4000 words about Introduction to Compensation: Designing A Pay Structure
Budget: $30 – $250 USD
Introduction to Compensation: Designing A Pay Structure
Learning Objectives: In this case, EHRM students will learn to design a pay structure. To do so, they will:
• Write a job description, using the O*NET website/or any other professional websites.
• Use the point method to conduct a job evaluation.
• Analyze pay survey data for benchmark jobs.
• Create a market pay line using Excel.
• Establish a pay policy line based on a pay level strategy.
• Create pay grades.
• Establish pay ranges.
Compensation is a critical area of human resource (HR) management, and one that can greatly affect employee behavior. To be effective, compensation must be perceived by employees as fair, competitive in the market, accurately based, motivating and easy to understand.
HR professionals might create the pay structure for their organization, or they might work with an external compensation consultant. There are several steps to designing a pay structure: job analysis; job evaluation; pay survey analysis; pay policy development; and pay structure formation.
Each step is briefly explained below. For a more extensive discussion, please review Milkovich & Newman (2008)
Step 1: Job Analysis Job analysis is the process of studying jobs in an organization. The outcome of this process is a job description that includes the job title, a summary of the job tasks, a list of the essential tasks and responsibilities, and a description of the work context. Also included are the knowledge, skills and abilities needed to perform the job.
Step 2: Job Evaluation Job evaluation is the process of judging the relative worth of jobs in an organization. The outcome of job evaluation is the development of an internal structure or hierarchical ranking of jobs. Job-based evaluation is used more often than person-based evaluation, and so the former will be the focus in this case. There are three methods of job-based evaluation: the point method (which is the most commonly used); ranking; and classification. Job evaluation helps to ensure that pay is internally aligned and perceived to be fair by employees.
Step 3: Pay Policy Identification Pay policy identification is the process of determining whether the organization wants to lead, lag or meet the market in compensation. The pay policy or strategy will likely influence employee attraction and retention. Pay policies can vary across job families (i.e., groups of similar jobs) and job levels if the top management feels that different strategies can be effective in different areas of the organization.
Step 4: Pay Survey Analysis Pay survey analysis is the process of analysing compensation data gathered from other employers in a survey of the relevant labor market. Gathering external pay data (e.g., base pay, bonuses, stock options and benefits) is essential to keep the organization’s compensation externally competitive within its industry. Employee attraction and retention can be improved by maintaining externally aligned pay structures
Step 5: Pay Structure Creation Pay structure creation is the final step, in which the internal structure (Step 2) is merged with the external market pay rates (Step 4) in a simple regression to develop a market pay line. Depending on whether the organization wants to lead, lag or meet the market, the market pay line can be adjusted up or down. To complete the pay structure, pay grades and pay ranges are developed.
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Learning Objectives: In this case, EHRM students will learn to design a pay structure. To do so, they will:
• Write a job description, using the O*NET website/or any other professional websites.
• Use the point method to conduct a job evaluation.
• Analyze pay survey data for benchmark jobs.
• Create a market pay line using Excel.
• Establish a pay policy line based on a pay level strategy.
• Create pay grades.
• Establish pay ranges.
Compensation is a critical area of human resource (HR) management, and one that can greatly affect employee behavior. To be effective, compensation must be perceived by employees as fair, competitive in the market, accurately based, motivating and easy to understand.
HR professionals might create the pay structure for their organization, or they might work with an external compensation consultant. There are several steps to designing a pay structure: job analysis; job evaluation; pay survey analysis; pay policy development; and pay structure formation.
Each step is briefly explained below. For a more extensive discussion, please review Milkovich & Newman (2008)
Step 1: Job Analysis Job analysis is the process of studying jobs in an organization. The outcome of this process is a job description that includes the job title, a summary of the job tasks, a list of the essential tasks and responsibilities, and a description of the work context. Also included are the knowledge, skills and abilities needed to perform the job.
Step 2: Job Evaluation Job evaluation is the process of judging the relative worth of jobs in an organization. The outcome of job evaluation is the development of an internal structure or hierarchical ranking of jobs. Job-based evaluation is used more often than person-based evaluation, and so the former will be the focus in this case. There are three methods of job-based evaluation: the point method (which is the most commonly used); ranking; and classification. Job evaluation helps to ensure that pay is internally aligned and perceived to be fair by employees.
Step 3: Pay Policy Identification Pay policy identification is the process of determining whether the organization wants to lead, lag or meet the market in compensation. The pay policy or strategy will likely influence employee attraction and retention. Pay policies can vary across job families (i.e., groups of similar jobs) and job levels if the top management feels that different strategies can be effective in different areas of the organization.
Step 4: Pay Survey Analysis Pay survey analysis is the process of analysing compensation data gathered from other employers in a survey of the relevant labor market. Gathering external pay data (e.g., base pay, bonuses, stock options and benefits) is essential to keep the organization’s compensation externally competitive within its industry. Employee attraction and retention can be improved by maintaining externally aligned pay structures
Step 5: Pay Structure Creation Pay structure creation is the final step, in which the internal structure (Step 2) is merged with the external market pay rates (Step 4) in a simple regression to develop a market pay line. Depending on whether the organization wants to lead, lag or meet the market, the market pay line can be adjusted up or down. To complete the pay structure, pay grades and pay ranges are developed.
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