Team-Based Pay System Design

There are many considerations in the designing of a team-based compensation system. After the alignment of pay with strategy, culture, and competencies of the employee, then the next step is to determine the type or types of team in a particular organization. There are four types of teams: The first is the parallel team that is defined as a part-time team that can be temporary or permanent that employees participate on in addition to their normal activities. The second type of team is a process team that carries out the work processes and is done collectively by members of a team. A project, or time-based team, is the third type of team and is the opposite of a parallel team in that members work full-time for the duration and until completion of a project. A fourth type is a hybrid organization that includes a mixture of the teams described above.

Another consideration that the organization should take into account is the number of job categories in an organization. The concept is termed broad banding, or encompassing more jobs into fewer bands, and it is used to determine the number of pay grades. The narrower the band, the fewer the differences, and the greater the equality of pay opportunity among the people within that band. After determining the bands, one must determine the parameters used to pay every job. This is the base pay for each job. Setting base pay is usually based on market pricing and job evaluations. Market pricing indicates what others in the market would pay for the same job. Job evaluations assess what skills and work is involved in a particular job. Also, one must determine the total pay allocated to the base pay.

The next step in the design of a team-based compensation system is the performance appraisal stage. The criteria upon which the rewards are given are necessary in order to create the link between strategy and reward. An organization must define the performance criteria of their employees. There are four criteria used in measuring team performance. The first is a demonstration of behavioral competencies that are personal attributes and behaviors such as attitude, motives, and traits that predict longer-term success. The second criterion is the acquisition and/or the demonstration of skills and knowledge. Thirdly, there needs to be an achievement of specific objectives within a specified period of time, best known as management by objectives (MBO’s). Finally, the results (quantitative or qualitative) are used to measure the performance of the team.

These criteria are different depending on the type of team present in an organization. The parallel teams would primarily use the MBO’s approach followed by the demonstration of behavioral competencies and the results of the team effort. In a process team, the primary criterion used is the demonstration of behavioral competencies followed by the acquisition of skills and knowledge and results. Finally, in a project team, the most important criteria is what the results are followed by demonstration of behavioral competencies and the achievement of specific objectives in a specified period of time.

Another component of pay is the increase in base pay. Individuals will sometimes ask for raises and in a team-based environment, it is much more difficult. One reason for the difficulty lies in the fact that different types of teams require different ways in which to handle the demands to increase base pay.

The third component of pay is recognition. Recognizing team results is very important in the sense that it can motivate team members and increase the team’s level of cohesiveness. If team members are praised for a job on which they all contributed, their teamwork will be reinforced. Recognition can actually have more of a motivating effect that reaches into the future. Non-monetary rewards such as plaques, trophies, vacation trips, and small gifts can be the best incentive for team members. However, the most important part of this kind of recognition is that management must give it with sincerity. In implementing recognition, the organization must reward teams that exceed objectives, they must determine who is eligible, and they should have several levels of recognition. For example, appreciation non-cash rewards, awards for significant financial contribution, and awards for extraordinary financial results. It is recommended that non-cash rewards be the primary type of recognition for all team types, and cash be the secondary reward for parallel and process teams but not for project teams.

The fourth main component of a compensation plan is the incentive plan. There are nine basic elements to an incentive plan that needs to be assessed beforehand. These are eligibility to receive incentives, participation, measurement, alignment of team and organizational goals, funding, timing (shorter time between payoffs is better because it raises motivation), benefits, administration, and evaluation of the whether or not the plan needs changes.

Implementation of a reward system is the next step after identifying and assessing the different pay components. There are three phases to implementation. The first phase is labeled feasibility, which asks whether the strategy in the organization is feasible at the stage, they are in currently. It includes planning, environmental assessment, readiness diagnostic, and the compensation strategy. The second phase is the design phase and it includes the design concept, the design components, testing of the compensation strategy, transition approach, union participation strategy, and administrative requirements. The third phase is the actual implementation of the program and it includes education/communication program, organizational integration, and ongoing monitoring. As mentioned earlier, it is important that the organization be ready to implement the new compensation system. The team design needs to be stable before implementing a new pay structure. The organization must stress communication and flexibility. There must be management support of teams; the culture must be one of cooperation; and there also needs to be strong administrative support that records team performance. Only after these elements are in place should an organization attempt to design and implement a team-based compensation system.

For any team-based pay plans to be implemented, there must be a link to the organization’s strategy. Team goals should be subsumed under the organization’s overall goals and objectives. Pay should be aligned with the accomplishment of those objectives. A performance measurement system also needs to be established. It is imperative that there are explicit measures of how well the team is performing in reaching the desired goals. These measures usually include such factors as productivity and quality. This is important in meeting goals and also measuring how much the team members should be paid according to their measured performance from the predetermined criteria. Another important design consideration is the allocation method to the team members. Various methods of distributing rewards – Equal payments to all members of the team; differential payments to team members based on their contribution to the team’s performance; and differential payments determined by a ratio of each group member’s base pay to the total base pay of the group. The first method fosters cooperation, whereas the second method may result in some members feeling slighted. A measure of cooperation and teamwork must be built in to this plan if used. The third ratio method reflects the market rates of the jobs. The last design consideration is the payment method. Team rewards should be kept separated from base pay so that the team member knows that their reward is strictly because of the performance of their team.

Team pay results in- Improved productivity (Better results are reported for those using team incentives than those using individual incentives in a team environment. These results seem to be long-term, as well); Improved employee satisfaction with the job and pay (This is due, in large part, to the improvement of their skills through teamwork and to the greater control over their pay than in the past); Reduced costs (Production costs are often decreased as employees perform more effectively and efficiently as a team); Reduced turnover and absence(because employees feel that they have a stake in the production, and they are more satisfied); An advantage to the customers is that the product is improved and the service quality is improved (This is because the employees start becoming well versed in the operations of the team and can, therefore, identify some of the important product and service improvements that can be made).

Credit: Strategic Human Resource Management-MGU KTM

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]
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