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=20 =20 &= nbsp; &n= bsp; &nb= sp; &nbs= p; = ; =20 October 2002

Bridging the=20 Chasm
To a New Pay System

=20

Howard=20 Risher =

=20

Public employers are confronted with = an=20 important and difficult human resource problem. On the one hand, = demographic=20 trends, combined with the emergence of a knowledge economy, have = triggered tight=20 labor markets for selected occupations. The problem of recruiting and = retaining=20 qualified IT specialists is only the tip of this iceberg. The imbalance = of=20 supply and demand prompts the escalation of pay at rates faster than the = levels=20 for those occupations in which knowledge is not a critical = consideration. To be=20 competitive in tight labor markets, employers have little choice but to = adopt=20 policies that allow them to be responsive and competitive in those=20 markets.

On the other hand, government pay programs are anything = but=20 flexible and responsive, and the problem is compounded by the deeply = entrenched=20 belief that employees should all be treated equally=97a policy that = makes change=20 almost impossible. Government leaders have effectively stopped defending = their=20 pay practices; there seems to be a widely shared realization that the=20 traditional model for public pay programs is no longer meeting the needs = of=20 government.

A few public employers=97perhaps the most prominent = is=20 Charlotte, North Carolina=97have successfully moved away from the = traditional=20 public sector program model. However, there still is a sense of = hesitancy to=20 take this step. Differences between the old and the new cause = apprehension, and=20 this can be a chasm that is difficult to bridge. This article looks at = some of=20 the considerations that affect these decisions.

The=20 Reasons for Change
Government pay programs have their = origins in a=20 different era. The federal pay system was adopted in 1949 and, except = for the=20 introduction of locality pay in 1990, has been static. To be sure, many = public=20 employers have =93tweaked=94 their programs, but the basic pay model and = its=20 components can be traced back at least that far. It is almost impossible = to find=20 other management practices that have been essentially the same for half = a=20 century.

The new = compensation model=20 relies on: a framework using a simple set of salary bands, alignment = with market=20 pay rates, a strengthened commitment to a pay-for-performance = philosophy, and a=20 responsibility delegated to line managers for day-to-day salary actions. = The=20 salary system now is seen as a management system that reinforces the = goal of=20 successful performance. The =93new model=94 is not new, however; = experience with=20 these ideas goes back 20 years.

Are traditional government pay = programs=20 working? This is a difficult question. From one perspective, as long as=20 vacancies do not result in operating problems, there may not be pressure = to=20 change. The common expectation is that any changes will increase the = payroll,=20 and this often counterbalances the interest in program changes. In = Charlotte,=20 however, the reason for change was integral to a broader strategy to = change that=20 city=92s government and to use financial rewards as a tool to shift = employee focus=20 to improved performance.

Escalating corporate interest in new pay = systems=20 has been triggered by the realization that traditional salary management = practices are simply too bureaucratic, too slow and unresponsive, and = too costly=20 to administer. Traditional pay practices also have produced a culture of = entitlement contrary to the importance of individual initiative and = commitment=20 to success. With the emphasis on reengineering and on cost-cutting steps = that=20 arose in the early 1990s, companies concluded that they could no longer = afford=20 the =93price=94 of a traditional pay program.

Public employers = may not be=20 able to live with the traditional model much longer either. The reasons = that=20 have prompted corporate actions are, to be sure, relevant for = government.=20 However, two more pressing reasons are the emergence of the knowledge = economy=20 and the aging of the workforce. The former is important to employers = that need=20 to compete for people in technical fields like IT. The latter will = affect all=20 private and public employers with an older workforce.

The baby = boomers,=20 who were born between 1946 and 1964, are fast approaching retirement. = Over the=20 next decade, organizations will see a rapid exodus of people now serving = in key=20 management and senior professional roles. And an important aspect of the = problem=20 is that the next generation of workers is smaller and growing slowly. = This fact=20 is attributable to lower birth rates from the late 1970s through the = early=20 1990s. The severity of the problem has been reduced by immigration, but = the=20 demographic trends have already contributed to tighter labor=20 markets.

Demographic trends, combined with the growing demand for = knowledge workers, indicate that the supply of qualified workers in some = occupations will be inadequate. Tight labor markets and their attendant = problems=20 will continue for at least the rest of the current decade. Projections = by the=20 U.S. Bureau of Labor Statistics show that the number of new jobs created = in a=20 long list of occupations will grow much more rapidly than the overall=20 workforce.

In addition to the IT fields, health and personal care = occupations will grow much faster than the norm of roughly 2 percent = annually.=20 Public school systems, for another example, will need to fill more than = 1=20 million new jobs, and this does not take into account the retirements = over the=20 period.

Tight labor markets trigger an escalation of salaries. = The IT=20 market is an example in which some specialists have commanded increases = in=20 excess of 20 percent a year. This is simple economics: for = mission-critical=20 jobs, corporations will pay whatever they have to pay. Public employers = will=20 have trouble competing under any circumstances, but a traditional pay = system=20 will exacerbate the problem.

At the same time, a number of = occupations=20 important to state and local government will grow more slowly than the = norm.=20 With few exceptions, manual and clerical support-job families are = projected to=20 grow slowly. This will affect prevailing pay levels: there will be no = economic=20 reason to grant pay increases. And, in fact, pay surveys over the years = have=20 shown an increasingly wide gap between professional pay levels and those = for=20 manual/clerical jobs.

Another aspect of the problem is the = growing=20 commitment of private employers to recognizing and rewarding their = better=20 performers. Several prominent companies have recently been spotlighted = for new=20 policies requiring a forced distribution on performance ratings: a = specified=20 percentage of employees have to be rated as outstanding, and a smaller=20 percentage as inadequate.

A similar philosophy is reflected in = the=20 practices of many companies. The purposes are to reinforce the = importance of=20 good performance and to reward and, ideally, retain the better people. = In=20 practice, this means that the pay for the =93best and the brightest=94 = will=20 increase, with compounding, at even faster rates.

It is not going to be easy for = public=20 employers to compete in this environment. The graying of the workforce = will mean=20 clogged career ladders that may prompt younger, better-qualified workers = to look=20 for more attractive opportunities elsewhere. It is unlikely that the new = generation of workers will be comfortable with the traditional, = seniority-based=20 pay model.

The First Step Is a Long=20 One
Experience confirms that it is difficult for public = employers=20 to break away from the traditional salary model. There is often support = for the=20 different alternatives in initial discussions; it also is easy to = develop a=20 consensus that the problems of the current system are serious. But the = unknowns=20 and the anticipated reactions of employees make any decision to move to = the new=20 model one that is fraught with apprehension.

Pay always is a = sensitive=20 subject in any organization. It affects employees=92 perceptions of = themselves,=20 along with their lifestyles. Pay can trigger anger quickly. And, of = course,=20 anticipated changes in a pay system make employees anxious. Moving to = the new=20 pay model is easier in a corporation that can argue that the change is = needed to=20 be competitive. This argument justifies a lot of management actions, but = it will=20 be less credible in government.

In the public sector, the problem is = compounded by the fact that no one =93owns=94 the pay system. That is to = say, no one=20 has the responsibility for keeping it up to date, for modifying it, or = for=20 taking the lead in initiatives to improve it. For most management = systems or=20 policy issues, someone is the resident expert or is responsible for = their=20 maintenance. Corporations always have a director or manager of = compensation.=20 Government has specialists who manage the classification process, but = this is=20 not the same as compensation management.

The personnel/human = resource=20 function administers the pay system, but even the best government HR = managers=20 have rarely had direct experience in planning and implementing new = systems,=20 which has not been part of their job description. At the same time, = however, pay=20 administration is not seen as a management concern, that is, as long as = job=20 vacancies and turnover do not affect operations. All of these = circumstances=20 contribute to an environment in which the pay system is prominent in = every=20 departmental budget but no one is truly accountable for it.

The Importance of Leadership
Compensation is = an=20 important management tool. It can inhibit employee behavior if employees = act=20 only to preserve their status or income. Or it can be used to motivate = an=20 employee=92s efforts. It can in fact be used strategically to accomplish = organizational goals, as is routine in the private sector.

When Louis Gerstner became CEO of = IBM in 1993,=20 he realized that the company would have trouble surviving unless it = changed its=20 culture. The proud IBM was seen as too rigid and slow-moving to compete=20 effectively in the highly competitive and dynamic IT market. Gerstner = was=20 brought in to revive the company, and one of the keys to his strategy = was the=20 introduction of a new pay system that ended the culture of entitlement = and=20 delegated much of the day-to-day responsibility for rewarding key = contributors=20 to managers. One of the reasons for IBM=92s turnaround and recent = success is the=20 change in the culture, in which the new reward system has been = key.

In=20 Charlotte, it was the city manager who saw a need to change the way the = city was=20 managed and began a significant reorganization of the structure and = operation of=20 city agencies. One of the prominent changes was in the way people are = managed=20 and compensated. The city adopted a market-based pay system, = administered within=20 salary bands; annual salary increases take into account market trends = and=20 individual performance. Managers make these decisions. There also is a = gain or=20 goal-sharing incentive system that has enabled all city employees to = earn an=20 extra $400 to $600 annually. The city has not raised taxes since=20 1986.

Effective managers can make change happen; they control the = =93levers.=94 When they conclude that change is necessary, there is = likely to be=20 little resistance. Control of the reward system is one of the most = powerful=20 levers available. But major organizational changes do not happen unless = someone=20 in a leadership position decides that change is necessary and takes = control of=20 the change strategy.

Leadership is not the same as effective = management;=20 it is the ability to identify organizational needs, to introduce new = ideas that=20 satisfy those needs, to define the strategic direction, and to gain a = shared=20 commitment to the success of the change initiative. Even the best = manager,=20 however, may not be willing to lead an initiative to change a pay=20 system.

Introducing a new pay system is a source of concern for = many=20 managers in public as well as private organizations. The term = =93bloodletting=94 has=20 been used to refer to the reactions of people and work groups who feel = they have=20 not been treated fairly. This is perhaps an overstatement, but the wrong = implementation strategy can undermine a leader=92s credibility. People = often are=20 reluctant to support an initiative that is not popular. But this fact is = at the=20 heart of the reason why leadership is fundamentally = important.

One=20 strategy that often is used when an employer decides to evaluate the = need to=20 change the pay system is to assign the task to a committee. It is = difficult to=20 criticize a committee=92s decisions. If the committee members decide = that change=20 is needed, their involvement helps to convince others.

Clearly, in the public sector the = various=20 stakeholders and constituencies have to be involved, which makes the = composition=20 of the committee a focal concern. It also makes it important to consider = the=20 need for leadership within the committee so that members are able to = reach a=20 sound conclusion. Without that leadership, a committee is likely to be = stymied=20 by the same chasm.

The final=20 decision to change the pay system always is going to be difficult. = Expected=20 benefits may not be fully realized if the new system is poorly designed = or the=20 implementation strategy is faulty. And managers have heard rumors of = other=20 employers that changed a pay system and experienced problems. In this = context,=20 managers find it all too easy to study the problem and rationalize the = deferral=20 or rejection of changes in the pay system.

So = Why Tackle=20 the Problem?
The reason that a growing number of = organizations=20 have moved to the new pay model is simple: it facilitates improved=20 organizational performance. The new model has a proven track record in = the=20 corporate world Surveys show that less than 1 percent of companies have=20 considered moving back to a traditional program. The new model also=20 substantially reduces the administrative costs that support the pay = system.=20 Charlotte has a single person who manages the system for the entire city = government. With the new model, pay no longer commands as much = attention,=20 resources, or organizational energy. Charlotte=92s experience confirms = this=20 point.

Moreover, as stated, the concern about increased payroll = costs is=20 not valid. One of the decided advantages of the new salary banding is = that=20 individual salaries can generally be =93slid=94 without adjustments from = the old=20 grade-and-range structure to the new salary bands. (This does not, of = course,=20 include necessary market adjustments.) Companies control salary costs = with a=20 budget, and the need to manage a budget is not new to = managers.

The=20 business reasons to make the decision to switch to the new model are = obvious.=20 But there still is a reluctance because the new model is so different. = It=20 involves a new employee relations philosophy, new values, and the = requirement=20 that managers develop new skills. It also calls for an intensive = educational=20 campaign because discomfort with change always is an issue. These = organizational=20 change issues can, however, be planned and managed. The chasm can be=20 bridged.

As an outsider involved with many organizations that = have=20 bridged the chasm, I believe it is clear that change needs to happen. = When=20 managers and employees adjust to the new environment, they like it, or = at least=20 they learn to live with it. If anything, the new model presents new=20 opportunities to people. The labor supply is going to be tight in some=20 occupations for years. For organizations with a maturing workforce, = retirements=20 will exacerbate the problems. Employers that do not adapt their pay = systems to=20 this market reality are going to have progressively serious problems in=20 competing for talent. The federal government already has found that it = is unable=20 to compete for qualified college graduates in technical fields. And = salary=20 increases compound over time, so the situation is only going to get = worse unless=20 changes are made.

Suggested Steps for = Bridging the=20 Chasm

1. Seek out opinions on problems with existing = pay=20 programs from major stakeholders, and develop summary = documentation. If=20 something is =93broken,=94 everyone is aware of it.

2. Conduct/sponsor an educational workshop on = the=20 primary new program concepts. People have generally read or heard=20 anecdotal comments that have influenced their opinions. Everyone = who will=20 be involved in planning needs to get on the same page.

3. Discuss and seek to reach consensus on the = goals=20 for changing the program. This step also should include an initial = attempt=20 to articulate a new pay philosophy. People need to know how the = new=20 program will benefit the organization.

4. Develop a preliminary model for the new pay = program. People need to see and understand what the new program = will look=20 like. This model does not have to include all details; the purpose = is=20 simply to move the discussion away from the abstract.

5. Discuss how a new pay program will be = affected by=20 other management practices. It may be that other changes will be = needed to=20 support the new pay philosophy (e.g., performance management, = supervisor=20 training). It also will be important to estimate the cost, if = any.

6. Develop a tentative schedule for planning = and=20 implementing the new program. People need to know what they can = expect,=20 and when. The duration of the schedule may well extend over more = than a=20 year, but it will be useful to establish a date when the old = system will=20 be replaced.

7. Give the stakeholders a chance to = =93fine-tune=94 the=20 preliminary plan. People need to know that their opinions were = valued and=20 affected the planning process. They also need to know that the = plan will=20 be evaluated and fine-tuned again, if necessary, after the first = year or=20 so.

8. Identify a champion. The organization needs = someone=20 to champion the program changes. This individual needs to believe = in the=20 changes and to have credibility as a=20 leader.

Howard Risher is a senior = fellow at the=20 Center for Human Resources at the Wharton School, University of = Pennsylvania,=20 Philadelphia (h.risher@worldnet.att.net)<= /I>=20

Copyright = =A9 2002, the=20 International City/County Management Association (ICMA)

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