CHALLENGES FACED IN DEVISING A COMPENSATION PLAN

Challenges Devising A Compensation Plan

Necessity Of Compensation Plan:

All organizations have a compensation plan, written or unwritten, formal or informal. For some organizations, the purpose of that plan may be merely to meet compliance requirements. For other organizations, the goal of the compensation plan may be to attract qualified employees, to retain those employees, and to motivate employees to direct their efforts towards achieving the goals of the organization. Regardless of the goal, size and complexity of a compensation plan, there are generally many easily-identified elements to any compensation plan.

A good Compensation plan is a must for any Company, big or small. The following checklist must be considered for devising a compensation plan for the organization:

·         Define the Job

·         Study and analyze the organization's general compensation structure.

·         Research and analyze the current compensation patterns in the Industry.

·         Determine the compensation level. 

·         List down all the important elements that make up a compensation plan and then provide for each one of them. 

·         Revise the plan based on the changes required.

·         Implement the plan and provide regular follow ups to make sure it is running smoothly.

However there are various problems, deterrent and challenges while devising a compensation plan. An HR in an organization has to deal with various questions, both at the organizational and individual level while forming the compensation plan. Some of these questions are as follows:

• What is the goal of the organization's compensation system? In addition to attracting and retaining qualified employees, is there an intent to reward employees for good performance, motivate good performance, and/or create or reinforce a particular type of organizational climate?
• What is the communication policy? How is the organization going to communicate the compensation plan to employees once it has been developed? Is the organization prepared to evaluate the effectiveness of any such communication? If so, how?
• How will decisions regarding pay be made? Who will be involved in these decisions? What decision guidelines will need to be developed?
• What is the organizations desired market position relative to pay? Will the organization choose to pay market rates, above market or below market? How does the desired market position fit with other strategic goals? Are there any competitive factors involved that will determine the pay strategy?
• What is the desired mix between benefits and cash? Since benefits are an important form of compensation, how does an organization use them to maximize the effectiveness of the compensation plan?
• What does the organization pay for? Does it pay for performance or seniority or some combination of the two?
• What is the role of performance appraisal in the organization? How important is performance appraisal and why?
• How will the organization manage change to the compensation plan once it has been developed? What systems need to be in place to implement any changes including deciding when change is necessary and who will make these decisions?
• How does the compensation philosophy and plan fit with the rest of the organization? How can the compensation practices reinforce other overall management philosophies and objectives? 

Taking the time to consider and answer these questions will make the both the process of developing and administering a compensation plan much easier and will result in the development of a compensation plan that more closely matches the organization's goals and objectives.

Objectives of a Base Pay Program

Every organization's base pay program has certain objectives. The principal ones are as follows:

• Internal equity
• External equity (or competitiveness)
• Individual equity
• Process equity
• Performance or productive incentives
• Maximum use of financial resources
• Compliance with rules and regulations
• Administrative efficiency.

It is important for H.R. personnel to balance all these objectives for a sound base pay program. As these points are being reviewed, management should ask the following questions:

• Is this point important to this organization? If so, how important?
• What are the implications of this point to the current or desired practices?

Internal Equity - Internal equity deals with the perceived worth of a job relative to other jobs in the organization. All employees compare their jobs to other jobs within the organization. The management must often determine the "worth" or "value" of one job in relation other jobs for the purpose of pay programs. Maintaining appropriate pay relative to value or worth is achieving internal equity.

External Equity - External equity deals with the issue of market rates for jobs. An employer's goal should be to pay what is necessary to attract, retain and motivate a sufficient number of qualified employees. This requires a base pay program that pays competitively.

Individual Equity - Individual equity deals with how individuals perceive how they are being paid relative to other individuals within the organization and perhaps within the same position. In simple terms, employees want to feel that the rewards they receive for how they do their work are comparable to the rewards received by others for the same amount of effort or output, all other factors being equal. Management has to take into account this factor too.

Performance Incentives - A significant element of a base pay program is to encourage higher or increased levels of employee performance. Pay systems need to be designed to improve organizational performance.

Maximum Use of Financial Resources - Since an organization does not have unlimited financial resources, the management needs to be design the base pay program to maximize the value to the organization with minimum use of these limited resources.

Compliance with Laws and Regulations - While not the primary objective of a pay program, one of the objectives of the management is to see that a pay program is kept in compliance with various state and central laws and regulations.

Administrative Efficiency - Due to the limited financial resources in an organization, one of the objectives of the management is to be to have a pay program that is easy to administer, flexible, and cost-effective.

Developing Rates of Pay for Jobs

The basis for most pay programs is a pay structure - a hierarchy of jobs with pay ranges and/or rates assigned. This is yet another challenge for the management to look for while devising a compensation plan. Pay structures are designed so that the greater the worth of a job, the higher the pay grade and range. For the management developing a pay structure is a process with a series of steps:

Job Analysis - This involves collecting and evaluating relevant information about jobs. Any data collected should clarify the nature of the work being performed (principal or essential tasks, duties and responsibilities), the level of the work being performed, the extent and types of knowledge, skill, mental and physical effort and requirements, and responsibility required for the work being performed.

Job Documentation - There needs to be a formalized way to document job content. In most organizations, a job description is the means used to accomplish this. Job documentation is used to evaluate job content, provide objective criteria for making pay comparisons, ensure that jobs are classified according to content as opposed to individual personalities. It should be reviewed by line management.

Development of a Job Worth Hierarchy - A job worth hierarchy is the result of job evaluation, the overall process of comparing jobs. There are 6 major methods of comparing jobs in order to develop the job worth hierarchy. The first three methods are "whole-job" evaluations and are non-quantitative in nature. These include ranking, classification and slotting. The second three are "factor" evaluation and are quantitative in nature. These include point factor, factor comparison, and scored questionnaires.

Labor Market Data Collection and Analysis - Before an organization begins the process of collecting labor market data, it must first define its relevant labor market. This may include similar organizations in the same labor market, all employers in the local market, similar organizations in the regional or national market, and/or all employers in the regional or national market. The goal of labor market data collection is to find data from employers with whom the organization competes for employees. Once the data has been collected, it must be analyzed. The simplest analysis involves comparing the going market rate and approximating this rate within the organization's own pay structure. Other methods involve using advanced statistics to study relationships among certain items in a specific job or market group. An organization may find pay range information, as well as weighted average of actual pay, very helpful.

Establishment of Pay Ranges and/or Rates - In order to actually establish a pay structure, an organization needs to set rates of pay for the jobs in the job hierarchy. Before doing this, an organization needs to ask, and answer, the following questions:

• How should the organization's pay level relate to the external market? Should the organization be a pay leader, match the market or pay less than market?
• What is the organization willing to pay for: job content, seniority, performance, skills, cost of labor, or some combination of all of these?
• What steps does the organization need to take to ensure that pay is administered in a manner free of bias and discrimination?

If an organization decides to use pay ranges, it will have to determine how many ranges to have. This will depend on the number of different levels of relative job value that are recognized by the organization and the difference in pay between the highest and lowest paid jobs in the pay structure.

Creating a pay structure is not the final step in the creation of a compensation plan. An organization must also decide how to administer this compensation plan. This means deciding how to pay new employees, how and when to give employees increases, how to determine the pay increase for an employee being promoted from one job to another and what influence, if any, cost of labor increases will have on the determination of pay increases for employees. This is also a challenge for the management.

Performance Appraisal

If an organization chooses to pay for performance, the compensation plan must include a well-designed and properly administered performance appraisal system in order to be complete. Following are some questions that will help determine if an organization's current performance appraisal system meets these criteria.

• Is performance appraised on the direct measurement of an employee's output or results? Does the performance appraisal system consider only job-related behavior rather than personality traits?
• Are supervisors and managers trained in the performance appraisal process?
• Are the criteria used to measure performance as objective and quantitative as possible? Or are the criteria open to subjective interpretation?
• Have objective job standards been developed? Have the employees had input into the development of these standards? Are they communicated to the employees at the beginning of the appraisal period? Are job standards reviewed regularly to ensure relevance and importance to the department and organization?
• Is the employee actively involved in the performance appraisal process? Or is a performance appraisal something that is "done" to the employee?

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