things that are described, remember that you are being held accountable for them as if you were.

For more information on best practice executive compensation governance processes, contact the author at ebura@mercesconsulting.com.

[This post is reprinted from another Merces Consulting Group blog from April of 2013]

What is Internal Equity, and Why Do You Need it?

The missing element in most not-for-profit compensation programs is the most important one — the system that ensures that equity exists in the compensation opportunities offered to people in the various jobs in the organization.  Its great to be competitive, but employees are in contact with other employees far more than they are with the labor market.  The reality is that people usually only find out their market value when they are upset with their current job and looking around.  Job evaluation is a tool to reduce the likelihood employees will ever need to look.

One of the reasons employees look around is a feeling that they are not being paid fairly compared to others within the organization — the obvious comparison is with employees in the same job, but for many, it’s a comparison to those who they feel are providing comparable value.  Whether it is a comparison of jobs held by two entry level professionals with completely different degrees, or three managers, or even the difference between one administrative assistant and another, everyone has a feeling about where their job is in the internal hierarchy of value, and if the compensation program doesn’t reflect that, there is a feeling that the system isn’t “fair.”

Another fairness issue related to equity is when differences in the nature of the job within the organization compared to the typical job out in the market.  Sometimes organizations will recognize that they need to pay more than “what the survey says,” but how much?  The occasional expert will tell you “15%” because, well, years ago someone said “add 15%.” Even worse, what about the job that doesn’t even exist in the labor market?

The answer is an internal equity process, frequently called “job evaluation.”  An effective job evaluation process measures key characteristics of jobs, using objective standards.  For example, every job requires some level of knowledge and skill.  Craft a series of definitions of various levels of knowledge, and determine what level each job requires.  Determine the amount of leadership exercised by each job, the nature of the working conditions, and other factors that have value to your organization.

There is no one simple job evaluation plan that will work for everyone.  The characteristics measured, the level definitions, and even the weight assigned to each factor should be based on the nature and philosophy of the organization.  Merces’ most common job evaluation plans measure:

  • Knowledge skill and ability required to perform job duties
  • The amount of problem solving used on the job
  • The type, complexity and nature of the leadership exercised by employees
  • Communications and contacts
  • Impact of work performance on the organization

Each of these characteristics is important to the valuation of a job, and are very typical for plans of this type.  With points assigned to each level definition, it is possible to create a total score for each job, and have jobs with a similar value assigned to the same pay grade. Measuring job value without reference to the market also provides another benefit — a system that ensures equity free of bias due to gender, race or other types of discrimination.

While developing a job evaluation plan may seem daunting, with the assistance of a qualified professional it can be a relatively painless process.  Administration of most job evaluation plans can be done internally, and managed effectively by a human resources professional.

For more information on compensation programs in not-for-profit organizations, contact the author at ebura@mercesconsulting.com.

[This post is reprinted from another Merces Consulting Group blog from January of 2013]