Compensation Structure

Compensation
Management
Basic Introduction
Sunday, September 28, 2014 2
Module 1 - Introduction To Compensation
A. Definition of Compensation
B. The Pay Model
C. Strategic Pay Policies

Module 2 - Strategic Perspectives in Compensation Management
A. Strategic Perspectives of Pay
B. Strategic Pay Decisions
C. Best Practices vs. Best Fit Options

Module 3 - Defining Internal Alignment
A. Definition of Internal Alignment
B. Internal Pay Structures
C. Strategic Choices In Internal Alignment Design
D. Which Internal Structure Fits Best?

Module 4 - Job Analysis
A. Why Perform Job Analysis?
B. Job Analysis Procedures
C. Job Analysis Data Collection Process
D. Job Descriptions

Module 5 - Job Evaluation
A. Definition of Job Evaluation
B. Major Decisions In Job Evaluation
C. Job Evaluation Methods
D. Final Result Pay Structure

Module 6 - Determining External Competitiveness
A. Definition of Competitiveness
B. Pay Policy Alternatives
C. Wage Surveys
D. Interpreting Survey Results
E. Pay Policy Line
F. Pay Grades

Module 7 - Employee Contributions: Pay For Performance (PFP)
A. Rewarding Desired Behaviors
B. Does Compensation Motivate Performance?
C. Designing PFP Plans
D. Merit Pay/Variable Pay
E. Individual vs. Group Incentives
F. Long Term Incentives

Module 8 - Pay and Performance Appraisals
A. Role of Performance Appraisal In Compensation
B. Common Errors In Performance Appraisal
C. Measuring Job Performance
D. Training Raters
E. Contextual Issues In Appraisal

Module 9 - Benefits
A. Benefits Determination Process
B. Value of Benefits
C. Legally Required Benefits
D. Retirement, Medical , & Other Benefits

Module 10 - Legal & Administrative Issues in Compensation
A. Legal Issues
B. Pay Discrimination
C. Comparable Worth
D. Budgets and Administration

Grading Structure
Grading % of Final Grade
2 Quiz 30%
Case Analysis/Project 30%
Class Presentations 10%
Attendance 20%
Class Participation 10%
100%
Purpose of Compensation
Motivate &
Retain Staff
Attract talent
Contribution based
Remuneration
Administratively
Efficient
Reward Valued
Behavior
Effective
Compensation

Ensure Equity
Institutionalized
Processes
Legal
Compliance
Business Goals
Business
Strategy
C
E
O

Compensation
Philosophy/ activities
serve Business
Objectives
The Pay Model
Business Strategy This defines the direction in
which organization is going in relation to its
environment in order to achieve its objectives.
Compensation Philosophy Consists of a set of
beliefs which underpin the reward/compensation
strategy of the organization and govern the reward
policies that determine how reward processes
operate
Business Goals
Business
Strategy
Compensation
Plan
Compensation
Strategy
Non-Financial
Rewards
Org.Structure
C
E
O

H
R

H
e
a
d

Compensation activities
serve Business
Objectives
Compensation strategy
is periodically
reevaluated and the
Compensation plan
periodically developed
The Pay Model
Compensation Strategy defines the intentions of
the organization on reward policies, processes and
practices required to ensure that it has the skilled,
competent and well-motivated workforce it needs
to achieve its business goals
Business Goals
Business
Strategy
Compensation
Plan
Compensation
Strategy
Non-Financial
Rewards
Org.Structure
C
E
O

H
R

H
e
a
d

serve Business
Objectives
is periodically
reevaluated and the
Compensation plan
The Pay Model
A strategic perspective on compensation
takes the position that how employees are
compensated can be a source of sustainable
competitive advantage

Business Goals
Business
Strategy
Compensation
Plan
Market Surveys
Compensation
Strategy
Job Evaluation
Unit Inputs
Total
remuneration
Performance
Management
Non-Financial
Rewards
Org.Structure
Performance
linked Pay
Individual Pay
Contribution
/outputs
Internal Equity External Equity
C
E
O

H
R

H
e
a
d

E
m
p
l
o
y
e
e

C

&

B
/
S

M

Pay levels /
structures
serve Business
Objectives
is periodically
reevaluated and the
Compensation plan
Compensation
Manager, along with
team is responsible for
carrying out
compensation related
activities
The Pay Model
Employment Relationship
TRANSACTIONAL Emphasizing the Cash &
Benefit Forms

RELATIONAL Emphasizing the Family /
culture / Bonding Aspects

Employment Relationship
HIGH PAY LOW
COMMITMENT

Hired Guns
(Lehman Brothers)
HIGH PAY HIGH
COMMITMENT

Cult Like (Microsoft)
LOW PAY LOW
COMMITMENT

Workers as commodity
LOW PAY HIGH
COMMITMENT

Family (Starbucks)
T
R
A
N
S
A
C
T
I
O
N
A
L

L
o
w

-
-
-
-
-

H
i
g
h

RELATIONAL
Low ----- High
End of Part I Module 1 & 2
Definitions
Job - Consists of a group of tasks that
must be performed for an organization
to achieve its goals

Position - Collection of tasks and
responsibilities performed by one
person; there is a position for every
individual in an organization

Job Analysis: A Basic H R M Tool
Tasks Responsibilities Duties
Job
Analysis
Job
Descriptions
Job
Specifications
Knowledge Skills Abilities
Human Resource
Planning
Recruitment
Selection
Training and
Development
Performance Appraisal
Compensation and
Benefits
Safety and Health
Employee and Labor
Relations
Legal Considerations
Job Analysis for Teams
Job Analysis

The systematic, formal study of the
duties and responsibilities that
comprise job content.

The process seeks to obtain important
and relevant information about the
nature and level of the work performed
Job Description
A summary of the most important features of
a job, including the general nature of the
work performed (duties and responsibilities)
and level (i.e., skill, effort, responsibility and
working conditions) of the work performed.

Typically includes job specifications that
include employee characteristics required for
competent performance of the job.

Should describe and focus on the job itself
and not on any specific individual who might
do the job.
Job Specification

A section of the job description that
defines what worker characteristics
(i.e., the knowledge, skills and abilities)
are required to perform the job for it to
be carried out competently.
Types Of Job Analysis Information
Considerable information is needed,
such as:
Worker-oriented activities
Machines, tools, equipment, and work
aids used
Job-related tangibles and intangibles
Work performance
Job content
Personal requirements for the job
Types of Data Collected Through Job
Analysis

Work Activities work activities and
processes; activity records (in film form,
for example); procedures used; personal
responsibility

Worker-oriented activities human
behaviors, such as physical actions and
communicating on the job; elemental
motions for methods analysis; personal
job demands, such as energy
expenditure

Analysis

Machines, tools, equipment, and
work aids used

Job-related tangibles and
intangibles knowledge dealt with or
applied (as in accounting); materials
processed; products made or services
performed
Work performance error analysis; work
standards; work measurements, such as
time taken for a task

Job context work schedule; financial and
nonfinancial incentives; physical working
conditions; organizational and social
contexts

Personal requirements for the job
personal attributes such as personality and
interests; education and training required;
work experience
Analysis
Job Evaluation
Methods
Job Evaluation
Four major methods used in job evaluation
and the advantages/ disadvantages of each

Job Ranking Method
Job Classification Method
Point Method
Factor Comparison Method
Job Evaluation Methods
Comparison Method Analysis Method

Entire Job Job Factors
Job Against Scale

Job Against Job

Classification Point Method
Ranking
Factor
Comparison
Ranking Method
Straight ranking
Alternation Ranking
Paired Comparison
Ranking Method
Advantages
Simple
Alternation method
ranks highest then
lowest, then next
highest, then next
lowest
Paired comparisons
method picks highest out
of each pair
Fast
Most commonly used
Disadvantages
Comparisons can be
problematic depending on
number and complexity of
jobs
May appear arbitrary to
employees
Can be legally challenged
Unreliable
Paired Comparison
Classification Method
Advantages
Uses job
families/groups
instead of individual
jobs
May produce same
results as Point
Method, but is less
costly
Disadvantages
Not useful when jobs
are very different
from each other
May be confusing to
employees about why
jobs are included in a
class
Compensable Factors
Must be present in all jobs
Factor must vary in degree
Should not overlap in meaning
All stakeholders viewpoints must be
reflected
Should be demonstrable by the actual
work
Factor Comparison
Compensable Factors used

Mental requirements,
Physical requirements,
Skill requirements,
Responsibility, and
Working conditions
Analyze Jobs
Select Key/Jobs
Rank Key Jobs
Distribute Wage Rates Across Factors
Compare Vertical and Horizontal
Judgments.
Construct the Job-Comparison Scale
Use the Job-Comparison Scale to Evaluate
the Remainder of the Jobs
Hay Profiling
Know How
procedures and techniques
breadth of management skills
person-to-person skills
problem solving
thinking environment
thinking challenge
Accountability
freedom to act
impact on results
magnitude
Advantages
Customized to the
organization
Relatively easy to use
once its set up
Results in ranking of
jobs and a specific
rupee value for each
job, based on
allocating part of the
jobs total wage to
each factor
Disadvantages
Using rupee values
may bias evaluators
by assigning more
money to a factor
than a job is worth
Hard to set up
Not easily explained to
employees

Point Method
Advantages
Highly stable over
time
Perceived as valid by
users and employees
Likely to be reliable
among committee
that assesses the jobs
Provides good data to
prepare a response to
an appeal
Disadvantages
Time, money, and
effort required to set
up
Relies heavily on key
(benchmark) jobs, so
if key jobs and correct
pay rates dont exist,
the point method may
not be valid
What is a Degree Level?
It is a scale that reflects differing quantity or
quality of the factor
It is used to differentiate jobs on the
factor
It is a definition that is clear and
unambiguous
It contains explicit language that spells out
the behaviors, skills, or performance
expectations for that factor at different
levels of the factor
How Do You Develop Degrees?
from Otis and Leukarts (1948) Rules

1. Degrees should be selected so that each job falls at only one
level. Note:
1. you can include some degrees that do not apply to the current
jobs if you feel there is too much of a jump between levels.
2. Another reason to create "empty" levels is if you think new jobs
will be created that will require that level in the factor.
3. The number of degrees selected should be no more than are
needed to differentiate adequately and fairly between all the
jobs being rated.
2. Each degree should be clearly defined in terms the workers
can understand.
3. Avoid the use of ambiguous terms, e.g., strong skills,
excellent.
4. Definitions of degrees should be written in objective terms.
5. In writing degree definitions, use examples as much as
possible.
How Do You Assign Point Values
to the Entire System?
1. The maximum number of points assigned is a fairly
arbitrary judgment (500-3000 is common)
2. The number must be large enough to allow sufficient
differentiation among the jobs to be evaluated.
3. If there is a very wide spread between the current
wages of the highest paid job and the lowest paid job,
the maximum number of points will need to be higher
4. If you choose more than one pay system, the number
of points or the actual factors themselves do not have
to be the same in each one.
5. SUGGESTION /THUMB RULE: Have no fewer than
1000 points and no more than 2000.
to the Degree Levels?
First, determine the number of points for
each main factor (e.g., 2000 total points
for the system would result in 200 points
for a factor weighted at 10%). Then use
The straight-line method, which simply
takes the maximum points for a given factor
and divides it by the number of degrees. Note:
this method assumes that the degrees should
be viewed as equidistant from each other
Position: Engineering Manager
Grade: 7
MAXIMUM
FACTOR
POINTS FACTOR JE Points
DEGREE
LEVEL
FACTOR
WEIGHTS
250 Communication & Interpersonal Skills 250 4 10%
250 Education & Training 250 5 10%
500 Problem Solving & Decision Making 400 4 20%
500 Responsibility & Accountability 500 4 20%
250 Specialized Knowledge & Application 200 4 10%
250 Supervision & Leadership 250 4 10%
125 Internal Impact 125 3 5%
125 External Impact 75 1 5%
125 Planning & Organizing 125 4 5%
125 Innovation 90 2 5%
2500 2265 100%
to the Degree Levels?
Or the accelerating method, where differences in
degrees are seen as greater as you move up in that
factor, and so the point differences reflect that jump,
e.g., 27, 80, 160, 267, 400

Or the decelerating method, where differences in
degrees are seen as smaller as you move up in that
factor, and so the point differences reflect it, e.g., 133,
240, 320, 373, 400

Rememberthe highest level of a factor is always
assigned the full number of points allocated to that
factor, and the lowest level of a factor has to have some
points assigned to it, i.e., 0 points is not permitted!
Anatomy of a Pay Structure
Pay Grades, elements,width
Factors Affecting Pay Structures
Corporate culture and value
Management Philosophy
External Economic Environment
External Socio-political
environment (Unions)

Anatomy of a Pay structure
Pay Structure consists of a series of
Pay Ranges, or grades, each with a
minimum and maximum pay rate

Pay Range - Has a minimum pay value,
maximum pay value and a midpoint

Midpoint of a range represents the
competitive market value for the job or
group of jobs.
Market Pricing
Comparing salaries w.r.t the market salaries
for the same role/s
Range Spread

Difference between maximum and
minimum pay value

- Usually expressed as a % of the diff. bet
the max and min divided by the minimum

Anatomy of a Pay structure
Spread on either side of midpoint :

Midpoint Minimum Maximum Midpoint
Minimum Midpoint

Midpoint = Max + Min
2

Minimum Midpoint Maximum

200000 350000 612500
Range Spread (Width) = 206 %
-75%
75%
Example Use 50% Range Spread
Using A 50% Range Spread :

Maximum = Minimum*(1+Range Spread)

Midpoint = Max + Min
2

Range Spread
Vary based on level and sophistication of
skills required for a given position
Entry level positions (skills that are quickly
mastered) have narrower pay ranges
Managerial positions will have broader pay
ranges
Typical Range Spreads
20 25 % - Lower-level service, production
30 40 % - clerical, technical
40 50 % - professional, administrative,
middle management

These range spreads have reached 300% or
more with Broad banding

Compa - Ratios
A Statistic that expresses the
relationship between base salary and
the midpoint, or between the midpoint
and the market average

Compa-Ratio = Base Salary
Midpoint
Most companies strive to have the overall
workforce paid at or around a compa-ratio
of 100 %
Compa - Ratios
Individual C-R vary according to

how long the individual has been in the
job
Previous work experience
Job performance
Compa - Ratios
22500

25000

90%
25000

25000

100%
27500

25000

110%
25000

25000

100%
24500
Mkt Avg

25000
Mkt Avg

98%
Person 1 Person 3 Average Person 2
Base Salary
Midpoint
Compa-Ratio
Base Salary
Midpoint
Market Saurveys

Standard vs. Custom
Apples to Apples comparison
Range Penetration
Range Penetration =
Incumbent salary Range Minimum
Range Maximum Range Minimum
Refers to how far into the range a
particular individuals salary has
penetrated
It is a measure of penetration in the range

Review
Mercers
Job-
Matching
Guide

Review
all Job
Descripti
ons as
they
relate to
RB
Match each
core job of RB
with the jobs
given in the
Mercer list.

Determine the
core level
using the
variations
from core
level table or
the
accompanying
decision tree

Establish All
Core levels
Match
remaining
roles in RB
with the
additional job
list provided
by Mercer.

Determine the
core level
using the
variations from
core level table
or the
accompanying
decision tree

Preparation
Match Core
Jobs
Match Addl
Mercer Jobs
Submit Data
Complete the
data input
sheet.

Instead of a
representative
position for
each job,
provide a min
of 5-10 job
holder data.

Submit the job
data sheet to
Mercer

Compensation Structure

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