Compensation Administration
How to Set Up a Solid Pay
System
North Dakota HR Conference for Local Government
Agenda
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Five steps to building a solid pay system
What options you have available
Implementing pay changes
Questions and answers
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Five Steps
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Pay Strategy
Job Analysis
Job Evaluation
Job Pricing
Performance Management
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Five Steps
1. Pay Strategy
Job Pricing
Pay Ranges
Performance
Evaluation
Employee Pay
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5.
2. Job Analysis
3. Job
Evaluation
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Pay Strategy
• A statement which identifies the significant
objectives of the pay system
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Broadly or narrowly defined jobs
Importance of internal vs. external equity
Definition of the market
Pay in relation to market
• Lead
• Lag
• Lead/lag
– Role of incentives, benefits, workplace rewards
– Visit www.foxlawson.com for more articles on Pay
Strategy
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Job Analysis
• To understand and clarify the nature and level of
work that each employee performs
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Questionnaires for employees to fill out
Review and validation of questionnaires
Development of job descriptions
Verification of job descriptions
• By employees, or by managers, or by both
• Position versus Job
– Position is each employee plus any vacancy
– Job may represent several employees
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Content of Job Descriptions
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Title
FLSA status (exempt vs non-exempt)
Reporting relationships (mostly for exempt)
Summary of job’s purpose
Typical duties and responsibilities (essential
functions for ADA compliance)
Minimum qualifications or job specifications
Working conditions
Disclaimer statement
Dates and approvals
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Job Evaluation
• To determine the correct internal value of the job
based on the nature and level of work performed.
• Does not account for market information
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Ranking
Point factor
Decision Band™ Method
Slotting based on another method (such as market
data)
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Job Evaluation: Ranking
• A non-quantitative process of rating the jobs
based on the “size” or “complexity” or “difficulty”
or “importance” of the job to the organization in
relation to the other jobs
• Pros:
– Easy, cheap and fast
• Cons:
– Ranking criteria change from job to job
– May be influenced by person in the job
– Any new or changed jobs require the whole set to be
re-ranked
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Job Evaluation: Point Factor
• A quantitative method which rates each job on
several different “compensable factors” such as
decision making, supervision, experience required
• Pros:
– Reliable, objective, easy to evaluate new jobs
• Cons:
– Expensive, time consuming, creates an inflexible
hierarchy
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Job Evaluation: Decision Band™ Method
• A quantitative method that evaluates jobs based
on their authority/responsibility, supervision and
complexity and difficulty of the work.
• Pros:
– Reliable, objective, easy to evaluate new jobs
– Transparent
• Cons:
– Introduces new terms
– Appears to be a single factor system
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Job Evaluation: Slotting
• A non-quantitative method supported by a
quantitative hierarchy
– e.g. Market based salary structure
• New jobs slotted based on market data
• Pros:
– Quick, market responsive, easy
• Cons:
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Need good market data
Need an existing salary structure
May be out of sync with internal equity
Market inequities will be built in
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Job Pricing
• The process of collecting valid market data and
establishing a salary structure
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Select and define benchmark jobs
Select and define recruiting market for jobs
Collect and validate market data
Establish salary structure
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Job Pricing: Benchmarks
• Jobs that can be found in other organizations and
have essentially the same duties and
responsibilities
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70% of duties and responsibilities are similar
Qualifications are similar
Usually populated by more than one person
Try to define enough benchmarks to cover about 8090% of your employees
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Job Pricing: What is the Market?
Job Type
Top Mgt.
Prof/Tech
Clerical/Trades/L
abor
Industry
Similar
Organizations
Similar
Organizations/Gen
eral Market
General Market
Org Size
Similar Size
All Sizes
All Sizes
Geography
Regional/National
Regional/Local
Local
Market
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Job Pricing: Salary and Benefits Data
• Salary data
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Minimum
Maximum
Median
Midpoint of pay range
Actual average of employees
• Pay practices data
– How employees move through the range
– Structure increases, merit increases
• Bonus data
– Eligibility
– Amount and targets
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Job Pricing: Salary and Benefits Data
• Benefits Data
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Health care
Dental
Vision
Retirement
Vacation/Sick/Holidays
• Employer and employee cost
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Job Pricing: How Many Pay Structures
• How many salary structures?
– Clerical/technical?
– Professional?
– Management?
• How many salary ranges?
– Depends on broad or narrow job definition, but usually-• 8-12% differences between pay range midpoints
• 30 to 60% range spreads from minimum to maximum
– Clerical/technical - 8-10 ranges
– Professional - 6-8 ranges
– Management - 5-6 ranges
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Sample Salary Structure
Pay Structure (Pay at Range Position vs Pay Grade)
$310,000
Pay Rate at Range Position
$260,000
$210,000
$160,000
$110,000
$60,000
$10,000
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Index of Pay Grade
Minimum of Pay Grade
Midpoint of Pay Grade
Maximum of Pay Grade
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Performance Evaluation
• A process to evaluate and assess the employees
performance in relation to the objective of the job
requirements
– Key result areas
• “What they do”
• Objective information
– Key process/competency areas
• “How they work with others”
• More subjective
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Salary Range Management
Performance
Level
Maximum of Range
Mentor/Top
Performer
Full Performance
Midpoint of Range
Developmental
Starting
Minimum of Range
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Employee Pay Movement
Quartile of
Range/
Performance
4th: Top
Performer
3rd: Full
Performance
2nd:
Development
al
1st: Starting
Exceeds
Expectations
2-3%
3-4%
4-5%
5-6%
Meets
Expectations
1-2%
2-3%
3-4%
4-5%
Does Not
Meet
Expectations
0%
0%
0%
1-2%
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Range Movement
• Move ranges according to market movement
• Move employees based on performance and
organizational capability
• Pay ranges and employee don’t necessarily
move at the same time or at the same pace
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Implementation Options
• Employees paid over the maximum
– Freeze pay until the pay ranges move up
– Freeze pay but provide a lump sum payment for the
difference until the ranges move up
– Reduce pay
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Implementation Options
• Employees paid under the minimum
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Do nothing
Raise pay to minimum immediately
Raise pay to minimum at next pay review
Raise pay based on a place in range calculation to
keep the employee in the same place in the range that
they were in their old range
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Implementation Options
• Appeals
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Generally a good idea
Provides relief valve
Gives management a chance to take a second look
Good idea to involve a team of select employees
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Questions?
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