HR Basics: Compensation

Summary

The video script 'HR Basics' explores the fundamentals of compensation in human resource management, focusing on three key elements: internal alignment, external competitiveness, and compensation management. It outlines a seven-step model for developing compensation plans, emphasizing job analysis, job evaluation, and market analysis to establish a base pay structure. The script also highlights the importance of variable pay and clear communication of compensation plans to motivate and retain employees, ensuring they understand the link between performance and rewards.

Takeaways

• 💼 Compensation is the pay provided by an employer to an employee in return for work, and it is a part of the total rewards strategy used to attract, motivate, engage, and retain employees.
• 📊 Compensation consists of fixed pay (base pay) and variable pay, which changes with performance or results.
• 🔍 Internal alignment involves job analysis, job evaluation, and pay policy identification to determine pay comparisons among different jobs or skill levels within an organization.
• 📝 Job analysis is the systematic process of collecting information about the similarities and differences in work, resulting in job descriptions.
• 📊 Job evaluation is the systematic process of determining the relative worth of jobs, leading to the development of an internal pay structure.
• 💹 Market pricing and job evaluation points are used to develop base pay structures, including pay grades and ranges.
• 📉 Pay policy decisions include whether to match, lead, lag, or combine market rates in setting compensation strategy.
• 🌐 External competitiveness involves market analysis to compare pay with competitors and ensure the organization's compensation system is competitive.
• 📈 Market analysis is the process of analyzing compensation data from other employers to keep the organization's compensation system competitive.
• 📊 Developing a base pay structure involves merging job evaluation with external market pay rates to create a market pay line, from which pay grades and ranges are developed.
• 🏆 Compensation management includes implementing variable pay and communicating the compensation plan to ensure employees understand their compensation and its link to performance.
• 🗣️ Effective communication of the compensation plan is crucial for employees to understand their pay structure, pay differences, and the total rewards they receive.

Q & A

What is the definition of compensation in the context of human resource management?

Compensation is the pay provided by an employer to an employee in return for work, which is comprised of two core elements: fixed pay (base pay) and variable pay.

What is the concept of Total Rewards in HR?

Total Rewards is a concept that describes all the tools available to an employer to attract, motivate, engage, and retain employees, with compensation being one of the six key rewards.

What are the three elements of a base compensation system?

The three elements of a base compensation system are internal alignment, external competitiveness, and compensation management.

What is the purpose of internal alignment in compensation planning?

Internal alignment ensures pay comparisons among jobs or skill levels within the same organization, determining how different types and levels of skills and work should be compensated.

What is the role of job analysis in the compensation planning process?

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

How is job evaluation different from market pricing?

Job evaluation is a systematic process of determining the relative worth of jobs within an organization, while market pricing looks at pay levels for the same jobs in the external labor market.

What are the steps involved in determining a pay policy?

Determining a pay policy involves deciding whether the organization wants to lead, lag, or meet the market in compensation, with options including matching, leading, lagging the market, or using a combination of these strategies.

What is external competitiveness in the context of compensation?

External competitiveness involves making pay comparisons with competitors to determine how much the organization should pay in relation to other organizations hiring similar knowledge, skills, and abilities.

What is the importance of market analysis in developing a base pay structure?

Market analysis is essential for gathering external pay data to ensure the organization's compensation system remains externally competitive by analyzing compensation data from other employers and relevant labor market data.

How is a market pay line developed in compensation management?

A market pay line is developed by merging job evaluation with external market pay rates through a regression analysis, creating a line that represents the relationship between job evaluation points and the salaries paid for those jobs.

What are the key components of compensation management?

Compensation management includes implementing variable pay, recognizing individual contributions, making pay decisions clear to employees, and ensuring they understand their compensation through communication of the compensation plan.

Why is it important to communicate the compensation plan to employees?

Communicating the compensation plan is crucial to ensure employees understand it, see the link between their compensation and organizational objectives, and have a clear understanding of how pay decisions are made and pay differences are justified.

Outlines

00:00

💼 Introduction to Compensation and HR Basics

This paragraph introduces the concept of compensation as pay provided by an employer to an employee for work done. It distinguishes between 'Total Rewards' and 'Compensation', highlighting that compensation is a subset of the broader rewards strategy. The paragraph outlines the two core elements of compensation: fixed pay (base pay) and variable pay. It then presents a basic model for building compensation plans, which includes internal alignment, external competitiveness, and compensation management. The paragraph details the seven steps involved in compensation plan development, starting with job analysis and ending with determining a pay policy. It explains the importance of job evaluation and market pricing in establishing an internal pay structure and emphasizes the different strategies organizations can adopt regarding market pay levels.

05:04

📊 Developing a Competitive Compensation Structure

This paragraph delves into the specifics of external competitiveness in compensation planning. It discusses the importance of market analysis for gathering external pay data to ensure the organization's compensation system remains competitive. The paragraph outlines the steps for market analysis, including selecting relevant market data, aging the data, and weighting it for better influence. It then explains the process of developing a base pay structure through job evaluation merged with external market pay rates, creating a market pay line that forms the basis for pay grades and ranges. The paragraph also touches on compensation management, including implementing variable pay and communicating the compensation plan to employees. It emphasizes the importance of pay for performance and ensuring employees understand the link between their compensation and organizational objectives, as well as the need for clear communication of the compensation plan.

Keywords

💡Compensation

Compensation refers to the pay provided by an employer to an employee in return for work. It is a fundamental concept in the video, which is explored in the context of a base compensation system. The script discusses how compensation is comprised of fixed pay and variable pay, which changes with performance or results. The video's theme revolves around understanding and developing a compensation plan that aligns with internal job roles and external market standards.

💡Total Rewards

Total Rewards is a concept that describes all the tools available to an employer to attract, motivate, engage, and retain employees. In the script, it is mentioned as an overarching strategy that includes compensation as one of its six key rewards. This concept is integral to the video's message, illustrating the comprehensive approach organizations should take to employee remuneration and benefits.

💡Internal Alignment

Internal Alignment is the process of making pay comparisons among jobs or skill levels within a single organization. The script explains that it involves job analysis, job evaluation, and pay policy identification to determine how different types and levels of skills and work should be compensated within the organization. This concept is key to ensuring fairness and consistency in an organization's compensation structure.

💡External Competitiveness

External Competitiveness involves making pay comparisons with competitors or other organizations that hire people with similar knowledge, skills, and abilities. The script discusses how organizations should analyze compensation data from the labor market to ensure their compensation system is competitive. This concept is crucial for attracting and retaining talent in a competitive job market.

💡Job Analysis

Job Analysis is a systematic process of collecting information that identifies similarities and differences in work. The outcome of job analysis is job documentation or job descriptions. In the script, it is the first step in internal alignment, essential for understanding the nature of jobs within an organization and their relative value.

💡Job Evaluation

Job Evaluation is the systematic process of determining the relative worth of jobs within an organization. The script mentions that it results in the development of an internal pay structure or hierarchical ranking of jobs. It is a critical component of internal alignment, helping to establish a fair and logical compensation system.

💡Pay Policy

Pay Policy is the process of deciding an organization's stance on compensation in relation to the market. The script outlines options such as leading, lagging, or matching the market. This concept is central to the video's theme, as it influences the organization's compensation strategy and how it positions itself in the labor market.

💡Market Analysis

Market Analysis is the process of analyzing compensation data from other employers or relevant labor market data. The script describes it as essential for keeping an organization's compensation system externally competitive. It is a step in external competitiveness, helping organizations understand market rates and adjust their compensation accordingly.

💡Base Pay Structure

A Base Pay Structure is developed through job evaluation merged with external market pay rates. The script explains that it involves creating a market pay line from which pay grades and ranges are developed. This structure is fundamental to compensation management, providing a framework for consistent and competitive pay across the organization.

💡Variable Pay

Variable Pay is compensation that changes with performance or results. The script discusses it as a component of compensation that allows employees to see the link between their performance and pay. It is part of compensation management and is crucial for motivating employees and aligning their efforts with organizational objectives.

💡Compensation Management

Compensation Management involves implementing variable pay and ensuring employees understand their compensation. The script outlines steps such as pay for performance and communicating the compensation plan to all employees. This concept is vital to the video's theme, emphasizing the importance of transparency and clarity in compensation practices.

Highlights

HR Basics is a series designed to provide essential knowledge on various human resource management topics.

Compensation is defined as pay given by an employer to an employee for work performed.

Total rewards encompass all tools an employer can use to attract, motivate, engage, and retain employees, with compensation being a key component.

Compensation consists of fixed pay, known as base pay, and variable pay, which fluctuates with performance or results.

A basic model for building compensation plans includes three elements: internal alignment, external competitiveness, and compensation management.

Internal alignment involves pay comparisons among jobs or skill levels within an organization to determine appropriate compensation levels.

Job analysis is the systematic process of collecting information about the similarities and differences in work, resulting in job descriptions.

Job evaluation is the systematic process of determining the relative worth of jobs within an organization.

Market pricing and job evaluation points are used to value jobs, with market pricing looking externally and job evaluation focusing internally.

Determining a pay policy involves deciding whether to lead, lag, or meet the market in compensation.

External competitiveness involves comparing pay with competitors to ensure the organization's compensation system is competitive.

Market analysis is the process of analyzing compensation data from other employers to keep the organization's compensation system competitive.

Developing a base pay structure involves merging job evaluation with external market pay rates to create a market pay line.

Pay grades group individual jobs with approximately the same job worth, each having the same pay range with minimum, maximum, and midpoint values.

Compensation management includes implementing variable pay and ensuring employees understand their compensation structure.

Pay for performance involves determining the use of variable pay that changes with individual or organizational performance.

Communicating the compensation plan is crucial to ensure employees understand the link between their compensation and organizational objectives.

Compensation is a critical element of the total reward strategy, requiring a strong base pay structure built through internal alignment, external competitiveness, and compensation management.

Transcripts

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 compensation highlighting the three elements of a base compensation system

internal alignment

external competitiveness and compensation management

But first a definition compensation is pay provided by an employer to an employee in return for work

Total rewards is a concept that describes all of the tools available to an employer that may be used to attract

Motivate engage and retain employees as you can see in this model

compensation which we focus on in this course is one left six key rewards available to do so

Compensation is comprised of two core elements fixed pay otherwise known as base pay that does not vary and

variable paid which changes with performance or results a

Basic model for building compensation plans includes three elements internal alignment external competitiveness and

Compensation management seven steps our actions are organized in these three critical areas of compensation plan development in this course

We'll take a look at each step

First internal alignment makes pay comparisons among jobs or skill levels inside a single organization

How differently should the different types and levels of skills and work be paid within the organization?

internal alignment includes steps of job analysis job evaluation and pay policy identification

Step one is 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

Traditionally the most common methods of job analysis have been observation

Interviewing questionnaires and generic information available through o-net a DOL resource which is an online database of jobs?

Sometimes a combination of these approaches is use depending on the situation and your organization

Step two is job evaluation, which is the systematic process of determining the relative worth of jobs?

The outcome of job evaluation is the development of an internal pay structure or hierarchical ranking of jobs through grades and ranges?

Two general approaches for valuing jobs are job evaluation with an internal focus and market pricing with an external focus

The methods of both you can see here

Job evaluation looks at pay levels within an organization and market pricing looks outside that organization so job evaluation

uses market pricing data for jobs with job evaluation points

market pricing on the other hand uses the same market pricing data for jobs, but without those job evaluation points

These strategies help us build our base pay structures including pay grades and ranges

Step three is determining a pay policy

Which is the process of deciding whether the organization wants to lead leg or meet the market in compensation?

Organizations have several pay policy options when implementing a compensation

Strategy they include matching the market by paying rates comparable to those of the relative market place

Leading the market by paying rates that are higher than the relative market place

Lagging the market by paying rates lower than those of relative marketplace wages or using a combination of the preceding three options

Now let's move on to external competitiveness, which makes 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 four is market analysis the process of analyzing

compensation data gathered from other employers in a survey of relevant labor market data

Gathering external pay data is essential to keep the organization's compensation system externally competitive

Market analysis otherwise known as market pricing can be accomplished in three easy steps first select your market data

Identify and select market data relevant to your jobs and organization number to age your data

Adjust selected data with a common point in time if necessary

3-way your data finally increase your influence of better data by giving it more weight

Step 5

Developing your base pay structure a base pay structure is developed through job evaluation

Which is merged with 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 may be adjusted up or down. Let's take a look

The market line is how we bring together job evaluation and market analysis to bring a base pay structure to life as

You can see here the x-axis represents the evaluation points associated with jobs that are used to map their importance in the organization

The y-axis represents the salaries the external labor market is paying for those jobs

The market line is drawn to represent the relationship between the job evaluation points and the salaries paid for those jobs

when establishing a pay structure

Organizations use pay grades to group individual jobs having approximately the same job worth

All jobs in a pay grade have the same pay range with a minimum maximum and midpoint

Finally we have compensation management, which includes implementing variable pay and ensuring employees understand their compensation

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 all employees

Step 6 is pay for performance

determining the use of pay that varies with some measure of individual or

organizational performance such as merit incentives or other forms of variable pay

Compensation typically consists of the two forms that we've discussed base pay and variable pay

Base pay is the fixed compensation paid to an employee for performing specific job responsibilities

employees may not always see the link between base pay and

organizational objectives

But variable pay allows employees to see that link his compensation is contingent on individual or group performance our

Seventh and final step is communicating the plan where we communicate compensation to ensure that employees

Understand it and have a clear line of sight between organizational mission culture and their compensation

Explaining compensation to an employee should be simple

And it's an important task that all too often goes unnoticed or unaccomplished in organizations

The following are a few ideas on how to communicate your compensation plan to your employees

First explain your pay structure communicate how your pay structure works, and how decisions are made?

Second explain pay differences ensure differences in pay between employees are understood

Third and finally provide total reward statements use total reward statements to communicate total rewards including your compensation

Remember that compensation is a critical element of your total reward strategy a strong base pay structure is built through internal alignment

external competitiveness and compensation management