Creating a Fair Compensation Policy
02/27/07
With 30 to 70 percent of any organization’s direct costs going to employees in the form of salary and benefits, salary administration is a big part of HR’s job. And an important one. As compensation expert Robert J. Butler of Resource Partners International told a group of HR professionals recently, “How we pay people influences how they feel about their organizations.”
The problem is, most smaller companies don’t have established pay policies. That’s a mistake, Butler said. “If you make it up as you go along, you confuse employees.”
Perform a Job Analysis
The first step in creating a pay policy that employees view as logical and fair is to conduct a job analysis. “Determine what people do and how,” said Butler. Your goal is to formally document duties and responsibilities. Chart:
Goals and accountabilities for each person, group, or unit.
The nature of relationships.
Qualifications, which are made up of knowledge, skills, abilities, and behaviors.
Relative importance to the unit or organization.
“With the right kind of analysis,” Butler said, “we can generate all kinds of information.” It’s good for developing ADA accommodation plans, performance evaluations, job descriptions, career ladders—and compensation systems.
Evaluate Jobs
Once you’ve outlined each job, compare them with one another. Or, as Butler said, “Rank ‘em and stack ‘em.”
One way to begin building a hierarchy is to assess the skill and effort required of each job, and the responsibility the jobholder has for making decisions, managing assets, and boosting the company’s results. Take into account any classification system you already have, which might be embodied in the job titles you already use.
Classify/Score Jobs
Next, put jobs into categories based on their relation to one another. Doing this ensures pay equity within the organization and helps keep discontent over perceived unfairness to a minimum.
Many HR people will have a good intuitive feel for the relative importance of each job and the category it should fall into. The job analysis and evaluation backs up your intuition with hard facts, allowing you to place jobs into the right category or salary “band” with confidence.
If you’d like to be more precise, assign jobs points based on the information you’ve already gathered. This is what the government does with its General Schedule system for awarding compensation. It assigns points based on the following factors:
Factor 1: Knowledge Required by the Position
Factor 2: Supervisory Controls
Factor 3: Guidelines
Factor 4: Complexity
Factor 5: Scope and Effect
Factor 6: Personal Contacts
Factor 7: Purpose of Contacts
Factor 8: Physical Demands
Factor 9: Work Environment
The result is to slot the job into one of the government’s fifteen pay categories. (For a more complete explanation, head to
(www.opm.gov/fedclass/html/gsclass.htm)
You may not need fifteen pay grades, but Butler says you should have “as many as you need and can differentiate.” However, he added, “The trend over time is to reduce the number of grades.”
Reconcile
You’ve analyzed and evaluated jobs, and placed each one into a category or grade level. Now you need to compare your salary scale with the external job market using accurate salary surveys. “Turnover is the enemy of ROI [return on investment],” observed Butler. “You’ve got to pay market rates or lose people.” What you discover will help you come up with pay range per grade.
All this is a lot of work, but remember what’s at stake. Compensation is a huge factor in attracting, motivating, and retaining employees. And, as Robert Butler says, having a logical pay policy “helps us anticipate where we want to go from where we are.”