An HR presentation on Compensation Management Best Practices.

1. Compensation
Management – Best
Practices
Carrie Scott, SPHR

2. Total Rewards and Compensation
Total Rewards
Monetary 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

3. 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

4. Total Rewards Components
Total
Rewards
Compensation
Base Plan
•Wages
•Salaries
Variable 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 setting
Talent Management
•Training
•HR development
•Career planning
•Succession planning

5. 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

6. Compensation System Design Issues
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

7. Market Competitiveness and Compensation
Lead the Market Meet the Market Lag the Market
Pros:
•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

8. Market Competitiveness and Compensation
Lead the Market Meet the Market Lag the Market
Cons:
•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.

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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

15. 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

16. 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 schedules
Home Schedule 3 labor markets
Schedule A, minus 15% Schedule 4 labor markets
Schedule B, minus 10% Schedule 7 labor markets
Schedule C, minus 5% Schedule 4 labor markets
Schedule D, plus 5% Schedule 1 labor market
Schedule E, plus 10% Schedule 1 labor market

17. 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

18. 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

19. 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

20. Individual Pay - Issues
R ates 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.

21. 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

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