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0706 PD: Paying outside the box

Sarah L. Fogleman Published on 07 August 2006

There are many different aspects of human resource management. Some are optional. Some are not. While it may be easy for an employer to put off writing a job description or assembling a handbook, the process of setting up a compensation package is one that every employer has had to go through.

Granted, some employers spend weeks or years choosing health insurance providers, doing wage studies and setting up 401(k)s, while others may just pick a dollar figure out of the air and call it finished. No matter how much time and effort is spent in setting up the compensation package, there are three basic principles all employers, large or small, should consider.

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1. Send the right message.

2. It’s not about money.

3. Use the right carrots.

Send the right message When it comes to employee compensation, most managers are busy asking, “What do I have to pay?” That is not an easy question to answer. A better question might be, “What do I want my compensation package to say?” Whether you realize it or not, it is already saying a lot. Child care and health benefits say that you value family. Giving longevity bonuses for employees on the anniversary of their employment with you says that you value employees who stay with the business. Throwing a party at the end of your business’s busy season lets the employees and their families know that you appreciate it when your people go the extra mile.

No matter what compensation elements you use, they all carry a message. That message is important. It is the principle on which the following two components of this [article] are based. Compensation packages can be linked to business structure, employee recruitment, retention, motivation, performance, feedback and satisfaction. Compensation is typically among the first things potential employees consider when looking for employment. It is important, therefore, to give a lot of consideration to your business’s compensation structure. After all, for employees, compensation is the equivalent not to how they are paid, but ultimately to how they are valued.

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Elements of successful compensation packages According to Schuler, “Total compensation involves the assessment of employee contributions in order to distribute fairly and equitably both direct and indirect organizational rewards in exchange for these contributions.” In other words, compensation has evolved beyond just an hourly wage.

It’s no longer a matter of answering the question, “How much do I have to pay?” Today, successful employers utilize both direct and indirect elements to meet the needs of their employees.

Direct compensation includes an employee’s base salary, which can be an annual salary or hourly wage and any performance-based pay that an employee receives, such as profit-sharing bonuses.

Indirect compensation is far more varied, including everything from legally required public protection programs such as Social Security to health insurance, retirement programs, paid leave and life-cycle benefits (for example, child care or moving expense). Both of these types of compensation are important in developing a competitive compensation package.

While many schools of thought exist on what constitutes a fair wage, there are no hard and fast rules. Research indicates compensation is among the leading things potential employees consider when looking for employment. So the question employers should be asking is, “What do employees expect wages to do?”

Research from the University of California says employees expect wages to:

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1. cover basic living expenses

2. keep up with inflation

3. provide some funds for savings or recreation

4. increase over time

While recent research has been devoted to the links between employee pay and satisfaction, the general consensus of these types of studies is that pay should be tied to performance to be effective. However, with agricultural jobs, that cannot always be done easily. Incentives offer the most common type of performance-based pay, but there are other alternatives for managers to consider. Time-based pay is another performance-based option, but before this or any other alternatives can be discussed, it is important to develop a clear understanding of wage structures.

The first thing employers should consider when developing compensation packages is fairness. It is crucial businesses maintain internal and external equity. Internal equity refers to fairness between employees in the same business, while external equity refers to relative wage fairness compared to wages with other farms or businesses. No matter the compensation level, if either internal or external equity is violated, a business will most likely experience employee dissatisfaction and employees will begin to balance their performance through a variety of ways, ranging from decreased productivity to absenteeism and eventually to leaving the business.

It’s not about money, but is about meeting needs of your employees It’s easy to think “dollars per hour” when talking about compensation. But an employer who develops a truly creative and successful compensation package understands it’s not about money. It’s about meeting the employee’s needs.

Most agricultural businesses are small, and most agricultural business managers think that limits their ability to create competitive compensation packages. True, a business with three employees might have a more difficult time setting up a 401(k) or health insurance package, but small businesses have the opportunity to know their employees much better and, therefore, better understand their needs. The success of compensation packages is not measured by the dollar cost to the employer.

The success of a compensation package is measured in how difficult it would be to duplicate those same benefits from a competing employer. This refers not just to cash wages, but also to direct and indirect benefits, including such items as flexibility in scheduling or working conditions.

One of the biggest mistakes an employer can make is a large investment of time or money to initiate compensation elements that his or her employees do not need or want. Successful compensation packages are really total rewards systems containing nonmonetary, direct and indirect elements, all based on the objectives of the employer and the needs of the employees.

Employers have a wide variety of compensation elements from which to choose. By combining many of these compensation alternatives, progressive managers can create compensation packages that are as individual as the employees who receive them.

Some indirect compensation elements are required by law: social security, unemployment and disability payments. Other indirect elements are up to the employer and can offer excellent ways to provide benefits to the employees and the employer as well. For example, a working mother may take a lower-paying job with flexible hours that will allow her to be home when her children get home from school. A recent graduate may be looking for stable work and also an affordable place to live. Both of these individuals have different needs and, therefore, would appreciate different compensation elements.

In a tight labor market, indirect compensation becomes increasingly important. Businesses that cannot compete with high cash wages can offer very individualized alternatives that meet the needs of the people you want to employ. Such creative compensation alternatives are the small business’s competitive advantage.

While money isn’t everything when constructing a compensation package, it is a large portion of what the package may eventually contain. It may be the only element a potential or current employee may think about when considering other employment options.

So, what constitutes a fair wage? One approach to determining a fair wage is a market survey. These are typically fast and easy ways to establish compensation guidelines for many businesses. A few phone calls to other employers in similar businesses can determine the “market” value for a specific job. Unfortunately, this technique is not necessarily well-suited for agricultural producers.

An agricultural manager can do informal surveys of other agricultural producers to determine the “going rate” for labor or modify existing studies of nonagricultural businesses to compare employees, not by job title but by skill sets. For example, operating a forklift in a factory and driving a tractor may require similar skills; therefore, they can be compensated similarly.

Compensation package values To help producers make more informed decisions in regards to employee compensation, the Kansas Farm Management Association conducted a survey of its membership during the fall of 2001. In this survey, participating operations provided detailed information about employee characteristics and compensation, including cash wages and complete benefit information.

Employee Competency A single business may employ people who possess a wide range of experience, skill and decision-making authority. Trying to compensate employees within such a wide spectrum of competency can cause managers to struggle. To help respondents and researchers better understand the variation seen in agricultural workforces, farm owners and managers were asked to provide information on employee competency when filling out the survey.

As a result, survey respondents were asked to classify each employee reported on this study into one of the following five competency levels:

•Level 1: Employees who are either new to the farm or have no advanced skills. They are, for example, individuals who are assigned their tasks by another person and who then perform miscellaneous jobs that require no previous training or experience.

•Level 2: Specialized individuals who perform anywhere from one to many tasks that require training. Although these employees may make decisions, such as the order in which to perform certain tasks, they do not have the authority to make decisions relating to their job responsibilities, area of production or co-workers. As a result, a Level 2 employee has no supervisory authority.

•Level 3: Employees are highly skilled in at least one specified area. These employees may make decisions related to their areas of expertise and may administer those decisions through other employees, therefore giving a Level 3 employee some supervisory capacity. However, this person’s decision-making authority does not extend into other areas of the operation.

•Level 4: Because of his or her exceptional skill level, this person is in a position to make decisions that impact entire areas of the operation. Many employees may have to carry out those decisions, giving this person a potentially large supervisory authority.

•Level 5: Level 5 employees are the most skilled and qualified full-time employees with a farm. They have complete supervisory authority and the most decision-making authority given to any full-time employee.

Survey participant information Overall, information was submitted for 446 employees, with the majority of those individuals classified in Levels 2 and 3. While, overall, 13 percent of participating employees owned all or part of the business, that number rose to 63 percent of employees in Level 5. The same is true when considering the percentage of employees related to the owners, with 34 percent of the overall group holding that distinction as compared to 79 percent of Level 5 employees.

The sample was predominantly male (87 percent) with 12 years of formal education and 15 years of experience in the agricultural industry. Overall, employees have been with their current businesses an average for 8.6 years, but that number is dramatically different for employees in Level 5, where the average employee has spent over 21 years with his or her current employer.

Fifteen percent of employees received sick leave, from 3 percent of Level 1 employees to 28 percent of employees in Level 5. The same trend holds for vacation time, but it is a more common benefit, with 39 percent of respondents receiving that particular benefit.

Employee compensation results Compensation packages can be broken down into their individual elements (annual wages, hourly cash wages, benefit values and prevalence) or considered as a whole (total compensation and hourly total compensation). In the results of this survey, we notice some interesting trends.

•Compensation across levels

Compensation and wage rates tended to trend upward across the competency levels. Not surprisingly, as competency increased, so did compensation. But that typically did not hold true in regard to employees in Level 5, where compensation typically dropped off below that of employees in Level 4. This is something which researchers were not expecting and, as a result, have formed a couple of theories.

Employees in Level 5 were more likely to be business owners or related to the owners. The results seen here could be explained by the tendency for owners or family members to take less in compensation and more in business equity.

The average Level 5 employee has been with his or her current employer over 21 years, as compared to just under nine years for average employees in Level 4. This information means that Level 5 employees are under less market pressure than their counterparts in Level 4. In other words, Level 5 employees are probably very situated in their jobs and do not frequently negotiate raises.

•Hourly wage versus hourly wage equivalent

The average hourly wage represents the average amount paid to employees who are paid on a per-hour basis. However, the hourly wage equivalent is a figure that is calculated to represent the amount a salaried employee is paid for an hour of his or her time.

The trends present throughout the compensation results show employees who are paid an annual salary at lower competency levels receive more per hour of work than their co-workers who are paid an hourly wage. But as competency increases, typically so does the number of hours worked per week, resulting in the higher level salaried employees actually receiving less per hour worked than the employee paid an hourly wage.

•Prevalence of benefits

Cash compensation, whether through hourly wages or annual salaries, is certainly the backbone of most compensation packages, but benefits are very prevalent, particularly with full-time employees who receive, on average, $5,537 in non-cash compensation per year. The most common benefit was farm products, followed by health insurance and bonuses. While housing was not the most common benefit, it was, on average, the most costly, valued typically at just over $4,000 per year. Profit sharing was the least common benefit, received by 2 percent of all employees and 4 percent of full-time employees.

While the second principle applies to meeting the needs of the employees, the third principle applies to meeting the needs of the business.

A compensation package is one of the most concrete ways in which an employer can communicate the mission, vision and values of the business. The benefits and incentives set in place by the compensation package will invoke certain responses from the employees. An employer has to be certain those responses match the objectives of the business. In other words, the employer has to be careful to “use the right carrots.”

For example, consider a dairy where the calving unit has seen an increase in mortality. To help solve this problem, the owner instigates a bonus system based on live calves sent to the dairy’s calf ranch. The result: heifer mortality starts to rise as sick and weak calves who normally would have stayed on the farm to be nursed to health are shipped off to the calf ranch – and eventually die.

Are the employees of that calving unit to blame for the sudden rise in mortality? No. If you’re surprised by that answer, think again. Based on their compensation package, those employees were only doing what their managers wanted them to do; they were following the carrots. As Johanna Sian said in Using Stories and Humor, “Sometimes we try to fix people when it’s the system that stinks.”

So, is it worth the risk? Should an employer instigate some type of performance incentive when there is a possibility it will only create problems in other areas of the business? The answer is, it is worth the risk?

The general consensus of recent studies is that pay should be tied to performance to be effective. The key is in finding carrots that don’t send the wrong message and making employees understand how their actions impact the entire business.

Successful managers must search for things the employees influence and base performance objectives on these areas. Your operation may benefit from the following: tenure bonuses for long-time employees, equipment repair incentives to encourage good equipment maintenance or bonuses for arriving to work on time.

The more production information data your business has, the easier this is to accomplish. Measures such as feed conversion rates, somatic cell count or mortality can offer great sources for performance incentives. But, as always, be certain those incentives send the message you want your employees to receive. It may take a few tries to find the system that meets your objectives and your employees’ needs, but with good communication and an open mind, you can achieve great rewards.

Conclusions Successful agricultural producers rely heavily on common sense when it comes to management decisions. The area of employee compensation should be no different. If you want your employees to be innovative, reward them for new ideas. If you want your employees to stay with you for a long time instead of training new employees every season, offer bonuses or tie their wages to their tenure.

If you need employees who show up on time, work hard and can be trusted with the most challenging of tasks, recruit those people, reward those people and promote those people. The future of your business could depend on it. PD

References omitted due to space but are available upon request.

—From 2004 Employee Management for Production Agriculture Conference Proceedings

Sarah L. Fogleman
Kansas State University

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