Compensation planning in HRM is a highly technical process. Deciding the compensation strategies is one of the most important strategic decisions that the top management of the company has to take. This happens in collaboration with HR department because it decides what kind of workforce we want to drive our organization. If we want competent and skilled workforce, we need to compensate smartly based on market competitive salaries. This process requires deep understanding of economics, finance and HR because all these factors highly influence the employee attraction and turn over rates.
The need for compensation planning in HRM
Compensation planning in HRM is one of the basic activities when any organization starts working. Before hiring process starts, all the pre-requisites for hiring must be in place. A well defined compensation strategy is one of them. So, compensation strategies come first when we are planning to hire the people and deciding what kind of workforce we need for our survival. If we require highly technical or experienced human resource, we must compensate them according to their skills. Hence, our compensation planning depends upon the type of business we are in and the people we need to run it. Let’s see the ideal process of compensation planning in HRM.
Process of compensation planning in HRM
The ideal process of compensation planning in HRM is as follows:
1) Organize the job descriptions
Job description or JD is a “written document of responsibilities an employee is liable to perform on his job”. The nature of each job lays down the foundation for job description. Two organizations, operating in the same industry might have same JDs for a particular job but under different job designations. One organization might call a job title as “level two officer” performing the same job responsibilities as the other organization calling another person as “level three officer”. Therefore, nature of jobs decides their JDs, not the designations. This is because JD is written on the basis of tasks and activities required to perform any job. This leads to compensating people on the basis of what they perform at their jobs. Thus, this approach to devise the compensation strategies is well thought out and aimed at compensating employees on the basis of their competencies.
Identify the KSAs
This process starts by categorizing different jobs under job grades/ titles within the organization. For this purpose, assess the KSAs for every job. KSAs are the knowledge, skills and abilities required for a specific job. Knowledge is what employee knows about his field. Skill is the expertise he acquires over time. Ability is his natural, innate talent. All these three factors are assessed for each job separately. Find out which KSAs are required for every job, the required qualification and experience and the tasks and activities relevant to this job. This is called Job Analysis. My another blog explains in detail how to conduct job analysis.
Ultimately, record all the essential and non-essential requirements for a particular job. This document is called Job Description. Hence, job description is the primary phase of compensation planning in HRM.
If we categorize jobs well and realize the value that comes with this exercise, the result is never less than a masterpiece of employee motivation.
2) Setting salary benchmarks
After laying down the JDs, we conduct a market or industrial analysis to compare the similar jobs. For this, it is important to take a sample of 3-5 organizations. These organizations must be within same geographical area (location); having the same business. For example, if we want to conduct a market compensation survey for the job of a Business Development Manager in a bank, we will conduct a research on how other banks in the same area are paying to their Business Development Managers, based on the job description elements. It is quite possible that other banks are having the job responsibilities of bringing in the business for the bank under a job title of “Relationship Manager” while we are calling the same person in our organization as “Business Development Manager”.
Hence, the market survey is based on the comparison between the same job descriptions, if the job titles differ. Main focus is on Job Descriptions as any two people performing the same job duties deserve to get same salaries. This is called setting up a “Market Competitive Salary”.
Benefits of market competitive salaries
Market competitive salaries are preferable for a variety of reasons. Firstly, we get a benchmark salary for all kinds of jobs so every company has to consider this when proceeding to hire. This helps in establishing itself as an employer of choice to attract competent workforce. Secondly, if a company does not pay market competitive salaries, it eventually starts losing good employees. For hiring and retaining competent employees, market competitive compensation is a highly important factor. And this is such an attractive one; it could get you the best workforce with a soaring market reputation.
3) Setting pay scales
Next step is to find out the median pay for every job using statistical techniques and then defining a lower and higher point for every grade. So, if we want to set the pay scale of cashiers in a bank, we can divide them into 3 grades; Officer grade 1, officer grade 2 and officer grade 3 with the former one being senior than the latter grade. Officer grade 1 can have employees who have less technical skills to more technical skills, less qualification to more qualification, less managerial skills to more managerial skills and less experience to more experience. Based on these scales, salaries of all officers in Officer Grade 1 will fluctuate within this pre-defined scale.
So, a pay grade might contain 5 such levels and when a person promotes to a higher level, his salary increases to the benchmark set for that level in the same pay grade.
4) Considering labor supply & demand
Labor supply and demand factors have a significant effect on compensation planning in HRM. If labor supply is greater than its demand then, there are more people and fewer jobs. Hence, organizations usually take advantage of high unemployment rate and pay less. While developing employee compensation strategies, this important economic factor must be considered.
Wise compensation planning is a win-win
Wisely constructed compensation strategies alone have a huge impact on employee attraction and retention rates. Good salaries lead to increased job engagement and high employee performance thus, leading to high organizational profits. So, employee compensation strategies based on employee skills and care is always a win-win result.