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Dane Sinn and Greg Wolf, Compdata Consulting
The cobwebs are cleared, the mattresses have been flipped. Hopefully, spring-cleaning was smooth sailing at home, but now it’s time to dust off your compensation plans at the office. This has become increasingly relevant for thousands of organizations as the economy creeps toward recovery.
In the aftermath of The Great Recession, many compensation plans will need a more thorough makeover than what normal market pricing activities offer. Massive layoffs have led to the absorption of responsibilities into other positions, resulting in outdated job descriptions and a lack of awareness of employees’ actual duties and contributions. As the economy begins to recover, incorporating a thorough job analysis review into your standard market pricing process is a necessary, but often overlooked step.
The following five steps outline one approach to market pricing.
Step 1: Determine your objectives. As with anything, you must begin by identifying what you plan to accomplish with market pricing. Are you focused on retaining specific talent? Are you updating salaries after an extended pay freeze? Are you searching for a way to boost morale? Which positions are you pricing? Clearly defining these objectives will set the stage for a more productive review.
This is also the appropriate time to reassess your compensation philosophy. Every company references its comp philosophy, but few actually practice what they preach. If you are concerned your current pay strategies are not producing the desired results, partner with your company’s leadership to re-evaluate the effectiveness of your compensation philosophy. Projects developed in a vacuum tend to be theoretical, or they focus on technical matters with little attention to practical implementation. For compensation programs to be effective, you need to identify what drives value in the organization, and then relentlessly and consistently reward these outcomes.
Be aware that during this process you will need to address various issues and potential roadblocks. Sometimes the obstacles are the thickest of red tape or even the burden of “the way we’ve always done it.” The most typical obstacle is a focus on financial matters. Most importantly, leadership must embrace this project in order to procure the manpower and monetary resources necessary to ensure a successful revision of your compensation plans. Share the project objectives with those in leadership roles, and map out the process and expected outcome in order to gain a strong shared interest. Success is not so much dependent on decoding a perfect selection of project steps or design, as it is about ensuring it fits with the organization’s business strategy and work culture.
Step 2: Perform job analysis. Job analysis is a key component of your market pricing project during this economic recovery period. For now, you simply cannot market price the way you’ve done in the past. The recession forced many companies into laying off parts of their workforce, while asking remaining employees to take on their responsibilities. Job descriptions are no longer as accurate as they were prior to the recession.
A job analysis questionnaire (JAQ) will provide a microscopic look at the positions you employ and their roles and responsibilities, allowing a truer comparison to the market. Each incumbent in the positions surveyed should complete a questionnaire ensuring the company receives a complete overview of the position as it’s currently performed. A comparison of these findings and the current job descriptions may reveal information not otherwise discovered. Ultimately, you may realize descriptions need to be updated, responsibilities need to be reassigned or specific employees need training on the duties required by the position.
In the first part of the JAQ, the employee will provide detailed information about the position. The incumbent will include employee data, such as the length of time in the role. The employee will also provide a brief overview of the primary purpose and contribution of the position to the department or organization. He or she will describe in detail the duties performed, how often they are performed and the percentage of time spent on each. These duties should be listed in order of importance, with the most important duty at the top of the list.
Next, the incumbent will report the level of education and experience needed to perform the job. This section of the JAQ is referring to what is needed for the position in general, not the education or experience held by the individual completing the JAQ. Then, the employee will report supervisory responsibilities, including the names and titles of those supervised by the employee. The JAQ will also require the incumbent to choose what types of supervisory responsibilities apply to the position. This will become important if the new job description falls into a different pay grade because of supervisory responsibilities and pay.
The last section of the JAQ pertains to the physical demands, working conditions and tools and equipment commonly used to perform essential duties of the position. The employee will indicate how much work time is spent on each of the activities and conditions.
Finally, the employee’s supervisor will review the JAQ. The supervisor may provide any additional comments about the position. However, the supervisor should not be permitted to change the employee’s responses. The questionnaire is intended to accurately describe the position, not the specific employee or their performance. The intent is to analyze how the job is accomplished today, not how it should be accomplished in the future.
It will be vital to have a plan in place for handling discrepancies, as it’s not uncommon for a supervisor and employee to have different interpretations about the details of a position. A helpful way to resolve this issue is to set a meeting with the supervisor, the employee and a third party mediator, preferably someone from human resources who is familiar with the project. If this discussion does not lead to a resolution, a decision will have to be made by an outside party. This could be the third-party mediator, the supervisor’s immediate manager, a member of human resources, or someone who will be able to make a nonbiased decision. The exact method will depend on each individual organization; however, a well-defined plan will help minimize confusion and frustration in these situations.
Job analysis will be the most tedious step in the project but is necessary to formulate a clear understanding of the requirements and responsibilities for each position. The level of detail gained through JAQs will assist in correctly matching your jobs, ultimately allowing you to more accurately and competitively price your salaries. As HR departments are short on time and resources these days, it may feel like an impossible challenge to design a JAQ. However, most consultants will be able to help you design one, if they don’t already have their own to share with you. Or, there are several templates available online for little or no charge.
Step 3: Determine effective market data sources. Ensuring you have reliable information that is relevant to your market is essential. To start, identify your organization’s peer groups by evaluating whether your competition for labor is based on industry, geography, organization revenue size, profit status or other criteria. Generally, this information is not difficult to identify; however, understanding the weight of each category often requires deeper analysis.
To add to the complexity, a growing number of companies must now define multiple peer groups that correspond with various functions and levels within the organization. A benchmark position will have a broader scope in comparison to an industry-specific position, which will require a narrower peer group. This may require the use of several market data sources. However, there is no magic answer to how many sources should be accessed. More important than a specific number is the quality of the match based on your criteria set.
If you are unable to locate sources with the data points and breakouts relevant to your project, keep looking. Without these, you will waste valuable time and budget pricing to a market in which you do not belong. It’s also important to understand the Department of Justice/Federal Trade Commission’s antitrust regulations as you search for a reliable data source.
Prior to selecting specific surveys, it’s imperative you gain an understanding of their survey methodologies. Surveys with employer-reported data will generally be more accurate and reliable than those including data from individuals or using formulas to calculate key data points.
One example centers around a Midwestern metropolitan area that saw a 10 percent increase in multiple shipping and distribution positions over a small period of time. A company had opened a new location in the area, and to attract employees, the center began hiring at a rate significantly higher than the market average. In fact, it began paying more than 10 percent more. To compete and retain employees, other companies in the area had to quickly increase their rates. The employer-reported data from this area showed these increases, but data calculated with a formula would not have reflected this change. The lesson here is that actual, employer-reported data is the preferred option.
Step 4: Develop pay structure (grades and ranges). Once you’ve selected your data source, you’ll want to develop a pay structure by comparing your data from the JAQs to the market and to your compensation philosophy.
First, assign benchmark jobs to grades and ranges based on the labor market. Your general staff positions may be easier to benchmark. Once you’ve assigned benchmark jobs, slot the remaining jobs based on comparable worth. Alternatively, your company policy or personal preference may dictate market pricing for each title. Finally, use the data you’ve retained to identify discrepancies in pay. This will help you determine where you’re underpaying or overpaying in regards to the market. Then, decide how to handle these discrepancies.
For those who have been underpaid, you could choose to grant a lump sum payment. Another option is to give more increases over a period until the compensation level for that position is consistent with the market.
If an employee has been overpaid, the situation is tougher to resolve. Most employers are hesitant to rectify overpayment, as it’s difficult to reduce someone’s pay and may devalue the employee’s role in the company. Other options would be to freeze pay until the market catches up, or give lower than normal increases. With any of these solutions, you must be aware of the message communicated to your employees.
Step 5: Communication is key. Finally, have a plan for communicating the final pay decisions with your employees. This is often the most overlooked step in the process of market pricing. Without a plan for effective communication, the entire market pricing project can backfire if employees become frustrated because they do not understand the changes. Does your company’s policy dictate full transparency?
In addition, determine the most effective means of communication. Will an HR representative or the line manager discuss the compensation changes with an individual employee? The answers to these questions will depend on your company culture and policies. It’s important to consider that during the process to revamp your compensation program, senior executives and the human resources team will typically take a lead role. Remember as you work through the process, the collective group of managers are instrumental in making the compensation program work effectively. The role of the manager is critical, as employees tend to trust their manager above all others. Ultimately, your plan should favor what will have the most positive impact for the organization as a whole.
Once you have market priced your positions, it is important to develop a long-term plan for addressing pay gaps. Which positions are critical to the product offering? Which positions experience high turnover? Which positions are most challenging to recruit? It may make sense to take a close look at these types of positions each year, while general staff titles can be maintained with a year or two between reviews. Regardless, market pricing is a frequent necessity as the economy and the compensation landscape coactively evolve.
Spring cleaning can be a daunting process, but these five steps will help you deep clean your compensation plans to be more current with the evolving economy. Take a careful look at the goals you want to reach, the tools you use to reach them and how you’ll carry them out in the future.
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