In this article we will explore some strategies for establishing and managing a compensation program that is based on objective and quantifiable criteria. More importantly, we will discuss the importance of and strategies for ensuring available payroll dollars are spent to help ensure attainment of business objectives. Let’s start with some basic assumptions:

Assumption #1: Organizations exist to accomplish objectives.
Assumption #2: A successful organization is one in which all systems and resources are aligned to accomplish those objectives.
Assumption #3: The primary reason organizations need employees is to engage in behaviors that will contribute to attainment of those objectives.
Assumption #4: Compensation (like all employee benefits programs) is a human resource development tool.
Assumption #5: The primary purposes of all human resource development tools are to facilitate the recruitment, retention and motivation of employees to engage in specific behaviors that will contribute to attainment of business objectives.

The most important component of an effective compensation system then is recognition of the role it plays in “aligning” human resources with business objectives. We suggest any other use of or purpose for compensation is a waste of precious resources.

While numerous studies have shown that compensation is not the most important component in the alignment process, they certainly have shown that compensation is one of the most important. Studies and our own experience have also shown that, in order for compensation systems to be effective, they must be perceived as fair, equitable and based upon objective criteria. The following are some suggested tools that can be used to ensure these criteria are met.

JOB ANALYSIS
The first step in the process is to analyze each job being performed. In doing so, it is important to determine and document:

1. Why the position exits;
2. The major duties performed;
3. The educational and experience requirements for successful job performance; and
4. The physical requirements for performing the job.

The primary tool for documenting the job analysis step is a job description. It is not necessary to list every duty performed in every job; however, it is very important to list at least the major duties. The job description should also include the job title, department in which it is located, the position to which it reports, the date analyzed and the job grade.

A critical component of conducting an objective job analysis is the need to analyze the required job duties, not the person performing the job at the time the analysis is conducted.

JOB EVALUATION
A completed job description permits comparison of the job duties and requirements to established, objective factors such as: education and experience requirements; initiative and ingenuity required; physical, visual and mental ability requirements; responsibility for equipment, material, product and process; work and safety of others; working conditions, including hazards; complexity of duties; supervision received; potential impact of errors; contact with others; responsibility for confidential data; and scope and character of any responsibility for supervising others.

This process includes identifying the degree of responsibility the job has in each of these categories. Lesser responsibility corresponds with lesser degrees; higher responsibility corresponds with higher degrees. Each degree is assigned a point value and, when the job evaluation step is completed, the points are totaled for each job being evaluated.

JOB GRADING
Organizations employ a number of different methods to grade jobs; however, the most effective and objective method is to establish a series of job grades with each grade having an assigned, sequential point range. The number of grades used should be sufficient to distinguish between levels of responsibility and enable employees to see a specific progression available for them to move upward, laterally or even downward in the organization. At the same time, the number of grades should not be so numerous that the distinction between levels of responsibility becomes confusing.

The total points for each job from the job evaluation process should be compared to the point ranges assigned to job grades and the appropriate grade selected for each job.

The same critical component mentioned in the job analysis step applies to the job evaluation and job grading steps – grade the job, not the person currently performing the job.

After all jobs have been graded, develop a spreadsheet listing all jobs and their respective grades in order from lowest to highest grade. This permits analysis and comparison of the resulting grades to ensure they appropriately, fairly and objectively reflect the hierarchy of the organization. Make any appropriate changes in the grades assigned at this point; however, make sure any changes made are based on objective criteria and not personalities.

JOB PRICING
Once again using objective criteria, establish a salary range for each job grade. Some of the considerations to include are: historical pay rates within the organization; market rates for positions requiring similar skill, education, experience, effort and responsibility; projected business conditions for the upcoming business cycle(s); and where the organization is in its life cycle – introduction, growth, maturity or decline. Based upon where the organization is in this cycle, establish a corporate compensation strategy to lead, simply compete with or lag the competition. This strategy should be reflected in the salary ranges established and the eventual administration of salary policies.

The following are some guidelines for developing salary ranges:

1. Each range should have a minimum, midpoint and maximum.
2. In general, lower level jobs have a narrow range between minimum and maximum salaries. Examples of typical range spreads (% maximum is above minimum) include:
   1. Production: 20% - 30%
   2. Clerical/administrative: 20% - 40%
   3. Exempt/managerial: 30% - 50%
3. Salary ranges are generally divided into quadrants. For example, if the spread between minimum and maximum of a range is 40%, each quadrant would account for one-fourth of that amount, or in this example, 10%.
4. There should be an overlap between pay ranges, which makes it possible for an experienced person in a job in a lower grade to be paid more than an inexperienced person in a higher grade.
5. The midpoint of each grade should be a set percent above the midpoint for the next lowest grade, for example 10%. This ensures consistent progression from one grade to another.
6. The “entry point” for each range is the range minimum.
7. The midpoint for each range is considered to be the “market rate.” “Market rate” refers to the amount a person in the surrounding labor market, who has sufficient knowledge and experience to perform the essential functions of the job without training, would expect to be paid.

SALARY ADMINISTRATION
A compensation program cannot be effective unless it is fairly and consistently administered. Therefore, the next step in the process is to establish guidelines to ensure fairness and consistency. Some of the topics for which guidelines need to be established include:

1. When salary reviews are to be conducted;
2. Who is responsible for conducting salary reviews;
3. Whether salary reviews will be based on time in the job, cost of living, performance, etc. and, if so, to what degree;
4. What percentage increases are available;
5. The organization’s policy covering disclosure of confidential salary information;
6. The organization’s policies for increasing the salaries of people who are paid less than the minimum for their assigned job grade and salary range (“green circle” rates);
7. The role midpoints will pay in the organization’s compensation practices;
8. The organization’s policies for increasing the salaries of people who are paid the maximum or more for their assigned job grade and salary range (“red circle” rates);
9. Required approvals for salary changes;
10. When salary changes are to become effective; and
11. How approved salary increases are to be documented, communicated and implemented.

After establishing and documenting comprehensive salary administration guidelines, members of the management team must be trained in their use and the importance of their fair and consistent administration. In addition, after all details have been finalized and training completed for the management team, appropriate details must be communicated to all employees to whom they will apply. This writer is an advocate of full and open disclosure of all compensation program guidelines, including job grades and salary ranges, but obviously excluding individual pay rates.

ALIGNMENT – THE PAY FOR PERFORMANCE LINK
Now let’s add another assumption to our list from above:

Assumption #6: Performance appraisal is another human resource development tool, the purpose of which is motivating employees to engage in specific behaviors that will contribute to attainment of business objectives.

People often say they use performance appraisals “to let employees know how they are doing and encourage them to develop their potential;” however, we suggest this is an incomplete use of a key human resource development tool. We suggest a more comprehensive and “aligned” purpose. Certainly, performance alignment requires us to let employees know how they are doing and encourage them to work to develop their abilities to their fullest potential. However, accomplishing key business objectives also requires us to engage in specific discussions of what they are doing and not doing that impacts attainment of the organization’s objectives. Alignment of the compensation tool, specifically the opportunity to earn more, with the performance appraisal tool permits us to provide incentives for employees to engage in the desired behaviors.

Some organizations accomplish this alignment by designing a pay-adjustment matrix that includes something like the following:

Performance Rating Available Increase*

Exceeds Expectations 3.6% - 5.0%

Meets Expectations 2.0% - 3.5%

Does Not Meet Expectations 0%

* Includes cost of living and merit components, consolidated here to save space.

A matrix such as this permits us to show employees that higher increases are available, within their grasp and under their control. Discussion of specific desired actions or performance improvements can be reinforced, and appropriate motivation provided, by pointing out during reviews that delivering the desired improvements can result in larger increases, and even shorter review times (not shown here).

As stated earlier, the most important component of an effective compensation system is to recognize the role it plays in “aligning” human resources with business objectives. We again suggest any other use of or purpose for compensation is a waste of precious resources. ●

OSHA ANNOUNCES 2005 PLAN FOR TARGETED INSPECTIONS
About 4,400 high-hazard worksites are targeted for inspection under OSHA’s Site Specific Targeting Program for 2005, the agency announced on August 9. This year’s program will initially target sites that reported 12 or more injuries or illnesses for every 100 full-time workers resulting in days away from work, restricted work activity or job transfer (known as the DART rate). The list also includes sites that have a “days away from work injury and illness (DAFWII) rate” of 9 or higher. ●

FLEXIBLE SPENDING PLANS MUST BE AMENDED BY DECEMBER 31, 2005
The IRS has issued a notice that will require sponsors of Section 125 Flexible Spending Accounts (“FSAs”) to amend their plans by December 31. Under previous regulations, participant claims for reimbursement had to be filed by the end of the plan year, or any participant funds remaining in the plan after that date would have to be forfeited. Now, the IRS has decided to offer a benefit for Section 125 plan participants similar to that they currently have in other plans.

Under IRS Notice 20045-42, participants may be given up to two and one-half months past the end of the plan year – beginning with the current plan year – to incur (and file for claims for) reimbursable expenses. Every employer that sponsors FSAs for employees must decide whether to extend the deadline for reimbursement of health and dependent care expenses and how to communicate any such decision. Any change to the deadline requires modifying plan documents. ●

About HR Advisor:

The information contained in HR Advisor is based upon extensive professional experience, research and “best practices.” DMJ HR does not practice law and nothing contained in this newsletter is intended or should be construed as legal advice. Readers who need legal advice on subjects discussed in HR Advisor should consult with their legal counsel.

Comments or suggestions pertaining to HR Advisor should be directed to:

Deborah Hall, SPHR
Consultant, DMJ Human Resources Division
A Division of DMJ & Co., LLP
PO Box 9258
Greensboro, NC 27429-0258
Telephone: 336-275-9886
E-mail: dhall@dmj.com