8/29/2005

The difference between exempt, non-exempt employees

What is the difference between exempt and non-exempt employees? We have brought on a few temporary employees (they cannot be classified as independent contractors and were not provided to us by an agency) for a temp-to-perm situation. We are paying them an hourly rate of $50/hour and were wondering if they would fall under the exempt or non-exempt category in regard to overtime pay.

Exempt employees do not qualify for overtime, whereas non-exempt employees do. According to the Fair Labor Standards Act (FLSA), employees who are non-exempt must be paid for every hour of work performed. Minimum wage laws also apply to non-exempt employees. FLSA along with state laws determine what constitutes overtime.

Exempt employees do not qualify for overtime, whereas non-exempt employees do. According to the Fair Labor Standards Act (FLSA), employees who are non-exempt must be paid for every hour of work performed. Minimum wage laws also apply to non-exempt employees. FLSA along with state laws determine what constitutes overtime.

A common misbelief is that salaried workers are automatically exempt and hourly workers are non-exempt. This is not always true. For example, administrative assistants are often paid a salary; however, based on their FLSA classification, they are considered non-exempt employees. Depending on their job status and level of responsibility, salaried workers can be non-exempt. In most cases, however, hourly workers are almost always non-exempt, and therefore, will qualify for overtime pay after 40 hours of work in a week's time. In general, the more responsibility and autonomy an employee has, the higher the probability that the employee is considered to be exempt.

For more information or to determine whether a certain class of worker is exempt, check out the U.S. Department of Labor's Compliance Assistance Tool www.dol.gov/compliance or their FairPay website www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm.

-- JEFF ARNOLD

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Calculating benefits and compensation for start-ups

I am starting a new non-profit organization. Although I don't anticipate having staff until year two or three, how would I go about calculating benefits and compensation?

The fact that you're doing your homework so early in the game means that you recognize your biggest asset: people.

In today's market of tough competition for talent, benchmarking compensation and benefits against your peers is critical. Since benefits and compensation levels vary by industry, job title and geography, you'll need to benchmark the data against similar businesses or other non-profit organizations. An excellent resource to get you started is the Salary Wizard powered by Salary.com, available both at NEHRA's website nehra.salary.com/salarywizard/layoutscripts/swzl_newsearch.asp and on BostonWorks boston.salary.com/. It provides useful benchmarking data for base salary, bonuses and benefits across all the key parameters.

You can also purchase compensation and benefits survey reports from providers like Watson Wyatt Data Services, Mercer Human Resources, and The Survey Group. These reports are often available based on industry and job level.

For helpful information on health benefit plans, check out the Kaiser Family Foundation www.kff.org. They produce an annual health care report which focuses on key trends in employer-based health coverage. There are also a slew of healthcare benefit brokers who could provide guidance. For general research of key elements of benefits plans, other great resources include industry recruiters and competitor websites and even some job sites.

-- JEFF ARNOLD

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Developing a structured compensation program

We do not currently have a formalized compensation structure at the company. I am developing performance evaluation forms, but I want to set up a structured salary range schedule. The last time I implemented a formal program it was the Hay System, which I have heard may now be out of date. We have a significant number of salary plus commission employees, non-exempt/hourly, and salaried employees. What processes should we be reviewing in order to develop a structured compensation program?

The Hay System was developed many years ago and is still used by many large and international companies. With the advances in technology and availability of market data, many employers have partially or fully moved away from internally focused point factor job evaluation methodologies in favor of market-value based systems. Employers facing external pressure from competitors see market pricing as more relevant, less complex, and less expensive. Internal-equity job evaluation programs are certainly still available and there are some simple point-factor programs that may meet your needs. (To be clear, point factor programs do link to market data but their approach is more geared toward providing point values for certain job characteristics.)

Market-based programs are typically easier to maintain and update. Simplicity became more important to human resource departments that were being asked to do more with fewer resources. It also helped in the recruiting frenzy of the late 1990s when competitors were "poaching" employees and therefore market rates were moving quickly.

The first step in determining the type of compensation program you need to install is to review your company's mission statement. Even if you don't have a formal written policy, the practices your company employs for your annual reviews and ongoing job offers should reveal some keys to the compensation strategy-which is likely a combination of externally competitive and internally equitable aspects.

You may also want to consider how much money and effort you're willing to budget for this process. A full-blown, point factor evaluation will likely require a five-figure consulting engagement plus several months of your department's time.

A simple salary structure might make more sense at this stage and should help you achieve the consistency you want quickly and easily. In its simplest form, a salary structure is just a series of "levels" or "grades," each of which is associated with a group of jobs of comparable value. In this case, value is based on the market value of the job and the jobs in your organization that are of equivalent value. The ranges have a "low", "midpoint" (or "control point") and a "high" that form the pay guidelines for all jobs in that grade. The spread between the low and high of a range generally increases (on a percentage basis) as one moves up the salary structure--higher on the organization chart.

You may also want to determine whether it makes sense to identify one, two, three or more employee groups that could each translate to it's own structure. Once you've divided your employee population into coherent groups, the idea of a salary structure within each group might make more sense. Some companies have different structures for technical and administrative jobs, and others might have different structures for hourly and salaried. Multiple structures are common in organizations that have different career paths that may have overlapping pay ranges.

-- BILL COLEMAN

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Guidelines for executive bonus plans

Do you have any sample policies or guidelines for executive bonus plans? We are thinking about offering bonuses to all our employees who have completed one year of service with the organization, tied to their yearly performance evaluation.

Linking pay to performance is a growing trend. It's good for the business and good for the employees. Pushing the executive plan down to the lower ranks in an organization is a good idea. However, simplifying it as you go down will make the plan more effective.

Key components of an incentive plan include:

1. Purpose
2. Eligibility
3. Responsibilities
4. Plan Funding
5. Performance Measures
1. Company
2. Group
3. Individual
6. Thresholds
7. Payment Formula
8. Caps or Maximums
9. Timing and Form of Payment
10. Administrative Procedures

When spreading an incentive plan down into an organization, the most important concept to remember is "line of sight." The plan will be most effective if each employee's award is tied to performance measures he/she can influence. The employee needs to be able to come to work and know what to do to positively increase his/her incentive award.

Another approach to linking appropriate measures to the employees' levels is to alter the mix of measures based on organization levels. For example, the table below shows a possible measure mix matrix:

	Company	Group	Individual
Executive	80%	0%	20%
Management	50%	30%	20%
Staff	20%	30%	50%

This example shows executives' awards are tied closely to corporate performance, whereas staff is tied more to individual performance.

Remember, incentives are not guaranteed - the target awards are at risk. Certainly, plans should be designed around a target expected compensation, but they must also acknowledge that in any given year, the incentive payment might be $0. For lower level employees it is appropriate to keep their pay mix heavily oriented toward base pay because they cannot afford the downside of a low payment. Thus their target incentives will normally be relatively low as a percentage of base pay. Executives, on the other hand, are generally well paid, and therefore can absorb much greater fluctuations in their annual income. Therefore it is appropriate to skew the executives' total cash income more toward annual incentives than for the lower level employees.

Typically, it is common to see target incentive awards range from 5 percent or 10 percent for the lowest level of eligible employees, 20 percent to 30 percent for management, 25 percent to 50 percent for senior management, and 30 percent to 100 percent for CEOs. (Certainly industry, company size and other pay factors will affect these pay practices.)

A final thought is that an incentive plan is not just a compensation program. It's also a communication device. Use your plan to tell all your employees what's important to the company and its stakeholders. Putting money on the table will get your employees' attention. Be careful, however, to set reasonable expectations. Make sure everyone knows what performance is expected and that no rewards are guaranteed.

And remember: listen to your intuition. Do what makes sense for your organization and monitor the results so you can adjust your plan from time to time.

-- BILL COLEMAN

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