HR Basics: Building a Fair and Competitive Compensation Plan in 7 Steps (Full Transcript)

Speaker 1: HR Basics is a series of short courses designed to highlight what you need to know about a particular human resource management topic. In today's HR Basics, we explore how to build a compensation plan, outlining the seven steps used to create a pay structure. Compensation is pay provided by an employer to an employee in return for work. Building a compensation plan takes you through seven critical steps to formulate a base pay structure and manage your compensation plan. 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 a compensation plan for their organization, or they might work with an external compensation consultant. A basic model for building a compensation plan includes internal alignment, external competitiveness, and compensation management. Seven steps fit into each of these areas, including job analysis, job evaluation, pay policy, market analysis, base pay structure, pay for performance, and communicating the plan. Let's take a look at each step. Internal alignment – pay comparisons among jobs or skill levels inside a single organization. How differently should different types and levels of skills and work be paid within the organization? Internal alignment includes the steps of job analysis, job evaluation, and pay policy identification. Step 1. Job analysis, which is the systematic process of collecting information that identifies similarities and differences in work. The outcome of job analysis is job documentation or job descriptions. Step 2. Job evaluation, which is the systematic process of determining the relative worth of jobs. The outcome of job evaluation is the development of internal structure or hierarchical rankings of jobs. Step 3. Pay policy, which is the process of determining whether the organization wants to lead, leg, or meet the market in compensation. Next is external competitiveness. Pay comparisons with competitors, other organizations that hire people with the same or similar knowledge, skills, and abilities. How much do we want to pay in relation to our competitors? External competitiveness includes the steps of market analysis and the development of a base pay structure. Step 4. Market analysis, which is the process of analyzing compensation data gathered from other employers in a survey of the relevant labor market. Gathering external pay data is essential to keep the organization's compensation extremely competitive. Step 5. Base pay structure. The internal structure developed through job evaluation is merged with the external market pay rates in a simple regression to develop a market pay line from which pay grades and ranges are developed. Depending on pay policy, the market pay line can be adjusted up or down. Finally, compensation management, making your compensation plan work by addressing individual contributions and clear communication with employees. How do we recognize individual contributions and make pay decisions clear to all employees? Compensation management includes the steps of pay for performance and communicating the compensation plan to employees. Step 6. Pay for performance, determining the use of pay that varies with some measure of individual or organizational performance such as merit, incentives, and variable pay. Step 7. Communicate the plan, ensuring all employees understand their compensation and have a clear line of sight between organizational mission, culture, and their compensation. Compensation is a critical element of your total rewards strategy. A strong base pay structure is built through internal alignment, external competitiveness, and compensation management. For more information, visit www.fema.gov