Managing Direct Compensation

2010-07-11

By: Peter Ronza, CCP, SPHR, President, Pontifex Consulting Group

In order to execute the direct compensation strategy it is necessary for an organization to design programs that will support it.

Base Pay Management

Base pay is the largest component of the total compensation package for most employees. Wages/salaries represent the largest controllable cost item for many organizations and failing to manage them effectively is a sure ticket to poor financial performance. Base pay is also the foundation for total compensation, since it establishes the standard of living for employees. It serves as the primary indication of the value the organization places on the role an employee plays and on the contributions the employee makes. For this reason the subject elicits great emotion and is often the source of conflict between the employee and the organization. It is therefore critical that base pay rates are viewed by both the organization and by employees as being:

• internally equitable

• externally competitive

• affordable/cost effective

• legal/defensible

• understandable

• appropriate for the organization

• appropriate for the workforce.

There are three primary approaches to determining pay. The first, pay for the job, is based on the role an employee plays in the organization and how well they perform that role; it is a “pay for performance in the job” approach. The second, pay for the person, is based on what the employee brings to the organization, in the form of knowledge, skills, abilities and behaviors. The last, pay for results, typically is not delivered in the form of base pay, but rather utilizes variable pay programs to reward employees based on output.

Organizations seem to be on a continual search for the ideal answer, the one quick fix that will address the challenges of paying people in a manner that elicits their best and that attracts and retains the best people. This quest is futile and the answer to “what is best” is “what fits.” What fits the organization, what fits the employees and what is both effective and affordable may be “all of the above.” Therefore the organization must understand all the approaches, assess the context and fit the program to that context.

Employees who have other employment options must feel that both their pay opportunity and their pay level are equitable relative to other employees and competitive with what other employers pay if they are to be expected to join the organization and remain with it. If employees feel they are inappropriately graded they will believe they are being treated inequitably. If they feel the ranges for their assigned grade are inappropriate they will consider their pay opportunity to be non-competitive. If they feel undervalued or underpaid, the organization will have a difficult time controlling turnover and/or sustaining productivity.

Establishing Internal Equity

Organizations use some form of job evaluation to assign relative internal values to jobs: ranking the jobs from high to low and classifying jobs into predetermined levels and scoring jobs using objective measures.

It is also necessary to align the grade placements to reflect the specific characteristics of the organization. Internal values are a function of how central an occupation/job is to the primary business of the organization and how critical it is to the performance of the organization. For example, Critical Care Nurses may be valued more highly than IT professionals in a hospital, even if surveys show the IT professionals command higher rates of pay in the market.

The number of grades in a pay structure should reflect the characteristics of the organization developing the structure. An organization might use more or fewer grades than is typical, depending on its reporting structure (how hierarchical or flat) and upon how many levels are defined within professional job families (a job family is a set of jobs involving work of the same nature but performed at different skill and responsibility levels). Flat organizations with few reporting levels and with few levels in job families might need fewer grades; more hierarchical organizations could need more.

Establishing External Competitiveness

Once the organization has created a job grade structure that reflects internal equity it can utilize prevailing market levels to establish pay ranges. Once an organization has decided on a competitive posture that dictates setting pay ranges at relevant labor market levels, as opposed to exceeding or paying below prevailing levels, the market averages can be applied directly to determining salary ranges.

Peter Ronza is President of The Pontifex Consulting Group. The company helps organizations re-design their Human Resources systems to attract, motivate and retain a high-quality workforce. We strive to help our clients bridge the gap between objectives and desired outcomes. For more information contact him at 612.803.3516.

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