The Six Sigma process is a way to instill a continuous improvement mentality, and thus motivate all employees to higher performance levels. While I can't speak to what every company is doing, I will suggest to you that the role of the black belt is to facilitate the Six Sigma adoption as part of the culture. Unless you are going to make the black belts permanent, I would not recommend that they be compensated any differently than they are now, at least from a base pay standpoint. Recognition, on the other hand, is a different issue. Black belts should receive some special recognition for their efforts and the ways to do this are infinite (dinners, award ceremonies, plaques, etc.).

Bonus plans are a more complicated issue. As improvements are made to various processes, and these improvements are measured, it is appropriate to share a part of the gains (generally financial) with employees. This means developing a structured, team-based process improvement bonus system. Each worker will need to participate in the appropriate type of bonus system. As an example, for plant-level employees you can use a plant-wide (as opposed to work team) gain-sharing or goal-sharing program very effectively to support Six Sigma efforts. For a call center, you might have each customer team paid according to its own performance. This needs to be developed, integrated and managed strategically.

Would you provide bonuses for black belts? My answer is yes, but with qualifications. I do not believe you should pay the black belts for the actual process improvement that they facilitate. Instead, pay them bonuses according to specific goals around successful rollouts. That is, as they are able to deliver training and facilitate successful team improvements, pay them bonuses appropriately. My difficulty in providing them with a "piece of the action" (share of the actual improvements) is that they may be motivated to inflate or misconstrue actual gains. There need to be some checks and balances built in to this.

As Peter Pande, Robert Neuman and Roland Cavanagh explain in their book, "The Six Sigma Way," Six Sigma training should eventually become part of basic business leadership skills for the organization. As with other types of leadership development, it would typically not be compensated. Interestingly enough, there is not one reference in their book about paying people to participate in six sigma training and/or become black belts, or even sharing gains with employees. The book, by the way, is a good primer to learn more about Six Sigma and what it really means for your organization.

Some companies even structure programs that don't assume annual increases. These firms provide frequent pay changes--more or less--as dictated by business needs. Typically, these types of decisions are made by a senior leadership team in light of a company's business plan.

Your specific question, of course, relates to the way your company determines the dollars an employee receives. This decision is part of the overall architecture of the program and, as such, is based on management preferences. Any of the methods you cite can be successfully applied to a system of annual increases. Most companies traditionally apply the percentage increase to actual salary, although some do apply it as a percentage of a midpoint salary range.

Here are some things to keep in mind as you evaluate the possibilities.

1. Within a specific salary range, a percentage based on salary generates relatively more dollars for employees at the top of the range. This may create pay inequities.
2. A percentage based on a salary midpoint tends to equalize the increase for all employees in that particular salary grade/range. But this also results in a reduced actual percentage for any employee above the midpoint. This approach is used to manage salaries by keeping them more closely to the midpoint.
3. A percentage based on position in range (e.g., quartile) has the same effect as percentage of actual salary: employees higher in the range receive more in actual dollars.

As an example, let's take two employees in a particular grade range with a midpoint of $60,000. One employee is paid $53,000 and one is paid $65,000. Both are "at expectations" performers and thus receive an increase of 4 percent. Under the "midpoint percent" system, they both would receive $2,400.

Under the salary system, one would receive $2,120 and the other $2,600. If you are comfortable that this difference is justified, then the salary percentage system may be right for you. Alternatively, if you are comfortable with telling the first employee why he received only 3.7 percent, while his colleague got 4.5 percent, then the midpoint system is the way to go.

Be sure you calculate your overall budget for raises using the method you selected for awarding actual raises to employees. For example, if you are going to give employees raises based on a percent of their midpoint, when you calculate your overall budget, use midpoints to do the calculation.

Otherwise, your numbers will be off. I would recommend that you get your senior leadership team together and have them review the advantages and disadvantages of these methods. They can then reasonably approve the appropriate calculation method.

Once you've determined your compensation philosophy and the project parameters, you'll define your specific labor markets and select (or create) the salary surveys to use in the analysis. Here are a few of the questions you'll want to answer with this part of your project:

• Who do you compete with for talent?
• How are you organized?
• Are you more internally or externally focused with respect to pay levels?
• Does it make sense to create pay structures for each function or business unit? This will be answered in part by the actual data analysis.
• What are your relevant labor markets for the types of positions in the company? Different groups will have different labor markets; the higher the job, the broader the geographic market.
• Are you dealing with any unions where wage and benefit changes must be negotiated?
• What type of pay system allows you to effectively reward and promote talent?

The answers to these questions enable you to determine the type of salary structures, the number of grades or bands, range spreads, and other compensation factors. They also will provide a guideline for the methodology to use for the analysis. For example, if you're externally focused, you will select a set of benchmark jobs (those that have good market data), do the market analysis, develop the structure, and then reconcile non-benchmark jobs to the new structure.

Typically, you will follow several project steps, although not necessarily in this order:

• Managers and employees update job descriptions.
• Evaluate/re-evaluate all jobs/changed jobs if you are using a formal, internal job evaluation system.
• Select and market-price benchmark jobs; analyze the data.
• Internally evaluate non-benchmark jobs if you are using pure market pricing.
• Reconcile internal and external differences.
• Decide on the final number of levels and assign jobs to those levels.

You also will need to develop a comprehensive cost analysis showing who is affected, why, and by how much. There are always costs involved with projects of this nature, and management will want an accounting of these costs. That's another reason why this initiative needs to be tied directly to your business strategy: it becomes much easier to justify.

Finally, don't forget a communication plan. A poorly communicated program can sabotage an otherwise well-planned initiative. You want a plan that begins at the top, and provides for updates to both management and rank-and-file. When the final impact is known, managers need detailed information on how each staff member is affected, and they should be provided with the tools to communicate it their staff.

Plan the project and gather background information. Do your homework and understand the systems you have in place.

Formulate compensation principles and strategies. Define where you want spending to be and why.

Analyze market data on pay and benefits. Examine your organization’s jobs, evaluate issues bearing on internal equity, commission appropriate surveys, and gather any other market information that is available.

Evaluate incentive compensation programs. You’ll want to calculate return on investment of each plan and assess its effectiveness.

Develop recommendations for changes in programs and administration. Build a business case and a financial-impact analysis for all important recommendations. Look at best practices as they might apply to your company.

Implement and communicate changes. It’s important to get feedback on communications materials before you make changes.

Meet with your management team to shape a philosophy of compensation and benefits. Understand how your pay and benefits programs support other aspects of human resources strategy and corporate goals. Determine how much pay is at risk at each level of the organization, as well as your spending tolerance for incentive awards. This helps you uncover significant issues, guides your program analysis, and informs your recommendations.

Get a clear understanding of how much it costs the company to compensate employees. Calculate the ROI on your incentive plans. In other words, learn how pay at your company increases levels of performance. Determine the investment necessary to meet or exceed competitive pay levels. What is the actual impact on cash flow? Your CFO should be an excellent resource for answering these questions.

Communication can make or break the success of any changes you want to introduce. Make sure that you understand and anticipate both positive and negative reactions. Talk with managers about their concerns. Get management buy-in for any major changes.

Don’t forget to periodically monitor and measure how effectively your compensation plans achieve desired goals.

When a position of ours has morphed and the salary range needs adjustment, all employees in that position are given an increase at that time, equivalent to the amount the range minimum was raised. My concern is that this ends up giving pay increases to employees who already are paid above-market wages, with no consideration of their performance.

Also, such “group raises” seem to create a rumor buzz that results in lower morale for employees in positions that do not get an adjustment. How do companies successfully adjust their ranges without creating the “what about mine” syndrome, while also addressing the employees who are already above market?

Companies adjust salary ranges for jobs for several reasons. One, salaries may simply be going up in the market overall. In this case, salary ranges are increased for all grades and for all jobs at a certain time of the year.

Sometimes, a company will adjust ranges just for specific types of jobs, because talent is scarce and wages are rising quickly in those jobs. Lastly, companies sometimes set up a new salary range when the content of the job has changed.

Let’s focus on this last type of change, because that’s what you’re dealing with. Now, let’s assume you’ve done a job evaluation and determined that the job should be elevated to a higher salary range. You now have several choices:

1. Adjust all salaries by the amount of increase in the range minimum, range midpoint or market rate (your current practice)
2. Adjust the salaries of employees who are below a certain point in the new salary range (such as midpoint or market rate)
3. Adjust the salaries of employees below the new range minimum to the new range minimum
4. Do not adjust any salaries now, but adjust those employees below the new range minimum on the date of their next merit increase or wage adjustment.

Each of these alternatives has advantages and disadvantages. The most costly is the first option, since you’re raising the salaries of everyone in the job, regardless of pay level. This leads to job re-evaluations being viewed as an entitlement. Salaries are increasing regardless of the market rate, and the more increases you grant, the more managers will assume it’s an easy way to get “free” (off-budget) increases for staff. The least costly, and disruptive, are options three and four. Many firms choose option three because:

• It provides increases for those who are below the salary range and whose salaries would typically need to be adjusted
• It ensures that employees are paid within the salary range, but not excessively
• It generally has only a minor cost impact, and directs dollars more effectively to below-market salaries.

I’d apply a performance caveat to whatever option you choose. Companies that assess performance regularly can avoid paying these adjustments to employees whose performance is below expectations.

I would like to give each employee a benefits/compensation statement at the end of the year, detailing the company benefits beyond salary. What items should be included? Should salary, OT, paid vacation days and uniform allowance all be included?

Before you spend much time, money and effort on this issue, it is important to ask why this is important for your company. How do total compensation statements fit with your long-term human resources objectives and your employee communication strategy? What purpose would you achieve by providing these documents to employees? Is it primarily to disclose information (using them as a communication device), or are you trying to influence employee satisfaction and improve retention? Is it merely an attempt to make employees think they are earning more than just their salaries? Justifying the expense requires you to link this business process to a strategic purpose for human resources.

The answers that emerge will drive not only the nature of what you communicate, but also influence other decisions such as format, timing and distribution method. For example, the potential formats are quite varied and depend upon the message you want to send to employees. Short statements and summary data make for easy reading, and can convey a sense of total compensation to employees without the need for weighty volumes filled with flowery language that describes "what the company is doing for you." Corporate culture also affects how you get the message across. Does your organization use humor with employee communications? Do you have an overall theme for human resources initiatives that could extend to this process?

In terms of the elements or components to include, you certainly will want to identify high-investment or performance-based items as separate categories: things such as incentive pay targets or actual earnings, the value of stock grants or options, health care costs, and so on. The specifics again are driven by the outcome you desire. However, you should take a "total compensation" approach to the data. By providing employees with a complete picture of your company’s investment, they begin to understand how these categories are related.

Unfortunately, many organizations issue total compensation statements and fail miserably in getting their message across. They believe that the information somehow will resonate with employees, without bothering to take the time think through all the issues. Planning the project within the context of your human resources strategy and business goals and then measuring the impact will greatly help you achieve a return on your investment.

We run a broadband pay scheme, with two or three zones to each band. The problem I have is twofold: managing the broadband salaries budget and giving greater freedom to our HR community. We already allow local managers to exercise discretion when setting starting salaries, providing they can justify why pay should be above or below the norm. Yet they say they want more "freedom to act," without having to justify salaries based on a person's knowledge, skills and experience. How do I get the message across that local discretion is given, but must be justified to ensure fairness and consistency?

The problem you describe outlines the general difficulties of a broadband pay system, which is predicated upon giving managers latitude to appropriately reward high performers and effectively manage overall salaries. In addition, by de-emphasizing "grade creep," administration time decreases while your ability to pay competitively for each job role increases. However, the difficulty lies in the fact that the bands are much less constrained than typical grade structures. Budget limitations notwithstanding, managers who are not trained to "make the tough call" can rapidly drive pay levels out of control as they try to satisfy pay-increase demands for staff members.

Your problems lie both with positioning and communication. Broadbanding is not a human resources program, and should not be seen as such. Instead, it is a tool for management to allocate salary dollars to individuals within the organization. HR's role is not to control the program, but to train, educate and monitor. You should evaluate any materials you have that describe the program, including policy statements, procedural manuals, salary planning guidelines and managerial training documents, to examine how your company has positioned broadbanding.

In addition, the successful use of broadbanding as a system for pay administration involves educating managers and the HR team on market factors that determine competitive pay, how to manage performance and attending to internal equity. These three areas of focus affect the placement of jobs within the bands (or zones), the rate of pay for new hires and also the management of pay increases.

Jobs are positioned within the zones of each band based on a market evaluation of competitive salary data. You will want to educate managers on which market data are used as well as why a given zone reflects the appropriate competitive pay for the job. The zones reflect the actual cost of labor for assigned jobs or roles.

Salaries for newly hired employees are based on the person's relative knowledge, skills and experience in comparison with others in the same job. Salaries need to be based on something other than gut feel, and this methodology provides a relatively reliable way of setting new-hire pay. Human resources can provide guidance in determining equitable salary offers during the hiring process, but it needs to understand the fundamentals first and to have a basic analytical tool kit. This is not a matter of control or justification, but rather a matter of service to the management team.

Pay increases for employees within a particular group are based on some combination of performance, job competence and market competitiveness. Although budgets for annual salary increases generally are used to control costs, it is difficult to legislate managerial behavior simply through budgets. Instead, provide managers with training on salary administration to equip them with the tools, techniques and knowledge needed to use the system effectively (and also to help the HR staff support system operations). This in turn allows HR to assist its clients with implementation and to resolve any issues that arise. Training also serves to maintain consistency throughout the organization. In other words, the messages conveyed by managers are the same messages that get sent to all employees.

One last point: Messages you want to convey should start at the top and move down to all levels. As you address these issues, there are no better people to deliver these messages than your CEO and your vice president of HR.

Our situation probably isn’t unusual, but I'm stumped for answers. I need to redesign commissions for our sales force. Presently they receive substantial rewards for retaining current business. As such, they have little motivation to generate new sales. How do I revamp our compensation so salespeople begin thinking in strategic terms, particularly drumming up new business to fuel our company's growth?

Revamping the compensation system, while crucial to your efforts, is only one of several issues you need to address.

It appears that your sales force fails to view its role strategically. Every employee needs to understand his role and the contribution he makes to long-term company success. No part of your organization is better placed than human resources to facilitate this understanding. Add to this that sales are the lifeblood of business strategy and you have an opportunity to improve your company’s performance. Here are the issues you should address, in order of importance:

1. Meet with the sales force as a group to discuss strategic and operational goals. The CEO should participate and explain why new customers are crucial.
2. Start regularly communicating goals (in writing and face to face) and the progress made on those goals.
3. Send several HR staff members into the sales organization to examine and understand sales processes from beginning to end.
4. Analyze your sales incentive plan of the past few years to isolate good results from poor results.
5. Form a "design team" to review sales compensation. Allow certain key sales personnel to participate to increase acceptance of any changes.

By communicating business goals, you keep salespeople informed and help them feel part of a larger team. Understanding their role in the organization should motivate them to think strategically about drumming up new business.

Salespeople, perhaps more so than most employees, focus on maximizing their earning potential. Your existing plan sounds as if it is based on a standard commission rate for all sales, including repeat business. Although repeat sales are important, they can be "easy sales" that don't inspire salespeople to aggressively pursue new customers. Pay particular attention to several interlocking factors: the efforts of salespeople to retain existing customers, their efforts to generate new business, and their pay levels. Hiring an outside expert may provide broader perspective as you work through these issues.

Again, you are dealing with more than a compensation problem. You are struggling with a fundamental business process that exerts tremendous impact on your company's success. It is critical to approach this from a strategic, not a programmatic, viewpoint. If you are able to raise the level of commitment of your sales team, you will achieve what many companies have yet to understand.

Background. Let us start with a bit of background and history. As a general definition, gainsharing is a system that “involves a measurement of productivity combined with the calculation of a bonus designed to offer employees a share of any increases in total organizational productivity.”(1) Gainsharing plans have been around for a long time. Traditional gainsharing plans are fairly complex programs that are geared towards reducing costs or increasing productivity. Called Scanlon, Rucker or Improshare, these plans each have unique features, but are commonly linked through measures of increased labor productivity and reduction of waste. They typically require some history or baseline of labor or other costs. Awards are the same for each group member, and generally don’t recognize individual performance. Elements of employee involvement are weaved into many plan designs.

Over the past fifty years, many companies have implemented or experimented with gainsharing plans, with varying degrees of success. Many traditional plans have not lived up to expectations, and thus were generally judged to be ineffective. The difference between successful plans and unsuccessful ones does not lie with plan design but depends upon employee involvement and, most importantly, employee commitment. Of the traditional types, Scanlon plans are probably the closest to true employee involvement, since their design is based on suggestion systems that ferret out ideas for changes to organizational systems, tasks and/or business processes.

New Designs. Within the last fifteen years, there has been a resurgence of interest in gainsharing as organizations came to realize that true competitive advantage comes not from technology, patents, proprietary systems or programs, but from the knowledge carried by employees. W. Edwards Deming states the case very succinctly for this new way of doing business when he says, “The greatest waste in America is failure to use the abilities of people. One needs only to listen…to learn about [workers’] frustrations and about the contribution they are eager to make.”(2) Newer plan designs recognize this as significant and are more aggressive in seeking employee involvement and commitment. The key distinguishing features of these new types of gainsharing plans are:

• A design is based on measurable, quantifiable gains;
• An identified mechanism for self-funding from a dollar standpoint;
• A change management driver, not primarily a compensation device;
• A way to enhance employee commitment for the success of the business team and organization.

If organizations truly value their employees as a repository of competitive advantage, gainsharing plans represent a way to motivate them – in effect to harness the knowledge and skills that all employees have and to focus it on specific actions that drive business success in very tangible ways.

While traditional plans were used mostly within manufacturing environments, new designs are being implemented in a variety of industries. Each has a common denominator of being focused on quantitatively measuring savings or productivity gains. Examples include:

• · Call centers measuring effectiveness of customer service;
• · Financial service companies measure cost per transaction;
• · Retail organizations measure inventory velocity and product margins.

Some organization have implemented a variant of gainsharing, called “goalsharing”. These plans provide for more qualitative measures, and generally focus on smaller groups or work teams with a function, business unit or plant facility. Goalsharing plans still generally provide for self-funding of awards, however.

Plan Objectives. As we have stated, gainsharing plans are focused towards engaging employees in improving the productivity of the business and sharing in associated rewards. From an organizational perspective, however, these programs need to be based on an integrated change management process rather than simply creating a new pay program for employees. If designed and implemented correctly, these programs promote and reinforce organizational change rather than entitlement. The emphasis should be on changes in the culture and management practices (including pay) that create an environment where employees can commit to their best work. This is the most difficult aspect of the gainsharing plan to be achieved, and it is particularly difficult in large-scale gainsharing programs that involve all segments of the company. Take the time to plan the project and to marshal the needed resources to do it right.

Favorable Pre-Conditions (4). There are a number of factors that the organization should consider before embarking on this type of initiative. A “no” answer to more than one or two of these pre-conditions means that a gainsharing plan should probably not be implemented until those pre-conditions are addressed.

• · Are you willing to share specific financial and operating information with your employees (this does not mean you need to have implemented “open book” management)?
• ·Are you interested in what employees have to say about how they work, and are you willing to use their ideas?
• · Can you keep gainsharing out of any union contracts (use informal agreements)?
• · Are your current base pay and benefit programs competitive with the relevant market?
• · Are you willing to involve employees in the design, implementation and administration of the plan?
• · Are there opportunities for the plan to be self-funding with real dollars?
• · Can you measure performance in tangible, quantitative ways?
• · Can you identify employee “champions” who are willing to go to bat for the initiative?

If at all possible, pilot the program at one or more locations that substantially meet these pre-conditions.

Barriers (5). There are some substantial barriers to implementation, including:

• · Management attitudes toward the capabilities of the workforce;
• · Lack of corporate or top management support;
• · Union or employee resistance;
• · Risk of failure;
• · Skipping the necessary preparatory legwork;
• · Lack of an implementation plan or follow through.

Any one of these barriers can de-rail an otherwise successful initiative.

Critical Success Factors. So how can you create a successful gainsharing system if you are considering it? Since gainsharing is a process intended to engage employees in improving the productivity of their business unit, a company that wishes to implement Gainsharing needs to pay critical attention to three areas:·Education and communication;

• Commitment, and;
• A results orientation.

A project plan that incorporates the proper amount of attention to each of these three areas is critical for success.

Education. Management must be willing to provide employees with information about the current state of the business and the need for change. Unless your organization has a history of participative management and open communications, employees generally do not have much knowledge of business processes, even within their own functional area. They may not understand the priorities of management, or the challenges of the business. In many organizations, management has historically shown little concern for the needs of employees. Consequently, moves on the part of management to affect this relationship are generally greeted with suspicion and mistrust. Define right up front what the company is trying to achieve. If you have a union environment, they will not be happy about the fact that you are attempting to tap into employees for participation in business processes. It tends to make them think you are trying to undermine the union.

Commitment. This goes hand-in-hand with education. Just because employees understand what you want to do does not mean they will agree to it. If this is something that the company feels strongly about, then you need to make employees believe in it as well. The best way to do this is to create a win-win situation for employees and management. Lay out the specific business rationale for implementing the program, such as competition, declining productivity, high cost of manufacturing, etc., and why gainsharing is an effective solution. Choose areas of greatest receptivity to employees. You will have to deal with all of the negative perceptions that will arise, such as, “Is management trying to fire people?”, “Is this a sneaky way of eliminating pay increases?”, “Do we have to give back pay?”, “What is the company trying to hide?” As you discuss and work through these issues, don’t focus your efforts on the fence sitters. Focus on the skeptics, because if they can be convinced, everyone else will come along. One important point to note – management’s commitment and credibility is absolutely key to gaining employee support. Half-hearted management commitment means little or no employee support.

All that being said, management can commit until they are exhausted and won’t get anywhere if employee relations are not workable. You may need to back up a few steps and make the change effort part of a focused communication strategy. If this is the case, your managers and Human Resources staff members need to educate the employees and build their commitment to the concept. Be prepared - as it may take a long time.

Results Orientation. We’re not talking about gainsharing results, but the logical follow through on company commitments. Employees will be extremely interested to see whether management will deliver on its promises. Follow through builds trust. Companies need to involve employees at all levels of the process, and management must be willing to provide more open business performance communications. What you want to create with employees are feelings of responsibility, control, and participation. Achieving this will be the hardest part of the change process. It requires constant on-going attention on the part of management throughout the design and implementation process. That is how true gains are made – in partnership with employees.

If you are successful at implementing a plan that has achieved the goals of these three areas, you will have created the type of lasting processes that you will need to move your business forward. It takes time, and a willingness to move into management practices that can be unfamiliar or uncomfortable, but the benefits are tremendous.

Portions of this article were written by Robert J. Fulton, Jr. and originally appeared at www.workforce.com and in Workforce Magazine.

Beverly Grant, BGJ Consulting

Robert J. Fulton, CCP, CEBS, managing director, The Pathfinder's Group, Inc.

Footnotes:

(1) Brian Graham-Moore and Timothy L. Ross, Gainsharing: Plan for Improving Performance, Washington, DC 20037, BNA Books, 1990, page 20.
(2) W. Edwards Deming, Out of the Crisis, Cambridge, MA, MIT, 1986, page 53.
(3) Harold N. Altmansberger and Marc J. Wallace, Jr., “Gainsharing: Plan for Improving Performance”, WorldatWork Building Block Briefings, Scottsdale, AZ 2001, page ix.
(4) Brian Graham-Moore and Timothy L. Ross, Gainsharing: Plan for Improving Performance, pages 37-43.
(5) IBID, pages 100-101.