Compensation Systems, Job Evaluation, and Pay Structure Design

Job Evaluation Methods: Ranking, Classification, and the Point Method

A compensation system can be structured around several job evaluation methods. A brief discussion of each follows, along with a conclusion about which plan to use.

The ranking method assigns numbers to job descriptions based on their relative value or contribution to the company, from highest to lowest. This plan is easy, fast, and the least expensive. However, ranking can create problems because it does not explain what it is about the jobs that matters to employees and managers. There are two common methods of ranking: alternative ranking and paired comparison.

Alternative ranking orders job descriptions alternately at each extreme. The paired comparison method uses a matrix to compare all possible pairs of jobs. These two methods are more reliable than simple ranking. However, it is very difficult to be objective and knowledgeable about all jobs. In the long run, ranking is difficult to defend, and costly solutions are often required to overcome the problems its simplistic structure can create.

Under the classification method, a job description is compared to established class descriptions, and each job is then slotted into the class it best fits. Job descriptions are not only compared to class descriptions and identified benchmark jobs, but can also be compared to each other to ensure that jobs within the same class are similar. The ultimate result is a job structure made up of a series of classes, each containing a number of jobs. Jobs within the same class are considered to involve similar work duties and are therefore paid equally.

The point method shares three common characteristics across all its techniques. The first is the use of compensable factors; the second is the determination of factor degrees that are numerically scaled; and the third is the assignment of weights to factors reflecting the relative importance of each. Compensable factors are based on the strategic direction of the business and how the work contributes to its objectives and strategy. There are six steps in the design of a point plan.

Compensation factors must be based on the strategy and values of the organization and work performance. Those factors should also be acceptable to the stakeholders affected by the resulting pay structure. Once the factors are determined, scales reflecting the different degrees within each factor are constructed. For these scales, the following criteria should be considered: (1) ensure that the number of degrees is sufficient to distinguish among jobs; (2) use understandable terminology; (3) anchor degree definitions with benchmark job titles and/or work behaviors; and (4) make it clear how each degree applies to the job. Factor weights reflect the relative importance of each factor to the overall value of the job. Weights are often determined through an advisory committee that allocates 100% of the value among the factors. Overall, the point method uses the sum of the compensable factor scores to determine a job's value and, in turn, the appropriate pay rate.

Before progressing to the actual design of the point plan, certain structural elements must be in place to ensure success. Organizational and human resource objectives and strategies must be adequately defined and clarified so that compensation objectives and strategies will sufficiently support their execution. These objectives help establish direction and provide standards for evaluating the eventual success of the overall compensation system. The information collected is used to determine relationships among jobs, where a job fits in the organizational structure, which jobs are supervised by the job holder, which jobs supervise a particular job holder, and the nature of any internal and external relationships.

Data related to both the employee and the job is collected. Job data includes job identification and job content categories. Identification covers basic information such as title, department, and number of incumbents, whereas content includes tasks, activities, performance, critical incidents, and working conditions. Employee information informs the analyst of employee characteristics, internal relationships within the company, and external relationships necessary to the job. All are important to defining the job.

Pay-for-Knowledge Programs and Workers' Compensation Payments

This data is gathered by interviewing and surveying job incumbents, supervisors, co-workers, and others knowledgeable about the job in question. Once the data is gathered, job descriptions — complete with a summary of job duties, reporting relationships, qualifications, and essential responsibilities — are produced, which in turn support a compensation survey.

The choice between the available plans hinges on several factors. First, one should consider benchmarking similar jobs in comparable organizations to capture the diversity of work performed within each job domain. This ensures the accuracy of decisions based on job descriptions. The degree of detail required in a job evaluation to make sound compensation decisions must be examined, along with the associated organizational cost. The internal alignment of the organization should be considered to determine which plan is more suitable, as well as which plan best supports organizational performance based on business objectives and the nature of work flow. The plan must support internal equity and fairness among employees. Finally, the selected plan should ensure that pay influences employee attitudes and work behaviors while directing and motivating employees toward the achievement of organizational objectives.

A pay-for-knowledge program is one in which employees are trained to perform the duties of other employees during their absence. "Cross-trained employees benefit themselves and the company they work for, which is the main rationale for using a pay-for-knowledge compensation program. The company benefits because cross-training enables employees to cover for one another during absences or in case of temporary vacancies. In addition, employees who have been cross-trained often present fresh perspectives, offering ideas for improving work flow and productivity. For the employees themselves, pay-for-knowledge creates a more interesting and challenging work environment, reducing turnover and absenteeism. One department in a 5,000-employee U.S. manufacturing firm agreed to implement pay-for-knowledge compensation to test this work design. Particular attention was given to specific skill blocks required for particular positions. Peer and management ratings were used for feedback on employee training, and guidelines were written on training and evaluation procedures. Any ratings — whether negative or positive — had to be supported with documentation in order to alleviate workers' anxieties about subjective judgments. Issues raised by the new system were largely related to skill mastery, including problems of unlimited learning opportunities and establishing equitable distribution of training. This case study demonstrates the potential of pay-for-knowledge" (A Pay-for-Knowledge Compensation Program that Works).

Payment for doctor bills: "Some employers maintain a list of 'company doctors.' If a list of doctors is posted at your workplace, you must use one of these doctors for the first 90 days of medical care. Using a 'company doctor' will ensure that all medical expenses are paid under Pennsylvania workers' compensation. After the first 90 days, you can go to your own doctor" (PA Work Comp for Medical Bills).

Payment for lost wages: "The law allows you to collect two-thirds of your gross weekly wages before your injury. There is a limit to how much you can collect while on workers' comp. The maximum payment amount is set each year. In 2004, you could collect up to $690 weekly" (PA Work Comp for Lost Wages).

Lump sum payment: "This is a one-time payment for workers who have been off work for at least four months. Before agreeing to this payment, you should consult a workers' comp lawyer" (Types of PA Workers' Comp Payments).

Retirement Plans and Discretionary Benefits Design

"An IRA is an individual retirement account; it is not started through a business. A taxpayer can contribute up to $4,000 per year to an IRA ($5,000 for 2008, and after 2008, the contribution limit will adjust annually for inflation in $500 increments). For persons age 50 and over, the law provides an increase in the contribution limits applicable to IRAs. This contribution is tax-deferred until an individual withdraws the money at retirement" (Types of Retirement Plans).

A defined benefit plan promises the participant a specific monthly benefit at retirement. This monthly benefit can be a fixed dollar amount or can be calculated through a formula that considers the participant's salary and years of service. Investment risk and portfolio management are entirely under the control of the company. There are restrictions on when and how funds can be withdrawn without penalties (Types of Retirement Plans).

When designing a discretionary benefits program, one must consider who will benefit most, because that audience will depend on it for their well-being. For example, discretionary benefits may be issued only to persons receiving assistance due to lack of funding. This is why creating such a plan must cover all angles so that all people who need it will be able to obtain it.

Examples of discretionary benefits include:

Dental care under the MCSS fee schedule for Ontario Works adults; prosthetic appliances such as back braces, surgical stockings, and artificial limbs (provision, replacement, and repairs); wheelchairs and repairs for the portion not covered through the Assistive Devices Program (ADP); hearing aids and batteries (co-payment under the Ministry of Health and Long-Term Care's ADP for provision, replacement, and repairs); vision care for adults; dentures where deemed appropriate; the cost of completing medical forms; and other items approved individually based on medical documentation establishing need and benefit.