The underlying objectives of any compensation system are to attract, motivate and retain good staff. But which compensation system is most likely to achieve that goal? The answer, not surprisingly, is that it depends.
There is no “magic bullet” — only a choice about what's right for your particular practice. There are literally hundreds of variations to choose from, but they are all derived from just a few theoretical models, which can be categorized as either base pay or performance pay. Most practices use some combination of the two categories to leverage the strengths of each. This article will examine two models of base pay — paying for the job and paying the person — as well as models that involve extra pay for performance — merit pay and practice-effectiveness pay.
Although no single model is right for everyone, the practice-effectiveness model does offer a number of advantages. Because this formula combines base salaries with variable bonus payments that depend on the performance of the practice, it helps control operating costs; rewards the right behaviors and builds unity; works with a variety of payment structures; encourages self-management and innovation; and breaks down bureaucracy. But before we analyze it, let's look at its rivals.
Paying for the job is the “traditional” model that most people know. Each position is slotted into a grade level and weighted based on the education and experience the job requires and the number of staff who report directly to the person in the position. Pay raises are scheduled as an employee's tenure with the practice increases. The traditional model is designed to serve as a cost-control tool and to establish each job's relative worth in a practice. [For an example of how to apply this model and combine it with merit pay, see “How to Keep Salaries on Track and Under Control,” April 1998, and a discussion of the article in Letters — “Rewarding Performance vs. Longevity,” July/August 1998.]
The traditional model has a number of advantages:
In short, the traditional pay model can be appropriate if your practice needs high levels of internal equity and centralized control of compensation. But the traditional model has several disadvantages:
In short, the traditional model offers consistency and the perception of fairness in a practice's compensation system. But be careful: Once implemented, it can become a dominant part of a practice's culture and have unintended, counterproductive results.
The alternative to job-based pay is to compensate staff according to the value of their skills in the market. The most common approach is competency-based pay. This model is designed to motivate staff to develop the competencies — knowledge and skills for performing specific work — that the practice needs to accomplish its objectives. This model is most appropriate for practices that need high levels of intragroup teamwork, intergroup collaboration and adaptability to change. (For tips on setting up a system of competency-based pay, see the box below.)
Competency-based pay is a compensation model that focuses on paying the person rather than paying for the job. It's intended to motivate staff to develop knowledge and skills that contribute to the practice's success. There are five steps in designing such a compensation system:
Advantages of the competency-based model include these:
There are several disadvantages of the competency-based model as well:
Merit pay, or extra compensation for superior performance, is a widely used model because of the belief that pay can motivate job performance and increase practice effectiveness. Research suggests that pay can do this when it's linked to actual performance. But this is not the case in most organizations. Considerable research indicates that merit systems fail to create a perceived relationship between pay and performance and fail to pay better performers more in total compensation. Hence, this model generally falls short in delivering its desired results. Here are some reasons why:
Practice-effectiveness pay
One way to combine fixed and variable compensation is with the practice-effectiveness model. It involves setting base salaries plus establishing a formula that will provide bonus payments based on certain practice-performance criteria. (For suggestions about how to implement this model, see below.)
Practice-effectiveness pay combines base salaries with bonuses that are based on the extent to which the practice achieves success in predetermined areas. Implementing this model involves six steps:
The practice-effectiveness model offers several advantages:
There is at least one disadvantage of the practice-effectiveness model: Proponents of traditional merit pay argue that this model lacks a strong performance-pay connection in the eyes of staff. (This is a disadvantage of traditional merit pay, too.) In other words, it may be hard for staff to see the direct connection between their individual effort and their reward for it. This is less of an issue in a small to medium-sized practice than in a large one.
Of course, there's more to implementing an effective compensation system than simply picking a model. Regardless of the model you select, the starting point is to develop job descriptions based on a thoughtful job analysis.
Here's the bottom line: The right model for your practice may not be the right model for the practice down the street. But each one requires that you identify what each staff position is designed to do, understand the model's advantages and disadvantages, affirm that it's compatible with the practice culture you want and ensure that it aligns with your business objectives. |