Compensation Management – Best

PracticesCarrie Scott, SPHR

Total Rewards and Compensation

Total RewardsMonetary and non-monetary rewards used to attract, motivate, and retain employees

Rewards System Strategic Objectives•Legal compliance•Cost effectiveness•Internal and external equity for employees•Recognizing contribution to maximize performance and manage talent

Compensation Approaches

Traditional Approach Total Rewards Approach• Compensation primarily base

pay only• Bonuses for executives only• Fixed benefits tied to seniority• Pay grade progression based

on organizational promotions• One organization-wide pay

plan for all employees

• Variable pay used with base pay

• Annual/long-term incentives provided to all employees

• Flexible and portable benefits offered

• Knowledge-based broadband determine pay grades

• Multiple pay plans consider job family, location, and business unit

Total Rewards Components

Total Rewards

Compensation

Base Plan•Wages•SalariesVariable Pay•Bonuses•Incentives•Stock Options

Benefits

• Health/medical insurance

• Life/disability insurance• Paid time off• Retirement• Work-life

Performance & Talent Management

Performance Measurement•Performance reviews•Goal settingTalent Management•Training•HR development•Career planning•Succession planning

Compensation Philosophies

Entitlement Performance

• Seniority-based pay• Across the board raises• Pay scales raised annually• Industry comparisons of

compensation only• Holiday bonuses

• No raises for length of service• No raises for longer-service

poor performers • Market-adjusted pay

structures• Broader industry comparison• Bonuses tied to performance

results

Equity•Workplace equity refers to the perception that all employees in an organization are being treated fairly•External pay equity exists when employees in an organization perceive that they are being rewarded fairly in relation to those who perform similar jobs in other organizations•Internal pay equity exists when employees in an organization perceive that they are being rewarded fairly according to the relative value of their jobs within an organization

Privacy

Transparency

Compensation System Design Issues

Market Competitiveness and Compensation

Lead the Market Meet the Market Lag the MarketPros: •Increase the supply of candidates•Increase selection rates of qualified applicants•Decrease employee turnover•Increase morale and productivity•Prevent unionization efforts

Pros:•Compensation structure remains competitive, therefore improving its ability to attract and retain top talent

Pros:•Option when financial resources are extremely limited

Market Competitiveness and Compensation

Lead the Market Meet the Market Lag the MarketCons:•Greatest propensity of increasing overall labor costs

Cons:•Although this strategy allows employers to better manage labor costs, it also has the potential of placing the employer in a position of having to play catch-up, requiring larger adjustments to the compensation structure during tight labor markets

Cons:•Much more susceptible to fluctuations in the labor market, risk greater difficulty in retaining and attracting highly qualified candidates, and typically tend to experience higher rates of employee dissatisfaction, poor performance and turnover.

Compensation Administration Process

Job Analysis(job description and job specifications)

Valuing Jobs•Job Evaluations•Market Pricing

Pay Surveys

Pay Structure•Pay schedules•Pay grades•Pay ranges

Individual Pay

Implementation, Communication, and Monitoring

Pay Policies

Performance Appraisal

Valuing Jobs - Job Evaluations Job Evaluation•Means used to identify the relative worth of jobs within an organization

Compensable Factor•Job value common among a group of jobs•Something for which an organization chooses to compensate an employee

Compensable Factors - Examples All Jobs

•Knowledge/education•Experience•Supervision received•Physical/mental demands•Autonomy and decision-making authority

Office/Customer Service•Customer interaction•Confidential information •Consequence of errors

Manufacturing/Warehouse•Safety and hazards•Specialized equipment used•Working environment

Valuing Jobs - Market Pricing

• Using marking data to identify the relative value of jobs based on what other firms pay for similar jobs.

Advantages Disadvantages• Ties organizational pay levels to

the external job market without “internal” job evaluation distortion

• Communicates to employees that the compensation system is market linked

• It relies on market survey data

• A specific job may differ from a “matching” job in the survey

• The market data’s scope (range of sources) is a concern

• Tying pay levels to market data can lead to wide fluctuations

Pay Surveys

• Collection of data on compensation rates for workers performing similar jobs in other organizations.

• Benchmark jobs (jobs found in many organizations)

• Look out for sources, number of respondents, age, etc.

Pay Structures - Why?

• Clarifies the market and internal value for each job, and provides a way to manage employee pay effectively

• Quantifies compensation costs and enables budget decisions

• Validates compensation strategy and aligns to business goals

• Provides a tool to talk with employees about development

• Helps to ensure pay equity

• Determines pay for non-benchmark jobs

• Allows for ease of administration

Pay Structures

Pay Schedules•Sets of pay grades, multiple markets grouped (geography, industry)

Pay Grades•A label for a group of jobs with similar relative internal worth•Associated with a pay range

Pay Ranges•The upper and lower bounds of compensation

Pay Structures - Schedules

• Provides a way of grouping together multiple labor markets, using the same set of pay grades

• Streamlines pay structure• Consideration: how complex is your organization?

• Industries and/or lines of business• Locations

6 Different Pay schedulesHome Schedule 3 labor marketsSchedule A, minus 15% Schedule 4 labor marketsSchedule B, minus 10% Schedule 7 labor marketsSchedule C, minus 5% Schedule 4 labor marketsSchedule D, plus 5% Schedule 1 labor marketSchedule E, plus 10% Schedule 1 labor market

Pay Structures - Grades

• No fixed rules for every organization

• Decide how many grades you will have. The number will vary in response to:• The size of the organization• The vertical distance between the highest and lowest job• How finely the organization defines jobs and differentiates

between them (levels)• The pay increases and promotion policy of the organization

• Determine the definition of each grade

Pay Structures - Ranges

Range Spread is the distance between the top and bottom of the range and is typically 30%-60% RS=(max-min)/min

Considerations for ranges• Difference at the base vs. top of the structure

• Bigger range spread at the top, narrower at the bottom• Time to proficiency• Differentiation of skill sets

• Overlap between pay ranges• Long tenure/high performing employees can earn higher

wages• Provides more cost effective career progression within the

organization

Individual Pay - Using Ranges

Employee placement in range•Minimum = new hire•Midpoint = proficient and meeting performance expectations•Above midpoint = takes into account performance, tenure, education or whatever the organization values most

Guidelines or Policies•Develop guidelines and policies about

• Where new employees enter ranges• How current employees move within ranges• What happens when an employee is promoted• How much discretion do managers have

Individual Pay - Issues

Rates out of range

•Red Circled Employee- An incumbent (current job holder) who is paid above the range set for the job

•Green Circled Employee- An incumbent who is paid below the range set for the job

Pay Compression•Pay differences among individuals with different levels of experience and performance in the organization are reduced.

New Thinking in Compensation

• Strategic approaches to compensation

• Pay the person for the individual worth (knowledge, skills and competencies) rather than for the value of a job they perform

• Reward excellence through a pay for performance compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational objectives

• Individualize the pay system to give employees choice in how they are rewarded and what reward they receive

Conclusion

Thank you! For more information, please feel free to reach out to Carrie Scott, FGP HR Consultant•cscott@fgp.com•863.553.7281