Compensation and Salary Administration PDF

BM2018 COMPENSATION AND SALARY ADMINISTRATION Compensation Management Compensation is defined as the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required (Heathfield, 2020). In a nutshell, compen...

BM2018 COMPENSATION AND SALARY ADMINISTRATION Compensation Management Compensation is defined as the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required (Heathfield, 2020). In a nutshell, compensation is the total of an employee’s pay and benefits (Lussier & Hendon, 2019). Objectives of Compensation Management (HR Guide, 2015) Compensation costs are frequently the largest part of the total cost at today's firms. Therefore, compensation management does its part to pay the employees fairly while staying in line with the company's budget. Also, compensation management aims the following (Dirks, 2020): 1. Compliance. Compensation must comply with the law, such as Republic Act No. 602 or an act to establish a minimum wage law, and for other purposes. Adhering to standards can complicate compensation management, but it will help protect the company against litigation and ensure fairness across the board. 2. Attract Top Talents. One of the primary goals of compensation is to recruit qualified talents. When a company has a competitive compensation plan in place, it can attract top industry talents. 3. Retain & Reward Personnel. Compensation affects the process of both attracting and retaining employees. A survey from the Society of Human Resource Management (SHRM) in 2016 revealed that employees now identify pay as one of the top reasons for job satisfaction. Pay is currently either first or second in importance to all four (4) major generations of employees in the workforce (e.g., veterans, baby boomers, generation X, and millennials). Therefore, HR must pay attention to fair and equitable compensation for company employees (Lussier & Hendon, 2019). 4. Boost Employee Motivation. When a compensation plan is structured effectively, it can drive motivation across teams in the organization. Employees who know that they are fairly compensated for their work feel appreciated and are more likely to stay engaged, committed, and productive. A well- developed compensation plan can also increase job satisfaction in general. 5. Maximize Return on Investment (ROI). Suppose the organization can create a compensation plan that stays within the budget while driving productivity through pay-for-performance and other motivational tactics. In that case, it can be both equitable for the company and advantageous for hardworking employees. The Compensation System An organization's compensation system includes anything that an employee may value and desire and that the employer is willing and able to offer in exchange. It includes the following (Lussier & Hendon, 2019): 1. Compensation components. All rewards classified as monetary payments and in-kind payments such as base pay, allowances, bonuses, and commissions constitute the compensation component. 2. Non-compensation components. All rewards other than monetary and in-kind payments such as free food in the cafeteria and gym membership constitute the non-compensation component. Parts of the Compensation System Compensation will be perceived by employees as fair if based on systematic components. Various compensation systems have been developed to determine the value of positions. These systems utilize the following parts (HR Guide, 2015): 09 Handout 1 *Property of STI  [email protected] Page 1 of 15  BM2018 I. Job Descriptions. It is a critical component of both compensation and selection systems. Job descriptions are defined in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. II. Job Analysis. It is the process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation. III. Job Evaluation. It is a system for comparing jobs to determine appropriate compensation levels for individual jobs or job elements. There are four (4) main techniques used in job evaluation (Lussier & Hendon, 2017) (HR Guide, 2015): A. Job Ranking - This method is one of the simplest to administer. Jobs are compared to each other based on the overall worth of the job to the organization. The 'worth' of a job is usually based on judgments of skill, effort (physical and mental), responsibility (supervisory and fiscal), and working conditions. B. Job Classification – In this method, jobs are classified into an existing grade/category structure/hierarchy. Each level in the grade/category structure has a description and associated job titles. Each job is assigned to the grade/category providing the closest match to the job. The classification of a position is decided by comparing the whole job with the appropriate job grading standard. A common set of job grading standards and instructions are used to ensure equity in job grading and wage rates. Because of differences in duties, skills and knowledge, and other aspects of trades and labor jobs, job grading standards are developed mainly along occupational lines. C. Factor Comparison - A set of compensable factors are identified as determining the worth of jobs. The typical number of compensable factors is small (4 or 5). Examples of compensable factors are: Skill Responsibilities Effort Working Conditions Next, benchmark jobs are identified. Benchmark jobs should be selected as having certain characteristics. Equitable pay (not overpaid or underpaid) Range of the factors (Some jobs would be at the low end of the factor while others would be at the high end of the factor). D. Point-Factor - This is an extension of the factor comparison method where a set of compensable factors are identified as determining the worth of jobs and which factors can be further defined as follows: 1. Skill a. Experience b. Education c. Ability 2. Responsibilities a. Fiscal b. Supervisory 3. Effort a. Mental 09 Handout 1 *Property of STI  [email protected] Page 2 of 15  BM2018 b. Physical 4. Working Condition a. Location b. Hazards c. Extremes in Environment Each factor is then divided into levels or degrees, which are then assigned points. Each job is rated using the job evaluation instrument. The points for each factor are summed to form a total point score for the job. Jobs are then grouped by total point score and assigned to wage/salary grades so that similarly rated jobs would be placed in the same wage/salary grade. IV. Pay Structures. It is useful for standardizing compensation practices. Most pay structures include several grades, with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is pre- determined through collective bargaining. V. Salary Surveys. This part includes the collections of salary and market data. It may also include average salaries, inflation indicators, cost of living indicators, and salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries and within one geographical region or different geographical regions. It is important to know which industry or geographic location the salary results pertain to before comparing your company's results. The following are the types of data gathered in a salary survey (HR Survey, 2019): Types of data gathered in a salary survey Base salaries Increase percentages or amounts Merit Increases Salary Ranges Starting Salary Incentives/Bonuses Allowances and Benefits Working Hours VI. Policies and Regulations. This part depends on the company’s or organization’s policies and regulations. Components of Compensation (Lussier & Hendon, 2017) There are four (4) basic components of compensation: 1. Base pay. It is typically a flat rate, either as an hourly wage or salary. Many employees consider this to be the most important part of the compensation program, therefore, a major factor in their decision to accept or decline a job. In the National Capital Region (NCR), the daily minimum wage rate is Php 537.00. 2. Wage and salary add-ons. These include overtime pay, shift differential, allowances, premium pay for working weekends and holidays, and other add-ons. 3. Incentive pays. These are also known as variable pays. Incentive pay is a pay for performance, and it commonly includes items such as piece work in production and commissioned sales. 09 Handout 1 *Property of STI  [email protected] Page 3 of 15  BM2018 4. Benefits. It is indirect compensation that provides something of value to the employee. Benefits may include health insurance (those payments to employees if they are unable to work because of sickness or accident), retirement pay contributions, and provision of a wide variety of desired goods and services such as cafeteria service, tuition reimbursement, and many other items. Direct Versus Indirect Compensation (Lussier & Hendon, 2017) Direct compensation. It is the form of compensation that goes directly to the employees as part of their paycheck. The first three (3) compensation components, such as base pay, add-ons, and incentive pay, are known as direct compensation. Indirect compensation. It is the compensation where employees do not get any funds, such as a benefits program. Employees never see these funds, and most do not realize how costly these benefits are to the firm. For-profit businesses usually design their compensation program with direct and indirect components that provide them the best productivity return for the money spent. To do this successfully, it is necessary to understand the expectancy and equity theory essential in motivating workers to perform to the best of their ability. Motivation and Compensation Planning (Lussier & Hendon, 2017) Expectancy Theory It is a process theory of motivation which means that an individual goes through a cognitive process to evaluate a situation. Expectancy theory proposes that employees are motivated when they believe they can accomplish a task and that the rewards are worth the effort. Expectancy theory is based on Victor Vroom’s formula: 𝑀𝑜𝑡𝑖𝑣𝑎𝑡𝑖𝑜𝑛 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑎𝑛𝑐𝑦 × 𝐼𝑛𝑠𝑡𝑟𝑢𝑚𝑒𝑛𝑡𝑎𝑙𝑖𝑡𝑦 × 𝑉𝑎𝑙𝑒𝑛𝑐𝑒 ✓ Expectancy is the person’s perception of their ability to accomplish or probability of accomplishing an objective. Generally, the higher one’s expectancy, the better the chance for motivation. ✓ Instrumentality is the perception that a particular level of performance is likely to provide the individual with the desired reward. ✓ Valence refers to the value a person places on the outcome or reward because not all people value the same reward. Figure 1. Expectancy theory and compensation 09 Handout 1 *Property of STI  [email protected] Page 4 of 15  BM2018 It is important to remember that these components are multiplicative, so if any of the three (3) is near zero, the motivating potential is low. The individual has almost no motivation to perform. Equity Theory (Lussier & Hendon, 2017) The equity theory developed by J. Stacy Adams proposes that people are motivated to seek social equity in the rewards they receive (outcomes) for their performance (input). Therefore, in general, equity theory proposes that employees are motivated when the ratio of their perceived outcomes to inputs is at least roughly equal to that of other referent individuals. Employees are more motivated to achieve organizational objectives when they believe they are being treated fairly, especially regarding pay equity. Also, according to equity theory, people compare their inputs (e.g., effort, loyalty, hard work, commitment, skills, ability, experience, seniority, trust, support of colleagues, and so forth), their financial rewards (e.g., pay, benefits, and perks), and intangible outcomes (e.g., praise, recognition, status, job security, sense of advancement and achievement, etc.) to those of relevant others. A relevant other could be a coworker or a group of employees from the same or different organizations. The definition says that employees compare their perceived (not actual) inputs and outcomes. Equity may exist, but if employees believe that there is inequity, they will change their behavior to create what they consider to be equity. Employees must perceive that they are being treated fairly relative to others. Managers can also help control employee perceptions of fairness. Perceptions of inequity hurt attitudes, commitment, and cooperation, thereby decreasing individual, team, and organizational performance. This perceived inequity is often used as a justification for unethical behavior. When employees perceive inequity, they are motivated to reduce it by decreasing input or increasing outcomes. A comparison with relevant others leads to three (3) conclusions, which can cause problems. The employee is either under-rewarded, over-rewarded, or equitably rewarded. ✓ When employees perceive that they are under rewarded, they may try to reduce the inequity by increasing outcomes (e.g., requesting a raise or committing theft), decreasing inputs (e.g., doing less work, being absent, taking long breaks, etc.), or rationalizing (e.g., finding a logical explanation for the inequity). ✓ When most employees perceive that they are overrewarded, they rationalize it in some way and accept it. ✓ When employees perceive that they are equitably rewarded, they are motivated to continue to put forth the same effort for the organization so long as they are content that inputs and outcomes are in balance. It is important to be bear in mind that people are not motivated to work harder by equity; rather, they are demotivated if it does not exist. Hence, HR managers need to understand that people will be demotivated if they feel (perceive) that they are not being treated fairly, especially regarding compensation. As a result, this information must be used in structuring the compensation plan. Basis of Compensation (Lussier & Hendon, 2017) 1. Performance versus Longevity. Some companies pay people more for longevity or seniority, which means accumulating years of service with the firm by promotions and raises over time (assuming the employee meets minimal organizational standards) regardless of performance because they have 09 Handout 1 *Property of STI  [email protected] Page 5 of 15  BM2018 been loyal members of the organization. Other companies, however, pay more for performance which means being able to complete certain tasks or doing certain things faster or better than average, or just being there and being loyal to the firm. 2. Skill-based/Competency-based. It means the company pays members of the workforce for individual skills or competencies that they bring to work, whether those skills are necessary for the individuals to do their current job. Competencies involve the individual’s level of knowledge in a particular area. Some examples of competencies include understanding negotiation and collaboration and problem- solving and decision-making expertise. On the one hand, skills involve the ability to apply that knowledge set in that field. Some examples of skills related to these competencies would include negotiating contract agreements, applying physics principles to a new equipment design, or making a high-quality decision based on a good analysis of a situation. With either method, the employees are being paid for the knowledge, skills, and abilities they may not necessarily use in the organization. Therefore, it is important to identify if it is valuable for a company to have people with extra skill sets. 3. Above/At/Below market. It is also crucial to determine whether the company will pay above, at, or below market. ✓ Above market pay. The organization may decide to pay above market to attract better workers and enhance the company’s employment brand. Companies also target the workforce's better productivity, which is deemed possible by paying more for employees. Efficiency wage theory states that if a company pays higher wages, it can generally hire better people who will be more productive. Some examples of companies that pay above-average wages are Google, Facebook, and Starbucks. ✓ Below market pay. Would a company get lower productivity from its workforce if they pay below the market? In general, yes, but not always. If the firm is in an industry where unemployment is high, it is easy to find replacement workers, and if most positions require a low-level skillset, the company may be able to get away with paying less than average. Some companies that pay below average compared to other industries are Walmart and McDonald’s. Salary Structure A salary structure (or pay scale) is a system that employers use to determine an employee’s compensation. A standard salary structure considers merit, length of employment, and pay compared to similar positions (Blakely-Gray, 2019). Types of Salary Structure There are three (3) main types of salary structure that businesses use (Blakely-Gray, 2019): 1. Traditional salary structures ✓ These are the second most commonly used system. These are divided into numerous pay grades. Salary increases are relatively small jumps between pay grades. Employers can use traditional structures to prevent employees from capping out at the maximum salary too quickly. ✓ In deciding what an employee needs to do to move on to the next pay grade, the HR department may use various metrics to determine a pay raise, such as performance and length of employment. ✓ It is also important to set the minimum and maximum salary range for each employee or employee group then determine the number of pay grades within the structure. 09 Handout 1 *Property of STI  [email protected] Page 6 of 15  BM2018 Example: Salary Structure for Sub-professional Non-supervisory Pay Grade 1 Pay Grade 2 Pay Grade 3 Salary Php12,034 Php12,790 Php13,572 2. Broadband structures ✓ These are more flexible than traditional salary structures. These salary structures utilize fewer pay grades, and each pay grade has a wider salary range than traditional structures. ✓ If a company uses the broadband structure, it has more freedom when deciding an employee’s salary. The company is not limited by a narrow salary range like traditional structure. ✓ However, using a broadband system can lead to greater pay inequalities between employees. The organization must consider conducting a pay audit to identify pay disparities due to race, gender, disability, etc. ✓ An employee may max out at the high end of their salary range if the company implements a broadband salary structure. Although this might be great at the moment, the employee may start looking at other jobs when they no longer receive raises. Example: Pay Grade 1 Pay Grade 2 Pay Grade 3 Pay Grade 4 Pay Grade 5 Salary Php13k – 15k Php15k-17k Php17k-19k Php19k-21k Php21k-23k 3. Market-based structures ✓ This structure is now the most popular system. These are based on what other employers pay employees. Under a market-based salary structure, conduct an external pay audit to determine your salary ranges for each position. ✓ To find out what workers are earning outside your business, doing some research is a must. The HR can use Jobstreet, Indeed, and Glassdoor to see what employees in similar positions earn. ✓ HR can put together a list of positions and their descriptions before collecting market data. That way, they can better compare positions. ✓ In some ways, market-based structures are a combination of traditional and broadband salary structures. The salary ranges can be high like broadband structures, but the ranges are generally narrow and consistent. Example: Pay Grade 1 Pay Grade 2 Pay Grade 3 Pay Grade 4 Pay Grade 5 Salary Php13k – 18k Php18k-23k Php23k-28k Php28k-33k Ph33k-38k Salary Structures and Wages in the Philippines Salary structures and wages in the Philippines are determined by factors such as nature of work, workplace location, working hours, type of industry/sector, and others. The salaries of those working in major cities and business districts are relatively higher compared to those employed in second-tier cities and provincial areas around the country. The Department of Labor and Employment (DOLE) and its affiliate agency, the National Wages and Productivity Commission (NWPC), are mandated to enforce the Labor Code of the Philippines, which prescribes employment regulations and labor laws for companies operating in the Philippines. 09 Handout 1 *Property of STI  [email protected] Page 7 of 15  BM2018 Minimum wage rates in the Philippines vary in every region, with a Regional Tripartite Wages and Productivity Board (RTWPB) to monitor economic activities and adjust minimum wages based on the region’s growth rate, unemployment rate, and other factors. Salary Computation Computing Pay for Work Done on A Regular Day Monthly rate × Number of months in a year (12) Basic daily rate = Total working days in a year Example: Assuming that there are 245 total working days in 2021. Sally has a monthly rate of Php15,000. Compute for the basic daily rate. 15,000 × 12 180,000 𝐁𝐚𝐬𝐢𝐜 𝐝𝐚𝐢𝐥𝐲 𝐫𝐚𝐭𝐞 = = = 𝐏𝐡𝐩𝟕𝟑𝟒. 𝟔𝟗 245 245 A Special Day 130% × Basic daily rate Example: Assuming that Sally works in a bank (mall location) on Saturdays. 130% × 734.69 = 𝐏𝐡𝐩𝟗𝟓𝟓. 𝟏𝟎 A Special Day scheduled as Rest Day 150% × Basic daily rate Example: Assuming that Sally works in a bank that operates from Mondays-Fridays but has to go to work on a Saturday for some reasons. 150% × 734.69 = 𝐏𝐡𝐩𝟏, 𝟏𝟎𝟐. 𝟎𝟒 A Regular Holiday 200% × Basic daily rate Example: Assuming that Sally works in a bank that operates from Mondays-Fridays but has to go to work on December 24th due to holiday transactions. 200% × 734.69 = 𝐏𝐡𝐩𝟏, 𝟒𝟔𝟗. 𝟑𝟖 A Regular Holiday also scheduled as Rest Day 260% × Basic daily rate Example: Assuming that Sally works in a bank that operates from Mondays-Fridays but has to go to work on June 12 because of special transactions. 260% × 734.69 = 𝐏𝐡𝐩𝟏, 𝟗𝟏𝟎. 𝟏𝟗 Employment Conditions for Employees Normal working hours shall not exceed eight (8) hours a day. 09 Handout 1 *Property of STI  [email protected] Page 8 of 15  BM2018 Payment of overtime work shall consist of an addition of at least 25% of the regular wage per hour worked or 30% thereof during holidays or rest days. Minimum wage rates for Agricultural and Non-Agricultural work vary in every region and should be properly observed. The minimum age of employment is 18 years old, but those aged 15 to 18 can be employed given that they work in non-hazardous environments. In the event of bankruptcy or liquidation, workers shall be paid their full salary before other creditors may establish any claim to a share in the employer’s assets. Developing a Pay System A pay structure is a hierarchy of jobs and their rates of pay within the organization. It allows individuals to identify what the pay range is for each job. Once creating a pay structure is done, the pay range for every job in the hierarchy comes after. A pay structure is composed of a job structure or the workers' job hierarchy from the lowest to the highest level. Pay levels, also known as pay grades, can be made up of different jobs, and each pay level has a maximum pay rate and a minimum pay rate. Figure 2. Creation of a pay structure and individual pay rates *Note: Some market factors need to be analyzed, such as product market competition and labor market competition to establish pay levels and determine the maximum and minimum pay rates of particular jobs. Labor market competitions refer to the labor supply and demand in the market that should be recognized to set the minimum value for a particular pay level. If compensation is graphed for a given type of work versus the number of workers in the labor market who can do the type of work, the place where the two (2) lines intersect is the average pay for that work. 09 Handout 1 *Property of STI  [email protected] Page 9 of 15  BM2018 Figure 3. Supply and demand curve Interpretation: If more workers are available than jobs, the market can get some of them to work for less than the normal rate (where the lines cross) because those workers need to work and earn a living. Therefore, the average compensation will most likely go down because there is an oversupply situation. When the supply of labor equals the demand for that labor in the workforce, there is equilibrium. The market will pay what the workers demand to be paid, or workers who have the necessary skills would not be willing to fill the job. On the other hand, if there are more jobs available than workers, there is the need to pay more to attract the limited number of workers with the required skillset. In either case, labor market competition will set the minimum pay that a worker will require to come to work for the company. Product market competition is a function of the value of the product or service sold to the customer that determines the top of the pay level. Companies' expenses such as materials, overhead, and other costs can affect labor pay. If the sales of the product or service that the company offers cover the labor cost, then it would be worthy of much money. Therefore, product market competition sets the top of the pay level for most types of jobs. Benchmarking Pay Survey Data Figure 4. Pay levels 09 Handout 1 *Property of STI  [email protected] Page 10 of 15  BM2018 Figure 5. Pay structure It is also crucial to look for benchmarks from the pay survey data and put those benchmark jobs into the pay level where they belong (the dots in Figure 4). Once the benchmark jobs are placed in a plot of the company’s pay levels, the market pay line comes after, which is also called a pay curve or a line that shows the average pay at different levels in a particular industry (Figure 5). These benchmarks are used to see whether the organization is doing good or not. If the range is correct, then the pay level was created successfully; if not, the lapses within the range have to be identified and corrected. After going through this process for a particular pay level, there will be the rate range, which provides the maximum, minimum, and midpoint of pay for certain jobs. Once the range is created, going in and adding to the range of any other jobs at approximately the same level based on job evaluations is possible. Once the pay levels are set, plotting the actual pay for people in the organization must be done next. These are indicated in black dots in Figure 5. These are identified where these actual pay levels fall within the pay structure, and sometimes, there are some plotted outside our pay level ranges—either too high or too low. Individual pay rates that fall outside the pay range on the high side are called red-circle rates (red dots in Figure 5), and those that are lower than the bottom of the pay range are green-circle rates (green dots in Figure 5). If there is a green-circle rate for an individual, the correct thing to do is raise the individual’s pay to at least the minimum for that pay level because the organization is not paying them fairly for their skillset. Meanwhile, if there is a red-circle rate for an individual, there would not probably be a cut to someone’s pay, but it is not possible to pay them more unless they move up to a higher skill level, and therefore a higher pay level. For example, an assembler is making Php13,000 per month, the maximum for his pay level is Php15,000, but he wants a pay raise and has not had one in several years, the answer would be “no.” However, HR can tell him that if he is willing to become a supervisor, he can get the chance to raise his pay rate because the skill level for a supervisor is higher than that of an assembler. Understanding pay levels and pay structure allows individuals to provide good answers to employees about why their pay 09 Handout 1 *Property of STI  [email protected] Page 11 of 15  BM2018 is set at a certain level. If a worker decides to become a supervisor, that employee is worth more and the organization can pay more. Delayering and Broadbanding (Lussier & Hendon, 2017) Lowering the number of pay levels using either delayering or broadbanding has been going on for years now. Delayering is changing the company structure to get rid of some of the vertical hierarchy (reporting levels) in an organization. Broadbanding is accomplished by combining multiple pay levels into one. When the number of pay levels that the company has to deal with is lowered, managing the pay process is simpler. It takes a long time to create, maintain, and evaluate 20 pay levels, when instead, there can just be five (5) broadbands. It also allows more capacity to reward outstanding performers. Because there are taller and wider levels, there is more pay flexibility while staying within the boundaries of the pay level. Figure 6. Broadbanding of multiple pay levels In Figure 6, as converted to broadband structure, the new broadband pay structure combines the first two (2) pay levels, the third and fourth level, and finally the fifth and sixth, making three (3) levels instead of six (6). This causes the red- and green-circle rates to disappear. It also creates a greater ability to adjust the pay of people based on their performance and ability. Finally, it lowers the administrative burden of maintaining the compensation system. Hence, when the pay structure is done, the hierarchy of jobs will then be created—from lowest to highest. With the fast-paced growth of technology, these steps are all easily done using computers. Once the HRIS has the necessary data, most of the company's pay structure can be created by using existing company information. In many cases, the HRIS can identify the market pay line and provide other compensation information, too. Compensation Plan A compensation plan is a complete package that lists details about employees' wages, salaries, benefits, and payment terms. Compensation plans include details about bonuses, incentives, and commissions that may be paid to employees. Also, compensation plans may detail scheduled raises and increases for years of service. 09 Handout 1 *Property of STI  [email protected] Page 12 of 15  BM2018 Steps in Creating a Compensation Plan (HR Guide, 2015) 1. Develop a program outline Set an objective for the program. Establish target dates for implementation and completion. Determine a budget. 2. Designate an individual to supervise the design of the compensation program Determine whether this position will be permanent or temporary. Determine who will oversee the program once it is established. Determine the cost of going outside versus looking inside. Determine the cost of a consultant's review. 3. Create a compensation philosophy Form a compensation committee (presumably consisting of officers or at least including one (1) officer of the company). Decide what, if any, differences should exist in pay structures for executives, professional employees, sales employees, and so on (e.g., hourly versus salaried rates, incentive-based versus noncontingent pay). Determine whether the company should set salaries at, above, or below market. Decide the extent to which employee benefits should replace or supplement cash compensation. 4. Conduct a job analysis of all positions Conduct a general task analysis by major departments. What tasks must be accomplished by whom? Get input from senior vice presidents of marketing, finance, sales, administration, production, and other appropriate departments to determine the organizational structure and primary functions. Interview department managers and key employees, as necessary, to determine their specific job functions. Decide which job classifications should be exempt and which should be non-exempt. Develop model job descriptions for exempt and non-exempt positions, distribute the models to incumbents for review and comment; adjust job descriptions. Develop a final draft of job descriptions. Meet with department managers, as necessary, to review job descriptions. Finalize and document all job descriptions. 5. Evaluate jobs Rank the jobs within each senior vice president's and manager's department, and then rank jobs between and among departments. Verify ranking by comparing it to industry market data concerning the ranking, and adjust if necessary. Prepare a matrix organizational review. Based on required tasks and forecasted business plans, develop a matrix of jobs crossing lines and departments. Compare the matrix with data from both the company structure and the industrywide market. Prepare flow charts of all ranks for each department for ease of interpretation and assessment. Present data and charts to the compensation committee for review and adjustment. 6. Determine grades Establish the number of levels (senior, junior, intermediate, and beginner) for each job family and assign a grade to each level. Determine the number of pay grades, or monetary range of a position at a particular level, within each department. 09 Handout 1 *Property of STI  [email protected] Page 13 of 15  BM2018 7. Establish grade pricing and salary range Establish benchmark (key) jobs. Review the market price of benchmark jobs within the industry. Establish a trend line following the company philosophy (i.e., where the company wants to be in relation to salary ranges in the industry). 8. Determine an appropriate salary structure Determine the difference between each salary step. Determine a minimum and a maximum percent spread. Slot the remaining jobs. Review job descriptions. Verify the purpose, necessity, or other reasons for maintaining a position. Meet with the compensation committee for review, adjustments, and approval. 9. Develop a salary administration policy Develop and document the general company policy. Develop and document specific policies for selected groups. Develop and document a strategy for merit raises and other pay increases, such as cost-of-living adjustments, bonuses, annual reviews, and promotions. Develop and document procedures to justify the policy (e.g., performance appraisal forms, a merit raise schedule). Meet with the compensation committee for review, adjustments, and approval. 10. Obtain top executives' approval of the basic salary program Develop and present cost impact studies that project the expense of bringing the present staff up to the proposed levels. Present data to the compensation committee for review, adjustment, and approval. Present data to the executive operating committee (senior managers and officers) for review and approval. 11. Communicate the final program to employees and managers Present the plan to the compensation committee for feedback, adjustments, review, and approval. Make a presentation to executive staff managers for approval or change, and incorporate necessary changes. Develop a plan for communicating the new program to employees, using slide shows or movies, literature, handouts, etc. Make presentations to managers and employees. Implement the program. Design and develop detailed systems, procedures, and forms. Work with HR information systems staff to establish effective implementation procedures, develop appropriate data input forms, and create effective monitoring reports for senior managers. Have the necessary forms printed. Develop and determine format specifications for all reports. Execute test runs on the human resources information system. Execute the program. 12. Monitor the program Monitor feedback from managers. Make changes where necessary. Find flaws or problems in the program and adjust or modify where necessary. 09 Handout 1 *Property of STI  [email protected] Page 14 of 15  BM2018 References: An act to establish a minimum wage law, and for other purposes, R.A. No. 602 (1951) Blakely-Gray, R. (2019, April 5). 3 types of salary structure you should know. Patriot. https://www.patriotsoftware.com/blog/payroll/types-of-salary-structure/ Compensation: Outline and Definitions. (2015). In Hr guide. https://hr- guide.com/Compensation/Compensation_Overview.htm Dirks, E. (2020, April 20). The 5 key objectives of compensation management. Hr soft. Retrieved April 19, 2021 from https://hrsoft.com/5-key-objectives-compensation/ Heathfield, Susan. (2020, May 25). How is compensation determined for an employee? The balance careers. https://www.thebalancecareers.com/compensation-definition-and-inclusions-1918085 Lussier, R. N., & Hendon, J. R. (2017). Fundamentals of human resource management: Functions, applications, and skill development. SAGE Publications. Society for Human Resource Management. (2016). Employee job satisfaction and engagement: Revitalizing a changing workforce. SHRM. 09 Handout 1 *Property of STI  [email protected] Page 15 of 15