MHR 6901, Compensation Management 1

Course Learning Outcomes for Unit IV Upon completion of this unit, students should be able to:

4. Propose a compensation survey related to a compensation plan. 4.1 Explain the purpose of a compensation survey. 4.2 Discuss the role of a compensation survey when determining an organization’s compensation


Course/Unit Learning Outcomes

Learning Activity

4.1 Unit IV PowerPoint Presentation

4.2 Unit IV PowerPoint Presentation

Reading Assignment Chapter 7: Building Market-Competitive Compensation Systems Chapter 8: Building Pay Structures That Recognize Employee Contributions

Unit Lesson In this unit, we move into the area of competitive compensation systems and recognizing employee contributions. Organizations must be able to offer competitive compensation and benefits in order to attract and retain high-potential employees. High-potential employees are necessary for an organization to compete in the global market. Compensation Surveys There are two broad categories for employee compensation: direct and indirect. Together, they make up a total remuneration package. Direct compensation plans are comprised of both salary payments and health and welfare benefits. To be competitive in today’s marketplace, it is necessary to develop pay systems that attract and retain qualified employees. When reviewing a compensation program for competiveness, it is good to consider reviewing a compensation survey. As with all analyses, it is important to start with a strategic analysis. Not only are the organization’s policies, plans, and compensation programs under review but so are the same policies, plans, and programs of the industry and local competitors. One way to get data on the competition is through a compensation survey. The purpose of a compensation survey as it relates to an organization’s compensation plan is to align the organization’s salaries with either published benchmarks for those positions that are translatable from one organization to the next or to capture the pay scales unique to that particular industry, keeping in mind that industry standards vary greatly. Compensation surveys help the employer avoid pay-mitigated turnover and the loss of trained staff to competitors. Several organizations provide compensation surveys, typically at a cost. Some organizations will also provide a free copy of the compensation survey to those organizations that participate in providing compensation data. Normally, this data is updated annually. It is important to remember the business strategy when reviewing compensation surveys in order to develop a compensation program. For example, an organization that has decided to develop a market leader business


Compensation Systems

MHR 6901, Compensation Management 2



strategy will want to consider paying in the higher ranges in order to attract the best talent. An organization that has developed a market match business strategy will want to consider paying at the market or industry average. Another part of the total compensation package is deciding on the appropriate combination of core compensation (i.e., the company-provided benefits and incentives). Again the compensation surveys can provide valuable information as to what the compensation is providing. Compensation Surveys and Plans for Multinational Corporations Given the explosive growth of organizations expanding and becoming multinational corporations, the topic of compensation becomes problematic. For those organizations that must take into consideration expatriate benefits, the organizations face a number of issues, which include pension, health care, social security, profit sharing, stock option plans, life insurance, and security. Although there are some surveys available for expatriate compensation, care must be taken when analyzing the data. Even compensation surveys as they relate to compensation plans have to be adjusted in order to compare like items. For example, organizations have to determine whether to maintain an expatriate in their home country’s program(s) or whether to enroll their expatriates in the host country’s benefit program(s). The most important advice when it comes to expatriate compensation surveys is to keep the expatriate happy. Many expatriate assignments fail due to financial dissatisfaction. More about expatriate compensation will be discussed in a future unit. As with all surveys, one must be mindful that the data provides guidelines with which to review current programs and make adjustments. Participants in surveys have unique challenges that can be learned from and built upon, but each organization should develop a compensation program that meets the organization's goals and objectives. Pay Structures Creating a pay structure for an organization typically involves the number of pay structures, market pay lines, pay grades, pay ranges, and results evaluation. Normally, an organization has more than one pay structure because the organization employs exempt and non-exempt employees. Of course, there are other structures for different job families or geographic regions as well. The organizational structure will often determine the pay structure. The market pay line, as mentioned before, is typically associated with the organization's business strategy. Pay grades are levels on the pay scale and are often grouped according to pay ranges. For example, a pay grade for a Technician I position may have a pay range of $25,000 to $27,500 depending on factors such as training, experience, and time on the job. After an organization develops a pay structure, it is best to compare it to the market or industry standards, taking into consideration the organization’s business strategy. When creating a pay structure, one should consider adding incentives to increase motivation and productivity within an organization. Merit pay is one way to increase motivation within an organization. However, care must be taken to develop merit increases that are meaningful and appropriately timed in order for them to be effective. Organizations that have a sales force have a variety of options when developing pay structures including a salary, commission, bonus, or a mixture of the options. Sales pay structures are usually related to the business strategy and the competitive market. Another form of incentive pay is the person-focused pay. In this type of pay system, the employee is able to increase his or her pay based on the attainment of job-related skills. The organization would need a way to assess the skills and would then increase pay according to specific skills. For this type of pay structure to be effective, it would be important for the organization to develop an ongoing training program or method to make training available to the employees.

MHR 6901, Compensation Management 3



Two other pay structure considerations are broadbanding and the two-tier approach. Under broadbanding, pay bands are created that involve more jobs and skills. The two-tier approach is a system that accommodates the newly hired employees as well as the long-term employees. Newly hired employees are often paid less than the current employees, which can be considered a cost saving measure in union environments when it comes to collective bargaining. Rather than implement layoffs, newly hired employees are hired at a lowered rate than the current employees. Of course, all compensation systems must be developed within a compensation budget and should be evaluated annually. Developing a compensation program is a complex task for an organization to undertake, and it is usually assigned to compensation specialists. In the next unit, we will look further into employee benefits, specifically addressing discretionary and mandatory benefits.

Learning Activities (Nongraded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. Each chapter of your textbook contains a case study related to the main theory or concept within the chapter. Review the case studies to gain a better understanding of the course materials as they relate to compensation considerations. Feel free to discuss the chapter case studies with your classmates in the Student Break Room forum.