Merit Pay Healthcare Example 2013 Merit Pay A System That Will Work Paul Richardson
The following describes a proven pay system that would result in those contributing the most to organizational performance and the continuing improvement of performance earning the highest salaries. Those contributing the least to the organization’s performance will be paid at the lower end of the scale. This incentivizes the desired performance and disincentivizes the undesirable performance. This system has many benefits. It is fair, i.e. it rewards performance consistent with the quality of that performance on an individual basis. It provides a wonderful mechanism for sharing true performance with employees and discussions of how to improve that performance. It is constantly up to date something that yearly goals/objectives can never be. That is, it is a real time management tool to apply human resources most effectively. Employees, especially those who perform well like the honest feedback and fairness of the reward system. It provides organization-wide calibration of expectations and allows management as a whole to recognize and utilize rising stars while also facing the falling stars in the organization before they fail. It is far more honest in its communication to and from employees. It doesn’t tolerate people building insular fiefdoms because the organization-wide process makes it obvious in a negative way. It needs to be understood that this system is based on competitive comparison of performance. It is not formulaic in its approach. It relies on person by person comparison based on current perceived value to the organization. While some may complain that it is not defined precisely enough, it is workable, fair, and honest. It values performance “up to the minute,” something that the rubrics so popular in HR circles can never do because they are out of date the minute they are written and would tend to get in the way of organizations ability to crisply respond to new performance needs. If you walk into any department and ask the manager who is their best performer, they can tell you. If you ask the rest of the team same question, they can tell you an answer virtually identical to the manager’s answer. This process is similar to that used in choosing up sides for a softball game. Please don’t roll your eyes yet. The kids know who will contribute the most
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Merit Pay Healthcare Example 2013 to their team and select them in order of that expectation/estimate of their contribution to the team’s success. The perceived value will have changing elements and emphases over time as the challenges faced by the organization also change over time. The avoidance of a formulaic, cast-in-concrete approach allows the system to value what is important to the organization as that continually changes. This technique recognizes and reinforces the value of the ability to continually learn and grow in your job performance. Any formulaic plan written into procedure will be totally inferior to the process described below. Executives have caused great damage by “casting processes in concrete” greatly impeding progress as conditions and imperatives change (as they always do). They need to redirect their approach to focus on results not process allowing flexibility and creativity in problem solution.
The key elements of this proven system are: Fairness Pay ranges based on the market for skills, economy-wide within a metro area or state or region Rigorous system to ensure it is done consistently across the organization Managers/supervisors are the key to doing it well. Each person needs to know where he or she is ranked and what that portends for their salary. Performance reviews must correlate well with salary rankings.
Copyright © 2013 by Paul W Richardson
Merit Pay Healthcare Example 2013 This is a great development tool as the process helps beg the question, “What can I do to be more competitive?” That is, “How can I earn more salary?” Implement this merit pay system for administrative personnel first. This gives a chance to train everyone and work out any wrinkles before it is implemented for lower level employees.
Fairness This is the most vital requirement for any (merit) pay system. It recognizes the need for absolute rigor in making sure that the methods used prevent subjectivity. Fears expressed by employees include; more pay for those who “suck up” to their boss and performance metrics based solely on a narrow subset of results. Employees are already concerned that their managers have weak management skills and would foul up the process. That is, they have a lack of trust in their leaders’ competence. Care must be taken to ensure that fairness is present across all departments in an organization/site. Allowing individual managers/supervisors to set pay within their own department without the perspective across the whole organization is a formula for unfairness from department to department. The requirement for managers, for example, to meet and agree on the across-the-organization “stacking” of staff nurses for example is necessary to calibrate the process for consistency across varying levels of managerial expectations. However, the biggest component of performance measurement for each person must come from the person’s direct boss. To be most effective the process needs to be led by and have the full commitment and involvement of the CEO or Division Manager. This leadership of the process from the top ensures it is given importance by all managers and support areas.
Pay ranges based on the market for skills, economy-wide within a metro area or state or region If the job market’s pay range for starting BSN nurses is X/year it does no good to offer jobs to new graduates paying ½X and expect them to take it “for the good of the patients.” This leads to compromise in “settling” for ADNs and kidding yourself that they will upgrade quickly to BSN levels. This has caused a problem for more than one healthcare system faced with
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Merit Pay Healthcare Example 2013 certification and competitive requirements for increasing percentages of BSN nurses. You may find some altruistic folks who will do it, but not enough to fill the needs. This is especially true as “boomer nurses” begin to retire in large numbers. A pay “curve” needs to be developed from the scatter plot of salary surveys (be careful that they are truly accurate) for the skill required and the area from which you recruit for employees. You might have curves for ADN nurses, BSN nurses, advanced practice clinical nurses, first level clinical supervisor/manager, etc. Looking at the empirical pay data will tell you how many curves you need. An adjustment is made to project the curve ahead for the future pay period. That is, an estimate needs to be made about the growth in pay for the next year for that competitive group. This is the community, local area or regional group you are drawing hires from not the group in your organization. The curves would be constructed to fit the data in quartiles, that is, 5 lines (four performance bands) versus time. There will be some upward slope as experience increases due to the proven fact that more experience is an added value to performance, especially in the area of resiliency under stress. Rigorous system to ensure it is done consistently across the organization A proven way to ensure consistency across a district is to have all supervisors and their managers “stack” the members of each group like staff nurses periodically. I recommend quarterly. The process requires that individuals in every job class be ranked from best to lowest performance (value to organization). The benefit of doing it more than once a year is that it provides the opportunity to provide feedback on “progress” to each employee throughout the year giving them a chance to change their performance for the better. Often the stacking process can point out favorable or unfavorable information about the people in a manager’s group of which he/she was unaware. Whether positive or negative it is a valid input to measuring the person’s performance. Each supervisor/administrator comes to the meeting (ex. Staff nurse stacking) with his or her own nurses ranked from top performer to bottom performer. The group stacking process is really a “merging” of the individual supervisor’s rankings into an organization-wide stack from top performer to bottom performer. The fact that this is done in a group, collaborative meeting tends to eliminate the “suck up” problem.
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Merit Pay Healthcare Example 2013 Once this is done the organization sets a consistent time frame for all supervisors to give the performance ranking which has been converted to a number representing their position within the band of performance where they fall. The bottom line represents a performance number of one, the next line represents a two and so on for three, four and five. The distance between lines is represented by a fraction. Therefore someone stacked halfway between 3 and 4 would have a performance number of 3.5. No one is given the rankings of any other person and all are encouraged to keep their own ranking to themselves. The consistent timing is important as everyone gets his or her info in a fairly short time window. This is most important when new salary amounts for the coming year are communicated. The system therefore, requires the supervisors to give feedback on performance periodically and the fact that it must correlate with the stacking process makes it more likely to be honest and objective. The organization’s leadership benefits greatly as well because they gain perspective on how the organization is performing as a whole and the overall relative strength of their own staff. They also can see if their people are growing in performance and how they are perceived in the organization as a whole. One of the biggest benefits of this system is that it forces people to realize they are part of a large system tasked to facilitate continuously improved patient outcomes. The fact that their performance is discussed organizationwide helps them realize that they must perform to optimize the performance of the whole not just their own personal niche. Making others’ jobs more difficult to make your own easier will not favorably impact your ranking. Once the stacking is complete, each person is plotted on the appropriate curve at his or her current pay and years of experience position. To construct the target or “should-be” wage the top 10 percent are positioned in the top (excellent) band, the next 40% are placed in the next (very good) band, the next 40% are placed in the next (good) band, and the bottom 10% are placed in the bottom (acceptable) band. This approximates a Gaussian distribution (Bell Curve) for the total population’s performance distribution. For example, a person who is at the middle of those ranked “good” would be plotted at the midpoint of that band for their years on the curve. That gives a “should-be” wage based on the result of the stacking. Once that is done, pay raises can be determined by taking the total dollars available in the organization for that year’s wage increases and spreading it proportionately across the total payroll to give each person a raise as close to their should-be
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Merit Pay Healthcare Example 2013 as is possible within the budget. Note, some people will have a negative should-be calculation. They would not qualify for an increase in pay. It doesn’t make sense to give people a reduction in pay. That would make people oppose it strongly from the start and doom any possibility of a positive result. The slope of the curve will correct the imbalance over time if the performance remains acceptable. If not, the person needs to be counseled, put on a plan of improvement, or removed from the position. Supervisors/managers are the key to doing it well. The top management in an organization must establish the expectation that the process will be fair for all people. Performance standards need to be consistent across the district. They must make sure that representatives of each sub entity realize that they are part of the whole and cooperation and teamwork are required to get the best result for the patients and for themselves. You cannot do the merit pay process without including real performance data in the mix of elements you are rewarding. It is my observation that many current managers are poorly prepared for managing this sort of system. To make this system work, significant management assessment of current leadership skills and based on the assessment, tailored training of leaders to fill the missing requirements is necessary. This would benefit performance greatly in all areas in addition to providing the basis to implement a merit pay system. A last comment on the “choosing up sides” analogy: you might say it would lead to favoritism on the part of the principals. However, a way to avoid that is to make sure the manager understands their own performance ranking is closely tied to the performance of the team they have chosen. As a training exercise on stacking I would use a process where managers were told that the board and CEO had decided that only the top 70% of managers in the performance stack would be retained for the coming year. As they reacted negatively you could tell them that it isn’t true yet but they need to rank their employees as if it were true. Each person needs to know where he or she is ranked and what that portends for their salary. Giving people objective information on their performance versus their peers allows them to take corrective action improving performance individually and for the whole organization. The merit pay system creates the expectation for feedback and the people will ask for it even if a supervisor is
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Merit Pay Healthcare Example 2013 reluctant to give it because the news isn’t as positive as they would like to give. The fact that pay follows performance in this system makes objective performance feedback necessary and that alone will greatly improve performance. Performance reviews must correlate well with salary rankings. The worst thing a supervisor can do is get into a situation where the performance reviews do not correlate with the person’s pay in a merit pay system. The result of this would be confusion, distrust of the supervisor (organization as a whole, as well) and a reduction in morale and performance. Top management must ensure that the process is honest, rigorous and fair. This is a great development tool as the process helps beg the question, “What can I do to be more competitive?” That is, “How can I earn more salary?” In a merit pay system, a person’s pay is the ultimate measure of job performance. It also makes the person realize that they have responsibility for their own pay since their performance is the determining factor. This realization is a powerful motivator for people to seek developmental opportunities and coaching from their supervisor. This creates a “virtuous cycle” where better performance is rewarded directly by one’s pay. It also gives early warning to those whose relative performance is slipping allowing them to take corrective action, i.e. grow. Implement this merit pay system for management personnel first. This gives a chance to train everyone and work out any wrinkles before it is implemented for non managers. I recommend a one-year period where merit pay is implemented for all administrative personnel as the best way to ensure the “launch” for all is smooth and effective. If you already are using something you term a merit pay system for administrators adjust it to fit the requirements listed above. An organization is best served by having the same pay administration process for all employees. However, the organization could gain much useful information in doing the stacking exercise immediately for all employees whether they tie it to pay immediately or not.
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Merit Pay Healthcare Example 2013 Summary Even if you do not implement the Merit pay process, the stacking process with the attendant discussion of performance across all departments in the organization is a very powerful management tool for those who want to strengthen the organization’s performance and the employee team. Merit pay is a very strong motivational tool for managing people’s pay, if you do it well. It also has great benefit in providing real-time data on how the organization is progressing in terms of continuous performance improvement. If you do it poorly, it will turn people off, reinforcing a belief that their managers are incompetent and subjective at best. If you are considering implementing a merit pay system, do it right the first time. Practice doing it correctly before you implement it organization-wide. Merit pay is not a panacea. It is a very effective tool for rewarding and encouraging the type of performance growth required if an organization is to meet the challenges it is facing to do a better job. Properly conceived and implemented, it is much more fair and a morale booster. It does take hard work, discipline and rigor in implementation to do correctly. If you are not committed to the level of work and excellent communication involved, walk away and don’t even try to implement it. Implementation Steps
1. Managers attend two-day workshop to learn the ins and outs of the process. They work through issues, see the benefits and the requirements for doing it well. Practice the process using real data would be provided. Important that ALL managers attend. At the end of the second day, assignments are made to obtain the data needed to start the implementation for managers as a first step. Assignments will also be made to address the issues that became obvious from the “practice exercises” and which will require immediate action. The task of obtaining longer lead-time data for job category pay would be assigned as well. 2. CEO has alternating weekly meetings. One week he/she leads movement on the way to implementing the merit pay system. The next week he/she follows up on the issues highlighted in the practice part of the workshops. Since the practice was done with real district data, the problems “discovered” have a priority to be addressed.
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Merit Pay Healthcare Example 2013 3. Preliminary salary data from the job market is accumulated for the manager jobs. 4. Pay curves are generated and approved for manager jobs. 5. Initial stackings are done of managers. Suggest first level managers are the group with the most leverage on organizational performance. 6. Based on initial stacking, establish action plan to deal with problems identified. 7. Strategy for assessing performance of people without peers in the organization is developed. This would likely involve accessing salary data from other organizations and conferring with other executives to determine where the local person’s performance fits in performance levels. Less precise than you would like but still better than doing it in a vacuum. 8. Based on initial practice stackings, look at the financial impact of the plan and adjust pay curves to fit the reality of the budget balanced with the competition for talent in the job market. 9. Set a target date for implementation for administrators. Would probably be consistent with the normal yearly performance review time. Since the managers will have been trained and a part of developing the process there should be minimal need for “kickoff meetings” of the type that would be required when the move to include non-managerial staff is implemented.
Copyright 2013 by Paul Richardson
Copyright © 2013 by Paul W Richardson