HR Basics: Building a Compensation Plan

Summary

This video explores the seven essential steps to building an effective compensation plan, covering key areas such as internal alignment, external competitiveness, and compensation management. It outlines how to perform job analysis, job evaluation, and market analysis, as well as how to develop a base pay structure. The video also emphasizes the importance of recognizing individual performance and effectively communicating compensation plans to employees, ensuring fairness, competitiveness, and clarity in the organization's pay structure.

Takeaways

• 😀 Compensation is the pay provided by an employer to an employee in exchange for work.
• 😀 Building a compensation plan involves seven critical steps to create a pay structure and manage compensation effectively.
• 😀 Compensation must be perceived as fair, competitive, motivating, and easy to understand by employees.
• 😀 HR professionals may either create compensation plans internally or work with external compensation consultants.
• 😀 A compensation plan includes three core areas: internal alignment, external competitiveness, and compensation management.
• 😀 Internal alignment includes job analysis, job evaluation, and pay policy identification.
• 😀 Job analysis is the systematic process of collecting information to identify similarities and differences in work, resulting in job documentation.
• 😀 Job evaluation determines the relative worth of jobs, leading to the development of an internal structure or job hierarchy.
• 😀 Pay policy determines whether the organization wants to lead, lag, or meet the market in compensation.
• 😀 External competitiveness involves analyzing compensation data from competitors to keep the organization’s pay structure competitive.
• 😀 Market analysis helps gather compensation data from other employers to determine competitive pay rates.
• 😀 A base pay structure is developed by merging the internal structure with external market pay rates, adjusted by pay policy.
• 😀 Pay for performance ensures compensation varies based on individual or organizational performance, using merit incentives and variable pay.
• 😀 Communicating the compensation plan clearly to employees ensures they understand their pay and its connection to organizational goals.

Q & A

What is the purpose of a compensation plan?

The purpose of a compensation plan is to outline how pay is provided by an employer to an employee in exchange for their work, ensuring fairness, competitiveness, motivation, and clarity.

What are the key factors that make a compensation plan effective?

An effective compensation plan must be perceived as fair, competitive in the market, accurately based, motivating, and easy to understand by employees.

Who is responsible for creating a compensation plan?

HR professionals typically create a compensation plan, but they may also work with external compensation consultants for assistance.

What are the three main components of a compensation plan model?

The three main components are internal alignment, external competitiveness, and compensation management.

What is the purpose of job analysis in a compensation plan?

Job analysis is the systematic process of collecting information to identify similarities and differences in work, ultimately resulting in job documentation or job descriptions.

What is job evaluation and why is it important?

Job evaluation is the process of determining the relative worth of jobs within an organization. It helps develop an internal structure or hierarchical ranking of jobs to ensure fair pay distribution.

What does the pay policy step in internal alignment focus on?

The pay policy step focuses on determining whether the organization wants to lead, lag, or meet the market in terms of compensation.

How does external competitiveness impact a compensation plan?

External competitiveness involves comparing pay rates with those of other organizations hiring individuals with similar skills. This helps determine how much an organization should pay in relation to its competitors.

What is the role of market analysis in compensation planning?

Market analysis involves gathering compensation data from other employers in the relevant labor market to ensure the organization's pay structure remains competitive.

How is a base pay structure developed in a compensation plan?

A base pay structure is developed by merging the internal structure, developed through job evaluation, with external market pay rates to create a market pay line. Pay grades and ranges are then established based on this line.

What are the steps involved in compensation management?

Compensation management includes determining pay for performance and effectively communicating the compensation plan to employees, ensuring they understand how their contributions align with the organization's mission and culture.

How does pay for performance work in a compensation plan?

Pay for performance refers to adjusting compensation based on individual or organizational performance, such as merit-based increases, incentives, and variable pay.