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HOW MUCH SHOULD WE PAY OUR EMPLOYEES?

12/7/2007 - A story from O’Seay’s Fables . . .

Mathew MacFinefellow, Supervisor Par Excellence, was sitting in his office one Wednesday afternoon, when one of his employees, Oliver Winsome, knocked on his door. “May I come in?” Oliver asked. “Sure,” said Mathew, “I was just reading this article on compensation and job satisfaction and I’d like to talk with you about it.” “Good,” said Oliver “because I was just wondering if you were going to give me that raise we talked about a couple weeks ago.” “Well, let’s talk about that,” smiled Mathew. My boss gave me this article I’ve just been reading, which says that job satisfaction is more important than compensation to employees, so I thought maybe we’d do something to increase employee job satisfaction at work. For example, we’re going to begin having small group meetings once a month to give employees an opportunity to express their opinions to management.” Oliver swallowed hard and took a deep but silent breath. “Well, he said, “that’s very important and it sounds like something I’d like to do, but what about that raise?” “Just think for a minute, Oliver, wouldn’t it be good if we were to create a working environment where we always have the free flow of communications so that employees could always feel that their opinions were important to management?” “Of course,” said Oliver, a bit plaintively, “but I was really looking forward to that raise.” Mathew harrumphed. “You don’t understand, Oliver. Here, take this article home and read it and then let’s talk about it tomorrow. Then you’ll more fully understand how a satisfying working environment is more important than wages.” “All right,” said Oliver,” as he took the article from Mathew and started to leave. Then, reaching the office door, he turned to Mathew and said, “All right then. If I read this article, will I get that raise we talked about?”

· How Much Should We Pay Our Employees?

One of the hottest employment questions management must answer is, “How much should we pay our employees?” Many years ago, an industrial psychologist named Frederick Herzberg attacked that problem by positing two relative workplace factors – (a) satisfiers, on the one hand, and (b) motivators, on the other. Satisfiers do not motivate employees, but they must be present on the job for employees to be “satisfied.” As an employer, you have to have them. If satisfiers are not present, Herzberg argued, employees tend to become dissatisfied. Motivators, on the other hand, do not “satisfy,” but can be used to motivate employees to superior performance. If motivators are not present on the job, employees do not tend to become dissatisfied on that account, but will not necessary be motivated, either. Thus, according to Herzberg, employers must first put satisfiers in place at work, prior to moving on to motivators. In other words, employees must be satisfied before they can be motivated.

Examples of satisfiers include compensation, an employee handbook, an open door policy, job security, fair management and good working conditions. Examples of motivators include recognition, achievement, opportunity for advancement and interesting work.

If we apply Professor Herzberg’s theory to compensation, we arrive at an interesting conclusion. First, we realize that compensation (in terms of a salary or an hourly rate) is not a motivator, it is a satisfier. Thus, we cannot use compensation to motivate employees to superior performance. What we can do, on the other hand, is use compensation as a satisfier, which brings us back to the question, “How much compensation do we pay our employees?” Experience tells us that we cannot ever pay employees “enough.” In our management workshops, I frequently ask, “How many of you make enough money and don’t want any more raises?” I have yet to see a raised hand, including my own. (It is said that when asked how much money is enough, John D. Rockefeller responded, “Just a little bit more.”) So, if we can’t pay employees “enough” compensation, how much do we pay them? And the answer is, we pay them “competitive” compensation. If we can say that our employees receive compensation that is competitive, then we can say that our compensation program is “fair,” and that we have gone as far as we can in satisfying our employees, with respect to compensation. We reach this goal through a systematic compensation management program.

· How To Develop A Systematic Compensation Management Program.

A systematic compensation management program assures that employees are paid fairly, both internally and externally – internally, one position compared to every other position in the company; and externally, when you compare the company’s overall compensation structure to similar positions at other employers. There are several steps in this process. First, develop comprehensive job descriptions on each job that comply with ADA, EEOC and with accepted principles of management. We do not recommend generic job descriptions, as duties for similar job titles tend to vary significantly from employer to employer.

The second step is to conduct a job evaluation program on each job description, using eight to twelve factors, each factor have degrees and points. Some of the factors include education, experience, financial responsibility, confidential material, supervision and others. The result of this process is that you will have assigned each job a specific number of points, so that you have a job hierarchy. Those jobs with more points will be higher on the scale and will, ultimately, be in a higher salary grade.

The next step is to divide all of the jobs into salary grades, based on the number of points received. Most employers will have some 18-22 salary grades and some have a different matrix for management. Each salary grade has a minimum and a maximum and, in some cases, a midpoint. We base the calculation of the grades on a compensation survey of similar positions in similar employers. Thus, each employee will fall in a salary grade and we then say that if the employee is paid within the grade, then he or she is paid fairly and competitively. In administering the program, employees receive an annual performance appraisal and their raise in pay is based on their performance. This is called a “Pay for Performance” program. For the past several years, an increase of about 4% has been standard for performance that “meets expectation.” Recently, the U.S. Department of Labor has released figures that show this number to be 3.9% for hourly employees and 4.1% for management. Increases for performance that exceeds expectation have been in then the neighborhood of 6% to 7%. If you have such a program, you have met the goal of employee satisfaction with regard to compensation.

We will be very glad to talk with you about developing a systematic compensation management program, answer your questions about compensation issues or help you resolve an employment challenge. You can reach Sandy Seay (sandy@seay.us) or any of his consultants at www.seay.us, or by phone at 407-426-9484. We’ll be back before the end of the year with our annual Human Resources Management checklist for 2008, an Irish greeting from the O’Seay clan of the west coast of Ireland, and some important ideas that will be helpful to you as you formulate your management goals and objectives for the coming year. We appreciate having you as a friend and client of our firm and look forward to talking with you.



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