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Making wise pay decisions in any businessor professional firm can have asignificant impact on the bottom line.But because of high visibility and closerrelationships in small firms, salariesmay be subject to more scrutiny, and may be the topicof more covert conversation, than is the case in largerorganizations. Further, most service organizations experience payrollcosts in an amount that exceeds 50 percent of thebudget. Managing that cost well is imperative to firmsuccess. WHAT DIFFERENCE DOES IT MAKE? Why do organizations in general care about makingwise pay decisions? Following are the five key reasonsto care. 1. Attracting and keeping the best employees. Firmsmust pay salaries that are within labor market rangesin order to compete with other employers for excellentstaff. This makes it imperative that they acquire anduse current, accurate and legitimate labor market dataas a key indicator of actual pay levels. 2. Assuring internal pay equity. Often more importantto employees than external pay competitiveness,internal pay fairness (real and perceived) is anessential component of sound employee relationsand job satisfaction. Firms that use a systematicmethod of assessing relative internal job worth, andapplying the results as indicators of job worth, arebest able to justify pay levels to their staffs. 3. Using financial incentives to motivate performanceresults. Even though the concept of “pay for performance”can be controversial, well-designed incentiveplans have been shown to dramatically improve financialand operating outcomes. Linking bonuses and/orbase pay levels to sound measures of performance resultscan be an excellent management tool, and cansupport culture change. 4. Supporting legal compliance. Effectively designedand administered pay plans will provide an employerwith guidelines that preclude such legal problems as(a) wage and hour violations, specifically with respectto exemption status and payment of overtime, and (b)illegal pay discrimination. 5. Optimizing payroll cost. A pay plan provides theemployer with assurance that salaries are neither toohigh nor too low. Such plans do not simply provideguidance with respect to increases in base pay, but focuson making sure that actual pay levels are appropriateand based on consistent, rational indicators. WHAT DETERMINESHOW MUCH TO PAY STAFF? It is always a worthwhile exercise to re-examine whywe pay employees … it is because they are valuable!But, what is it specifically that makes them valuable?There are four key indicators of employee value: � Demonstrated competencies. This includes theemployee’s knowledge, skills and abilities (KSAs) … allof the things that qualify the individual to hold the jobin the first place, and which, when enhanced, can qualifythis person for promotion to a higher-level job. Competencies may be manual, technical, analytical,managerial and/or administrative in nature and aregenerally job-specific. They may be acquired throughformal education, on-the-job training, experienceand/or tenure. � Demonstrated traits and behaviors. These arethe qualities that enable the employee to interact withothers in the firm and/or represent it to outside individualsor organizations. Traits and behaviors are generallynot job-related, and include such qualities andcharacteristics as leadership, teamwork, communication,dependability, honesty, initiative and adherenceto policies and/or values. � Nature of the job. While the job itself is usually definedindependent of the individual who holds it, theduties, functions and responsibilities associated withit may change over time as a result of the employee’sinterest and/or abilities. Regardless of how the jobcame to be as it is, it is still that set of functional rolesthat identifies it as a job that could be executed by anynumber of different individuals. � Performance outcomes. This refers to the businessconsequences of an employee carrying out thefunctions of his or her job. It is a measure of the resultsproduced in terms of quantity, quality and/or timeliness.Results are usually measured in terms of goalachievement and/or adherence to standards. The indicators above occur in a sequence. The firsttwo constitute the means of production, which whenapplied in the context of the job, result in performanceoutcomes (ends). Each of these four indicatorsis, in fact, different in nature from the others. Thesedifferences demand dissimilar modes of measurement,especially if any or all of them are intended todetermine distinctions in pay. When we ask employee groups what they thinkshould make the difference in how employees arepaid, i.e. why shouldn’t everyone be paid the same,they invariably begin by responding that it is theirpersonal skill set, education and/or experience thatshould account for differences in pay. When asked toidentify additional indicators, they may concede thatthe market value of their job should also have an impacton pay. Sometimes, it takes considerable probingto find an employee who thinks that “performance”might also be an indicator of pay differences. At the same time, most of our new clients tell us thatthey want us to help them to “pay for performance.”Yet, when we look at their performance appraisalforms, we find that they are actually equating skills”demonstrated competencies,” above) and traits andbehaviors (“demonstrated traits and behaviors,”above) to performance, often with little or no mentionof outcomes achieved. Because skills, traits and behaviors are, by their nature,personal characteristics for which there are few,if any, quantitatively sound measures, such practicesoften lead to pay policies that fail to meet the fundamentalgoals of pay plans as noted above. For example,equating “performance” to the means of production,as opposed to the ends (results), creates a situationin which outcomes are not linked to pay. In addition,supervisors’ ratings of skills, traits and behaviorsare highly subjective and can lead to allegations of illegalpay discrimination if an adverse impact occurs becauseof them. HOW CAN WE MAKE WISE PAY DECISIONS? Following are some practical guidelines for improvingcash compensation practices in small law firms. Establish and maintain a job- and/or skill-basedsalary structure. The first requirement of managingpay wisely is an established structure or frameworkwithin which to make equitable, competitive wage orsalary decisions. This structure is typically based onthe values of the jobs that comprise the firm’s organization,but it can also be based on the skill/competencyrequirements of the role. The value of the job or theskill set is most frequently used as a starting point fordetermining base pay levels. Establishing job values is the most commonly usedapproach to a base pay structure. Jobs need to beevaluated, based on clear, current descriptions, byconsidering both (1) relative internal job comparisonsand (2) job-specific labor market values applicable tothe location(s) and, for some jobs, firm size. It is almost always a mistake to evaluate and classifyjobs without considering both of these factors. Veryimportantly, be sure to review the structure at least annuallyto make sure that the job and/or skill classificationscontinue to reflect the labor market and the jobsand reporting relationships as they change over time. Use the structure to administer base pay effectively.Salary structures have traditionally been establishedas overlapping series of salary grades, eachwith a minimum, midpoint and maximum value defininga pay range. The purpose of establishing a rangehas been to allow latitude for the recognition of performance,tenure and/or experience differences. Unfortunately, many organizations focus on salaryincrease percentages during their merit reviewprocess, often using a tool called a “merit increase matrix,”which is a table that identifies the allowable percentageincrease based on both current position in therange and performance rating. If there are any significantpay inequities and/or lack of correlation betweenexisting pay and performance level, this approach willsimply not work quickly enough to prevent undesirableturnover, potential illegal pay discrimination,and/or unnecessary increases in payroll cost. Instead, we recommend that the firm focus on thebase pay levels that result from the increases, as opposedto the increase percentages. This means thatthe top-notch performer who is currently in the lowpart of the range should be adjusted up to a level inthe range that is commensurate with his or her performance.Similarly, individuals who are already paidmore than their performance justifies should not begiven “merit increases” at all. Failure to take this recommendation not only perpetuatesexisting inequities, but also results in the retentionof mediocre employees and the loss of outstandingemployees to other employers who will recognizeand pay for their superior performance. Define “performance” and measure it accordingly.If your firm wishes to link cash compensation toemployee performance, be sure to think through what”performance” for pay purposes means in your firm. Itis helpful to differentiate the means of performancefrom the ends of performance. As noted earlier, themeans are the demonstrated skills, traits and behaviors.The ends are the results or outcomes … the benefitsof the work to the firm. Set up a two-part system of performance management.It is helpful to establish two parallel processes toaccomplish the usual goals of a performance managementand/or “pay for performance” system:
1. Employee development process. This is the systemthrough which supervisors work with their employeesto help develop the means of improving theirperformance outcomes. This process includes training,coaching and counseling designed to enhance thecompetencies of existing staff, whether these competenciesare skills, knowledge, abilities, traits and/orbehaviors. It also involves, as appropriate, careerplanning guidance. The employee development process should be welldefined in terms of schedule, forms and supervisorycommunications with staff. The documentation of theprocess is typically part of the employee’s personnelfile and serves as evidence of the firm’s desire to providedevelopment opportunities for its staff. The employeedevelopment process itself becomes the “review”and it is solely for the purpose of improvingcompetencies. This process does not have a direct impact on theemployee’s pay, with the significant exception thatany noteworthy deficiencies with respect to competencies,especially as they relate to traits and behaviors,should preclude any base pay increases and/orbonuses until such time as they are corrected to thesatisfaction of the supervisor. Some firms use a statementof “Expectations of Employment” to communicatethe firm’s general requirements with respect tovalues and work behaviors. 2. Base pay process. The pay plan, unburdened fromthe weight of the employee development process, thenbecomes a much-simplified matter of truly linking actualpay to outcomes produced, if desired. If the firmwishes to de-couple pay from performance, it is then aneven more simple matter to pay employees based exclusivelyon the value of their job and/or skill set. If performance is to be considered, the plan can providefor a quantified measurement of performance outcomes,which can be tied to actual wages and salaries, oreven bonuses, if those are granted. The documentationof results achieved can, if effectively planned and executed,be accomplished with a simple one-page form.

Abolish entitlements. Entitlements are, for themost part, expectations of pay increases that are tiedto the passage of time. The most common entitlementsare (1) pay increases linked to tenure, (2) regularannual “merit” increases, especially when grantedon an anniversary basis, that are unrelated to currentpay level and/or performance results and (3) cost-oflivingor general increases. The messages sent by all of these kinds of entitlementsare (1) performance doesn’t count and (2) themost important pay determinant is the passage oftime. These messages are guarantees of mediocrity. These suggestions obviously apply to most employers,but may be particularly relevant to small lawfirms, especially if there is a perception that structureand policies are better suited to large firms. In fact,structure and policies will contribute significantly tothe achievement of the firm’s pay goals, and they donot need to be burdensome. In fact, they can, in thelonger term, save a great deal of time and potential legaldifficulties, not to mention costs. Shari Dunn is the founder and managing principal of CompAnalysis, Inc., a San Francisco Bay Area compensation and human resources consulting firm that works with law firms and other organizations to design pay plans.

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