STRATEGIC COMPENSATION SYSTEMS ANALYSISEmployee compensation entails more than “pay”. It is broad term encompassing the full range of economic benefits provided to employees in exchangefor their employment commitment and performance contributions to an organization. It includes both direct and indirect compensation, immediate and deferred compensation, and extends to a wide array of economic incentives and benefits. The strategic concern is to how best create a compensation system which supports the business strategy of the firm. To that end, the analytical grid below identifies key considerations and decision points.Strategic Strengthening Containing Limiting Promoting Criteria Performance Cost Liability Fair PlayObjectives Individual External Legal Internal Equity Equity Compliance EquityChallenges Tie to Strategy, Tie to Labor Develop Pay Address Perform. To Pay Market Structure Pay IssuesDeterminants Philosophy Labor Market Legislation Work Culture Collective Case Law Host Society BargainingConsiderations 1. Variable Pay 1. Ability to Pay 1. Equal Pay 1. Workforce 2. At Risk Pay 2. Ability to 2. FLSA Adjustment 3. Comp. Mix Compete for HR 3. Litigation 2. Redesign 4. Effort/Impact 3. Ability to take 3. Pay 5. Econ. Motivation Pricing Compression 6. Expectancy Theory 4. Turnover 4. Pay 7. Employee Needs 5. Recruitment Cost Secrecy 8. Annuity Issue 6. Ability to take 5. At-Will Strike Employ. 7. Inflation/COL 6. Equity Theory Methods 1. Performance 1. Definition of 1. HR Audits 1. Job Desc. Measurement Labor Market 2. Pay Struct. 2. Job Eval. 2. Bonus Systems 2. Job Benchmarks 3. Workload 3. Deferred Comp. 3. Comp. Surveys Standards 4. Flex. Benefits 4. BLS Data 4. Pay Adj. Type of Pay Performance-Based Market-Based Comparable Competency Worth -BasedThreshold Considerations in Compensation System DesignThe primary goal of system design is to insure both external and internal equity within the parameters of legal compliance and the employer’s ability to pay. There are four (4) key questions which must be addressed:1. How much should we pay? (What is the SIZE of the economic pie?)2. In what form should we pay it? (How should the pie be SLICED?)3. When should it be provided? (When and how do we serve the pie?)4. How do we make adjustments? (When should we change the pie recipe?)To address these fundamental questions, the following steps need to be followed in compensation system design:1. Work Design – Determine how best to design the organization and the work performed within it.2. Job Evaluation – Determine how best to “value the worth” of jobs, selecting both the criteria and the most appropriate job evaluation methodology; the evaluation should produce an initial hierarchy or structure of jobs.3. Job Benchmarks – Determine the key (most important or most common) jobs for which to anchor compensation levels; benchmarks should include both a brief job description and job specification (qualifications needed).4. Labor Market Definition – Define the labor market from which to recruit human resources to perform the work; market parameters can be based on industry, geography, and profession.5. Market Research – Conduct a survey to obtain the compensation data needed; survey design should identify compensation level, range, form, and timing of adjustments for each job benchmark.6. Compensation Determination – Determine the level of total compensation and the “mix” (form) of various types of pay and benefits. 7. Job/Pay Structure Design – Set up a pay structure (pay levels, ranges, scales) by “pricing” the job structure (established in step no. 2) with survey data.8. Compensation Review Policy – Set up an administrative procedure to insure periodic review of both pay and work; such review includes the system itself and each of the individual jobs (typically includes job re-evaluation based on changes in duties). 9. Internal Equity Review – Examine periodically the effects of compensation adjustments or disparities due to factors such as compression, annuity vs. at-risk pay, HR turnover, etc.The “end product” of this process should be a direct pay system and a supportive system of indirect pay and benefits which are internally and externally equitable.Threshold Considerations in Performance-Based CompensationIf a performance-based system fails to meet ALL of the following conditions, it is unlikely to be effective in achieving the desired objective.1. Valence – Is the value/attractiveness of reward sufficient to motivate the person to exchange leisure for work? Consider form and timing.2. Instrumentality – Is there a clearly understood, well known, and consistently applied policy & system which ties
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