“Internal Equity”: An Impediment to Effective Workforce Management

18 Dec. 2012 | Comments (0)

This blog was triggered by the recently released report, False Summit: The State of Human Capital, 2012, co-authored by McKinsey and The Conference Board. The report listed that one of the four areas of opportunity for HR is to “secure a steady, reliable pipeline for today’s skilled workers.” As the report states, “. . . the bar for real talent keeps rising, and the supply of qualified candidates still falls well short of demand.” Thus, one of the focus areas found in this report centers on the frequently discussed skills gap problem.

The report’s survey also found that, in the future, the lowest HR priority is going to be surrounding compensation and benefits, as base pay systems have looked the same for more than 20 years. The problem with this situation is that the underlying philosophy, along with internal communications, needs to be reconsidered to support current staffing realities. 

According to a recent WorldatWork survey, 88% of employers now rely on market pricing to some degree to decide compensation levels; 50% use market pricing exclusively. 86% of employees – a similar percentage – target median market-pay levels as necessary in salary planning, which makes salary management simple and straightforward.

This situation signifies that a job evaluation method is still used for half of the survey participants. The point factor approach, once the most common approach used in salary decisions, continues to be employed by 20% of the survey participants. Gerry Ledford, a researcher and consultant in USC’s Center for Effective Organizations, explains the trend, “The use of internal equity systems is not dead but it is in long-term decline.” The focus on internal equity emerged in the years after World War II when employers were struggling to realize labor peace. In that era, employees commonly spent their career with a single employer, and so this type of emphasis made more sense.

Job evaluation is commonly based on the application of ‘metrics’ to ‘measure’ the internal ‘value’ of each job. Those often used words are misleading, however. Jobs are not being measured; the results are – typically expressed as points and best understood as not a measure of value, but as an index of where each job stands in the internal hierarchy.  Moreover, ‘equity’ is effectively defined by the existing hierarchy.  The grumbling makes that clear whenever there is an initiative to move jobs up or down in the hierarchy.

For stable operations, this internal focus may make sense, and suggests a sense of fairness and consistency.

These decisions, however, ignore what’s going on in the labor market. They also ignore the staffing implications of changes in the business strategy. For reasons that are now difficult to understand, the process to assign jobs to salary grades is too often walled off from day-to-day management.

There was a flurry of research on job evaluation in the 1950s and 60s, but practices remained the same until the late 70s when women started advocating pay equity. The response was the development of computer-based job evaluation systems to minimize subjectivity and possible discrimination. Yet, this interest in new ideas was short lived and for the most part ended with the 1990 recession. 

That recession prompted companies to eliminate bureaucratic practices. Employers realized the focus on internal salary relationships was pushing the salaries for some jobs higher than market levels. In a seminal book published during that time called Strategic Pay, Ed Lawler discussed a list of problems associated with this type of job evaluation.

Now the skill gap highlights a broader consideration that is relevant to all employers. Whenever demand exceeds supply, it drives up prices – as well as wages. No single employer can solve the skills gap, of course. However, a willingness to raise wage and salary levels should make it possible to find qualified workers, but that may mean moving jobs up a grade or two – or possibly more. Yet, that cost is easily justified when a company is in a bind and unable to operate at full capacity.

Too often we have treated the ‘rules’ for managing salaries as inviolate. The reasons for this again reflect the thinking of a different era. The common model for salary systems was not conceived for a world with rapid technological change and the premiums associated with hot skills.

Strategies for dealing with the skills gap are related to the argument for categorizing jobs as A, B, and C Positions in order to create a framework to guide workforce management, and that theme was central to the 2005 book, The Workforce Scorecard, by Huselid, Becker, and Beatty. The strategic importance of A Positions justifies higher compensation. Therefore, planning the compensation for a position is similar to an investment decision.

Every job does not have to be aligned at the market median. For years, workshops in salary management have mentioned the idea of paying, for example, at the 75th percentile, but as the WorldatWork survey documents, that argument has not gained traction. Frankly, the added costs to pay all employees at that level would be difficult to justify, but when used selectively, the practice is fully justified.

Is that really “equitable?” This argument is contrary to the traditional message, and no doubt would not be well received by many employees. However, the need to staff with qualified workers is both logical and easily understood. Employees must understand that having the talent needed for continued success is a priority.

This is a time of significant change in workforce management. Many workplaces are still in a state of flux with downsizing, outsourcing, etc. Demographic trends are also important to many employers.

Internal equity never really existed. Employees become comfortable with the status quo and then resist change, especially when others benefit. It is easy to forget that the hierarchy of jobs and the current grading system are snapshots of the past. In some cases, there has been little change for years. The factors that supposedly determined a job’s ranking two or three decades ago reflected a different era. Jobs are redefined or created in response to new technology with increasing frequency. We need pay systems that support today’s work environment, but also have the flexibility to support tomorrow’s talent needs.

 

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  • About the Author: Howard Risher

    Howard Risher Howard Risher is a private consultant, focusing primarily on pay and performance issues.  His 40+ years of experience have included managing consulting practices for Mercer and Watson Wyatt as we…

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