Platt Perspective on Business and Technology

Developing a rational compensation package policy – 2: structuring compensation according to the standard model

Posted in HR and personnel by Timothy Platt on November 3, 2011

This is my second posting in a series on compensation policy and its implementation. (See Part 1 of this series for the basic organizational and conceptual framework that I will be developed this within.) My goal in this installment is to:

• Outline some of the basic approaches and assumptions that go into making standard HR compensation package policy, and to
• Analytically discuss them in terms of the implications and consequences of these practices.

The standard compensation model, as I will label this approach can be represented as any HR compensation policy that satisfies a particular set of constraints and underlying assumptions:

• The compensation package that would be available for any given position in an organization has to fit for overall value into a set range with a standard and at any given time fixed minimum and maximum level allowed.
• The range that is available for negotiating compensation with any given employee or potential hire, for any given position is determined according to the level of that position on the table of organization. That is how compensation determination is standardized across what may seem to be an open-ended range of possible positions with each holding a unique set of job responsibilities and employee skills and experience core requirements.
• Compensation ranges set for any given level on the table of organization in most cases show some overlap with the ranges available at the levels immediately above and below on that table of organization.
• When an employee’s compensation reaches and would exceed the maximum level associated with any given position, they in most cases as default decision would have to be promoted to the next level up. This can happen as a result of performance based pay increases or through accumulation or standard annual pay increases.
• The lower and upper limits of a compensation range can be adjusted up to allow for inflation and other outside of the business factors, and when this is done, it is usually done for all position/compensation levels and according to a single multiplier standard.
• As a general rule, new hires are brought in at a compensation level that can go up to mid-way up the standard compensation range for that position but it is the rare exception that an employee would be brought in at or even near the high end of the range for the job level they would be hired at. This is, among other things, to avoid forced promotions after a brief tenure on the job and with the business.
• Compensation ranges are kept secret as confidential proprietary information by the Human Resources Department and by the business as a whole, and intentional publication or sharing of this information by a member of the staff would in most cases be considered a serious and even actionable breech of proper behavior as an employee.
• And specific compensation offered to any individual employee is even more closely guarded.

Businesses operate in competitive environments, and seek to carve out and maintain market share and profitability in the face of competition. This carries over to and impacts upon every aspect of the organization and its operational processes and practices – hiring and compensation range determination included. So businesses need to know what levels and types of compensation value their competition would offer for any given position that they would need to hire for too. Note the shift there, from level on the table of organization to specific job description and candidate skills requirements.

This tends to force two types of standardization:

• Standardization in what compensation would in fact be offered for any given job description and level of candidate seeking it, and
• Standardization at what level, or at least corresponding level that any given position would be placed at on a table of organization of a hiring company.

And increasingly with the internet and its online information resources, and even more so with social media sharing, employees and potential employees know as much or even more about what the market will bear for any given hire in any given position, than the HR people of the hiring company know.

As a final thought for this posting I will add one more complication, and with rapidly changing fields and areas of professional expertise such as information technology in mind.

• One of the key drivers in determining what the market will bear in compensating employees is in the commonality or rarity of the skills and experience they have and can bring to the job – and of course, the importance that those particular skills and experience would hold in offering competitive value to the business.
• New technologies and skills are developed in the marketplace and older technologies and skill sets fall away in importance except perhaps in the old technology maintenance niche in support of legacy systems. And job descriptions shift accordingly as employees need to know and use new technologies if they are to continue to offer competitive value.
• This drift can and does mean that the static job descriptions that tend to be in place in an organization drift towards irrelevancy unless continuously updated – which might take place.
• But that issue of commonality or rarity enters in here, as employees who do keep up with cutting edge technologies can become more valuable to their employer – or to competing employers, than the compensation range they are working within would support.
• This means that this drift can, and with time will lead to loss of key employees as they become more attractive to the competition and as their personal knowledge of the marketplace informs them of emerging opportunity.
• This, I add, applies specifically and directly to the employees a business would most need to retain – employees most in a position to help them create and sustain unique value propositions.

So I end this posting with a conundrum of sorts, which I will address in my next series installment.

You can find this posting and related in my directory: HR and Personnel.

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