Performance pay primer - employee compensation programs

There are some very good reasons for developing an effective compensation program. First, the compensation program affects the ability of the organization to attract and retain quality employees. High-quality teachers are key to improving student achievement.

Second, employee compensation is the largest single expenditure in a budget. About 83 percent of an average K-12 budget is directly related to personnel costs. The amount of money spent on compensation is closely linked to how resources are allocated overall. The school board’s primary job is to allocate resources (people, time, and materials) to support student learning and make sure these allocations are in line with goals for student achievement.

Third, local patrons want assurance their tax dollars are well spent and they are receiving high-quality services. Communicating with the public is another important job of school boards. By encouraging community support for a shared vision of student achievement, a school board can build a consensus for supporting the allocation of resources needed to deliver high-quality education.

Finally, the compensation program communicates the district’s goals and philosophy and influences employees’ work attitudes and behaviors. A vision of student achievement and the activities that support that goal should be evident in every decision that is made.

Compensation includes all forms of financial return as well as all tangible benefits and services an employee receives as a result of his or her employment relationship with the district. Compensation can be both direct - wages, merit increases, incentives, and cost of living adjustments - or indirect - which may include pensions, health insurance, or various leave provisions.

Most total compensation programs include a combination of direct and indirect compensation through varying delivery option. They usually include - but are not necessarily limited to - base pay, performance pay, performance incentives, and employee services and benefits.

Base pay should reflect the value of the employee’s work performed in a particular position. It usually does not take into account contributions that result from unique abilities based on individual differences among employees. Some pay systems set wages on the skill or educational level of employees. Base wages are periodically adjusted for cost of living increases (inflation), in response to competitive pressure, or to reflect changes in employees’ experience, performance, or skills.

Performance pay is designed to reward employees’ past work behaviors and accomplishments. Most performance pay systems are based on increments of base pay and provide different amounts depending on the level of performance. For example, an individual employee who is considered an outstanding performer may receive a 10 to 12 percent performance increase and an employee who is considered a satisfactory performer may receive a six to eight percent performance increase. Performance incentives are tied directly to an employee, team, or department performance. Incentive programs can be short- or long-term; results can be measured in terms of cost savings, production volume, achievement of quality standards, return on investments, or increases in funding (i.e. successful grant writing). The possibilities are endless. Long-term incentives tend to focus employee efforts on longer-range results, usually based on long-term organizational goals and objectives.

Performance incentives and performance pay are not the same. While both use increased compensation to motivate high performance, timing of the payment and its effect on base pay differ. Performance pay is a reward for outstanding past performance. The decision to award performance pay is not usually communicated in advance, and the amount of money available to fund performance pay increases is usually not known far in advance. Performance pay is usually added to base pay, permanently increasing it. Performance incentive systems are offered to employees before the actual performance and are usually one-time payments that do not permanently affect labor costs.

Employee benefits may include time away from work (vacation, sick leave), services (drug counseling, financial planning), and protection (insurance benefits, pensions). Often, these forms of compensation are forgotten during discussions about employee pay. Because of their rising costs, employee services and benefits are becoming an increasing part of an overall compensation program.

When used at the CEO or superintendent level, performance incentive outcomes should reflect the critical indices of organizational success. These outcomes can be measured by improvements on state student assessment scores, SAT/ACT scores, graduation rates, increased student participation in activities, customer (e.g., student, parent, community) satisfaction surveys, or operational issues such as submitting quarterly financial reports and correcting any deficiencies in audit recommendations. Like performance incentives, the possibilities are endless.

Typical performance incentive programs set five (5) to 20 percent of the base salary. Some plans are "bonus" programs with a one-time payment over-and-above the base salary. Other plans are "pay-at-risk" programs that may incorporate a portion of the base salary into the incentive program. For example, a pay-at-risk program may start with 95 percent of the base salary with a maximum performance incentive of 120 percent of base salary. Thus, five percent of the person’s salary is "at-risk" if targeted work outcomes are not met.

Whichever program a district considers, it should be simple to administer and easy for employees to understand. One reason incentive programs fail in the private sector is that they are not clearly understood by the participants. Successful performance or incentive programs should only have three to five objectives that focus on the issues that matter most, are attainable, and can be measured objectively.

Districts should be careful in setting objectives and make sure they are not unrealistically high or low. One way to set realistic objectives is to do a simple trend analysis and then set the goal slightly higher. The history of the students’ performance can be used as a "trend" for setting an objective for student achievement based on the percentage of students meeting or exceeding standards.

Another method is to set minimum and maximum achievement levels for each objective. For example, if the objective is to increase the number of students meeting or exceeding standards by 10 percent and students achieve a 7.5 percent increase, the teacher could qualify for 75 percent of the bonus amount (the minimum). If the students’ achievement were less than 7.5 percent, the teacher would not receive a bonus. If the increase in student achievement were 12 percent or more, the teacher would receive a maximum bonus of 120 percent.

A performance incentive program requires flexibility for yearly goal review and renewal. Both the board and superintendent need to understand the relationship between incentive measures and outside forces necessitating changes in direction. Goals and objectives may change from year-to-year depending upon changes in legislation, revenue, student population, or other external forces. The parties should expect these changes.

Setting specific objectives based on district goals and reviewing them annually is a collaborative process for the board and superintendent. Reviewing the goal-setting process helps motivate sustained performance and is particularly important early in the program. OSBA offers boards and superintendents in-service training and assistance in understanding, developing, and implementing performance pay and performance incentive programs.

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