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Step and Grade Compensation Plans: Designing a Program to Drive More than Just Marketability

June 18, 2020

by Leah Davis, CPA

Step and Grade Compensation Plans

Ask any employer today to name their greatest business or operational challenges and you are guaranteed to hear “finding qualified and skilled employees” in the top three of nearly every list. For many public employers, this struggle to build and retain a talented workforce can often be made even more difficult by budget constraints, changing political climates, and pay equity regulations, among many others. This environment has left many cities, counties, and school districts feeling like a fresh approach to compensation programs may be the answer.

Many public employers have been using some form of a step and grade (also called step and lane) compensation model for years. These models were originally developed to provide a transparent, predictable, and, ideally, equitable pay scale on which public employees and governance could rely heavily. Initial development of a customized compensation program, including an assessment of each position within the system, is often a major investment of time and financial resources for an organization, which can deter ongoing program maintenance and updates. However, when properly designed, implemented, and maintained, an effective compensation program drives far more than just marketable pay rates for employees.

Below are the most basic benefits of an effective and relevant compensation model:

  • Position descriptions are kept current and accurate.

The integrity of the entire compensation model relies on the assumption that all position descriptions, or job descriptions, accurately reflect the essential duties and requirements for each role. Employers should update these descriptions whenever there is a new position created, or if a permanent change to an existing position occurs. To help formalize a process of maintaining job descriptions, all positions should be reviewed bi-annually for accuracy.

  • Objective position point assignment and classifications reflect overall impact.

When consistently applied, a quality position pointing and classification methodology should provide leaders and employees with an objective and logical “hierarchy” of positions based on point value within the organization. This hierarchy, depending on the classification methodology used, is meant to represent the level of skills and experience needed for each position and the level of financial and operational impact that each position has within the specific organization. To be effective, all position classifications and pointing must be accurate both as an individual position and relative to all other positions.

  • Steps and grades reflect competitive wage levels to attract and retain quality talent.

Public employers should be aware of their competition also vying for top talent and what those other employers are offering related to compensation. Organizations should also review annual cost of living adjustments, which increase the entire compensation scale, on at least an annual basis to ensure that they are keeping up with the market.

  • Pay equity compliance is actively managed.

Public employers in Minnesota are required to file a report every three years to ensure that they are not engaging in discriminatory pay practices based on gender. A well-designed and maintained compensation program should ensure that all employees—regardless of gender—are compensated fairly.

While the above list details the key benefits of a position classification and compensation program, there are several additional questions that employers should be asking themselves when evaluating compensation program performance:

  • How and why does our organization award step increases?

Are step increases, which are in addition to annual cost of living adjustments, based on length of service, performance, or other factors? How have these step increases been awarded in the past; how do we wish to evaluate and award these increases going forward? Depending on the award methodology and retention concerns, does our organization have the appropriate number of steps within our scale?

  • If step increases are based in whole or in part on employee performance, does our organization have an effective performance evaluation process in place?

Are employees clear about performance expectations? Are evaluations carried out consistently and effectively by managers across the organization? Does current evaluation criteria motivate the behaviors that actually drive organizational success?

  • Is the current compensation program designed to grow with the organization?

If our city, county, or school district expects to have future growth, does the current compensation scale provide enough “open space” to add new positions and responsibilities within and among the grades or lanes?

  • Does our organization have a clear and consistent position classification and point review request process?

When employees wish to have their position point assignments reviewed, for whatever reason, do we have documented request procedures, eligibility guidelines, and review processes? Are employees and supervisors aware of what factors actually impact a position’s point assignment and what factors do not?

  • How do our union contracts affect and influence our compensation model and its marketability?

Do independent union scales impact the relevance of the overall, non-union compensation model?

  • Do we have a documented policy for approving exceptional service and/or longevity pay above the approved compensation scale, if necessary?

How might this exceptional service and/or longevity pay impact our organization’s pay equity compliance?

  • Do all exempt positions (not eligible for overtime pay) meet the Department of Labor Fair Labor Standards Act (FLSA) exemption guidelines?

Has it been made clear when an employee can be classified as exempt from overtime? Are there employees who need to be reclassified and paid overtime when worked? How will this be communicated to reclassified employees?

When thoughtfully designed and carefully maintained, position classification and compensation programs can be a valuable asset for public employers. When well done, they provide the framework for not just pay rates, but workforce policies and practices that can attract, motivate, and retain the best employees. Just think—how many of your organization’s top three challenges would seem a bit less daunting if you were the employer of choice for the most talented employees in the marketplace?

Find more solutions to your Human Resources needs with AEM Workforce Solutions!

Leah Davis, CPA, is the President of AEM Workforce Solutions and also a Partner at Abdo, Eick & Meyers. She has over ten years of experience owning and operating her own business, providing outsourced Human Resources and payroll support.

You can reach Leah at 507.524.2347 or click here to contact her via email. 

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