Designing and Implementing Compensation and Benefits Structure
Compensation structure
A compensation structure defines various job position in the organisation, grades or bands, pay and benefits, and entitlements.
Why a compensation structure is required
If carefully designed, a good compensation structure is instrumental in attracting and retaining high performing staff. It helps in maintaining both consistent and equitable pays, reduces risk of errors in pay processing and legal risks, provide a defined career path to employees and maintain their motivation, trust and moral.
Steps involved in designing a compensation structure
A compensation structure needs to be designed according to the pay philosophy of the company. The pay philosophy should be drawn from long term objectives and strategy of the company. Steps involved in designing a compensation structure depends on the stage from where a company starts. Considering SSG and our discussion I reckon the process of establishing compensation structure in SSG should consists of following 7 steps:
- Define Organisation structure
- Define pay philosophy
- Define grade/band structure
- Define benefits and entitlements
- Benchmarking with Market
- Identifying gaps and develop strategy and timeline to fill them
- Communication and Implementation
- Define Organisation structure
A permanent (not too frequently changing) organisation structure should be developed in alignment with the long term objectives and strategy of the company and its business model and structure i.e. either of Departmental structure, Business Unit structure or a Hybrid of both.
The organisation structure should be based on roles and positions and not individual and can have matrix indicating filled, vacant, on hold, and future positions.
Based on the roles/ positions in the organisation structure, a job analysis of each role/position should be performed to determine value of the role/position and to develop a position/job description with reporting lines.
- Define pay philosophy
There should be a clearly defined pay philosophy again in line with the long term objectives and strategy of the company. This philosophy will be compensation constitution and will identify how to consistently attract and retain talent. Like commercial competitive advantage identification, a compensation competitive advantage should be established.
The compensation competitive advantage will define what type of talent company wants to attract (younger employees/ millennials, entrepreneurial employees, sales employee, strong leadership team, employees with dependents, high tenured and experienced employees etc.) It will also define how the company wants to position itself in employment market (a pay master, an average employer, a market leader, educator and trainer etc.)
- Define grade/band structure
Based on job analysis in step 1, jobs should be evaluated and grouped. The evaluation can be done using either of Job Ranking Method – highest to lowest ranking, Job Classification Method – grouping jobs into various classifications, or Point Factor Method – breaking jobs into compensable factor and places weight or points to each factor.
Once the job evaluation is complete, the jobs should be arranged in a job-worth hierarchy known as grades. Grades provide rooms for gradual career development and progression. There are three methods of this: Traditional method – based on ranges with relatively large ranges and narrower spread within each range (e.g. Pay grade 1, Pay grade 2, Pay grade3, etc.), Broadband – based on bands with fewer ranges and relatively wider spread (e.g. Entry Level, Professional Level, Management Level, Executive Level, Board Level etc.), and Hybrid – mix of both where up to certain job levels a grading system is used and after that level band level is used or in certain band levels a grade system is implemented while in others it is simply the band itself. The selection of method will depend on the roles, progression frequency, and size of organisation.
In case of grades each grade shall have three pay ranges (to provide room for growth) as Min – Mid – Max. Similarly, in case of bands each band should have three bands (to compensate various experience levels) as Entry – Mid – Experienced. There could be a pay range for each band level to provide room for growth.
After defining the grades or bands (whatever) the positions should be placed into their respective grade or range.
- Define benefits and entitlements
Fourth step is to define benefits, the company is willing to offer as both compulsory (super, mandatory allowances, overtime etc.) and additional (discretionary allowances, vehicle, salary sacrifice, bonus etc.) benefits.
The benefits should be defined in accordance with the grade/band structure and should also clearly define entitlement conditions, restrictions and ceilings.
- Benchmarking with Market
Though it is not necessary but it is important to perform a benchmarking with market. For benchmarking either a tailor-made survey can be performed through an external HR consultant or a research can be performed by internal HR department through various HR and payroll publications and website, job boards, recruiters and job advertisement websites.
The Benchmarking is necessary to align the compensation structure with the pay philosophy and the benchmarking should only be done with organisation following similar philosophy instead of just comparing with competitors and industry peers.
- Identifying gaps and develop strategy and timeline to fill them
The sixth step shall be to start assigning grade or band to each existing staff and compare their current pays with the benchmark to identify the extent of the gaps. Some employees will be marginally ahead or behind of level they should be at whereas some will have significant gap.
It is important to assess the gap not only at individual level but also at the organisation level with determining the overall financial impact.
For those who are behind either marginally or significantly, if the overall financial impact is not significant then they should all be adjusted upward to fill the gap immediately. If the overall financial impact is significant, then the immediate adjustment should be for only those who are marginally behind. For those who are significantly behind, a two to three years gap adjustment scheme should be implemented. It is important to incorporate future inflation and pay adjustment factors in developing such scheme.
For those who are above the level where they should be, their revision should be put on hold for a year or years depending on the gap itself. If the gap is so big that it is not expected to be filled in few years, then pay or the role can also be renegotiated with such employees.
- Communication and Implementation
Change management if not properly and timely communicated create chaos and misunderstanding and may have negative impact on the business. Compensation is a delicate and sensitive issue and therefore, it is very important to establish a right communication and tone with employees as early in the process as possible and keep them aware of the objectives and progress of the whole exercise.
Though the respective manager should be taken on board either from start or after completing the fact finding stages but as minimum, the employee engagement should be well before the final implementation to avoid any surprises, conflicts and demotivation etc.
The most appropriate way of communication will be a detailed message (or messages depending the stage of engagement) from HR stating objective, findings and results of the exercise with properly addressing all concerns and queries as result of the message.
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