Art.history



Compensation Management Summary Case

11/11/97

ARTHUR, Inc. LLP

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You have been hired by a regional office of Arthur Inc., an accounting firm located in Seattle, WA. Arthur Inc. was founded in l965 by two University of Washington accounting professors. It is one of handful of highly successful regional public accounting firms. Strategically positioned in regional market, Arthur, Inc. has four key industry bases, namely family owned business, construction, health care, and municipalities. Core competencies include coaching-based management consulting, a full spectrum tax consultancy, financial forensic which includes high level accounting and financial consulting to litigation attorneys and their clients, bankruptcy and insolvency, and retirement planning.

Arthur Inc. has offices located in Seattle and Portland and employs more 200 employees. The two district offices are quite autonomous, with freedom to select and hire their own team of managers. The company has written "HRM policies" and believes in equal employment opportunities for all applicants as required by the Equal Employment Opportunity Act. From its inception, the motto of Arthur, Inc. has been "Professional Services with a Personal Touch".

Salaries vs. Overtime

Employee-management relationships have traditionally been good. However, there have been increasing complaints about pay in the organization. Therefore, they have decided to conduct a strategic audit of their compensation practices and have hired your consulting group for this engagement. The managing partners inform you that most of the complaints deal with alleged external pay inequities; that is, with situations in which employees feel that their salaries are low in comparison to the external market. The partners believe salaries are regionally competitive but may not be competitive with national accounting firms.

"We try to provide our employees with quality opportunities. Sure there are tradeoffs in working for a regional rather than a national firm. That's to be expected. But we don't move our people all over the country like the national firm. Nor do we expect them to live out of a hotel room for months on end. Our people go home at night to their families," Andre Dubois, Senior Managing Partner explained. "Still we don't want to lose our bet people to the bigger firms. So we are in a dilemma regarding what we should do." Dubois added that he would like your consulting group to evaluate the wroth of jobs at Arthur, Inc. and develop a salary structure that insure that the Arthur, Inc. is r competitive.

One other reason that salaries may not appear competitive is that Arthur, Inc.. still pays overtime or awards compensatory time off for extended work during tax season or special engagements. This is possibly an issue because the national and some regional firms have switched to a straight salary structure for all exempt accounting personnel. "Arthur's employees erroneously may be comparing their base salary to the salary received by peers at the other firm. While base salaries at Arthur, Inc. would compare relatively low by comparison., we believe that with overtime, the rates the pay offered by Arthur more than exceed those of the other firms," Dubois said. Professional employees make a lot of money for overtime during tax season (3 1/2 months). Accountants work 60-80 work weeks minimally for 3 1/2 to 4 months. "While we give them a choice of compensatory time or money, most employees opt for time-and-half pay," Dave Knibbe, a junior partner explained, adding that overtime lowers fixed costs but may increase total salary payroll.

Kristie McJones, one of two female partners, had her own views on the pay for performance controversy. "We're talking about professionals here. Professionals have a job to do and they do it regardless of how much time it takes. Moving to salaries just makes sense. It will really cut our fixed cost overload and give us a real competitive advantage with our clients. We've been paying overtime to employees who really don't require it for too long. From a cost perspective, variable pay helps to control fixed costs. It just makes sense."

"We'd like to see recommendations from your group's regarding whether we should switch to straight time. If no switch is made, we'd like you to develop a specific plan of action to communicate our pay advantage to our employees and to perspective employees." Knibbe added that he's also like a determination which jobs are exempt under the Fair Labor Standards Act.

To appear more competitive, the managing partners are thinking about extending the firm's profit sharing program to lower ranking employees. Currently, only the partners have shares in the firm's profit sharing plan. partner's earn shares based on the revenue generated and billable hours. The question is whether it would be advantageous to develop some sort of gain sharing or profit sharing plan for other employees. "It might encourage our young accountants to stay with us -- even if they don't make partner. The question that remains on the table is whether we should do it at all and if we do what form should it take (e.g. profit sharing, gain sharing, bonuses or variable pay). Then we'd have to decide whether to link the incentives to individual , group or organizational performance.

Tom Jones who just made partner supports the move to variable pay. "We have a hard time retaining our accounting personnel as well as our support staff. We spend time, money and energy training them and then too many move on to the larger firms," Jones said. "I personally was thinking about leaving the firm. And I would have, if I hadn't made partner this year. Six to 10 years to make partner is a long time to wait. Today's professionals work hard and most don't want to wait to become partners to get rewarded. Becoming a partner isn't the incentive it used to be. Today's accountants are committed to their profession. What we want is commitment to our firm." he added vehemently, adding that. base pay coupled with the overtime during tax season may not be a fair reward for what is demanded. "We really should look into some sort of profit sharing, labor cost sharing program, " he exclaimed.

In diffidence to the Jones' position, Henry Lowbuck, another partner, wondered whether profits should be dispersed to staff personnel. "We never know when there will be an economic downturn. If we give everyone profits all long, we are really breaking with tradition. We shouldn't jump into anything. I'd need to see the research and a thorough cost benefit analysis before I'd be willing to commit to such a drastic change in our culture."

Metrics and Raises

One partner voiced concerns about measuring performance. We currently give merit pay increases based upon performance evaluation results. We've just finished evaluating all our employees with our performance appraisal system. But we haven't yet decided how to allocate raises. "Employees really complained a great deal this year about the process. They claimed it was too subjective. Managers do what they want anyway, so why bother," Knibbe explained. Arthur, Inca's current performance appraisal system rates employees on 10 job attributes (quality of work, quantity of work, dependability, client relations, ability to meet deadlines, teaming, professionalism, accuracy of reports, personal appearance, communication skill). Scores on each factor are rated from 1 to 5 (5 represents high performance) and then averaged. Anchors for the ratings are: "5" = Exceeds Expectations Routinely; "4" = Occasionally Exceeds Expectations; "3" = Meets Expectations; "2" Occasionally Fails to Meet Expectations; "1" = Significant Improvement Needed. The attached personnel inventory includes the latest ratings.

"We're not sure how well our system is working. There have been complaints by some employees that the ratings aren't any good. Some managers seem to rate strictly and others leniently. Women claim they are always under rated. We don't know if they are. If they are, we don't know if they actually perform worse or are being discriminated against. Other employees complain that it doesn't matter what rating they receive, pay raises are based on seniority -- not performance. We'd like your consulting group to look into these issues, find out what the relationship is between pay, performance, gender, and seniority and make some recommendations," claims Wendell Patrick Young III, senior partner, mumbling that the entire appraisal system probably ought to be junked. If you recommend going with something different, what should replace the current system. Second, if an incentive plan is implemented how would it interface with the assessment of individual contributions. .

Equal Pay Concern

As already noted, the partners also are worried about hiring and retaining "good" support personnel. The market for support personnel with accounting knowledge is fierce in the Seattle/Portland area. While it may not be due to compensation, turnover at Arthur Inc. has been high (28%) among support staff personnel. That's why we want to conduct a job evaluation study. If our pay is equal to other firms, then how do we convince our staff personnel to stay. If it is not, then what adjustments should we make," McJones contended. As another partner summarized, "We're concerned about internal equity, as well as external equity. We want to pay what it takes to get quality personnel but obviously we don't want to pay more than we have to."

Knibbe added that he would like to know whether the secretary positions are different enough to justify distinct titles "If we had fewer titles, it would simply our pay structure and allow greater movement of personnel without concomitant increases in salary. I've heard about the process of broad banding. Maybe that's the way to go for us?" he pondered. To make the compensation picture even more bleak, Arthur Inc. has just received word from the Department of Labor that Maggie Neale has filed a complaint alleging that Arthur, Inc. is violating the Equal Pay Act. She claims that she is being underpaid for performing the same job as her coworkers. Finally, the data entry clerks and team assistants have filed a memorandum asking for hazardous duty pay. They claim that working with CRTs is hazardous to their health.

With all the turmoil, the partners are anxiously awaiting your recommendations. To confront these problems, your staff assistant collected:

a) Job descriptions for a sample of jobs at the accounting firm

b) A personnel inventory sheet which lists the names, age, sex, organizational and job tenure, performance rating and current salary of a representative sample of employees in representative job categories.

c) Your staff assistant knows that there is wage and salary data available in the Balmer Library and in the government documents sections of all other libraries. Other external pay survey data is available by calling the Washington Department of Employment Security's labor statistics office, visiting Millman and Robertson in downtown Seatte, and via the internet (See Table 1).

d) You have a total budget of $250,000 to effect any necessary changes including all salary adjustments and merit raises should you wish to go ahead and provide them. The benefit load level is 40%. the plan will be implemented on July 1, 1998. The $250,000 does not include your consulting fee.

Your Task:

To deal with the wage and salary problems that have surfaced at the firm., you decide to conduct a job evaluation study. Your final report should

(1) Identify your compensation objectives and link them to specific HRM and organizational objectives .

(2) Respond to all major decisions relating to internal, external and employee equity and explain your rationale for each decision.

(3) Make an appropriate point evaluation system for evaluating the worth of jobs in the firm. You can modify existing point systems providing you justify your choice and modifications and clearly indicate what system was modified and why. Put your entire manual in an appendix to your report.

(4) Discuss and defend your choice of factors, weights, degrees and explain how you determined the value of each job. Why are your compensable factors appropriate for this type of a firm? An appendix to your report should include a copy of your job evaluation system. including factor weight definitions, degree statements and points per factor and degree.

(5) Determine the point value of each job using your system and explain the process used your team used to arrive at these values. You should prepare an exhibit which lists by factor the point value and the total points for each job. You should also include a Table which lists each job and the points assigned to each compensable factor in your systems

(6) Prepare a scatter diagram which shows the relationship between pay and points for each job incumbent.

(7) Determine pay policy line using least squared regression. Show the equation and show the draw the current pay policy line on your scatter diagram showing slope and intercept. Calculate the slope and intercept by correlating salary and point totals. This can be accomplished with a business calculator, by hand, or on a PC. Write the equation at the bottom of the graph or include it in the body of your report.

(8) Discuss in your report any concerns with the structure and explain what the graph tells you about the current structure. You should list the title of each job and the points assigned to that job overall and by compensable factor.

(9) Select at least 10 benchmark jobs for which external market data is available using what every pay survey data you think is appropriate (the reports in the library or from job service should be sufficient). Be sure to indicate how jobs were matched and what pay rates you used.

(10) Calculate external pay policy line using benchmark jobs and updated external market rates of pay. Show the equation and draw the external pay line on your scatter diagram so it can be compared to the internal line.

(11) Compare and contrast external and internal pay lines.

(12) Determine and defend your pay policy.

(13) Based on the above relationships, develop a job classification scheme. You should indicate (draw bars) the pay range and point width and pay grade overlap (if you are using these). Defend your pay structure and explain how it helps you meet your compensation objectives.

(14) Using this information, prepare a professionally written, formatted, and typed memorandum (20 pages or less, not counting graphs and figures), which summarizes your findings, addresses the concerns of the partners, and deals with any other concerns you might have about the salary structure.

(15) Make specific recommendations in terms of what you would do to correct any problems.

(16) Develop a profit-sharing or labor cost saving plan with appropriate metrics.

(17) Using this information, prepare a professional written, formatted and typed memorandum (20 pages or less, not counting figures and appendices) which summarizes your findings, addresses the concerns of the partners and deals with any other concerns you might have about the salary structure.

(18) Since the organization believes in pay for performance, you should indicate what size raises will be and how they will be determined. A total of $200,000 is available for performance- contingent raises and to correct base pay inequities. You should adjust salaries as needed. If you decide to adjust any one's salary (up or down), be specific in terms of the size of the adjustment and reason why you are adjusting the salary. Provide evidence that these adjustments are necessary. Finally, prepare a one page executive summary for distribution to the class on the day of your presentation.

(19) Finally, prepare a one page executive summary for distribution to the class on the day of your presentation.

(20) You should include a letter of transmission and a summary of your billable hours and bill for consulting.

(21) Prepare a 20 minute summary of your findings and recommendations for presentation to the rest of the class who will serve as the hospital's board of directors.

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Arthur, Inc.

"Professional Services With a Personal Touch"

Mission

As a major regional accounting firm, we are committed to achieving value for our clients, rewarding careers for our staff and excellent performance for our employee owners.

Guiding Values

• We are committed to our clients' success and define our success in terms of theirs. We strive to understand their needs to exceed their expectations by delivering practical advice, effective engagements and outstanding value.

• At Arthur Inc., the staff members are the firm. We value our own professional well being and that of our colleagues. We will provide challenging career paths with ample opportunity for growth and professional development. We uphold the principle of nurturing creativity, innovation and teamwork. We will honor excellence and reward contributions on the part of the individual and group. Our staffs members are empowered to draw out and sustain excellence in all that we do.

• As owners of Arthur Inc., we are each personally committed to our company's continued prosperity and growth. We strive to enhance the value of the company by planting the seeds for new opportunity, by growing our chosen areas, and harvesting the rewards

• We will make no ethical compromise in the pursuit of these goals. We will sustain stewardship and social responsibility at all levels and in all our relationships.

Table 1

Sources of Wage and Salary Data

|Data Source |Cost |

|I. General Salary Information | |

|A. JobSmart | |

| | |

|A wealth of information is available at this website. Has links to numerous salary surveys and | |

|readings on salary negotiations. Sometimes, this website doesn't come up automatically.. If | |

|that is the case, use a search engine and type in "http:// | |

|B. Cost of Living Calculators. | |

|These links help you convert your current salary into the value of those dollars for various | |

|cities in the United States. | |

|1. Datamasters | |

| | |

|2. Computational Negotiations | |

| | |

|Explores various ways to provide a computational framework for negotiation. | |

|3. Salary Calculator | |

| | |

|II. Public Sector Published Salary Surveys | |

|A. Bureau of Labor Statistics |FREE |

| | |

|The BLS has a 24-hour current data hot line with recorded information about the Employment Cost| |

|Index, employment situation, Consumer Price Index Producer Price Index and other information. | |

|Call 202 606-STAT. The State of Washington's BLS office is located at 400 E. Pine Street, | |

|#315. Seattle, WA. Telephone No 206 720-3396. Alternatively, use your world wide web browsers to| |

|locate the Bureau of Labor Statistics and see what you find. | |

|1. Bureau of Labor Statistics | |

| | |

|2. Occupational Handbook | |

| | |

|3. Washington State Department of Employment Security, | |

|Labor Market and Economic Analysis Division | |

| | |

|ESD-LMEA, P.O. Box 9046 | |

|Olympia, WA 98507-9046 | |

|(360) 438-4800 Fax: (360) 438-4846 | |

|III. Private Sector Published Surveys | |

|A. Administrative Management Society |$150 to $250 for nonmembers |

|4622 Street Road, Trevor PA 19047 | |

|215 953-1040 | |

|B. American Compensation Association | |

|P.O. Box 1176, Scottsdale, AZ 85252 |Free to $100 |

|(602) 951-9191 | |

|C. College Placement Council, Inc. |Free to members |

|65 East Elizabeth Ave, Bethlehem, PA 18018 |$150 for non members |

|(215) 868-1421 | |

|D. The Hay Group |$350-$1,500 |

| |Must Be a Client |

|2299 South 18th Street, Philadelphia, PA | |

|(215) 875-2300 | |

|Contains general information on a wide variety of jobs. Includes job evaluation value using the | |

|Hay guidechart. | |

|E . Hewitt Associates |Free to Participating Firms. |

| |Others $25 |

|100 Half Day Road, Lincolnshire, IL | |

|(312) 295-5000 | |

|F. Institute of Management and Administration |$245 |

|29 West 35th Street, 5th Floor | |

|New York, NY 10001 | |

|(212)244-0360 | |

|G. KPMG Peat Marwick - |Fee varies depending on survey|

| | |

|345 Park Avenue, New York, NY 10154 | |

|(212) 872-5770 | |

|H. Milliman and Robertson |$300 and up |

|Seattle, WA |Conducts specialized Northwest|

|(206)624-7940. |surveys. |

|I. Towers, Perrin, Forster & Co. |$900 -$1,300 |

|600 Third Avenue, New York, NY 10036 | |

|(212) 309-3400 | |

|J. Clayton Wallis Company |You can access their data base|

| otherhr.htm |for free for 30 days. |

|IV. Professional Surveys | |

|A. Information Systems | |

|1. Datamasters | |

| | |

|2. Source EDP |Engineering and Accounting |

| |surveys. Check out their list |

|Source Services Corporation, Dept. DED |of HRM Resources |

|4545 Fuller Drive | |

|Suite 100, Irving, TX 75038 | |

|3. TechWeb | |

| | |

|TechWeb provides a salary survey results for IS managers. | |

|B. Engineers | |

|1. Adminstratiiive Association of Engineering Societies |$55-$225 |

|345 E. 47th Street, New York, NY 10017 | |

|(212) 705-7840 | |

|2. Natiioial Society of Professional Engineers |$30 to Members |

| |$55 to Nonmembers |

|1420 King Street, Alexandriia, VA 22314 | |

|(703) 684-2800 | |

|C. Human Resources Management | |

|1. Human Resources Management Society of Human Resources Management | |

| | |

|D. Banking Services | |

|1. Bank Administration Institute |$50 for members |

|60 Gould Rollinig Meadows, IL 60008 |$75 for nonmembers |

|(312) 228-6200 | |

|E. Sales and Marketing | |

|1. Robert Half International |Free |

| | |

|552 Fifth Avenue, New York, NY 10036 | |

|(212) 221-6500 | |

|2. Sibson & Co. Inc. |$500- $550 |

| |(Must be a client) |

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