Benefits and Compensation

Compensation 101—The Basics

  • Employees are satisfied.
  • Both internal and external equity are maintained.
  • Control is maintained over compensation costs.

For a review of basic compensation program principles, we turned to Compensation.BLR.com®.

Properly structured and administered, your compensation program will:

  • Help attract top talent.
  • Retain core employees.
  • Encourage longevity while efficiently using financial resources.

Establishing an effective compensation administration program requires three major steps:

  • Job analysis.
  • Job evaluation.
  • Job pricing.

Once established, it is important to maintain and update the following aspects of the program: salary levels, salary banding, salary increases, performance appraisals, and longevity increases.

Job Analysis

Each job in the organization should be thoroughly analyzed and then described in a written job description. Your job description should state clearly and simply:

  • Who does the work (including the qualifications, education, and job skills required),
  • What the work entails,
  • Where the work is performed,
  • When the work is done (hours, how often, or what times of year),
  • Why the person does the work (why is the job essential to the company), and
  • How the job is accomplished.

For the purposes of the Americans with Disabilities Act, it is appropriate and necessary to list the essential and nonessential functions of the job in case someone asks for a job accommodation for a covered disability.

Here are five job description summaries in the engineering series for discussion purposes:

Job Title

Job Description

Junior Engineer

Performs routine engineering tasks using standard procedures. Applies limited judgment under direct supervision.

Engineer B

Designs and develops major engineering project systems and subsystems under general supervision. May give technical supervision to lower-level engineers and technicians.

Senior Engineer A

Designs and develops portions of major engineering projects under general supervision. Provides technical support to other departments. May supervise technicians and lower level engineers.

Project Engineer

Directs an engineering design team to complete assigned engineering projects in accordance with customer specifications and within schedule and budget limitations.

Director of Engineering

Reports to chief operating officer. Directs the accomplishment of product engineering objectives. Provides technical guidance and ensures sound engineering procedures and effective use of facilities.


Compensation.BLR.com, now thoroughly revved with easier navigation and more complete compensation information, will tell you what’s being paid right in your state–or even metropolitan area–for hundreds of jobs. Try it at no cost and get a complimentary special report. Read More.


Job Evaluation

Job evaluation determines what jobs are worth on an absolute basis and relative to other jobs in the organization. It can be done in a variety of ways, but usually involves assigning “points” based on complexity, impact, budget, supervisory duties, and so on, and attaching job ranks based on the total number of points. Jobs that are of greater value to the organization have a higher labor grade; jobs of lesser value fill the lower grades. The five engineering jobs might be evaluated as follows:

Job Title

Labor Grade

Junior Engineer

33

Engineer B

37

Senior Engineer A

39

Project Engineer

40

Director of Engineering

43

Job Pricing

Job pricing involves establishing rate ranges, that is, minimum, midpoint, and maximum dollar values for each labor grade. By studying wage and salary surveys, employers can compare wages in the labor market to the jobs within their organization. The result is a scale of wages that allows the employer to compete in the labor market (external equity) while ensuring that jobs that are worth more to the organization are paid more than those of lesser worth (internal equity). Here’s an illustration of a set of rate ranges.

Labor Grade

Minimum

Midpoint

Maximum

33

$30,147

$40,196

$50,245

37

$40,954

$54,605

$68,257

39

$52,851

$66,828

$81,455

40

$51,533

$68,711

$85,888

43

$64,845

$86,460

$108,075


Try BLR’s all-in-one compensation website, Compensation.BLR.com®, and get a complimentary special report, Top 100 FLSA Overtime Q&As, no matter what you decide.   Find out more.


Red Circle Rates

One of the most common problems faced in compensation systems is what to do about red circles (employees paid above the maximum). Some alternatives:

  • “Grandfather” the employee; this means allowing the employee to stay above the maximum until the person is promoted, terminated, or retired.
  • Freeze the employee at that red-circle rate until adjustments to the rate range finally capture the employee’s rate back into the structure.
  • Increase the employee’s wage by only half of the adjustments made to the range, again, until the rate is captured.

A similar problem occurs with employees who are under- or overpaid in relation to actual performance. As defined, the minimum, midpoint, and maximum rates are each definitions of pay for specific levels of performance. Midpoint pay usually assumes an employee performing all major duties in a satisfactory manner. So an employee performing 80 percent of the job duties at less than satisfactory efficiency under normal supervision who is paid above the midpoint has a pay situation similar to a red-circle rate except that it is within the rate range. In this case, counseling and performance evaluation feedback are needed to bring performance in line with pay.

In tomorrow’s Advisor, factors to consider in determining pay increases, plus an introduction to the all-things-compensation-in-one-place website, Compensation.BLR.com®.