elements of

BASE PAY
administration

Jason C. Kovac, CCP, CBP

L. Kate Beatty, CCP
Executive Editors
 elements of

BASE PAY
administration

Jason C. Kovac, CCP, CBP

L. Kate Beatty, CCP
Executive Editors
Elements_BasePayAdmin_06Book.qxp 1/19/10 8:35 AM Page ii

About WorldatWork®
WorldatWork (www.worldatwork.org) is the association for human resources
professionals focused on attracting, motivating and retaining employees. Founded
in 1955, WorldatWork provides practitioners with knowledge leadership to effectively
implement total rewards — compensation, benefits, work-life, performance and
recognition, development and career opportunities — by connecting employee
engagement to business performance. WorldatWork supports its 30,000 members
and customers in 30 countries with thought leadership, education, publications,
research and certification.
The WorldatWork group of registered marks includes: WorldatWork®, workspan®, Certified
Compensation Professional or CCP®, Certified Benefits Professional® or CBP, Global Remuneration
Professional or GRP®, Work-Life Certified Professional or WLCP™, WorldatWork Society of Certified
Professionals®, and Alliance for Work-Life Progress® or AWLP®.

Any laws, regulations or other legal requirements noted in this publication are, to the best of the
publisher’s knowledge, accurate and current as of this book’s publishing date. WorldatWork is
providing this information with the understanding that WorldatWork is not engaged, directly or by
implication, in rendering legal, accounting or other related professional services. You are urged to
consult with an attorney, accountant or other qualified professional concerning your own specific
situation and any questions that you may have related to that.

This book is published by WorldatWork. The interpretations, conclusions and recommendations

in this book are those of the author and do not necessarily represent those of WorldatWork.

© 2006 WorldatWork
ISBN 1-57963-1568 (Paperback/softback)
978-157963-271-7 (E-book)

No portion of this publication may be reproduced in any form without express

written permission from WorldatWork.

WorldatWork Press
www.worldatwork.org
Acknowledgments
WorldatWork Press would like to thank the following technical reviewers for helping
to shape and strengthen the content of this book:

Jennifer C. Loftus, CCP, Charles Pascual, CCP, Patricia Zingheim, Ph.D.,

CBP, GRP, SPHR, National Executive Director, Partner, Schuster-Zingheim
Director, Astron Solutions Compensation and Benefits, & Associates Inc.
Catalina Marketing
Corporation

Article Reviewers
Michael Batt, President, Richard D. Landsberg, Michael Schelstrate, CCP,
USAlliance Consulting Nationwide Financial SPHR, Human Resources
Services Director, Triumph Composite
Tom Farmer, Senior
Systems Inc.
Consultant, Bruce G. Lawson, CCP,
Hewitt Associates President, Fox Lawson Bruce Schlegel,
& Associates LLC Director, Compensation,
Nancy S. Fraser, CCP,
Benefits & HRIS, Xilinx Inc.
Director, Global Jim McKay, FFA, ASA,
Compensation, M&A Engagement Leader, Jeremy B. Sochol, CCP,
Benefits & HRIS, Watson Wyatt Worldwide Vice President, HR Shared
Sykes Enterprises Inc. Services, Standard
Howard Pardue, SPHR,
Register Co.
Doug A. Grieser, CCP, Vice President,
Senior Manager, Human Resources, Bruce I. Spiegel,
Compensation and Benefits, Western University Vice President,
Insight Distribution of Health Sciences Global Compensation
Network Inc. Services, ACS Inc.
Mark E. Pittel, CCP,
Matthew Harper, CCP, Managing Director, Sullivan Gary E. Starzmann, CCP,
Executive Compensation Cotter & Associates Inc. CBP, GRP, SPHR,
Manager, MeadWestvaco Global Compensation
James P. Saik, CCP, CHRP,
Solutions Architect,
Linda K. Ison, CCP, Manager, Total
ACS Inc.
Managing Director, Compensation, UFA
Mercer Human Resource Co-Operative Limited Mark Szypko, CCP,
Consulting Director, Compensation,
Benefits & HRIS,
Comcast Corp.

WorldatWork Staff Contributors

Dan Cafaro
Rebecca Williams Ficker
Alan Luu
Wendy McMorine
Kris Sotelo
Table of Contents
Chapter 1 – Compensation Program Objectives . . . . . . . . . . . . . . . . . . . . . . . 1
Figure 1-1: Total Rewards Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 1-2: Seven Categories of Work-Life Effectiveness . . . . . . . . . . . . . . . . . . . 7

Chapter 2 – Legal and Regulatory Environments . . . . . . . . . . . . . . . . . . . . . . 11

Sherman Anti-Trust Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Davis-Bacon Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
National Labor Relations Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Walsh-Healey Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Fair Labor Standards Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
- Minimum Wage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
- Overtime Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Salary Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Salary Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Duties Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Child Labor Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
FLSA Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Service Contract Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Anti-Discrimination Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
- Equal Pay Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
- Title VII of the Civil Rights Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
- Age Discrimination in Employment Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
- Executive Order 11246 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
- Vocation Rehabilitation Act of 1973 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
- Vietnam Era Veterans Readjustment Act of 1974 . . . . . . . . . . . . . . . . . . . . . . 27
- Americans with Disabilities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Elements of Base Pay Administration | V

Chapter 3 – The Job Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Job Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Figure 3-1: Building a Base Pay Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Job Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Job Documentation Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Other Job Description Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Developing the Job Worth Hierarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Market Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Job Content Evaluation Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Nonquantitative – “Whole Job” Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Quantitative – “Factor” Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Factor Selection and Weighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Who Should Perform the Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Other Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Pay-Data Collection and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
- Pay-Data Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
- Figure 3-2: Sample Labor Market – Large Retail Firm . . . . . . . . . . . . . . . . . . . 42
- Analysis of the Collected Market Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Chapter 4 – Base Pay Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Setting Rates and/or Ranges for Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Figure 4-1: Market Position – Lead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Figure 4-2: Market Position – Lag . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Figure 4-3: Market Position – Lead/Lag . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Pay Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Figure 4-4: Pay Range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Figure 4-5: Red and Green Circle Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Broadbanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Sidebar: Broadbanding is not for Everyone . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
Starting Rates of Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Increases to Base Rates of Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Merit Pay Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Performance Appraisal Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Chapter 5 – Communication of the Pay Program . . . . . . . . . . . . . . . . . . . . . . 59

Staying on Top of Program Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Checklist: Subjects Frequently Included . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Chapter 6 – Maintaining and Auditing the Pay Program . . . . . . . . . . . . . . . . 65

Keys to Successful Pay-Program Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Ongoing Administrative Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Pay-Program Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

VI | Elements of Base Pay Administration

Chapter 7 – Current Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Hot Skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Target Market Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Access to Salary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Sidebar: Reliability of Today’s Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Performance Differentiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Articles & Perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Compensation Philosophy: The Starting Point . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Christopher Kelley and David Gustat
What Is Base Salary? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Michael O’Malley, Ph.D.
Market Pricing 101: The Science and the Art . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Deb Grigson, John Delaney and Robert Jones, JD, CPA, CEBS
Linking Compensation Policies and Programs to Organizational Effectiveness . . . 102
Dow Scott, Ph.D., Richard S. Sperling, CCP, Thomas D. McMullen
and Marc Wallace
New Ways to Manage Pay: Upgrading Base Pay, Pay Progression
and Variable Pay Plans to Attract and Retain Talent . . . . . . . . . . . . . . . . . 114
N. Frederic Crandall, Ph.D.
Compensation in the Hot Seat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
John M. Bremen
The Future of Compensation Professionals, According to Your Colleagues . . . . 128
Barbara Manny, Thomas D. McMullen, Richard S. Sperling, CCP,
and Dow Scott, Ph.D.

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Selected References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Elements of Base Pay Administration | VII

Compensation
Program Objectives 1
T
hroughout history, employers have struggled with how to attract, motivate and
retain their workforce. What if I give them more base pay? More pay-at-risk or
incentive pay? Better health insurance? Pension? 401(k)? Flexible work schedules?
How can I provide something of value to the employees, so that they will stay with the
organization and increase productivity? This value comes in the form of total rewards.
One of the main components of the total rewards model is compensation.
Compensation can be defined as the cash provided by an employer to an employee
for services rendered. Compensation comprises the elements of pay (for example,
base pay, variable pay, stock, etc.) that an employer offers an employee in return
for his or her services. Compensation is just one of the many means an employer
has to attract, retain and motivate employees.
Organizations need to determine where base pay fits within the business strategy.
The first step in determining this is to understand the organizational compensation
philosophy and strategy. Not all organizations have a written philosophy or strategy
but those that do can ensure their compensation programs closely align to the business
strategy. When creating a compensation philosophy/strategy, the main goal of the
statements should be to ensure the compensation programs will support the business
goals. For example, if the business goals are to increase sales by 15 percent, but the
compensation programs do not motivate employees to achieve those goals, the
compensation plan is broken.
A major component to compensation philosophy/strategy development is to create
compensation program objectives. The following list contains some of the most
common compensation program objectives:
• Internally equitable
• Externally competitive
• Affordable
• Fiscally responsible
• Understandable
• Legal/defensible
• Efficient to administer

Chapter 1: Compensation Program Objectives | 3

• Flexible
• Culturally appropriate
• Aligned with business objectives.
The most common objectives of a compensation program are to be internally
equitable and externally competitive. Each organization needs to determine which
objectives are most important and prioritize them. It is vital to select objectives that
support the compensation philosophy/strategy and that link to the business strategy.
If the objectives are not aligned, the compensation program will not help the
organization achieve its business objectives.
These compensation objectives may be altered based on changes in the business
strategy. A key component in determining the appropriate objectives is to recognize
where the organization is in the business life cycle. For organizations in the startup
phase, affordability is typically a key objective, with greater emphasis on incentives
than base salary. As the organization moves into the growth stage, external equity
might take a more prominent role in addition to being more flexible to attract, retain
and motivate employees. When the organization moves into the maturity phase, base
pay might move more to an internal equity-driven approach for some key positions
and an externally competitive approach for others. At this stage organizations are
looking to have the plan more efficient to administer and are creating incentive
programs to achieve business objectives. As the organization moves into the decline
stage, base pay has the potential to be frozen, with incentives being used to motivate
employees. At this stage, organizations might be more concerned with being
legal/defensible and affordable. These are just some examples of how the business
life cycle could influence the compensation objectives. Organizations move in and
out of phases in the continuum, and it is important to recognize what stage the
organization is in and utilize the appropriate tools for that life cycle.
When developing a compensation philosophy/strategy, organizations need to also
review their total rewards strategy and determine how compensation fits within the
organization’s total rewards package. As stated previously, total rewards are a way
to look at the entire employee value proposition for an organization. Total rewards
encompass compensation, benefits, work-life initiatives, performance and recognition,
as well as development and career opportunities. By looking at all of the aspects as
one, and recognizing that each component feeds into attracting, retaining and
motivating employees, organizations will better understand the employee value
proposition. Determining where and how compensation fits into this model is key
to any successful compensation program.
Compensation and benefits professionals have come a long way since serving as a hybrid
job between human resources and finance. Salary structures then were very rigid and
highly controlled, and benefits programs were designed as a one-size-fits-all answer
to a homogenous workforce. Today compensation and benefits are considered a recognized

4 | Elements of Base Pay Administration

profession. Since the 1970s, organizations have put a greater emphasis on strategically
designed direct compensation and benefits programs. These programs have become more
flexible and adaptable to the ever-changing work environment and reflect the following:
• Emergence of greater international/multinational organizational presence
• Influx of new generations of employees (generation X, Y, etc.) with different values
• Increased business competition
• Workforce diversification, addition of two-income households and the decline
of the sole breadwinner model
• Stricter government regulations and mandates for compensation and benefits
(e.g., Fair Labor Standards Act of 1938, Employee Retirement Income Security Act
of 1974, Sarbanes-Oxley Act of 2002)
• Health-care cost increases and the desire to contain those increases while still
providing health-care benefits to the workforce
• Health-care programs designed to cater to the changing demographics and needs
of the workforce
• Perception of HR as more of a strategic partner
• Addition of work-life effectiveness programs in recognition of the changing needs
of the workforce demographics.
Throughout the past decade, the professions of compensation and benefits
have continued to advance and mature. As more strategic plans and designs
are required for the changing workforce, additional stress and pressure have
been placed on the compensation and benefits practitioners to find innovative
ways to attract, retain and motivate employees. Based upon these needs,
a new model has been introduced in these fields — a model of total rewards.
Organizations that understand the concept as it affects their industry, competitive
environment and employees, as well as know the proper way to deploy critical
factors to their strategic advantage, will be the clear winners in the battle to attract,
retain and motivate top performers.
Total rewards has five main components: (See Figure 1-1 on page 6.)
• Compensation
• Benefits
• Work-Life
• Performance and Recognition
• Development and Career Opportunities.
Compensation and benefits are the two core components of total rewards that
address employee financial needs. In every organization there is some overlap
of these components; the degree of overlap depends on the organizational culture
and specific strategic program design. Each area has a distinct and unique body of

Chapter 1: Compensation Program Objectives | 5

 FIGURE 1-1 Total Rewards Model

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knowledge. Individually and collectively, these components can assist the practitioner
in addressing the needs of attraction, retention and motivation.
A third overlapping component is work-life. Unlike compensation and benefits,
work-life is just beginning to move from a “field” to developing into a profession.
Work-life addresses the nature of work and the many elements of rewards that are
important to employees and employers, but are often less tangible than
compensation and benefits. It is important to note that work-life overlaps and
typically integrates with compensation and benefits.
While work-life elements have always existed in organizations, these elements
have not always received much attention in the quest to attract, motivate and retain
employees. However, research has consistently shown that employees place an extremely
high value on matters that relate specifically to the total experience of working. (See
Figure 1-2 on page 7.)
Each of these elements must be taken into consideration as part of the reasons
why employees would want to work for an organization, why they would want to
stay and what would energize them to perform at their best (attraction, motivation
and retention). It’s a matter of moving from employment to engagement.
The other two components of the total rewards model are performance and
recognition and development and career opportunities. Performance can be used
in many ways within an organization and is defined as follows:
• The alignment and assessment of organizational, team and individual efforts in the
achievement of business goals.

6 | Elements of Base Pay Administration

 FIGURE 1-2 Seven Categories of Work-Life Effectiveness

• Dependent care
Caring for dependents can be defined as programs created that allow an employee to
care for a person who relies on another for support. In most cases dependent refer to the
following:
- Child/children
- Child/children of domestic partners
- Elder
- Adult with disabilities
- Pets
• Health and wellness support
Supporting health and wellness is defined as programs that provide for or maintain
freedom from disease and provide for an optimal state of soundness of body and mind.
• Workplace flexibility
Workplace flexibility was initiated on an ad-hoc basis to meet the needs of individual
employees in particular situations. Eventually, when the value became evident,
companies began more structured flexibility initiatives as a means to meet workforce
business objectives. But flexibility is more than programs; it often requires a significant
cultural shift for an organization.
• Financial support programs
In the area of financial support, work-life is primarily concerned with gaining approval
for — and helping implement — voluntary financial benefits and resources and referrals
that assist employees with managing their financial responsibilities.
• Creative use of paid and unpaid time off
This is defined as personal time away from work for family, relaxation, education,
volunteerism, emergencies or military service. Some of the newer policies in this category
include paid family leave for new fathers as well as mothers, and paid or release time for
community service.
• Community involvement programs
These programs involve not only external community outreach, such as company giving
(foundations or direct), but also a renewed focus on building a strong internal sense of
community. Formal ethics programs and shared (or catastrophic) programs, such as
leave banks and disaster relief funds, are some of the creative new ways of taking care
of each other.
• Culture-change initiatives
Building such an effective, rewarding work environment always requires the buy-in of
managers at all levels, beginning with senior leadership, who set the business strategy
down through the entire organization. This often involves changing specific aspects of
the existing culture since achieving optimal levels of work-life effectiveness requires tight
alignment of shared values.

Chapter 1: Compensation Program Objectives | 7

 - Performance planning is a process whereby expectations are established linking an
individual with team and organizational goals. Care is taken to ensure goals at all
levels are aligned and there is a clear line of sight from performance expectations
of individual employees all the way up to organizational objectives and strategies
set at the highest levels of the organization.
- Performance is the manner of demonstrating a skill or capacity.
- Performance feedback communicates how well people do a job or task compared
to expectations, performance standards and goals. Performance feedback can
motivate employees to improve performance.
Recognition can also play a vital role in employee engagement. Recognition should
accomplish the following:
• Reinforce the value of performance improvement.
• Foster continued improvement, although it is not guaranteed.
• Formalize the process of showing appreciation.
• Provide positive and immediate feedback.
• Foster communication of valued behavior and activities.
Development and career opportunities are defined as follows:
• Development comprises learning experiences designed to enhance employees’
skills and competencies.
• Career opportunities involve plans to help employees pursue their career goals.
Development and career opportunities include the following:
• Learning opportunities
- Tuition assistance
- Corporate universities
- New technology training
- Attendance at outside seminars, conferences, virtual education, etc.
- Self-development tools and techniques
- On-the-job learning; rotational assignments at a progressively higher level
- Sabbaticals with the express purpose of acquiring specific skills, knowledge
or experience.
• Coaching/Mentoring
- Leadership training
- Access to experts/information networks
- Exposure to resident experts
- Formal (or informal) mentoring programs, in or outside one’s organization.

8 | Elements of Base Pay Administration

• Advancement opportunities
- Internships
- Apprenticeships with experts
- Overseas assignments
- Internal job postings
- Job advancement/promotion
- Career ladders and pathways
- Succession planning
- Defined and respectable “on and off ramps” throughout the career life cycle.
As noted earlier, the components of the total rewards model overlap, interact,
integrate and work synergistically with each other. The total rewards model helps
drive value proposition factors for the employee and employer. By allowing the total
rewards proposition to bend and flex, organizations will be able to utilize components
to attract, motivate and retain.
While there are common influences for all businesses within certain sectors of
the economy, each organization has unique circumstances that will influence its
total rewards decisions. This is the organization’s point of strategic advantage.
The total rewards model can have a very different look and feel based upon specific
organizational values and needs. In the WorldatWork core model, each component
can play a bigger or smaller role in the entire package and can relate to the other
components in differing ways. What makes the integration of these specific elements
challenging is that employee needs and values differ within organizations. These value
differences are typically based upon their life experiences and current life needs, and
determine their sense of what the total rewards package should look like.

Chapter 1: Compensation Program Objectives | 9

Legal and Regulatory Environments 2
C
ompensation programs have been significantly influenced by federal, state and local
legislation and regulation in the last 70 years. To effectively develop and manage
compensation programs within legal constraints, an understanding of the
provisions and limitations of applicable laws and regulations is necessary. This section
describes federal legislation that significantly impacts pay program administration. It is
important to note that some states have laws that are more favorable to the employee
than the federal law. In these instances, the state law will trump the federal law. (For
example, in California, overtime is paid to employees after working eight hours in one
day, versus the federal law that requires overtime after 40 hours in a single work week.)
Prior to 1930, legislative action on compensation arrangements between employers
and workers was looked upon with suspicion; courts and labor unions were skeptical
of such intervention. However, the length and severity of the “Great Depression”
made economic security a higher priority, and government action came to be
regarded as necessary.

Sherman Anti-Trust Act

The Sherman Anti-Trust Act of 1890, although initially not intended for compensation-
type issues, affects almost all compensation practitioners. The Sherman Anti-Trust Act
has its roots in the early industrialization of the United States, when companies that
established an industry could monopolize it and eliminate potential competition.
This act, as it relates to compensation, has been applied in situations where
organizations have engaged in “price fixing” of wages. The argument has been made
that employers have fixed the price of wages through open disclosure of information
in salary surveys and projections of budget increases. In fact, throughout the last few
decades, several cases have gone to court regarding price fixing of wages — Federal
Reserve Bank of Boston, Utah Health Care Group and Exxon. With the Utah health-
care association, the courts created a consent decree regarding how that group can
utilize compensation data. Although this decree only applies in that situation, most
survey vendors and organizations have adopted guidelines from the consent decree
when conducting surveys. The consent decree listed the following guidelines to ensure
that the survey data is not in violation of the act:
• The data must be at least three months old. Most survey vendors wait at least three
months after collecting the data to report the data (which helps fulfill this requirement).

Chapter 2: Legal and Regulatory Environments | 13

• There needs to be a minimum of five organizations matching a given job. By
requiring at least five organizations, it will be difficult for any one organization’s
anonymity to be breached.
• No one organization should represent more than 25 percent of the incumbents
for a given job match. By minimizing the effect of one organization in a survey,
the results are less likely to be skewed by a single company’s pay practice.

Davis-Bacon Act
The earliest recorded effort to enlarge federal economic control was the passage of
the Davis-Bacon Act in 1931. Under this act, the Department of Labor is authorized
to establish, by locality, wage-payment schedules to be used by all bidders seeking
construction contracts with the federal government in excess of $2,000. Employees of
such construction contractors must be paid the special federal “prevailing” wages and
fringe benefits established by the Secretary of Labor. Pay is typically interpreted by the
government as union-equivalent wages and benefits in the construction trade positions.

National Labor Relations Act

The National Labor Relations Act (NLRA) of 1935 was enacted with the intention
of creating a better environment for collective bargaining. The NLRA was created to
provide a more equitable environment for labor- and management-dispute resolution,
and covers all employers involved in interstate commerce (with the exception of
airlines, railroads, agriculture and the government). The NLRA guarantees the right
of employees to select or reject third-party representation, as well as the rules for
bargaining in good faith and controlling against unfair labor practices. The enforcing
agency of the NLRA is the National Labor Relations Board (NLRB). It is interesting
to note that neither the federal courts nor the U.S. Department of Labor have
jurisdiction in matters concerning the NLRB.

Walsh-Healey Act
The Walsh-Healey Act, passed in 1936, provided general employment regulations for
employers holding manufacturing or supply contracts with the federal government
in excess of $10,000. While originally requiring payment of overtime rates (time-and-
one-half) for hours worked in excess of eight per day or 40 per week, the law was
amended in 1986 to eliminate the requirement to pay overtime rates after eight
hours in a workday. Although the law requires employees to be paid the minimum
prevailing manufacturing wage established by the Secretary of Labor, the secretary
has, as a result of litigation, issued the minimum wage as the “prevailing” wage since
the 1960s. The law also established certain child labor and safety standards. The U.S.
Department of Labor (DOL) is the enforcing agency for the Walsh-Healey Act.

14 | Elements of Base Pay Administration

Fair Labor Standards Act
The federal legislation that most significantly affects the design of direct compensation
(cash) programs is the Fair Labor Standards Act (FLSA) of 1938. Much of the
terminology used by compensation professionals is traceable to the provisions of the act,
and its influence is clearly evident in the pay programs of employers covered by the act.
Employers engaged in interstate or foreign commerce have been covered since
the law was passed in 1938, and numerous other employers were included in later
amendments to the act. It always has been interpreted very broadly, to include
practically any employer of any size.
The FLSA’s primary objective was to eliminate working conditions that were
detrimental to the health and well being of workers. This was accomplished by the
establishment of minimum wage, overtime pay, recordkeeping and child labor
standards for all covered establishments unless a specific exemption is applied.
Minimum Wage
The federal minimum wage was established by FLSA at 25 cents per hour. By 1981,
it had been raised to $3.35 an hour and in 1997 it was raised to $5.15 per hour. (The act
provides for changes in the minimum wage through federal legislation). Additionally,
for tipped positions, the minimum wage is $3.15 per hour, as long as the employee’s
tips raise the hourly rate to at least federal minimum wage, or $5.15 per hour.
Overtime Pay
The FLSA requires all nonexempt employees be paid at least one-and-one-half times
their regular hourly rate of pay for hours worked in excess of 40 in a workweek
(or, in certain special cases, for hours exceeding eight in any one day or 80 in a
two-week period). The workweek generally is defined as seven consecutive 24-hour
periods, which may start at any time and may be different for various employee
groups. Because overtime must be calculated on a weekly basis, overtime worked
in one week may not be balanced against straight-time hours not worked in another
week, unless special exceptions exist in the law.
“Hours worked” include the time an employee is required to be on duty or on the
employer’s premises, or at other prescribed places of work, and any other time that he
or she is “permitted or suffered” to work for the employer. “Hours worked” can include
time spent in training programs, travel time within the workday, sleeping time if the
tour of duty is less than 24 hours, a rest period of less than 20 minutes, changing
(clothes) time, waiting time and work performed at home.
The regulation specifically addresses the issue of comp time (paid time off) in lieu
of overtime. This practice is acceptable in the public sector, but is considered illegal
in the private sector. Cash is the extra compensation for overtime, not time off.
In addition to the base rate, any bonus that the employee may receive could factor
into the overtime calculation. Bonus payments can be defined as any payments that

Chapter 2: Legal and Regulatory Environments | 15

are in addition to the regular earnings of an employee. This is determined by the
period the bonus covers and the type of bonus. The DOL discusses seven specified
types of payments that would be excluded from the regular rate, and therefore
excluded from being included in an overtime calculation.
• Discretionary bonuses
• Gifts
• Payments in the nature of gifts on special occasions
• Contributions by the employer to certain welfare plans
• Payments made by the employer pursuant to certain profit-sharing plans
• Payments made by the employer pursuant to certain thrift plans
• Payments made by the employer pursuant to certain savings plans.
Bonuses which do not qualify for exclusion from the regular rate as one of these
types must be totaled in with other earnings to determine the regular rate on which
overtime pay must be based.
For an organization to include the bonus payment into the regular rate of pay, the
organization needs to determine which pay period(s) the bonus is related to. The DOL
separates the recalculation of overtime into four categories: (1) when the bonus covers
only one weekly pay period, (2) when the bonus covers several weekly pay periods, (3)
when the bonus cannot be identified with particular workweeks (workweek example) and
(4) when the bonus cannot be identified with particular workweeks (hourly example).
In the first case (when a bonus covers only one weekly pay period), the additional
overtime is simple to calculate. The employer would add the bonus amount to the
weekly earnings and divide by the total number of hours worked. This calculation
will give the employer the new regular rate for overtime purposes.
Example: You have a call-center employee who worked 45 hours during the workweek.
Because that employee had achieved all of the required times, he receives a $100 weekly
bonus. The employee’s wages are $10/hour or $400/week. To calculate the new rate
for overtime you would take the weekly wage of $450 (45 hours X $10) and add the
$100 bonus amount to get $550. To calculate the new regular rate you would divide
$550 by 45 (hours worked) to get the new hourly wage of $12.22. So the additional
amount you would need to include for overtime purposes would be $30.55 ($12.22
X 5 [hours of overtime] X .50 [overtime factor]). So for the week, the employee
would receive a paycheck for $580.55 ($450 [$10/hour X 45 hours] + $30.55
[overtime amount due to the bonus] + $100 [bonus]).
For the second situation, the same process will be used, however, the bonus would be
distributed over several pay periods. The regulation states the following formula: “When the
amount of the bonus can be ascertained, it must be apportioned back over the workweeks
of the period during which it may be said to have been earned. The employee must then
receive an additional amount of compensation for each workweek that he worked overtime

16 | Elements of Base Pay Administration

during the period equal to one-half of the hourly rate of pay allocable to the bonus for that
week multiplied by the number of statutory overtime hours worked during the week.”
Example: You have an administrative assistant who earns a performance bonus for
the month of February. The month of February had four weeks, and the administrative
assistant worked the following hours: 40, 42, 40 and 43. She receives a performance
bonus of $200. To find the additional amount required for overtime, you would take
the total amount of the bonus ($200) and divide by total hours worked (165 hours)
to get the bonus hourly rate of $1.21/hour. According to the regulation, you would
then multiply .5 (one half) by the bonus hourly rate ($1.21) by the number of
overtime hours (5) to have an additional payment due of $3.03 (.5 X $1.21 X 5).
For the third situation, the DOL states, “it may be reasonable and equitable to assume
that the employee earned an equal amount of bonus each week of the period to which
the bonus relates, and if the facts support this assumption additional compensation
for each overtime week of the period may be computed and paid in an amount equal
to one-half of the average hourly increase in pay resulting from bonus allocated to the
week, multiplied by the number of statutory overtime hours worked in that week.”
Basically, the regulation is stating that you can assume the employee earned an equal
amount of bonus for each week he was eligible, very similar to situation No. 2 above.
Example: You have a front-line supervisor who earns a performance bonus based
on an increase of widgets produced, for a six-month period. The supervisor earns
$15/hour and worked about 52 hours overtime during the six-month period. The
performance bonus was $1,000.
To calculate the additional overtime amount, you would take the amount of
the bonus ($1,000) divided by the number of weeks the bonus was allotted
(26 weeks) to get $38.46/week. That would mean the average hourly increase
would be the additional weekly amount ($38.46) divided by the number of
hours worked each week (for this example, we will assume the supervisor worked
two overtime hours each week for a total of 42 hours/week) to get an average
hourly increase of $0.92. According to the formula above, you would then multiply
the hourly rate ($0.92) by the overtime factor (.5) by the number of overtime
hours (52) to have an additional payment due of $23.92 (.5 X $0.92 X 52).
The fourth situation the DOL discusses is when it may not be feasible to assign an
equal bonus to each workweek. The DOL states, “it may be reasonable and equitable
to assume that the employee earned an equal amount of bonus each hour of the pay
period and the resultant hourly increase may be determined by dividing the total
bonus by the number of hours worked by the employee during the period for which it
is paid. The additional compensation due for the overtime workweeks in the period
may then be computed by multiplying the total number of statutory overtime hours
worked in each such workweek during the period by one-half this hourly increase.”

Chapter 2: Legal and Regulatory Environments | 17

 Example: You have a retail store assistant manager who earns an annual bonus
based on profit. The assistant manager earns $17/hour and worked a total of
2,340 hours (260 overtime) for the year. The bonus was $2,500.
For this example, you would take the total bonus amount ($2,500) and divide by
the total number of hours worked (2,340) for an additional overtime amount of
$1.07/hour. You would then multiply the amount ($1.07) by the overtime factor
(.5) by the number of overtime hours (260) to have an additional payment due
of $139.10 ($1.07 X .5 X 260).
Occasionally, a bonus may be written as a percent of the employee’s wages. If the
plan is written so the bonus would include a percentage of both straight time and
overtime, you would not need to recalculate the overtime. The example in the
regulation is a performance bonus that pays 10 percent of straight time and 10
percent of overtime earnings. Take note, the regulation states this is an acceptable
practice, as long as it is not used to circumvent the overtime requirements of the act.
According to the regulation, employers would not need to factor in overtime
for a true discretionary bonus. The DOL describes a discretionary bonus as follows:
• The fact that payment is to be made is determined at the sole discretion of the employer
• The amount of payment to be made is determined at the sole discretion of the
employer.
• Both the above situations are not pursuant to any prior contract, agreement or
promise causing the employee to expect such payments regularly.
The regulation has examples of situations in which the bonus is not
discretionary:
• If an employer promises in advance to pay a bonus, he has abandoned his
discretion with regard to it.
• If an employer promises to pay their sales employees one cent for each item sold, this
payment is discretionary depending on the financial condition of the firm. The
amount of the bonus is no longer discretionary, but the payment is.
For gifts, money paid at Christmas or special occasions, these bonuses may be
excluded from the regular rate, and therefore excluded from the overtime recalculation.
To qualify for this exclusion, the bonus must actually be a gift or in the nature of a gift.
It cannot be measured by hours worked, production or efficiency. If the payment is
geared toward wages and hours worked, production or efficiency, then it is no longer
considered a gift and must be included in the regular rate for overtime purposes.
The DOL has several regulations pertaining to circumventing the overtime re-
calculations. This is one of those regulations. This regulation pertains to when an
employer designates a portion of regular wages as a bonus. The employer is not
allowed to pursue this practice and the DOL will take action if this practice occurs.

18 | Elements of Base Pay Administration

An illustration of how this type of plan works over a three-week period may serve
to illustrate this principle more clearly:
1. You have an employee who earns $400/week without regard to the number of
hours worked
2. In the first week, the employee whose applicable maximum hours standard is
40 hours works 40 hours and receives $400. The books show he has received $206
(40 hours X $5.15/hour) as wages and $194 as bonus. No overtime has
been worked, so no overtime compensation is due.
3. In the second week, he works 45 hours and receives $400. The books show he
has received $206 for the first 40 hours and $38.63 (5 hours X $7.73 an hour)
for the five hours over 40, or a total of $244.63 as wages, and the balance as a
bonus of $155.38. The employer then computes overtime compensation by
dividing $155.38 by 45 hours to discover the average hourly increase resulting
from the bonus — $3.45/hour — and half this rate is paid for the five overtime
hours—$8.43. This is wrong. The employee’s regular rate in this week is $8.89
($400 divided by 45 hours). Therefore he is owed $422.28 [($8.89 X 40hours) +
($8.89 X 1.5 X 5 hours)], not $408.43.
4. In the third week, the employee works 50 hours and is paid $400. The books show
the employee received $206 for the first 40 hours and $115.95 (10 hours X $7.73
an hour) for the 10 hours over 40, for a total of $321.95, and the balance as a bonus
of $78.05. Overtime pay due on the “bonus” is found to be $7.81. This is wrong.
The employee’s regular rate in the week is $8. Therefore $440 is owed, not $407.81.

Exemption
Exempted from the overtime pay and minimum wage provisions of the act are
executives, professionals, administrators, computer professionals and outside sales staff.
The act also provides for other specific exemptions. For employees to be exempt from
the statutes for the FLSA, they must pass three tests — salary basis, salary level and
duties. It is important to note that classification of exempt or nonexempt by using a
job title alone will not determine if that position is exempt. The employer needs to be
cognizant of the employee’s job duties to ensure that the employee’s duties fall within
the range of the regulations. It is also extremely important to ensure the job descriptions
are accurate and up-to-date, and that all job specifications listed on the description are
being performed by the employee.
Example: Company A could have an executive assistant to the CEO exercising
independent judgment with respect to matters of significance and performing
executive assistant duties which would classify her as exempt. Yet in Company
B an executive assistant might type memos, schedule appointments and
perform duties that are not defined as exempt, and hence, the job is classified

Chapter 2: Legal and Regulatory Environments | 19

 as nonexempt. It is even feasible that two people in Company A who have the
title of executive assistant have differing duties, and one could be exempt while
the other could be nonexempt.

Salary Basis
To be considered salaried under the FLSA exemption means to be paid the full salary
for the workweek regardless of the number of hours worked, the quality of work or
the quantity of work during that workweek.

Salary Limit
An employee must pass the salary limit test to be considered exempt. The salary
limit test is the same for all exemption categories (except outside sales), and is
$455 per week. This $455 per week equates to $23,660 a year. Any employee
earning less than $455 per week ($23,660 a year) in base salary will be classified
as a nonexempt employee, regardless of the duties performed. The salary limit
is effective for all of the United States and its territories, except American Samoa.
For employees in American Samoa the lower limit is $380/week.
In addition to the lower limit of $455 per week, the DOL recognized that occasionally
an employer has an employee that earns more than $100,000 per year, yet does not
meet the exemption requirements, therefore is a nonexempt employee. The DOL has
established a “bright line exemption” for employees who do not meet the all of the
primary-duty requirements for the exemption tests, yet could still be considered
exempt. The DOL has determined that any employee earning more than $100,000 per
year who meets one of the primary-duties requirements (executive, administrative,
professional), performing office/nonmanual work, yet is not considered exempt can
be exempt from overtime. This $100,000-per-year salary must include at least $455 per
week in base salary, however the remaining amount would be considered “total annual
compensation.” Total annual compensation can include commissions, nondiscretionary
bonus and other nondiscretionary compensation. Total annual compensation does not
include benefits (for example, 401(k) contributions, payment for medical insurance).

Duties Tests
Each of the six classifications of exempt employees has its own duties tests
(executive, administrative, learned professional, creative professional, computer
professional and outside sales).
The first duties test covered is the executive test. If the employee meets the
salary-basis and the salary-level test, the following are the duties the executive needs
to perform to be an exempt employee:
• Has the primary duty of managing the enterprise or a recognized department or
subdivision

20 | Elements of Base Pay Administration

• Customarily and regularly directs the work of two or more other full-time
employees (or their equivalent)
• Has the authority to hire or fire other employees (or recommend the hiring, firing,
advancement, promotion or any other change of status of other employees).
The second exemption is the administrative exemption:
• Has the primary duty of performing office or nonmanual work directly related to
the management or general business operations of the employer or the employer’s
customers
• Exercises discretion and independent judgment with respect to matters of significance.
A third exemption is the learned professional:
• Has the primary duty of performing work requiring advanced knowledge, defined
as work that is predominantly intellectual in character and that includes work
requiring the consistent exercise of discretion and judgment
• Has advanced knowledge in a field of science or learning
• Has advanced knowledge customarily acquired by a prolonged course of specialized
intellectual instruction.
The fourth exemption is the creative professional:
• Has the primary duty of the performance of work requiring invention, imagination,
originality or talent in a recognized field of artistic endeavor.
The final two exemptions are a little different then the first four. The computer
professional, in addition to the salary requirements, allows for the employee to earn
an hourly wage and still be exempt. The hourly wage is $27.63 per hour. For the
computer professional, the following is the duties test:
• Employed as a computer systems analyst, computer programmer, software engineer
or other similarly skilled worker in the computer field performing the following duties:
- (A) application of systems analysis techniques and procedures, including
consulting with users to determine hardware, software or system-functional
applications
- (B) design, development, documentation, analysis, creation, testing or
modification of computer systems or programs, including prototypes, based
on and related to user or system-design specifications
- (C) design, documentation, testing, creation or modification of computer
programs related to machine operating systems
- (D) a combination of duties described in (A), (B) and (C), the performance
of which requires the same level of skills.
The outside sales exemption has no set salary requirement and consists of the
following duties:

Chapter 2: Legal and Regulatory Environments | 21

• Has the primary duty of making sales (any sale, exchange contract to sell,
consignment for sales, shipment for sale or other disposition; includes the transfer
of title to tangible property, and in certain cases, of tangible and valuable evidences
of intangible property), or obtaining orders or contracts for services
or for the use of facilities for which a consideration will be paid by the client
or customer
• Must be customarily and regularly engaged away from the employer’s place or
places of business.

Child Labor Provisions

Restrictions on child labor are designed to protect the educational opportunities of
minors, as well as their health and well-being. Fourteen is the minimum age for virtually
all nonagricultural work covered by the act. Sixteen is the minimum age for employment
in a nonagricultural occupation that is declared nonhazardous by the secretary of labor.
Eighteen is the age at which there is no restriction on the type of work that may be performed.
The following FLSA provisions apply to the employment of children 14 to 16 years
of age and provide rules for the periods and conditions of employment:
• Work must be outside of school hours.
• The child may not work more than 40 hours in any one week when school is not in
session and no more than 18 hours a week when school is in session.
• The child may not work more than eight hours in any one day when school is not
in session and no more than three hours when school is in session.
• The child may work only between the hours of 7 a.m. and 7 p.m. in any one day
except during the summer when the evening hour will be extended to 9 p.m.
• There is a special exemption for minors age 14 and 15 who are employed to
perform sports-attending services at professional sporting events
Children 14 to 18 years old are banned from the following occupations considered
to be hazardous:
• Occupations in or about plants or establishments manufacturing or storing
explosives or articles containing explosive components
• Coal-mine occupations
• Logging operations; occupations in the operation of any saw, lathe, or shingle;
or cooperage stock mills
• Occupations involved in the operation of power-driven woodworking machines
• Occupations with exposure to radioactive substances and to ionizing radiations
• Occupations in the operation of power-driven meat-processing machines
• Occupations involved in the operation of bakery machines

22 | Elements of Base Pay Administration

• Occupations involved in the manufacture of brick, tile and kindred products
• Occupations in roofing operations.

Recordkeeping
Employers are required to keep individual employee records on wages, hours and
certain other information. These records must be saved for at least three years.
No particular form is required with regard to exempt employees, but the following
records must be maintained for nonexempt employees:
• Name and home address
• Birth date if the employee is younger than 19 years of age
• Sex and occupation
• Hour and day when the workweek begins for the employee
• Regular hourly pay rate for any week when overtime is worked
• Hours worked each workday and total hours worked each workweek
• Total daily or weekly straight-time earnings
• Total overtime pay for the work week
• Deductions from or additions to wages, and total wages paid each pay period
• Date of payment and pay period covered.

FLSA Enforcement
The Wage and Hour Division of the U.S. Department of Labor is responsible for
enforcing the FLSA. Authorized representatives may investigate and gather data
regarding wages, hours and other conditions and practices of employment, and
may enter establishments to inspect the premises, review and transcribe records
and interview employees.
A two-year statute of limitations applies to recovery of back wages except in
the case of willful violations, for which there is a three-year statute of limitations.
Willful violations also may be prosecuted criminally and the violator fined. A second
conviction may result in imprisonment.

Service Contract Act

Passed in 1965, the Service Contract Act applies to federal contracts for services in excess
of $2,500 and requires service contractors to pay minimum wages and fringe benefits as
established to be prevailing by the Secretary of Labor. As with the Davis-Bacon Act, pay scales
are based upon “prevailing” wages, which is typically interpreted by the government as union-
equivalent wages and benefits in the local labor market. The act also includes certain safety
standards. The U.S. Department of Labor is the enforcing agency of the Service Contract Act.

Chapter 2: Legal and Regulatory Environments | 23

 Recordkeeping and posting requirements, government investigations and hearings,
court actions and blacklisting of violators have been established as enforcement
mechanisms for the Davis-Bacon, Walsh-Healey and Service Contract Acts.

Anti-Discrimination Laws
The federal government enacted a number of statutes in the 1960s that were
designed to ensure the fair treatment of specific segments of the population in regard
to their rights as individuals and employees. The most important of these are the
Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964.
Equal Pay Act
As early as World War II, the National War Labor Board was created as the arbiter
of salary disputes between labor and management. In 1942, it issued an order for
salary adjustments to “equalize the wage or salary rates paid to females with rates
paid to males for comparable quality and quantity of work on the same or similar
operations.” A bill requiring “equal pay for comparable work” performed by males
and females was introduced in Congress in 1945 and rejected, as were several similar
bills for the next 18 years.
The Equal Pay Act, which prohibits gender-based compensation discrimination,
was successfully enacted in 1963. Specifically, the act prohibits an employer from
discriminating “between employees on the basis of sex by paying wages to employees ...
at a rate less than the rate at which he pays wage to employees of the opposite
sex ... for equal work on jobs that require equal skill, effort and responsibility, and are
performed under similar working conditions ....” There are, however, four exceptions
(affirmative defenses). Unequal payments can be based on (1) a seniority system,
(2) a merit system, (3) a system which measures quantity or quality of production
or (4) any other factor aside from gender.
The act, an amendment to the Fair Labor Standards Act, was originally enforced
by the Wage and Hour Division of the Department of Labor, and employers subject
to the FLSA were subject to the provisions of the Equal Pay Act as well. In 1979, the
Equal Employment Opportunity Commission (EEOC) became the enforcing agency.
Plaintiffs who file lawsuits under the Equal Pay Act must show that they are paid
less than a person of the opposite sex for doing substantially equal work (in the
same job family) which requires substantially equal skill, effort and responsibility
and is performed under similar working conditions. Once the prima facie case has
been established, the burden shifts to the employer to prove that the pay difference
is based upon a seniority system, a merit system, a system that measures earnings
by quantity or quality of production or some other factor aside from gender.
The “bottom line” of the Equal Pay Act for pay-program design and administration
is that if, on the average, men and women are paid different rates when they perform

24 | Elements of Base Pay Administration

work that is substantially the same, these differences must be shown to be attributable
to one of the “allowable differences.”
The effects of the Equal Pay Act have been far-reaching and include the revision
of employee benefits programs to eliminate gender-based differentials; greater
emphasis on written job descriptions; greater emphasis on job-content-oriented
procedures for assignment of pay grades and ranges to specific jobs; and greater
emphasis on written policies and procedures.
Title VII of the Civil Rights Act
The most comprehensive of the civil rights statutes, this legislation was created
to prohibit discrimination by employers on the basis of race, color, religion, gender
or national origin, in the hiring, firing, training, compensation or promotion
of employees. On the last day of debate, gender was added as a prohibited basis
of discrimination, creating overlap with the Equal Pay Act.
For cases subject to this overlap on sex-discrimination in pay, the Senate added
the Bennett Amendment, which (ambiguously) states, “It shall not be an unlawful
employment practice under Title VII for any employer to differentiate upon the basis
of sex in determining the amount of the wages or compensation paid to employees
of such employer if such differentiation is authorized by the provisions of the Equal
Pay Act.” Regardless of how the amendment is interpreted, differences in pay may
be defended if attributable to work that is not substantially equal, or is based on
seniority merit or quantity and quality of work.
The Civil Rights Act is enforced by the EEOC, which was created by the act.
Virtually all employers with 15 or more employees are covered.
Employees who file lawsuits under the act must demonstrate either “disparate
treatment” or “disparate impact.” Under “disparate treatment,” the plaintiff must
prove that the employer deliberately discriminated, based on the employee’s race,
color, religion, national origin or gender. If this is done, the employer must demonstrate
a legitimate nondiscriminatory basis to justify the practice. Then, in order to prevail,
the employee must prove that any such “justification” is just a pretext for
discrimination.
Under “disparate impact,” the employee must establish a prima facie case showing
adverse impact on a protected class. Then the employer must validate the challenged
practice by demonstrating a business necessity for the practice and proving that no
alternative exists that would produce a less adverse impact.
The bottom line of Title VII for pay-program design and administration is
that pay programs should produce pay rates that treat all classes of employees
similarly, and any differences should be attributable to job-related, defensible
causes (seniority, performance and the like). Case law resulting from litigation
under Title VII created the concept of “bona fide occupational qualifications”

Chapter 2: Legal and Regulatory Environments | 25

(BFOQ). This concept specifies that job qualifications imposed by employers
must be defensible and necessary in order for an employee to perform the job.
Age Discrimination in Employment Act
The Age Discrimination in Employment Act, passed in 1967 and amended
in 1978 and 1986, protects workers aged 40 and older from employment
discrimination. While it prohibits discrimination in all terms and conditions
of employment, it has been applied principally in cases involving retirement,
promotions and layoff policies.
The purpose of the act is to “promote employment of older persons based on their
ability rather than age, to prohibit arbitrary age discrimination in employment, and
to help employers and workers find ways of solving problems arising from the impact
of age on employment.”
The law prohibits mandatory retirement (with some exceptions, generally involving
public safety); limiting or classifying employees in any way related to their age (such
as with maturity curves); reducing any employee’s wage in order to comply with the
act; and indicating any preference based on age in notices of employment. Individual
state laws sometimes are more restrictive than the federal law.
The act applies to employers of 20 or more persons, as well as to federal, state
and local governments. Employment agencies serving covered employers and labor
unions with 25 or more members are also included under the provisions of the act.
There are several statutory exceptions to the ADEA:
• Bona fide executives who are entitled to $44,000 per year or more in retirement
benefits from employer contributions; also, there is a mandatory retirement age
of 65 that is allowed
• Elected (or high-level appointed) officials in the government
• Bona Fide Occupational Qualifications (BFOQ), which can be defined as an
occupational qualification that is reasonably necessary to the normal operation
of the employer’s business; employers may discriminate on the basis of age
if it is reasonably necessary.
• Seniority systems.
The EEOC has been charged with the enforcement of the act since July 1979.
The plaintiff must prove that he or she is a member of a protected group and that he
or she has been adversely affected by a personnel policy or action (prima facie case).
Once this is established, the burden shifts to the employer, who may argue that the
adverse treatment occurred on the basis of considerations other than age or that the
decision or policy was rightly based on age (for example, if age is a BFOQ for the job).
Executive Order 11246
This presidential order, signed by President Johnson in 1965, requires companies
holding federal contracts or subcontracts in excess of $10,000 not to discriminate

26 | Elements of Base Pay Administration

in their employment practices (which include pay practices) on the basis of race,
gender, religion or national origin, and to take affirmative action to ensure that their
employment decisions are made in a nondiscriminatory manner. For service and
supply contracts in excess of $50,000, contractors must also develop and implement
written affirmative action plans which include goals and objectives of increasing
minority and female participation in their workforce.
The executive order is enforced by the Office of Federal Contract Compliance
Programs (OFCCP) in the U.S. Department of Labor, which investigates complaints
of discrimination and also conducts on-site compliance reviews to determine federal
contractors’ compliance with the executive order mandates.
Vocation Rehabilitation Act of 1973
The act covers persons employed by, or seeking employment from, federal
departments and agencies or businesses performing federal contract work in excess of
$2,500. Recipients of federal assistance are also protected from discrimination based
on any mental or physical disability that substantially limits one or more major life
activities. Section 503 of the act applies to private industry and Section 504 applies
to institutions receiving federal grants. Discrimination in employment is prohibited
in all terms and conditions of employment, which certainly includes compensation.
The act is enforced by the OFCCP, which requires covered employers to utilize
affirmative action to employ and advance qualified handicapped individuals. The act
also requires employers “to make reasonable accommodation to the known physical
or mental limitations of an otherwise qualified, handicapped applicant, employee or
participant.” Further, the act requires the elimination of physical barriers, to ensure that
the “facility is readily accessible to and usable by qualified handicapped individuals.”
Charges under the act proceed in exactly the same way as Title VII. If, for example,
a human-capital policy or action has an adverse effect on a handicapped person, the
employer must then show that the adverse treatment was based on considerations other
than the handicap (for example, seniority or performance), or that the handicap was a
legitimate basis for such policy or action. This last defense is rare in compensation cases.
Vietnam Era Veterans Readjustment Act of 1974
The Vietnam Era Veterans Readjustment Act requires companies holding federal
contracts or subcontracts of $10,000 or more to take affirmative action and not
to discriminate in the employment and advancement in employment of qualified,
special disabled veterans and veterans of the Vietnam era.
The act is also enforced by the OFCCP, which investigates complaints and checks
for compliance with the act during on-site investigations.
Americans with Disabilities Act
The Americans with Disabilities Act (ADA) of 1990 was enacted to include any
company involved in interstate commerce with 15 or more employees. The act is

Chapter 2: Legal and Regulatory Environments | 27

enforced by the EEOC and dictates that the charge of discrimination must by filed
within180 days of the alleged discriminatory act.
A disability can be defined as an impairment that substantially limits or restricts
a major life activity such as hearing, seeing, speaking, breathing, performing manual
tasks, walking, caring for oneself, learning or working. Any employee or job applicant
who meets the following criteria may be covered under the ADA:
• Has a physical or mental impairment that substantially limits one or more of the
major life activities
• Has a record of any such impairments
• Is regarded as having such impairments
• Is associated with anyone having such impairments
This provision is designed to protect any qualified individual, whether or not he is
disabled, from disability-related discrimination.
It is important to note that the individual must be qualified for the job and must be
able to perform the essential functions of the job. Essential functions can be defined
as those functions that include the following criteria:
• Reason the position exists is to perform the function
• Limited number of other employees available to perform the function
• Degree of expertise or skill required to perform the function.
Under the ADA, if an employer can reasonably accommodate a request by a disabled
employee (or applicant), it is required to accept it. A reasonable accommodation
is any change or adjustment to a job or work environment that permits a qualified
applicant or employee with a disability to participate in the job-application process,
to perform the essential functions of a job or to enjoy benefits and privileges
of employment equal to those enjoyed by employees without disabilities. It is a
violation of the ADA to fail to provide reasonable accommodation to the known
physical or mental limitations of a qualified individual with a disability, unless to
do so would impose an undue hardship on the operation of the business. Undue
hardship means the accommodation would require significant difficulty or expense.
The act specifies three criteria to measure reasonableness of accommodations:
• Size of the business
• Number (or type) of facilities
- Budgetary constraints
- Type of operation
- The composition
- The makeup of the workplace
• Nature and cost of accommodations.

28 | Elements of Base Pay Administration

The Job Process 3
P
ay structures are the foundation of most employee compensation programs;
they are job hierarchies with pay rates and/or pay ranges assigned. Implicit
in the construction and use of pay structures is the premise that the greater
the worth of a job — as determined by job content and labor-market analysis —
the higher its pay grade and range.
Thus, regardless of the methodology selected for their development, pay grades
and ranges ultimately are determined by the following:
• Market rates for comparable jobs in other organizations — external competitiveness
• Management’s judgment as to the relative internal worth of the job’s content —
internal equity.
Organizations may emphasize either external competitiveness or internal equity, but
they will blend and balance the two to meet their overall employee-relations objectives.
The process of developing a pay structure involves a series of steps. These steps
include the following:
• Job analysis
• Job documentation
• Job evaluation — for example, development of the job-worth hierarchy using
- Market pricing
- Job content
• Establishment of pay rates or ranges — for example, the base pay structure.
(See Figure 3-1 on page 32.)
The first two steps toward building and maintaining a pay structure — job analysis
and documentation — typically involve systematic approaches to job content definition
and written job descriptions (or some other form of written job documentation).
Defensibility and decision-making in compensation programs are enhanced through
effective application of these two steps, and their role in developing pay rates for jobs
becomes more important as organization size and complexity increase.

Job Analysis
Job analysis, simply defined, is collecting and evaluating relevant information
about jobs. The first step in the job analysis process is to determine specifically what
information is to be collected. The data collected should clarify the nature of work

Chapter 3: The Job Process | 31

 FIGURE 3-1 Building a Base Pay Structure

Job Analysis

Job Documentation

Job Evaluation

Market Data Emphasis Job Content Emphasis

Data Collection Job Content

and Analysis Evaluation

Job Content Reconciliation of Internal and Data Collection

Evaluation External Considerations and Analysis

Job Worth Hierarchy

Base Pay Structure

being performed (including principal tasks, duties and responsibilities) as well as the
level of work being performed. Data should include the extent and types of
knowledge, skill, mental and physical effort, and responsibility required for the work
being performed. Reviewing the minimal job requirements for knowledge, skill,
mental and physical effort will allow the organization to have a written
documentation for ADA purposes. Work environment, hazards and general physical
conditions, which affect the work, also may be pertinent.
In collecting information about jobs, there are primary data sources and secondary
data sources:
A. Primary data sources are employees who are actually performing or supervising
the work. There are four commonly used techniques for collecting job information
from primary sources:
1. Questionnaires — can be defined as a written set of questions regarding job
content that requires the incumbent to either:
a. Prepare a narrative response (open-ended)
b. Provide limited responses to a predetermined set of answers (highly structured)
c. Advantages:
i. Flexibility; can be created/tailored to the job group being analyzed

32 | Elements of Base Pay Administration

 ii. Consistency; everyone will be answering the same set of questions
iii. Can cover a large number of jobs
d. Disadvantages:
i. Follow-up questions (open-ended) may be required if the
questions/responses are not clearly defined/answered.
ii. Questions can be t ime consuming and expensive to develop and
to complete.
iii. Questions (and responses for highly structured questions) need to
be validated first.
iv. If the questionnaire is too long, the employees may grow tired of answering
the questions and the data will be incomplete and/or inaccurate.
2. Interviews — can be defined as follows:
a. Structured, one-on-one review of job content by a job analyst and
an incumbent or supervisor (individual)
b. A structured review of job content between a job analyst and a group
of incumbents (group)
c. Advantages:
i. The job description is created based upon direct information from
the person (or group) being interviewed.
ii. Interviews allow buy-in into the process, because the participants will
feel they are directly influencing the results.
iii. When using group interviews, the results will have greater validity due
to several sources.
d. Disadvantages:
i. Interviews can be costly in time and resources.
ii. In a group interview, a dominant participant might sidetrack the
conversation, as well as cause other participants not to participate.
3. Logs or diaries — can be defined as a written account of tasks the incumbent
completes while working
a. Advantages:
i. Accurate descriptions because the incumbent records information
while they complete the tasks
ii. Multiple sources can be used
b. Disadvantages:
i. Incumbent might not record every task completed
ii. Potential for embellishing tasks.

Chapter 3: The Job Process | 33

 4. Direct Observation — can be defined as:
a. Observing workers to understand:
i. Job Duties
ii. Responsibilities
iii. Tasks
b. Advantages:
i. For short-cycle work, observations can be done fairly easily to identify
which tasks are being completed and to confirm behaviors.
c. Disadvantages:
i. Can be a time-consuming and costly process in terms of resources used
(time requirement to observe employees doing their job)
ii. May not be sufficient information to determine job specifications —
for example, the skills, abilities and behaviors necessary for successful
performance of the job
iii. Not as useful in higher level jobs.
As you can see, each of these techniques has advantages and disadvantages; the
organization should weigh the costs, the complexity and the availability of resources
to determine which approach will achieve the best results. Most compensation plans
use more than one method of acquiring data from primary sources, striving for
comprehensiveness, accuracy, flexibility, administrative efficiency and uniformity.
B. All other sources of information about jobs are referred to as secondary sources.
Some frequently used secondary sources of information about jobs include the
Bureau of Labor Statistics O*NET and the Occupational Outlook Handbook; pay
surveys; existing job descriptions; and information on similar jobs provided by
other employers.
The collection method and the resources available will affect determining who conducts
the job analysis. More accurate data and greater acceptance of pay decisions usually result
if the supervisor and the job incumbent are involved in the job analysis process.

Job Documentation
Most organizations with formalized pay programs use written job descriptions to
document job content. Job descriptions may be defined as narrative statements of the
nature and level of work being performed by persons occupying the job, as well as job
specifications. Their exact content will be determined largely by the purpose or purposes
for which they will be used. For example, information that is relevant to staffing, recruiting
or test validation may not be required for compensation purposes, and vice versa.
Some computer-based job analysis methods result in job documentation that is not
in narrative format, but the purpose and uses are the same. (Throughout this publication

34 | Elements of Base Pay Administration

the term “job documentation” is used to include narrative, written descriptions and
other systematic methods of documenting job content.)
Job documentation has five major uses in the design and administration of wage
and salary programs:
• Job documentation is useful in evaluating job content and should be prepared with
the evaluation criteria in mind. Before the relative value of jobs in an organization
can be determined, the nature, purpose and organizational level of the jobs must
be clearly understood. Principal duties and responsibilities, skill levels, and mental
and physical effort required, as well as the conditions in which the work is
performed, likewise must be clearly understood. A common shortcoming of job
evaluation systems is the lack of quality information about the jobs.
• Job documentation also provides accurate data for making pay comparisons with other
organizations. In gathering and analyzing salary survey data, a determination must
be made as to whether jobs described in the survey are comparable to jobs in the
organization. If so, it is valid to use the survey data. If no documentation exists, or if it
is inaccurate, incomplete or outdated, then invalid comparisons and decisions may result.
• Job documentation also is used to provide classification control. In sound pay
programs, employees are assigned to classifications (job titles) that are descriptive
of their job duties. Thus employees are classified on the basis of actual work
performed, rather than personal background or characteristics.
• Job documentation with clear definitions of job content provides effective
communication vehicles, so employees and supervisors know what is to be
accomplished. Once clear and accurate job documentation exists, it is much easier for
employees and supervisors to set performance goals or standards and, subsequently,
to review the employee’s performance in light of these performance targets.
• Job documentation may be required when third parties request an explanation of the
organization’s decisions. Recent court cases show that government agencies charged
with enforcing employee relations, labor relations and civil rights statutes frequently
rely on job content analysis to determine the legality of human resources programs and
practices. The existence of accurate, current, job-content-based documentation greatly
will enhance an organization’s ability to defend unwarranted charges of discrimination.
There are numerous other uses for job documentation outside of base pay plan
administration, such as employee selection and orientation, training and development,
and succession and career-path planning.

Job Documentation Components

There are a variety of formats for job documentation. Whatever the format, documentation
should include the nature of the work (principle duties), the level of skill and responsibility
required to perform the work, the types and amounts of mental and physical effort
required, and the general physical environment in which the work is performed.

Chapter 3: The Job Process | 35

 Written job descriptions typically will include at least the following sections:
• A job identification section including job title, department or location, date of
completion and approvals
• A general summary or statement of job purpose
• A list of principal duties and responsibilities of the job.
• The minimum levels of knowledge, skills and abilities required to perform the work.
Rather than listing every conceivable task, major responsibility areas normally are
highlighted (5 percent or more of time spent), with some indication of priority of
duties or percent of time spent on each. In most cases, this means placing the
highest/most important duty first, then those with decreased importance.
Some employers also choose to include some or all of the following information,
either in the job description or in some other form of job documentation:
• Relevant scope data, such as budget, sales or profit responsibility, number of people
supervised, etc.
• The nature and extent of supervision received and given
• The physical and mental effort required
• The physical environment in which the work is performed
• A disclaimer clause, stating that the job description does not necessarily include
every task that an incumbent might perform.

Other Job Description Considerations

In narrative job descriptions, emphasis should be on brevity and clarity. Present tense and
action verbs are normally used to enhance clarity. Potentially biased terminology should be
avoided. If job specifications are included, they should be precise and verifiable, based on job
content, not on the personal characteristics of the incumbent. Qualifications should reflect
reasonable levels of knowledge, skills and abilities necessary for satisfactory job performance,
not set at unrealistically high levels. Finally, job descriptions should be kept current to
accurately reflect the jobs and to assist in any auditing process (internal or external).
Who should write the job description? To a great extent this depends upon the
resources available to the organization. Whether prepared by the incumbent, the
supervisor, a human resources specialist or a third party, the important thing is
that the descriptions be well written. Line management may or may not participate
in writing job descriptions, but it is important that it reviews and approves them.

Developing the Job Worth Hierarchy

In the early 1880s, Frederick W. Taylor assisted a steel company that was seeking
a method to improve productivity. He designed a formal, systematic way of assigning
pay to jobs, and his study became known as “job evaluation.”

36 | Elements of Base Pay Administration

 The 1923 Federal Classification Act was an initial attempt by Congress to establish
a system for compensating federal white-collar employees fairly and systematically.
It served to encourage the birth of a formal compensation-management approach
that utilizes systematic methods for analyzing relative job value and compensation
patterns within private and public organizations.
Merrill R. Lott designed the first point-factor job evaluation plan in the 1920s.
This was followed in the late 1930s and early 1940s by the first factor-comparison
method of evaluation, designed by Edward N. Hay, Eugene I. Benge and Samuel L.H.
Burke. Since that time, numerous adaptations of the basic internal-evaluation
techniques — slotting, ranking, classification, factor comparison, point factor — have
been developed by academicians, management consultants and business organizations.
Over the years, the term “job evaluation” has taken on two meanings:
• To some compensation professionals, “job evaluation” is the overall process
of comparing jobs in order to develop the job worth hierarchy. In this sense it
contains the elements of both market pricing and internal job-content analysis,
because internal and external comparisons are included.
• Many other compensation professionals, however, use the term in the more
restricted sense of job content evaluation, developing a hierarchy based only on
internal comparisons of job value.
Two basic methodologies historically have been used in developing a job worth hierarchy:
one starting with and emphasizing market data; the other starting with and emphasizing
job content. Each employer must determine which approach best suits the needs of its
organization. To a great extent, the organization’s pay philosophy; the number of distinct
jobs; the sophistication of management; and the money available for design, installation and
maintenance of the system will determine this. Each approach will be considered in turn.

Market Pricing
Although practically all systems recognize the role of the market in ranking jobs,
some existing formal systems use market rates as the primary basis for establishing
job worth. Benchmark jobs are chosen, priced from survey data and assigned relative
values based on market pay levels. Benchmark jobs closely resemble other jobs
performed in other organizations and/or across industries. Benchmark jobs should do
the following:
• Be well-represented positions in the marketplace
• Be important in the organization’s internal hierarchy
• Represent many organizational levels or grades in the salary structure(s) utilized
by the company
• Be matched to 70 percent or more of the duties found in the survey jobs

Chapter 3: The Job Process | 37

• Generally have multiple incumbents, with the exception of managerial and
executive-level positions within an organization.
All other jobs then are positioned in relation to these benchmarks. This process
of positioning non-benchmark jobs is called slotting because it involves comparing
or evaluating the value of the job not based on market factors (or points), but
on its relative worth compared to other jobs that were priced in the market.
Benchmark jobs likewise can serve as internal anchor points for non-benchmark
jobs. For example, a human resources assistant and an administrative assistant may
be assigned to the same pay grade and salary range. These two benchmark jobs thus
can be used to determine the relative value of other jobs assigned to that pay grade,
for which market pay data are not available.

Job Content Evaluation Methods

Whichever basic approach is followed, most employers eventually face the task of
determining the relative worth of one or more jobs on the basis of job content alone.
This occurs early when the job content method is used — usually immediately after
the job documentation has been prepared. With the market pricing approach, it occurs
when no labor-market data is available to determine the positioning of non-benchmark
jobs, and/or when management reconciles labor-market and job content data.
There is an almost limitless variety of evaluation methods emphasizing job content,
but virtually all of them are modifications or derivatives of four basic methods. These
four methods can be separated into two groups: quantitative and nonquantitative.

Nonquantitative — ‘Whole Job’ Evaluation

The two nonquantitative methods — ranking and classification — derive their
nonquantitative label from the fact that they do not produce a precise numerical score
for each job being evaluated. They do, however, assign each job a relative position
in a job worth hierarchy. In measurement terms, they produce ordinal-level data only.
Also called “whole-job” evaluation, these two nonquantitative methods determine
relative worth of jobs on the basis of an overall or global assessment of job content.
This is contrasted with the quantitative methods, wherein the evaluation of job
content is based on a factor-by-factor evaluation of various aspects of job content.
• Ranking is perhaps the oldest, fastest and simplest of the classic methods of
job evaluation. Evaluators rank jobs in order of their overall worth or value to
the organization. The job the evaluators believe to be most valuable is placed first;
the one they perceive as being worth least is ranked last, and so on. In this way
a hierarchy is produced. There are many variations of this method. Some include
instructing the evaluators to consider certain attributes of the jobs in their
rankings. Another variation, paired comparison, compares each position to every
other position (one at a time) and develops a “score” from the number of times

38 | Elements of Base Pay Administration

 a position is deemed more important than another position. The “score” is used
to produce a ranking.
• The federal government originally developed classification during establishment of
its pay program. A number of grades or levels are specified beforehand, and broad
descriptions are written to delineate the characteristics of jobs to be placed in
each of the grades. Each job then is evaluated by comparing the job documentation
to the grade description, and the job is assigned to the grade that most closely
describes the job characteristics.

Quantitative — ‘Factor’ Evaluation

The two broad categories of quantitative evaluation methods are the point-factor
plans and job component. Each method evaluates job content on a factor-by-factor
basis and produces a numerical score for each job evaluated.
• In the point-factor method, a number of factors are selected, such as those mentioned
in factor comparison. These factors are weighted, and a scale of point values is
assigned to each to reflect this weighting. Each job is compared to descriptions of the
various levels or degrees within each factor. When the appropriate degree is selected
for each factor, the assigned points are combined to produce a total score for each job.
• Job component is a quantitative job-content evaluation method that uses multiple
regression and market data to establish the job worth hierarchy. Compensable
factor data are collected on highly structured questionnaires for each job. These
data are entered into a computer for benchmark jobs and then regressed against
market data for those jobs. The resulting formula produced by the regression analysis
is used to calculate the predicted value for both benchmark and non-benchmark
jobs. Jobs are then arrayed in a hierarchy based on their predicted value.

Factor Selection and Weighting

All quantitative methods of job evaluation have one thing in common — a set of
job factors that form the basis for evaluation. The choice and weighting of these
factors is critical to the resulting job worth hierarchy. The selected factors should do
the following:
• Represent all major aspects of job content for which the employer is willing
to pay (compensable factors) — typically skill, effort, responsibility and working
conditions (or subfactors of these broad universal factors)
• Avoid excessive overlap
• Be definable and measurable
• Be easily understood by employees and administrators
• Be relatively simple to evaluate, without requiring excessive installation
or administrative cost

Chapter 3: The Job Process | 39

• Be selected with legal considerations in mind.
It is difficult to choose one set of compensable factors that can be applied to the
entire organization, top to bottom, or to jobs with far different job content, such as
production jobs, clerical jobs and management jobs. However, if more than one set
of factors or systems is used, care should be taken to ensure that no job, or group
of jobs, will have its position in the job worth hierarchy distorted by the set of factors
or systems used in the evaluation process.
The weights assigned to the factors should be determined by the employer’s
judgment of their relative importance to the organization. Factor definitions and
degrees should be written in a clear, easily understood manner. These definitions
should be as specific as possible, and the degrees available should represent all
of those needed to logically evaluate the jobs that will be included in the system.
The compensable factors included in most existing job evaluation plans are really
“subfactors” of skill, effort, responsibility and working conditions. Care should be
taken to avoid subfactors that are duplicative or so greatly overlapping that they
cause an overweighting of one of the principal factors.

Who Should Perform the Evaluation

The job evaluation process can be performed in a number of different ways, depending
to a great extent on the size and nature of the organization. Senior management may
evaluate jobs in a smaller organization, while committees of lower-level managers
typically assist in this process as the organization grows. Staff specialists are often
used in larger organizations.

Other Considerations
Experience suggests that a successful job evaluation process can be facilitated by
the following:
• Including incumbents (of the types of jobs being evaluated) in some part of the
evaluation process
• Establishing an appeal procedure whereby supervisors or employees who disagree
with job grade assignments may voice their concerns
• Communicating the basic elements of the evaluation system to the employees,
including an explanation that the system is based on internal and external
considerations, to establish credibility of the system with employees
• Installing procedures for a periodic (usually annual) internal audit. The procedures
need not be complicated or time-consuming and could well begin by assessing
employee complaints about the system. An analysis of turnover statistics and exit
interviews can also be very helpful in isolating potential problem areas. Several
questions should be asked about the application of the job evaluation system:

40 | Elements of Base Pay Administration

 - Is training provided to those involved in the job evaluation process?
- Are written instruction or guidelines provided?
- Are job evaluation decisions made or reviewed by more than one person?
- Is there inter-rater reliability?
- Are persons in protected classes involved in the decision-making process?
- Are the decision makers representative of organizational entities and a cross-
section of employees?
- Have the factors been applied consistently to all of the evaluated jobs?
- Have changes in the organization or the workforce lessened the appropriateness
of the methods and procedures used?
Finally, several additional points should be considered regarding the design
of quantitative evaluation plans:
• Is there a defensible rationale for the choice and weighting of factors?
• Has the weighting of the factors been statistically analyzed to preclude the use
of factors that overlap or are irrelevant?
• Have degree-level definitions been consistently and logically defined for each factor?
• Are there unused or little-used degrees within any factor that are superfluous?
• Do the factors fairly represent the content of jobs held by both men and women?
• Are the factors limited to skills, physical and mental effort, responsibility and
working conditions or subfactors thereof? If not, are they defensible?

Pay-Data Collection and Analysis

Pay-Data Collection
There are a number of valid and reliable methods of market pay-data collection and
analysis in common use; some are formal, others informal.
Before collecting pay data, an organization should define its relevant labor market,
which typically varies by job group and may consist of the following:
• Similar organizations in the local labor market
• All employers in the local market
• Similar organizations in the regional or national market
• All employers in the regional or national market.
(See Figure 3-2 on page 42.)
Employers will want to use surveys that include data from other employers with
whom the organization competes in the labor market. Therefore, this survey sample
may vary between different groups of jobs. Typically, considerations include the
geographic area, size of the organization, employee relations practices, profitability

Chapter 3: The Job Process | 41

 FIGURE 3-2 Sample Labor Market — Large Retail Firm

Top Administrative/ Clerical

Management Professional

• General • General
Industry • General
• Retail • Retail

• $1 Billion –
Organization Size • All Sizes • All Sizes
$4 Billion

• Regional
Geography • National • Local
• Local

(if relevant), industry type, organizational structure and other factors deemed
pertinent to the job group to be surveyed. Because this selection process requires
a great deal of care so that an appropriate labor market is sampled, it is usually
helpful to determine the sources of new employees and where employees go when
they voluntarily leave the organization.
The organization next decides whether it will conduct the salary survey, use a
consulting firm, subscribe to or purchase commercially available surveys, use data
available through services such as the Bureau of Labor Statistics, local chambers of
commerce, employer associations or online (Internet) applications. Organizations
base these decisions on the cost of securing the data, time constraints, reliability
of the data, the need to control the quality of the data collected and the necessity of
keeping the data confidential. The survey can be conducted by the following methods:
• Telephone interviews
• A mailed questionnaire
• A personal visit to the company to be surveyed
• A meeting of all participating organizations to discuss the job matches
• Any combination of the above.
Conducting the survey itself will give the organization more control over data
collection and analysis, but it also may be the most expensive and time-consuming
choice. Additionally, when conducting the survey the organization needs to be cognizant
of the Sherman Anti-Trust Act and any potential implications. When the organization
conducts its survey, it may limit the number of participants willing to provide data.
Also, when surveys are used in collective bargaining, the individual employer may
be required to reveal data that is considered confidential by survey participants.
It is for these reasons that many organizations decide to use third-party sources.

42 | Elements of Base Pay Administration

 Another decision to be made by the surveying organization is the type of pay
data to be collected. Depending on the degree of sophistication desired, the surveying
organization will determine whether it is concerned with total rewards or some
combination of the elements of total rewards — base pay, other cash, benefits,
perquisites or work-life issues. Some surveys may request an array of individual
pay rates for benchmark jobs while others will request only summary data, such as
the means (averages) or medians (middle values) of pay for benchmark jobs within
each participating organization. Many surveys will also ask for the established pay
grade range for benchmark jobs. Some surveys gather additional data such as job
tenure, education attainment, number of people supervised, etc.
Finally, the employer will select the benchmark jobs for which data are to be
collected. Job descriptions and survey questionnaires will be prepared and potential
survey participants will be contacted.
Based upon this brief description of the process of collecting pay data, it should
be apparent that the process is, and should be, neutral with respect to the sex or race
of employees included in the data.
Analysis of the Collected Market Data
Once pay data is gathered, the organization must determine the depth of analysis required to
meet its needs. While some organizations might simply determine the average market pay
rate and approximate it within its own salary structure, others may choose to utilize more
sophisticated analytical techniques. At a minimum, this process requires the computation
of the going market rate (average or median) for the organization’s benchmark jobs.
Formal analytical techniques involve the science of statistical sampling: the study
of relationships existing among selected items that form a specific group (the sample)
and are representative of the entire group (the population). The objective is to
provide a data sample that accurately describes the larger universe.
Another decision is whether or not the data should be weighted; and if so, how?
Some data may be more relevant (or representative of the organization’s jobs) than
other data. Pay rates for each employer can be averaged; or they may be weighted by the
number of incumbents. One employer may have a disproportionate number of the jobs
or employees, and pay far above or far below the going rate for all other organizations.
A weighting may be applied to that employer’s data so that a more representative
sample is obtained. In most surveys this is referred to as the weighted mean (or
median). If an organization is utilizing more than one survey, it may believe one survey
is a better representation of the job within the organization, and may choose to weigh
that survey more heavily. Additionally, with today’s hybrid jobs, organizations are
finding that more than one job listed in a survey reflects a hybrid job within the
organization. Based upon this “blended” job in the organization, the data will need to
be blended (or weighted appropriately).

Chapter 3: The Job Process | 43

 The measures most commonly used to depict a “typical going rate” are means
and medians. The range of values, which is often divided into quartiles, is also quite
useful. Many compensation practitioners believe the interquartiles (the middle
50 percent, between the 25th and 75th percentile) are the most useful, because they
exclude any wide swings of data at either the upper or lower extremes; others may
select a broader range (for example, the 10th to 90th percentile). Eliminating a portion
of the data to eliminate extremes is referred to as trimming the data. When computing
the average for trimmed data, the result is known as a trimmed mean.

44 | Elements of Base Pay Administration

Base Pay Structure 4I
Setting Rates and/or Ranges for Jobs

A
pay structure is established by setting the rates of pay for the jobs in the job worth
hierarchy. In setting these rates, a number of major policy issues should be
considered. First off, how should the organization’s pay levels relate to the market?
In most organizations, a compensation philosophy defines the competitive market
position an organization will take with its compensation programs. The three most
common competitive market positions are lead, lag and lead-lag.
The first option an organization has regarding competitive market position is to lead
the market (See Figure 4-1). When an organization leads the market, it consciously sets
its pay structure at year-end anticipated market level, not at the current market levels.
The organization’s pay levels will then “lead” the market until the start of the next year.
In other words, the company will start the year ahead of its competition and remain
there until the end of the year, when market rates catch up. When an organization uses
this method of competitive market position, the organization is usually seen as a “pay
leader.” The organizations that typically lead the market will look for experienced talent
and attract that talent by paying higher-than-market wages.

FIGURE 4-1 Market Position — Lead

Market
Company Pay Level

Lead t
men
Market
Move
t
rke
Ma

Time

The second option for an organization is to lag the market (See Figure 4-2 on
page 48). When an organization lags the market, it consciously sets its pay structure
equal to current market levels at the beginning of the year. With this scenario, the
organization’s pay levels will “lag” the market as the year progresses. Typically, an

Chapter 4: Base Pay Structure | 47

 FIGURE 4-2 Market Position — Lag

Market
Level

ent
ovem
tM Lag
rke Market
Ma

Company Pay
Time

organization that lags the market will choose to hire less experienced applicants
and pay less than market wages. The organization may offer additional training
and development opportunities as a means to attract and develop employees.
The third option an organization has is Lead-Lag (See Figure 4-3). When an
organization is using a lead-lag philosophy, it consciously sets its pay structure at
midyear anticipated market level. By doing this, the organization’s pay levels will
“lead” the market in the first half of the year and “lag” the market in the second
half. Typically, an organization that uses a lead-lag philosophy will attempt to hire
more qualified applicants than lag organizations, but offer more training and
development opportunities than lead organizations.

FIGURE 4-3 Market Position — Lead-Lag

Market
Level
t
men
Move Lead
t
rke Market
Ma

Company Pay
Lead
Market

Time

After the compensation philosophy is determined, the compensation strategy will

be developed. A compensation strategy includes the principles that guide the design,
implementation and administration of a compensation program. Some strategies also
specify which programs will be used and how those programs will be administered.
A typical compensation strategy is intended to ensure the compensation programs
will support the business strategy of the organization. The compensation strategy

48 | Elements of Base Pay Administration

will guide the organization on what it is willing to pay for. Some examples include
the following:
• Job content
• Seniority
• Performance
• Skills
• Cost of living
• A combination of the above.
It will also guide the organization on how it pays its employees.
• A single-rate structure (all employees on a given job receive the same pay)
• A time-progression structure, or step increase (progression through a pay range
based solely on time in the job)
• A range structure with progression based on merit
• A combination of time-progression and merit, with automatic progression to
a certain point in the range, and further progression within the range based on merit
• A pay system based solely on productivity
• A pay system based on the acquisition of new skills
• A combination of the above
• A pay system that provides for long- or short-term incentives, in addition to base pay
• Steps the organization should take to ensure that pay is administered
in a bias-free manner.
Having decided the major policy questions, the pay structure and pay-delivery
system can then be created.

Pay Structure
If pay grades are utilized, the number of grades is typically influenced by one or both
of the following factors:
• The number of different levels of relative job value that are recognized by the
organization;
• The difference in pay between the highest- and lowest-paid jobs in the pay structure.
To determine whether the proper number of grades has been established, an
employer should determine whether the jobs in each grade should have the same
range, or jobs in different grades warrant different pay ranges.
After the pay grade has been determined for each job through the job evaluation
process, an organization can proceed to develop its pay ranges around each of its job
grades. (See Figure 4-4 on page 50.)

Chapter 4: Base Pay Structure | 49

 FIGURE 4-4 Pay Range

• Maximum

• Midpoint

• Minimum

Pay-range midpoints usually are the focal points in the development of pay ranges,
particularly in non-union systems. A midpoint most often is defined as the market “going
rate” for jobs assigned to that grade. Midpoints actually will reflect the organizations’
policies regarding the relationship of their pay trends to the market; for example, whether
they lead, lag or lead-lag competitive pay rates. Because pay ranges are developed from
historical pay data and are designed to last for some predetermined amount of time, it
is not uncommon for the midpoint of a range to be the prospective market going rate.
It is up to the organization to determine the desired lifetime of its pay structure and how
much future market pay-rate growth it will build into its pay-structure midpoints. Many
organizations utilize the midpoints of pay ranges to determine frequency of pay increase
as well as size. For these reasons, the determination of pay-range midpoints can be
a critical factor in maintaining a competitive pay position within the labor market.
An organization can determine its pay-range midpoints by simply averaging the
market rates for benchmark jobs in each grade. Or it may use more sophisticated
techniques such as linear regression. The organization can plot a trend line of its
own pay rates, compare it to the competitive pay trend line and determine what
is necessary to achieve the desired competitive position within the labor market.
Having determined the midpoints of its pay ranges, an organization will then develop
its pay range minimums and maximums. The pay range minimum is usually the lowest pay
rate that an organization plans to pay for jobs in a particular pay grade. Employees hired
at the pay-range minimum usually possess minimal qualifications for their jobs. The pay-
range minimums should also be competitive with what other organizations are willing to
pay to hire employees to fill jobs at that level. Pay rates below the pay-range minimum are
referred to as green circle rates. Green circle rates may result from the following:
• Poor performance
• Range increases
• Company policy of starting trainees at a probationary rate below the minimum.
Green circle rates normally are temporary anomalies that are resolved either by attrition
or by an eventual increase in the employee’s pay rate to the pay-range minimum.

50 | Elements of Base Pay Administration

 A pay-range maximum is typically defined as the highest rate an employer is willing to
pay for jobs in that grade. The range maximum recognizes, in a structural way, that there
is a limit of worth for any job, above which the organization will not ordinarily pay.
Organizations will usually strive to keep all pay rates within the established pay
ranges, but in some cases they may decide to pay either above the pay-range maximum
or below the minimum. Rates paid above the maximum are referred to as red circle
rates. Red circle rates may occur as a result of the following:
• An employee’s demotion from a job in a higher pay range (with no reduction in pay)
• Changes in job content causing the job to be re-evaluated at a lower level
• A pay increase granted to an exceptional employee who has reached a career plateau
or whose skills are in very short supply
• The result of the organization not following its own pay-administration policies
(for example, ignoring the range maximums).
(See Figure 4-5, below.)
In determining grades and salary ranges, the organization must consider things such
as the following:
• Range spread (the percentage difference between the minimum and maximum
of a given pay range)
• The amount of range overlap, if any, desired between adjacent pay ranges.
There are many schools of thought on how to approach these two issues. Organizations
should form their own policies, taking into consideration issues such as the following:
• Promotional practices
• Union status
• Salary compression

FIGURE 4-5 Red and Green Circle Rates

X Red Circle Rate

• Maximum

• Midpoint

• Minimum

X Green Circle Rate

Chapter 4: Base Pay Structure | 51

• Key pay grades resulting from labor shortages or high turnover
• Pay grades that constitute career plateaus.
The resulting pay structure should reflect the following:
• The organizational objectives
• The organization’s philosophy on how it will relate pay to the market
• Internal relative job values
• Total rewards mix
• Compensation policies, practices and procedures
• The employer’s approach to organizational structure
• The economic ability of the organization to pay at a given level.
Once the pay-range structure has been developed, the organization must decide
how it will move employees through the pay range. Many organizations use
individual performance as the basis for movement through the pay range. Others
use an automatic (or step) progression approach based upon employee tenure.
Still others provide cost-of-living increases tied to various inflation indices. Many
organizations use a combination of these and other methods.
After an employer has established one or more pay structures (hierarchies of pay
grades and ranges), a number of other policy issues must be addressed. Some of the
most important of these are as follows:
• What should the starting rates be for new hires?
• How should employees move from the minimums to the maximums of the pay
ranges established for their jobs?
• How should a pay increase be determined for an employee who is being promoted
from one job to another?
• What influence, if any, should increases in going market rates, and increases
in the cost of living, have on the determination of pay increases for individuals?
Each organization must develop its own answers to these questions and
establish policies and procedures to facilitate consistent practices throughout
the organization.

Broadbanding
Broadbanding has been a part of the HR field since the late ’80s and early ’90s and
was developed to compress many salary grades into fewer, wide pay “bands.” Those
organizations that implemented such a system were driven by the need to adapt
salary administration systems and procedures to meet a new business climate and
create a flatter organization.
Broadbanding can be defined as a pay structure that consolidates a large number
of pay grades and salary ranges into much fewer broadbands with relatively wide

52 | Elements of Base Pay Administration

salary ranges, typically with 100-percent (or more) differences between minimum
and maximum. Simply stated, broadbanding refers to the collapsing of job clusters
or tiers of positions into a few wide bands to manage career growth and deliver pay.
Broadbanding was created to help achieve several objectives, namely the following:
• Develop broader workforce skills.
• Encourage career development among employees.
• Reduce administration of job evaluation, salary structure and merit pay.
Broadbanding usually appeals to fast-moving organizations that are undergoing
persistent change. Such organizations that want to be quicker and more flexible in
the marketplace have implemented broadbanding. They have found that broadbands
complement processes designed to increase company speed, flexibility and risk taking.
Some or most of the career-ladder rungs were removed and employees were
encouraged to earn more by adding value to the company. This could be accomplished
by developing new skills or competencies and/or participating in a variable pay
system with a line of sight to the company’s performance.
Broadbands support this evolving organizational dynamic by providing less formal
structure. The traditional compensation approach emphasized internal equity and
focused employees’ attention on the world inside the firm, and broadbanding helps
them experience an internal culture that more closely reflects the external,

SIDEBAR: Broadbanding Is Not for Everyone

This is not to say that broadbanding is a panacea for all organizations. One potential
disadvantage is that broadbanding’s delayered approach to salary administration may
not fit the culture of heavily level-oriented companies. The need to manage salaries
also does not go away. Market pricing becomes even more important because it is used
extensively to identify salary targets.

When broadbanding is implemented, an organization may also have to re-examine things

such as management incentives, perquisites and other items tied to the conventional salary
grade. Line managers also may need to be retrained to make compensation decisions while
˜
being persuaded to accept new or greater responsibility for employee career development.

As some companies have found, pay systems are most effective when they support
organizational change, not when they lead change. Some theorize if an organization is not
ready for broadbanding, it will likely fail.

Other potential pitfalls exist:

• It could be possible to flatten the pay structure to the extent that supervisors and their
subordinates are in the same band.
• The question of inflation arises, both of pay and of expectations, when employees are
put in bands with potentially higher maximums than their previous grade maximums.
• It becomes more difficult to compare jobs to the marketplace and maintain external equity.

Chapter 4: Base Pay Structure | 53

competitive marketplace. It helps make it easier for them to reorient themselves
to the marketplace.
In broadbanding, there is no automatic progression to the midpoint because there
is no midpoint. The marketplace for talent is no longer represented by highly defined
salary structures, but rather mirrored by loosely defined, ambiguous broadbands that
do not directly apply to an employee’s position.

Starting Rates of Pay

When pay ranges have been formally established, it is the policy of most employers to pay
new hires who appear to have only the minimum qualifications for their jobs, at or near the
range minimum. The objective is to avoid paying them at rates that are too close to those
paid to more experienced employees in the same job. Occasionally, supply and demand
conditions are such that new hires with relatively little experience must be paid substantially
above the range minimums. Additionally, individuals with substantial experience (or
otherwise superior qualifications) frequently are hired at higher levels in the rate ranges.

Increases to Base Rates of Pay

Today’s employees typically are eligible for several types of base pay increases, such
as general (or across-the-board) increases, cost-of-living increases, promotion
increases and within-range increases, such as step increases and merit increases.
General (or across-the-board) increases are those that are granted in equal percentages or
equal dollar amounts to all employees in an eligible group. For example, all employees
might receive pay increases equal to 25 cents per hour, or 3 percent of their current
pay. Employers might specify that some employees (for example, those who exceed
the maximums of their rate ranges or those whose performance is unacceptable) are
to be excluded from receiving such increases. General increases are not conceptually
compatible with pay-for-performance programs, and the use of general increases has
diminished as performance-based programs have expanded.
A cost-of-living increase is a specific type of general increase that is typically awarded
in equal cents per hour or percentage terms to all employees in a pay program or
structure. Cost-of-living allowance (COLA) increases, however, are intended to protect
employees’ purchasing power against erosion caused by inflation. These increases
typically relate to increases in the Consumer Price Index (CPI). Thus, all cost-of-living
increases are general increases, but not all general increases are cost-of-living increases.
Promotion increases are increases granted to employees who are promoted from one
job to another job with a higher pay grade and range. The size of increase is usually
influenced by the magnitude of the promotion (as measured by the difference
between the pay ranges assigned to the promotee’s old and new jobs) and the pay
relationships among the promotee’s peers, superiors and subordinates.

54 | Elements of Base Pay Administration

 Within-range increases are types of base pay increases that move employees forward
in the pay ranges assigned to their jobs. Within-range pay increases are virtually
always determined by some combination of the employees’ length of service and
performance. The two principal types of within-range increases are as follows:
1. Increases based primarily on length of service (though differences in performance
may also be reflected). These may be step increases, whereby the pay ranges
are divided into a number of pay rates with increases related to length of service.
The step-increase concept is used most commonly for nonexempt employees,
and there are several different approaches to this concept:
a. The first is for length of service only. Here the employee receives single step
increases up to the range maximum, which is usually at or just above the
competitive market rate. If performance is unsatisfactory, the increase is
denied and probation, demotion or dismissal may result.
b. The second reflects both length of service and performance. One approach
is illustrated in the following table:
Performance Rating Pay Action
Outstanding 2-step increase
Exceeds standards 1-step increase; may accelerate
timing of next review
Meets standards 1-step increase
Does not meet standards No increase
c. Another approach involves two or three performance tracks through which
the employee progresses to a performance zone maximum. The number
of steps can be increased to allow for smaller percentage steps.
d. Finally, it is possible to add timing differences. This further accentuates
differences in pay level based upon differences in performance.
2. Increases based on merit usually are administered in the form of a range of
percentages for varying levels of performance. As mentioned earlier, they also
may be used in combination with step-progression increases.
Inherent in most merit-increase programs are the following notions:
• The speed with which employees move through pay ranges will be
determined principally, if not solely, on the basis of their job performance.
• Performance will also determine how far employees are allowed to progress
in their pay ranges.
Thus in determining merit increases, many organizations consider the performance
of the individual and his or her current rate in the pay range. As a result, the merit
increase may vary in size and timing.
Many organizations use a fixed frequency and vary the increase’s size. The fixed
frequency may vary by job level, but the most typical frequency at all levels is 12 months.

Chapter 4: Base Pay Structure | 55

Timing of increases is sometimes based on the pay policy year (focal point) or the
anniversary (anniversary date) of the employee’s service or last increase date.
A smaller but significant percentage of organizations varies the size of the increase
and the frequency. A minority of organizations fixes the size of the increase, but
varies the frequency.
The size of the increase (typically measured as a percent increase) generally varies
directly with the individual’s performance (the better the performance the bigger the
increase) and, inversely, with the employee’s position in the pay range (the lower the
position in the range, the bigger the increase as a percent of current pay). It is common
practice to provide supervisors and managers with increase-planning guidelines. These
guideline charts include a range of options to allow managerial flexibility.
A final variation on the above methods involves either step-progression or percent-
merit guideline increases to the range midpoint, with a lump-sum bonus given that
varies in amount, depending upon performance.
There are, of course, many variations of these pay-increase approaches. Basically,
however, all known variations of in-range pay increases are some combination
of these two basic approaches — step increases or merit increases.

Merit Pay Considerations

Compensation professionals believe certain conditions generally must exist for
performance-based pay-increase programs to be successful:
• Individual differences in job performance should be measurable.
• Individual differences in job performance must be significant enough to warrant
the time and effort required to measure them and relate pay to them.
• The pay range should be sufficiently broad (35 percent to 50 percent) to allow for
adequate differentiation of pay based upon performance, and/or level of experience
and skill.
• Supervisors and managers must be trained in employee-performance planning
and appraisal.
• Management must be committed, and employees must be receptive, to making
distinctions in pay based upon performance.
• Managers must be adequately skilled in managing pay.
• Sufficient control systems must be implemented to ensure that merit increase
guidelines are followed.
There are potential productivity and incentive benefits to be derived from the
implementation of a performance-based pay-increase program. However, this type
of program is more complex to administer and requires more difficult management
decisions. Compensation professionals must ensure that their merit pay programs

56 | Elements of Base Pay Administration

measure performance as objectively as possible. Management must carefully
evaluate performance and make judgments regarding pay differentials. Significant
commitments of time and effort are required by all involved in this process.

Performance Appraisal Considerations

For a performance-based pay system to meet its objectives, a well-designed and
properly administered performance-management system must exist. An effective
performance-management system includes the following characteristics:
• Performance is appraised on the basis of direct measurement of each employee’s
output or results. For example, the quantity and quality of work is assessed rather
than the employee personality traits. Employee behavior is considered only to the
extent that it is job related and affects job results.
• Supervisors are trained in the concepts and the process involved in appraising
performance.
• Measures or criteria used are as objective and quantitative as possible to minimize
the potential for varying interpretations by different reviewers.
• Objective performance standards are established for various levels of employee
performance when practical.
• The relative importance (weight) of each of the performance criteria is established.
• When practical, employees are involved in the determination of performance
criteria, standards and weights to ensure greater acceptance of the program.
• Performance criteria, standards and weights are communicated to the employee
at the beginning of the appraisal period, and periodically reviewed and updated
for timeliness, relevance and utility.
• The appraisal is written, and discussed by the employee and supervisor. The
employee is involved in the process prior to finalizing the written appraisal.
(Many organizations make a copy of the written appraisal available to the employee
and provide an appeals mechanism for reconciling differences between employee
and supervisor.)
• Finally, the appraisal process is audited routinely and frequently, to identify
and eliminate potential problems.

Chapter 4: Base Pay Structure | 57

Communication
of the Pay Program 5
M
any aspects of human resources are not well understood by employees,
from how pay is determined to why a company conducts salary surveys
or provides certain benefits plans. Maintaining the proper balance
between the administrative demands of the program, the communications needs
of employees and the fiscal responsibilities to the organization have long been
a challenge to HR professionals.
For employees, pay delivers a strong message. Many studies have shown pay
consistently ranks as a top reason for staying with an organization. Compensation
can be a powerful motivator or an equally powerful de-motivator, depending upon
how it is used. Getting everyone on the same page will eliminate confusion caused
by secrecy, infrequent communications and crossed signals.
A major component to communicating pay actions is to clarify the expectations and
increase employee awareness of what is required. Employees expect communication
pertaining to the pay program will be as follows:
• Honest
• Thorough
• Understandable
• Relevant.
While communicating pay actions to employees, one must always remember
to describe it simply and briefly from the employee perspective. Additionally, the
communicator must remember to focus on the main elements of the pay action.
These main elements will include the following:
• The reason behind the pay action
• How the pay action will be processed
• When the pay action will become effective
• Whether the pay action will be permanent (or just a temporary action)
• Whether the pay action will be in a lump-sum or a periodic action.
When communicating pay actions, one must be cognizant of the communicator.
It would not be recommended to have a fellow department member notify
employees of a market increase. One needs to examine the information being

Chapter 5: Communication of the Pay Program | 61

communicated and chose the appropriate communicator. The appropriate
communicator could be one of the following:
• HR manager
• Director
• Department manager
• Supervisor.
The appropriate communicator should be chosen based upon the specific pay
action and the audience. For the pay system to influence work behaviors and
attitudes, the workforce must understand it. To relate pay messages to employees
in a lasting manner, the supervisor is usually the most effective channel to use and
should be the center of the communications effort. Employees’ perceptions about
the organization’s pay system are shaped through dialogue with their managers
and via formal and informal communications programs. Ongoing communication
with employees enhances the effectiveness and acceptance of the pay program
and helps reduce misperceptions. Conducting “train the trainer” sessions will help
supervisors communicate pay information to employees.
For any program to succeed, it must be relentlessly communicated to the workforce.
In today’s competitive business environment, many companies have abandoned
secrecy about their pay program in favor of conveying information to their employees.
Information about pay ranges and merit budgets is increasingly made public by
organizations. A major part of every compensation professional’s job nowadays is
answering questions about the compensation program and trying to get management
and employee buy-in. When communicating pay information on employees, you need
to tell them and sell them on the program.

Staying on Top of Program Administration

The job’s not done until the paperwork is finished. However, with the case
of pay programs, that is never the case. Paperwork is a component of the ongoing
part of pay maintenance.
To keep the pay program running like a well-oiled machine, in light of continual
changes within the organization and in the labor market, compensation professionals
should follow these guidelines:
• Objectives are clearly stated; policies and procedures should be established and
communicated
• Proper controls are in place to ensure that policies and procedures are
consistently applied
• There is adequate support for the compensation function, including sufficient
staff and other resources, as well as top management buy-in to ensure the pay
program is administered fairly

62 | Elements of Base Pay Administration

• The compensation staff properly performs administrative activities
• The pay program is audited regularly to ensure effectiveness and compliance.

Checklist: Subjects Frequently Included

• Objectives of the pay program
• The targeted competitive position of the organization’s pay levels
• Methods used to define and determine the value of jobs
• The role of individual performance in the pay program (how performance
is measured, how frequently and by whom)
• How pay-increase amounts are determined
• The effect of economic constraints and government regulations on distribution
of available funds to employees
• Polices, procedures and controls used to administer the pay program on an
ongoing basis.
Techniques that facilitate communication include the following:
• Written policy statements
• Oral presentations to employee groups
• Direct discussion between supervisors and employees
• Supervisory training in performance appraisal and pay administration
• Distribution of procedure manuals that describe how the pay program operates
• Individualized status reports to employees
• Ongoing written communications on current topics via employee newsletters,
intranets or other in-house publications.
The methods used for communication will depend to a great extent on the
management style of the organization, the general employee relations atmosphere,
and the resources management is able and willing to commit.

Chapter 5: Communication of the Pay Program | 63

Maintaining and Auditing
the Pay Program 6
M
aintenance of pay programs is one of the most critical elements of sound
base pay administration. Unless programs are properly maintained, errors
occur and inequities will eventually undermine program effectiveness.
The maintenance of pay programs is inherently difficult, due to the following:
• Continual changes in the content of the various jobs in an organization
• Continual changes in the going market rates for jobs
• Frequent changes in organizational structure and staffing levels
• The ever-evolving and expanding regulatory framework governing pay programs
• The inevitable turnover within the compensation function itself.

Keys to Successful Pay-Program Maintenance

There are five keys to the proper maintenance of pay programs:
• Clearly stated objectives, policies and procedures are established and
communicated.
• Proper controls are operative to ensure policies and procedures are being
consistently applied.
• There is adequate support for the compensation function itself — including
provision of sufficient staff and other resources, as well as the top management
support necessary to ensure that the pay program is administered with fairness
and integrity.
• The compensation staff properly performs administrative activities.
• The pay program is routinely audited for effectiveness and efficiency.
This chapter focuses on the ongoing administrative activities necessary for
maintaining pay programs and the types of audits that can be conducted to ensure
that the programs are functioning properly.

Ongoing Administrative Activities

The proper maintenance of base pay programs requires continual analysis of the
content and requirements for the various jobs in an organization. The information
collected in the course of these ongoing analyses requires careful documentation by job
descriptions, completed position analysis questionnaires or some combination thereof.

Chapter 6: Maintaining and Auditing the Pay Program | 67

 Changes in organizational structure and staffing levels also affect the content
of jobs and their relative worth to the organization. Unless job documentation
is properly maintained and jobs are properly evaluated, employees may be assigned
incorrect job titles, pay grades and or pay ranges. To ensure ongoing program
success, some organizations undertake regular reviews or “desk audits” of various
organizational components. Others attempt to verify job content information
throughout the process of performance planning and appraisal.
Compensation professionals also continually monitor the position of the
organization’s pay levels vis-à-vis those of the competition. Thus, compensation
professionals participate in, purchase and extract data from pay surveys. This
compiled data, as well as the organization’s pay philosophy and ability to pay, combine
to produce decisions regarding changes in pay structures and budgets. If the
monitoring of the market is neglected or poorly performed, an organization’s pay
rates and/or rate ranges may be too high (causing excessive financial costs) or too low
(causing excessive employee relations costs) when compared with those of
competitors.
In addition to pay-structure maintenance activities, compensation professionals
create pay-increase budgets, planning documents, authorization procedures and
guidelines that combine to support the organization’s pay philosophy. They also
prepare periodic reports for top management regarding pay-program results and costs.

Pay-Program Audits
Systematic pay-program audits can be invaluable for ensuring an organization’s
compensation program is being properly administered and maintained. Observers
of human behavior have noted “people do what is inspected, not necessarily what
is expected.” In the absence of audits, polices may become wishes and pay programs
may be rendered ineffective due to inconsistent practices and resultant inequities,
charges of illegal discrimination, employee dissatisfaction or excessive costs.
The first step in preparing for and conducting pay-program audits is deciding what
to audit. In general, pay-program audits include some combination of four different
types of measures:
• Process measures are used to determine the extent to which the pay program is being
smoothly and efficiently administered. Some sample measures would be as follows:
- Productivity of staff
- Satisfaction of line managers with the administration of the pay program
- Cost of analytical/data-collection activities
- Job analysis
- Job documentation
- Job evaluation

68 | Elements of Base Pay Administration

 - Survey data
- Amount of management time required for pay-program administration
- Cost of data processing/consulting support
- Error rates in databases
- Backlog of requests for evaluations/re-evaluations
- Timeliness of pay-increase planning and processing
- Timeliness of quality of performance-appraisal data.
• Policy compliance measures are used to determine if the pay program is being
administered in accordance with policy. Several examples would be as follows:
- Actual rates and ranges versus market position specified by policy
- Pay position in range
- Percent of employees outside pay ranges
- Green circle
- Red circle.
- Extent of compliance with salary-increase policies
- Extent of compliance with starting-rate policies
- Job title congruence with actual job content
- Validity of job evaluation data
- Consistency of pay grade and range assignments with job evaluation results
- Compliance with performance-appraisal policies and procedures
- Quality of performance-appraisal information.
• Documentation adequacy measures are used to determine the extent to which the
program is committed to writing. Consider the following:
- Percent of jobs for which accurate and up-to-date documentation exists
- Percent of jobs with accurate job evaluation documentation
- Percent of jobs with valid pay-grade assignments
- Percent of employees’ files containing current performance-appraisal documents
- Compliance with Fair Labor Standards Act (FLSA)/Equal Pay Act (EPA)
recordkeeping requirements
- Existence of written policies regarding
- The design and operation of the job evaluation procedures
- The operation of performance-appraisal procedures
- Pay increases
- Structure-adjustment procedures
- Re-evaluation procedures.

Chapter 6: Maintaining and Auditing the Pay Program | 69

• Overall results measures are used to assess how well pay programs achieve the
established goals, such as the following:
- Attraction and retention of qualified employees
- Number of openings
- Duration of openings
- Quality of employees
- Number of terminations (voluntary and involuntary).
- Compliance with applicable laws and regulations
- Grievances
- Lawsuits
- Statistical analyses.
- Results of performance-based pay polices
- Turnover by performance level
- Percent of payroll allocated in a performance-dependent manner
- Correlation between pay and performance levels.
- Protection of the organization’s financial resources
- Pay as a percent of operating budget
- Historical
- Product competitors.
- Organization rates versus market rates.
- Employee perceptions of
- Internal equity
- In the same job
- In different jobs.
- External equity.
The second step in preparing for and conducting pay-program audits is to select
the participants. Participants should understand audit principles and processes, and
possess well-developed analytical, writing and interpersonal skills. In addition, they
should be disinterested parties that have no stake in a particular audit outcome.
The third step is to develop a data collection and analysis plan. Interviews or opinion
surveys can be used to determine how various parties view the pay program. Auditors
also can examine a wide variety of internal and external records and reports, including
human resources records, payroll data, pay-survey data, accounting records and
compensation databases.
The fourth step is to assemble the necessary data to support the analysis.

70 | Elements of Base Pay Administration

 The fifth step is to analyze the collected data and develop findings and recommendations.
The audit report should present findings in an objective manner and provide adequate
information to give readers the proper perspective.
Management’s role is to do as follows:
• Review audit results and recommendations.
• Prioritize the improvements that are required.
• Allocate the necessary resources.
• Follow up to ensure that the work is completed.
Organizations often find that audits are useful tools for educating management
groups about the intricacies of pay-program administration, thus increasing their
understanding of and support for the pay program.
Considering the size of base pay expenditures in many organizations, it is
generally appropriate to conduct comprehensive audits at least every two years.
This approach will ensure organizations are continually aware of the extent to
which pay programs achieve their objectives so problems can be identified and
resolved as quickly as possible.

Chapter 6: Maintaining and Auditing the Pay Program | 71

Current Trends 7
A
s the compensation function continues to evolve several new trends are
beginning to show. The first six chapters of this book focus on the foundations
of base pay programs, whereas this chapter will discuss compensation trends.

Hot Skills
Amid rapid changes in the labor market, organizations need to keep a close eye on
how their competitors are paying their employees and how they are handling hot
skills positions. Hot skills employees, such as knowledge workers and those with
certain IT skills (and those in the health care industry, namely nurses) are in high
demand. As pay continues to escalate, organizations struggle with attracting and
retaining these hot-skills positions.
As the demand continues to increase, some organizations are redesigning the
total rewards mix to both attract and retain these employees. Hot skills are critical
to organizations and, as long as they are in short supply and demand is high, they
will continue to drive up pay for those skill sets. As organizations mature in their
understanding of the total rewards model and how that model can flex to attract
and retain employees, more and more organizations will begin to utilize a modified
model for hot skills.
Part of the total rewards package modification could be to increase the frequency
of pay increases. Some organizations might offer more frequent increases to hot-skills
employees in order to retain them. These additional increases are usually smaller
in amount (versus the annual increases of 3.5 percent), but they would need to be
structured in a way that the increases would be meaningful to the employee. You
usually see this type of total rewards modification in the nursing industry and with
IT professionals. The nursing profession, for example, is more nomadic, and by
providing more frequent increases it might help slow down the movement.
A third thing organizations might do is create a separate salary structure for these
hot-skills employees. Organizations have been using multiple salary structures for
some time, however, in most cases this was for varying groups of employees within
the organization (clerical, professional, managerial). By creating a separate structure
for hot-skills employees, organizations will be better suited to accommodate any
additional movement to the pay ranges for these employees.

Chapter 7: Current Trends | 75

Target Market Position
Most organizations tend to set pay targets at the 50th percentile. As discussed earlier,
this means that most organizations tend to target pay at “what everyone else is
paying.” This may or may not work for all organizations. To attract qualified applicants
for key positions within organizations, organizations may set pay targets higher than
the 50th percentile. Some organizations might target the 75th percentile for key
positions. This signifies that organizations recognize that several of their positions
within them are key to the development and ongoing growth of the businesses.
Therefore, those positions are more valuable and should have a higher pay target.
For example, in a retail environment the buyer position (the position that
determines what goes into the stores and how much the stores should purchase)
is an integral part of the business. A retail organization might want to attract the
best buyers in the industry to ensure they have the exact product customers are
looking for in an appropriate quantity. This organization might set pay targets
higher than the 50th percentile to attract the best talent for the position.

Access to Salary Data

Now, more than ever, employees have access to free salary data, whether it is through
the Internet, trade publications, newspapers or other sources. Therefore, it is
important for compensation professionals to recognize that this information is
available and employees are using it. Although this “free” data might not be the most
accurate, it is important for an organization to at least review this information during
compensation reviews and see how closely it matches the data that is normally used.
Be sure to keep good documentation of the sources actually used and be prepared to
address the reliability and validity of “free” sources.

SIDEBAR: Reliability of Today’s Sources

• Online sources — It is important to know where the data is coming from, its source, and
how old it is. This information will help determine how valid and reliable the data is. For
example, if an online survey source uses two-year-old New York City salary data, then
applies a governmentally available differential to apply that data to Phoenix, then applies
an aging factor, the salary data information probably will not be very reliable. If the data
source is city of Phoenix salary data from this
˜ year, then the reliability would be greater.
• Trade publications — With trade publications, it is very important to know the source
of the data. A lot of times they might survey their audience to get the information. In this
case, the data is not very reliable because the results cannot be validated. Did readers
put a higher salary than they earn to inflate their worth when the survey came out?
• Newspaper — This is another source where it is very important to pay attention to
the source and how the information is reported. Newspapers usually are looking for
a “story,” therefore, it is important to locate the source of the information and closely
examine how the data is reported.

76 | Elements of Base Pay Administration

Performance Differentiation
In recent years, merit budgets have remained around the 3.5-percent range.
Unfortunately, this becomes a problem when it is time to deliver merit increases to
employees. It is very difficult to differentiate performance with such small budgets.
One way to address this issue is to use more variable pay. By using variable pay,
managers will be able to make up for shortcomings by delivering a one-time lump sum.
From an employee perspective they will receive the entire amount at one time, which
is a plus. However, the monies will not be tied to base pay, which could be a negative.
Another way to address this is to inform managers that it is acceptable to give employees
a zero (0) increase for the year if their performance does not justify an increase. This is
very difficult for managers to understand, because compensation and merit increases,
in particular, have become an entitlement for most employees. Throughout the years,
organizations have not done a good job explaining that merit increases are based upon
the “merits” of the employee, and comparatively speaking, if one or several employees
are not performing, it is completely justifiable to give them a zero (0) increase.
It is important for organizations to determine a way to differentiate performers
within the organization, and to ensure that high performers are being compensated.
As the compensation function continues to evolve within organizations (and
as a profession), it is important for compensation practitioners to utilize the total
rewards model to ensure the best talent is being attracted and retained. As new
issues arise, understanding what employees value and how that value system
influences employee engagement is a vital piece of the compensation function.

Chapter 7: Current Trends | 77

Articles & Perspectives
Compensation Philosophy: The Starting Point
By Christopher Kelley and David Gustat

Problem: Your boss just let you know that the board of directors is really taking this
corporate compliance thing seriously and has asked to have a recommendation on a new
compensation philosophy at next month’s board meeting. Your boss wants you to take
the lead on developing the new compensation philosophy and presenting it to the board.
The current compensation philosophy was developed 10 years ago, but nobody really knows
much about the existing philosophy since it is rarely ever talked about.

Start at the Beginning

Just what is a compensation philosophy anyway? What is it supposed to do?
How should a compensation philosophy be developed?
Compensation philosophy may be best defined by what it is not. Compensation
philosophy is not a be all, end all. Organizations don’t develop a compensation
philosophy and then forget about compensation completely. A compensation
philosophy is the starting point for the journey through the land of compensation —
not the destination. In addition, compensation philosophy is not simply a statement
that proclaims, “We’re a 50th-percentile payer.” There’s more to it than that.
(See Sidebar 1 on page 83.)
In its simplest form a philosophy is a set of beliefs or principles that explains
actions and practices. A philosophy answers the question, “Why?” In the context
of compensation, it also answers the questions, “How do I set up every element
of my compensation programs?” and “Which compensation programs make sense for
my organization?” The principles outlined in a compensation philosophy should help
any reader understand the following:
• Should pay be based on what competitors pay, or on internal worth?
• How should the organization be positioned relative to the market?

Articles & Perspectives | 81

• Should pay be differentiated? If so, based on what? Performance? Knowledge?
Seniority?
• Should pay be 100-percent fixed or should there should be a mix of base and variable?
Moreover, a sound compensation philosophy should have some connection to the
overall strategy and mission of the company. To see this in action, let’s look at two
companies that both say they pay for performance in their compensation philosophy.
Company A: As a manufacturer of high-margin widgets, Company A has a powerful,
recognizable brand. Customers prefer its widgets to the competitors’, even though they cost
more. Company A makes the highest-quality product and charges more than its competition.
This business philosophy translates to people, as well. The company hires the best,
most qualified people, and pay them more than the competition — through their
incentive plan. The pay plan is based on company sales performance, not individual
performance. Incentive targets are set at competitive levels, but the maximum payout
percentage is well above the competition. This translates into above-market incentive
payouts when the business does well.
For Company A, pay for performance becomes “top pay for top company sales”
and “average pay for average sales.” Company A distinguishes individual performance
through promotions and merit increases and therefore, offers more base pay.
Company B: Company B manufactures inexpensive widgets. It spends less to make its
widgets than the competition and passes that savings on to customers. Its brand
is not recognizable by most consumers, but its widgets are usually the least expensive.
Consumers know when they buy these widgets that they are sacrificing quality, but getting
the best price. Company B hires good people, but loses many top candidates to the
competition because minimizing costs also translates to minimizing salaries and the
incentive plan. Incentive targets are set at competitive levels, but the maximum payout
percentage is below competitive levels. The plan is based on overall company cost — the
better the cost control, the better the payout.
For Company B, pay for performance becomes “more pay for reduced costs.”
Both Company A and Company B believe in pay for performance — but in different
ways. Their industry and their basic strategies as to how they compete help
determine their compensation philosophy. A good compensation philosophy reflects
the business philosophy. Not the other way around. So which company has the “right”
compensation philosophy? Maybe both. It really depends on how well the philosophy
fits for each particular organization during each phase of the business life cycle.
By understanding the core ways the company competes and makes money,
compensation professionals will begin to see a strategy. Many companies articulate
this in a mission statement. But every company has a strategy, a way of doing
business and a core set of beliefs. The job of the compensation professional is
to ensure that the compensation philosophy reflects the business philosophy.

82 | Elements of Base Pay Administration

 SIDEBAR 1: A “P50 Compensation Philosophy” is Not Enough

Many organizations have stated compensation philosophies to pay to the “50th percentile
of the market.” But this is far from adequate. It’s important to have a target or a goal of
where aggregated pay levels should fall relative to the labor market. However, a
philosophy needs to address much more than that. Without articulating more about the
beliefs about compensation, people in the organization are left to assume that everyone
and every program simply needs to be at the 50th percentile.

Executives and managers naturally think broader than a single statement of paying at the
“50th percentile,” but they’re conditioned to think of a compensation philosophy that way.
One way to break through that paradigm is to play the Actor Salary Survey game. Provide
a listing of roughly 10 Hollywood actors and ask the executives to guess what the going
rates are for each actor to have the lead role in a major motion picture.

What’s amazing is that in virtually every group where this exercise has been played, people
always guess the pay levels with lots of variation.
˜ They know that some actors are worth
more and some are worth less. Now ask executives to think about being a movie studio
executive who follows a P50 pay philosophy. Offer a lead role to Tom Cruise for the 50th
percentile and he’ll likely hang-up the phone. Conversely, offer P50 to Edward Norton and
he’ll gladly accept, but then the executive would be fired for spending about $10 million
more than necessary.

The point of the exercise is to break the paradigm of being locked into a single number
and appreciate that it is okay to pay what is appropriate. Use the market data as a guide.
But exercise judgment, make good business decisions and understand the difference
between an individual’s pay and an overall positioning strategy against the market data.

A well-articulated compensation philosophy may help employees throughout the

organization understand the intentions and beliefs of the senior leaders. This improved
understanding means that employees actually know/comprehend why certain programs
are in place, which in turn leads to a more engaged workforce and a higher-performing
organization.

How a Compensation Philosophy Works

A compensation philosophy is not just a sheet of paper expounding on how the
company feels about different elements of compensation and how they are used.
The philosophy is the starting point for all compensation design. Think of the
compensation philosophy as the “moral compass” from which professionals set their
direction for the compensation strategies and programs. It is the core from which
individual compensation programs and strategies are built. The compensation
philosophy should be the “stake in the ground” to which all compensation programs
can be tied.

Articles & Perspectives | 83

 Organizations are frequently faced with having to evaluate new and emerging
compensation programs. They also may need to assess the design of their annual
incentive plans. With a solid compensation philosophy, the compensation or rewards
professional’s job becomes easier. New plans, or modifications to existing plans, should
first be bounced against the philosophy to see if the changes fit the desired results.
Even without requests for changes or new plans, each company should proactively
evaluate existing plans against existing philosophies to look for gaps in desired
results. This will highlight possible needs for program changes to address these gaps.

How the Compensation Philosophy Is Developed

A compensation philosophy needs to be an expression of the beliefs of the most
senior leadership in the organization. Ultimately, the board of directors has the ability
to approve or reject the compensation philosophy and in some organizations, it may
actually take an active role in defining it. The best compensation philosophies are those
which are developed as part of a collaborative effort that involves and engages senior
leadership members, but also takes into account as input the perspectives of a cross-
section of other stakeholders in the organization. (See Sidebar 2 on page 85.)
Getting more perspectives takes more time. However, engaging the real stakeholders
helps ensure buy-in down the road and might even help uncover any major
disconnects between these critical players. Better to resolve these situations early,
rather than have the differences boil over during the rollout of a program change.

84 | Elements of Base Pay Administration

 SIDEBAR 2: Techniques for Developing an Effective Compensation Philosophy

The process for developing an effective compensation philosophy varies with each
organization based on the culture for how decisions get made and the circumstances
facing the organization. However, there are some common tips and techniques
to consider when working with clients to help develop a compensation philosophy.

Senior leadership team:

• Be clear on the identity and role of the executive sponsor for developing/revising
a compensation philosophy.
• Engage the senior leadership team by conducting individual interviews.
• Recap and gain consensus for the final compensation philosophy.

Cross-section of employee groups:

• If using employee groups for input, be sure to clearly communicate the purpose
and expectations. ˜

• Use focus groups to gather rich, quality data. Use online surveys for more quantity,
but less depth of info.
• Gather information from top performers and ensure demographic representation.

External labor market:

• Research compensation philosophies of other similarly situated organizations.
• In rare circumstances where attraction and retention are critical issues or trouble spots,
consider surveying workers in external labor markets to identify values and desires.

Boards all across America are faced with increasingly more scrutiny about the pay levels
and practices in the corporations they represent, so it’s not surprising that this project
request may be given to the compensation department. With the thoughts and ideas
presented here, compensation professionals are now better prepared to take on this
challenge. And with some focused effort, they will be able to define the compensation
philosophy that is right for their organizations.

About the Authors

Christopher Kelley is the managing partner at HR Analytic Services LLC. He can be reached
at [email protected] or 630/524-5818.

David Gustat is a consultant who focuses on providing strategic compensation solutions

for organizations. He also serves as chairman of the WorldatWork Compensation Advisory
Board. Gustat can be reached at [email protected].

Reprinted from workspan January 2006.

Articles & Perspectives | 85

What Is Base Salary?
By Michael O’Malley, Ph.D.

Sometimes people do things that require reflection, as often their thoughts and
actions are piloted in a direction that never breaks from a scripted logic or habitual
course. Figuring and administering base salaries, at times, can be an exercise that
is time-consuming, necessary and frequently automatic and rote.
Often, compensation professionals go through the motions, just trying to meet
some end without considering the underlying rationale for their actions, such as
when they use a hiring rate, a performance management form with measures and
rating scale or a grade structure with progressions and ranges. Consistency surely
is necessary, but sometimes it comes at the expense of true reflection and change.
The question, “What is base salary?” can startle compensation professionals who
so often are caught up in the doing. Surprisingly, this simple question, which relates
to one of the most fundamental business practices, can mysteriously stump scores
of professionals. Despite the great energy spent in setting base salaries, many
practitioners falter when they are asked to explain what they are trying to achieve
and what salaries are they’re intending to represent.
When an array of an organization’s salaries is created, those dollar values embody
implicit and explicit rules and meanings. They are an archive and rendering of past
decisions. Among other things, they may signify the following:
• Market conditions
• The importance of a job to the company
• Employees’ past and potential performances
• Prior experiences
• Hierarchical constraints (e.g., it is impossible to earn more than the boss)
• Tenure
• Skill sets
• Internal pressures to attract and retain talent.

86 | Elements of Base Pay Administration

 Maintaining that base salary is all of these misses the point and is an admission
that base salaries are, in essence, an amalgam of necessity and expedience; products
of impromptu decisions and reactions, versus the outcome of sound, deliberate planning.
The question, “What is base salary?” forces a revisiting to what is most important
in determining base salary and, in relation, how best to fashion salary programs.

Creating a Definition
Step One
A healthy first step in salary planning is to stop and craft a definition for base salary:
“Base salary in this organization represents …” What?
Limitless possibilities abound, which is why asking this basic question is so
essential. Most companies make an assumption that salaries should denote the
relative worth of an employee (his/her market value in the context of an
organization’s mission and culture) combined with some indicator, or set of
indicators, of organizational value. These indicators usually — but not necessarily —
are performance-related and should be specified. Performance can be construed as
having two general dimensions:
• Outcomes versus process (content). Outcomes represent the tangible results
of one’s efforts: The fulfillment of goals, the meeting of expectations and the
realization of accomplishments. Process refers to the enablers of those outcomes:
The competencies, skills and abilities that are necessary ingredients for success.
• Present versus future (time). Present performance pertains to contemporary
events, usually within the past year, or how a person has executed his/her job
responsibilities in the current business-planning cycle. Future performance is the
anticipatory value a person has on future assignments and job duties based on the
qualities he/she possesses that may (or may not) be used in the current position.
Sometimes, organizations ascribe future values to people who are designated as
“high potential.” There is a multitude of choices in how to attribute value.
An organization’s approach to measurement should help underscore its
claims (e.g., “superior compensation for superior results”). At the group level of
measurement, this may imply that one company is better than all others on a set
of select measures. At the individual level, this may imply that one employee
is better than most others both inside and outside the organization on a set
of select measures.
For example, the best researcher in a pharmaceutical company is not just someone
who outshines his/her peers within the organization; it is someone who every
other pharmaceutical company wants. “Superior” usually requires a reference
to something or someone who is independent or outside of the system to which
one belongs. A company’s standards of excellence may not conform to others’
conceptions of excellence.

Articles & Perspectives | 87

Step Two
Secondly, base salary definitions should incorporate how practitioners arrive at
indices of worth by explaining how the various relevant components will combine
to affect base salaries. For example, it is insufficient to say only that base salaries
mirror the market value of positions, results achieved, and skills and competencies
expressed. It’s necessary to describe the manner by which these elements blend
together. Consider the three employees in Figure 1 and their respective scores on
two hypothetical performance dimensions. All else being equal, who would you say
should be paid the most relative to a market median?
With no basis
FIGURE 1: Which Employee Should Be Paid
or criteria from the Most Relative to a Market Median?
which to work,
the answer is Employee Performance Results Performance Process
Employee 1 Rating = 4 Rating = 2
unclear; there is
Employee 2 Rating = 3 Rating = 3
no understanding
Employee 3 Rating = 2 Rating = 4
of base salary.
Measures could
be combined additively or multiplicatively, depending on how companies think about
performance and, ultimately, how they care to reward people. Consider the following:
• If one practitioner believes that one type of performance augments another
(as process surely may do for outcomes), then multiplicatively combining scores
may be the prudent option.
• If another practitioner believes that base salaries reflect the sum total of an
employee’s performance — both process and results — then the scores are
additively combined and the three employees are equal.
• If another practitioner weights the results three times more important than
process, then Employee 1 would be the better performer.
• If yet another practitioner finds that base salaries reflect the joint effort of
process and outcomes (i.e., performance is greater when employees possess both
aspects in greater degrees), then Employee 2 would be the better performer
(results multiplied by process).
Some organizations use what can be called a conditional definition of performance:
They limit how high a manager, for example, can score on results based on how high
he/she scores on process. The latter limits the former, reasoning that, “We will measure
you on your results, but we will only count results up to a certain point depending
on how well you perform on process.” This measures performance on one’s ability
versus chance or other factors. In the example, if a results score can only be as high
as a process score, Employee 2 again would win.

88 | Elements of Base Pay Administration

From Conception to Reality
After defining base salary and specifying how monetary values are assigned to
employees, the employer needs to follow through on conception. The following
three allocation rules, or a combination thereof, can be used to attach base salary
amounts to people.
Equity
Equity is the familiar principle that “to each according to his/her contribution.”
The argument is that employees’ salaries should be aligned with their performance
in the way in which they are conceived: Past or present, process or outcome. The
most common way of legislating equity has been through merit matrices. (Contrary
to the rumor that this tool has died, matrices are alive and well and almost universally
used in one form or another.)
Briefly, matrices view base salaries as a function of two components: Position in
range and performance. Better performers who are the farthest below their
midpoints receive the highest pay increases. Note: These systems recognize that base
salaries are dynamic, and pure equity (performance-based distributions) is achievable
only over time.
Also, it is critical to note that merit matrices or grids have their own embedded
logic or assumptions. First, with standard grid systems, base salaries represent
historical competence in one’s position. That is, base salaries not only represent
what people recently did, but what they have done in the past. The ostensive
difference between a person well above midpoint versus one well below is not
just this year’s performance, but last year’s, the prior year, etc. Secondly, current
performances have different meanings depending on where people are within
the salary range. For example, a given performance rating has greater implication
for to base salary and greater incremental value for employees lower in the range
versus those higher in the range.
There is nothing inherently right or wrong with these underlying assumptions, but
they are, nonetheless, assumptions, and some companies find them palatable while
others do not. Those that object typically believe that grids do not help create the
meritocracy that is sought and cite two problems with achieving equity in this fashion:
• The divergence of dissimilar performers on pay for those below midpoint is too
slow. (Higher performers do not readily break away from the pack due to resource
constraints and other situational variables.)
• The convergence of dissimilar performers on pay for those above midpoint is too
great. (As per the usual guidelines, mediocre to good employees begin to catch up
with the truly superior employees.)
Essentially, some companies maintain that grids present too many contaminants
to equity. Indeed, their suspicions are corroborated by studies that show the best

Articles & Perspectives | 89

predictors of base salaries are starting wage and time in the organization, with
performance a sporadic and less influential contributor.
Most variations on a merit grid theme are attempts to refocus definition and
meaning of base salary as a proxy for performance by correcting the purported
defects. To bring salaries closer into alignment with true differences among
employees, some companies take the following steps:
• Insert time parameters. Companies put time delimiters on how long it should
take employees who display certain aptitudes and produce certain results to pass
midpoint, usually shortening the period for the perennial superstars.
• Broaden ranges or loosen the upper end of grids. Companies allow greater
discretion to continually move people who perform well up in salary.
• Allocate separate merit pools. Companies allocate more of their merit dollars
to employees who are designated high performers (and less to others) so that
differentiation between employees is speedier over time. This method often is used
in tandem with procedures that restrict the number of high performers, more
quickly widening the differences in pay among people who perform differently.
• Use separate grid salary ranges for separate populations. Companies carve
up their salary ranges and apply the conventional grid to these various ranges for
people who are low, medium and high performers, respectively. Essentially, they
use higher midpoints for higher performers, permitting more rapid movement
and faster monetary recognition of employees’ contributions.
All of these approaches attempt to pay according to performance. To fulfill this aim,
companies need to resist the habits of mechanistic application and ad hoc solutions.
Equality
Some companies consider person-related differences to be irrelevant to their base pay
decisions. They take the time to collect and measure individual and specific items,
such as performance, and provide feedback accordingly. But, when it comes to money,
everyone is paid about the same by design. In this instance, the distributive rule is
“to each equally,” or “one for all and all for one.” This may appear to be a simple rule
with a simple application, but it is tricky in practice because the rule can be applied
at any level of reward. For example, you can pay people equally and either well below
or well above market. So, even in this instance, the whats and whys of base salary
have to be determined.
As an example, consider a major chemical company that believes that everyone
should be paid at the 75th percentile against their relevant set of comparator
companies. Base salaries across the organization represent a particular market
position, but several considerations go into this market placement (relative labor
costs and affordability notwithstanding). The abilities to attract and retain talent,
motivate employees and encourage collegiality all are viable concerns. This raises

90 | Elements of Base Pay Administration

a broader issue about base salary: How to establish a definition and attendant actions
that retain the intended functions of salaries. The concept of equity is attractive
because, presumably, equity promotes motivation and, correspondingly, equality
does not. This is another common assumption that mostly goes unchallenged.
As it happens, evenly high salaries in concert with other HR programs (e.g.,
performance feedback) may facilitate motivation and other positive behaviors.
Research shows that, as people’s salaries increase, they become less concerned
with relative pay proportionate to their contributions. That is, if you treat everyone
especially well, they are less vigilant about how others fare in the pay system.
Also, evidence suggests that high pay stimulates positive employee attitudes and
citizenship and encourages greater effort (aka, “the overjustification effect”
or, high pay acts as an inducement to try harder). The overriding point is that
compensation professionals sometimes are dismissive of potential base salary
programs because of an errant belief system.
Need
At the programmatic level, dollar allocations based on need usually resemble equality,
with salaries uniformly set at median market levels and annual adjustments made
according to the cost of living. Base salary’s purpose is to provide sustenance;
to make sure that people have enough. These systems typically are found in large,
privately held companies in which cultures of paternalism tend to prevail.
The problem with need-based base salary programs is that ultimately, needs are
personal and idiosyncratic. Using base salaries to respond to employees’ economic
situations or shortfalls (e.g., marriages, birth of children, prolonged periods of tepid
pay increases, etc.) yields programs that are counterintuitive. Promotions and raises
are made without due consideration to other things that matter. People are paid
for responsibilities that they cannot fulfill and life choices to which not everyone
subscribes. Nevertheless, it is conceivable to develop salary programs founded
on need, and some companies literally make pay decisions on these grounds.

You Have to Pay What You Have to Pay — Or Do You?

What does the core definition of base salary encompass and exclude? Most
companies create policies that attempt to handle anomalies and preserve the
core meaning of “base salaries.” Usually, this involves specifying what you
will handle through base salaries and what is best left to the other varieties
of rewards and HR devices.
For example, you may believe that years of service is an important corporate
quality, but one that you prefer to recognize with a gold watch as opposed to
ramped-up wages. Similarly, frantic managerial appeals for higher salaries to retain
employees may be handled through other means (e.g., variable compensation, new and
energizing job assignments, car allowances, etc.).

Articles & Perspectives | 91

 Perhaps you may decide to impose dollar limits on new-hire salaries if paying
the amounts required to attract a candidate would exceed a level of salary that is
tolerable, and instead treat the difference with sign-on bonuses or stock. Without
a strong foundation and resolve for what constitutes base salary, the keepers of the
salary system will be mercilessly subject to a free-for-all for dollars with a resulting
program that makes little sense.
The expression, “You have to pay what you have to pay” suggests that whatever
you pay, regardless of cost, is always right. If it’s necessary, then it must be correct,
right? Wrong. Pay programs that strive for this so-called flexibility typically do not
have order and seldom are regarded as fair by employee beneficiaries.
For example, Sally is a soft-spoken, solid citizen and performer who quietly takes
what she is given, which is less than she deserves; hot shot Mark was hired at a
ridiculous premium; Deirdre’s pot was sweetened when she threatened to quit; Tom’s
salary was enhanced following the successful completion of an important project —
as a kind of thank-you; Bart, who is a decent performer, hasn’t gotten a raise in two
years because of his misfortune of working in an underachieving division; Lionel has
been with the company forever and has profited through the cumulative effects of time.
Not that these things don’t happen, or even that they shouldn’t. But in the tough
and often-thankless world of the compensation manager, someone should have the
discipline and assertion to produce a plan that underscores which considerations
will be included and not included in salaries.
We sometimes think that we are doing a pretty good job at managing salaries
when, upon analyzing our pay dispersions, we discover that most employees fall
within a competitive range. We have seen these results produce a modicum of
comfort. In truth, it isn’t that hard to pay people within a competitive range.
The margins are relatively wide ($36,000 to $54,000 for a position with a $45,000
midpoint), and those at the fringes either take care of themselves (people below
or near minimums never join the organization or self-select out) or are taken care
of (those near or above the maximums are promoted, retired or let go).
Simple omnibus comparisons to the market do not prove that a salary system
is working. When an employee asks, “What is base salary, anyway?” you should have
a ready answer with evidence to attest to the validity of your assertion. Base salaries
should be revealing of the organization’s core factors and principles.
The proof is in the demonstration that observed distinctions in salaries are
legitimate. Are actual salaries explainable, or predictable, from the information used
to generate them? (Statistical methods can answer this question.) The results of your
query show how far the company’s base wages depart from your stated intentions
and the extent to which extraneous factors were permitted to encroach on your
program. Competitive analyses of your pay practices ought not simply be an exercise

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in determining how you measure up to market, but ought to offer a pragmatic and
rigorous way of examining the logic of your salary program and its susceptibility
to capriciousness.

About the Author

Michael O’Malley, Ph.D., is a vice president and practice leader in the New York office
of Clark/Bardes Consulting. He has more than 20 years of human resources consulting
experience, with areas of specialization in compensation design, organization development
and research, and leadership. O’Malley is the best-selling author of Are You Paid What
You’re Worth? and Creating Commitment. He has been the featured guest on more than
100 radio and television broadcasts and is a frequent keynote speaker at national
conferences and executive retreats.
O’Malley has a bachelor’s degree from Case Western Reserve University, where he was
selected Phi Beta Kappa. He has his doctorate in social psychology from Vanderbilt
University. He is a member of the American Psychological Association and the Society
for Industrial and Organizational Psychologists. O’Malley is the winner of both the Stephen
Bednarik and Richard Griffith Memorial awards for achievements in the field of psychology.

Reprinted from WorldatWork Journal Third Quarter 2003.

Articles & Perspectives | 93

Market Pricing 101: The Science and the Art
By Deb Grigson, John Delaney and Robert Jones, JD, CPA, CEBS

Whether you are a seasoned veteran who market prices 2,000 jobs a year or you are
newly charged with converting your company’s 20-year-old point system to a market-
based pay system, the world of salary surveys — just like the stock market — is ever
changing. Staying abreast of new developments will keep you ready and able to meet
the challenges placed on you as your company’s market-pay expert.
The effort to balance current payroll against the market is critical because of the
need to hire, retain and properly motivate the best people. Really, the market is
the backdrop behind which a company’s show is created. In this Web-access world,
one can assume that every employee has a fairly good idea of how much his or her
co-workers earn in terms of base salary. Using market data effectively helps the
business logically and consistently present its market-pay position to employees.
While an employer’s market position is important, the consistency with which
market data is collected — and the consistency in creating supporting pay polices
around that market — is what creates an atmosphere of employee commitment.

Step One: Buy the Right Data

There are many surveys from many different sources available every year. Selecting
the right survey sources is predicated on a good understanding of the business
and how it relates to the market. To start, there are a few questions that need
to be answered:
• From which market do I hire employees?
• To what market am I losing employees?
• In which market would my company like to compete?
The answers to these questions will create a description of a company’s market
position and lead to the survey sources that provide data relevant to a specific
market. You may find that different job groups have different markets. If so, then
different survey sources are needed for different employee populations or, at the very

94 | Elements of Base Pay Administration

least, a survey that has the data cut (i.e., the way a particular vendor separates
data, such as by geographic location, number of employees or market segment)
the company requires. (See “Market Comparators” on page 101.)
After determining the market your company competes in (or the one it wants to
compete in based on its job groups), it’s time to select the surveys. Survey vendors
will willingly review the participant and job list available in their surveys. Clearly
describe to the vendor the market comparisons that best represent the business, then
determine how many of your company’s positions are represented in the selected
survey’s job list. It is relatively easy to find surveys for jobs that are common to many
industries (e.g., administrative assistant), and a good all-around survey will have
most of these jobs available.
But it may become more challenging to find survey sources when looking for
executive jobs, unique industry jobs and/or sales jobs. But there are resources, such
as Survey Sources for U.S. and International Employee Pay and Benefits, published by
Personnel Systems Associates, that can help focus the search. While the cost may
be more per useful market data point due to the specialized nature of the data,
it may be worth the money because it’s the only way to obtain the necessary data.
Surveys come in all price ranges and many formats beyond the traditional paper
reports. PDFs and electronic and Web-based tools provide flexibility that was not
practical just a few years ago. Choose the format that works best for the company.
Depending on the number of pricings you expect to conduct annually, one system
may be more cost-effective than another. Many vendors (e.g., Radford, McLagan, etc.)
maintain compensation Web sites that allow users to review the qualification of the
survey, costs and methods for delivery.
Light users (i.e., fewer than 50 jobs annually with minimal analytic requirements)
will find that buying a printed or PDF report is sufficient, as data can be manipulated
via in-house spreadsheets. “Power” users (i.e., more than 50 jobs annually with or
without fairly extensive analytic requirements) will find electronic versions more
easily manipulated and shared among stakeholders.
Power users should consider some form of Web-based market-pricing tool that
enhances the use of the electronic data and facilitates the process of creating
composite pricings (multiple survey jobs and sources). These tools will cut in half
the time commitment for market pricing and even survey submission. Plan how
much administration is necessary for the market-pricing effort, and then make sure
you have the surveys and systems to meet the demand.
Club, Industry-Specific and Local Surveys: Gold
Surveys come in all shapes and sizes. Many companies participate in and subscribe
to club, industry-specific or local surveys.
• Club Surveys. Provided via a professional organization. Participating in and

Articles & Perspectives | 95

 receiving data from the club survey is a privilege of membership. Local and
industry-specific surveys can be club surveys. These surveys are chosen when they
closely represent a company’s market position and the data cannot be found more
economically elsewhere.
• Local Surveys. Often provide a number of general-industry entry-level positions.
To find local survey data, check with local HR organizations to see if they can
provide the name of a local survey provider.
• Industry-Specific Surveys. Usually provided via a professional organization
specific to the business.
For a survey to be useful, the participant list, survey jobs and specific data cuts
must be relevant to the company’s established market position. Evaluate the quality
of the data before committing to a purchase. Review the provider’s methodology
section. Many of the following facts will be described in the methodology section:
• Number of participants
• Data collection period
• Excluded data and reasons
• Positions included
• Type of data cuts available, industries, geographies, etc.
• Information about the survey vendor.
If you choose to buy a club survey, you may have an opportunity to participate
in creating the survey jobs and methodology for data collection and analysis.
This is a good opportunity to ensure that the survey provides your company with
the positions and data you need most. Note of caution: The survey jobs should
always be generic enough to ensure comfortable matching by selected businesses
outside of your own.
Custom Surveys
Despite the array of surveys available, there are many underrepresented niche
positions or industries. Custom surveys can help define these hard-to-reach markets,
and can answer unique, qualitative questions (e.g., the frequency of the incentive
payout). If you choose to conduct a custom survey, choose a partner with experience
collecting and analyzing compensation data. Current laws and trends in governance
strongly suggest that a “disinterested” third party conduct salary surveys. A good
partner also will ensure that each survey question is designed to elicit the quantity
and quality of answers most useful to you, the survey sponsor. Custom surveys
can be conducted either using your company’s name as the source or anonymously.
Typically, all participants receive the results in exchange for participation.

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Step Two: Defensible Market Pricing
After developing the market position and selecting the surveys, it’s time to begin
the market-pricing task. Collect job codes, titles, families and descriptions for the
jobs being market priced. Also collect the following:
• Incumbent data
• Unique identifiers
• Base pay data
• Bonus pay data
• Long-term incentive data
• Demographic data (e.g., department, location, budget code, etc.)
Ensure the HRIS request has any possible “cuts” of data you may want to use to
analyze positions against the market. Experts agree that jobs should be priced based
on job content alone.
Next, organize position data up front. Think through how the company will want
to compare the data (e.g., by business unit, budget code, department, job functions
and families, etc.).
Position Matching
Select a family of jobs to price, then organize the jobs by their natural hierarchy.
Select the job at the bottom or the top of the hierarchy and match that job first.
This will establish an anchor job.
Job matching is the process by which a company’s jobs are matched to a survey’s
jobs. Many survey vendors offer job-matching conferences. These provide excellent
opportunities to validate the matching exercise and ensure that you are using the
same measuring stick as other compensation experts.
To get started, read your job documentation and note the facts about the following:
• What the job does
• How much experience is necessary to do the job
• Who the job reports to
• Whether the position is supervisory
• The extent to which the successful completion of the job’s content affects the
company’s overall success.
This process is called leveling. It is important to understand the level of the
company position and the level of the positions documented by the survey. Generally,
they are not the same.
The importance of job matching cannot be overstated. It is important to carefully
choose matches and document the reasons for selecting each match; clients and
business leaders will challenge the matches. If there are questions about the job

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responsibilities for an in-house job, call the supervisor and review the responsibilities.
If there are questions regarding the vendor’s survey job description, call the vendor
for clarification. After selecting the job match and level, it’s time to select the data cut.
Selecting a Data Cut
This goes back to the very first step. When you considered potential survey sources,
you also considered how to best describe the market. Selected data cuts should follow
your market (i.e., if you determined that the company is a pharmaceutical firm with
revenues of $1.5 billion and those options exist in the survey, the data cut is an
accurate reflection of the company’s market position).
Note of caution: It is important to be consistent throughout the process to
create credibility. The surveys and data-cut selections should always be consistent.
If you cannot find adequate representation for your chosen market, then drop
the qualification that makes the choice too narrow. In the case of the $1.5-billion
pharmaceutical company that employs 500 people, the qualification to cut likely
is the number of employees. After making the decision to broaden the scope of your
search, stick with that search for the remainder of the market pricings. Some matches
may have to be dropped because they do not have the exact market comparators.
This is expected, and you will have a more defensible analysis when providing the
business with an apples-to-apples study.
After determining that the survey job and the company job are a good, defensible
match, the next step is to determine the quality of data. General parameters include
the following:
• Number of Companies in the Match. Data is less reliable with fewer companies.
Usually, surveys will not report less than five company matches. Typically, five
company matches offer the best opportunity for a decent data range.
• Number of Incumbents in the Match. Data is less reliable with fewer
incumbents. Some jobs can be expected to be one company and one incumbent,
but you should only accept these ratios when it makes sense based on your
understanding of the job content.
• This Year’s Data vs. Last Year’s Data. Note: This requires two years of data.
A data analysis can be conducted to see if the trend is reasonable, but the definition
of “reasonable” is variable — it depends on the market. Consider the technology
industry as an example. In the past two years this segment’s salary data has slowed
considerably, and there are no expectations that the data will move much up or
down. If there is a jump in the data, some investigation is necessary to determine
where the data is coming from and whether there has been a change in quantity
or quality of data providers.
If after close examination you do not feel the data is good, throw it out. Remember:
Using bad data erodes your professional credibility and the company’s ability to rely
on the market.

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Data Adjustments
What if the match is pretty good, but not perfect? Vendors place the most
important job responsibilities in the first sentence of the position description.
Based on this parameter, try to achieve at least an 80-percent match. A plus or
minus 20-percent adjustment (i.e., a job content adjustment) is fine, provided
the survey data does not have a better match and you are reasonably content
with the match. To defend your position, document your reason for creating an
adjustment to the data point. Not only will the documentation help defend the
market position, it will help re-create your work next year — long after you’ve
forgotten when you chose this path in the first place.
Other adjustments can be made, as well, and should represent the position match
and the company’s market position. The following adjustments are common:
• Aging the data
• Making geographic adjustments
• Leading or lagging the market.
Data should be aged consistently. Vendors collect market data as of a specific
effective date. That data can be aged to today or to some time in the future. Every
survey source can have a different effective date, so the apples-to-apples rationale
applies. Remember: Pick one date and stick with it.
The first question to consider is how much to age the data. One option is to age
all data to the market’s reported annual change rate, which is found in the
pay-practices section of the selected surveys and/or in one of the merit-increase
and salary-structure annual surveys. Many companies will pick one aging percent (e.g.,
4 percent) and stick to it across company jobs, surveys and various measures (i.e., base
pay, bonus pay, long-term incentives). A case can be made for variability; for example,
officer positions versus all others. Often these populations have different aging rates.
A case can be made for a different aging percentage for base salary and variable pay.
Again, if the market supports it and it can be used consistently, it could be a valuable
tool for creating your defensible position in the market.
Geographic adjustments usually are made to data points when the position is
hired locally, but the data is collected nationally. Take, for example, the position
of administrative assistant. If you collect national data for the position but need to
attract and retain in Manhattan, you will find that you need to make an adjustment
to the original data to ensure a competitive rate. Geographic adjustments typically
are applied to the market pricing one it is complete.
Finally, a company may choose to lead or lag the market in a particular sector
or job group to reflect a business position. If a company has a group of jobs that
are key to the business, it would be effective to lead the market. In this case, consider
adjusting the market data position by some agreeable percentage to reflect the
company’s commitment to the position.

Articles & Perspectives | 99

Survey Composites
The use of three or more survey sources is recommended. Remember: Despite a
vendor’s best efforts, levels of organization participation change annually. As such,
there will be some variability in every survey source. Using several different sources
creates less variability for pricings just by creating a bigger data pool. The market
pricing that results from the combination of several survey sources is called a
composite. Composites can be created in several ways:
• Simple average of the data points
• Employee-weighted (the weighted average based on all reported employee data
points, when the survey vendor provides data this way)
• Company-weighted (the weighted average based on the number of companies
providing aggregate data, when the survey vendor provides data this way).

Difficult-to-Match Jobs
Most companies have a number of jobs that are not easy to match. This typically
requires a bit of creativity. Sometimes the position is a combination of jobs that
can be matched independently; for example, the manager of housekeeping and the
manager of engineering. If one incumbent holds both jobs, then a blended approach
may be the best way to go. There are a couple of questions that can help guide this
process:
• What percent of time does the incumbent perform duties for Job A? Job B?
• Are the skills, experience and/or education more or less for one of the jobs?
Based on your answers, you can apply a relative weight to the two jobs and combine
them 50/50, 80/20 or whatever the case may be.
Another technique is to match the job to a matched internal job, then apply an
adjustment factor of 5 percent to 15 percent. If the adjustment is up, it is called
a premium. If the adjustment is down, it is called a discount. This technique indicates
that the two jobs are similar in content, but one is bigger or smaller than the
matched internal job.
When making adjustments and allowances, document the work. As stated,
this adds credibility to the pricing and it sets you up for successfully re-creating
the work next year.

Benchmarking
Benchmarking is the practice of choosing a sample of the total number of jobs
in the company for the market-pricing analysis. This is usually done when it is
not necessary or economical to market price all positions in a company. A few tips
for successful benchmarking include the following:

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• Try to price 30 percent to SIDEBAR: Market Comparators
50 percent of the jobs.
Surveys and survey data typically represent
• Select jobs from each job grouping.
a variety of market comparators, including
• Include jobs that are common to the following:
many companies and can be • All data
reliably found in the survey data, • Revenue size
along with a few jobs that you think • Profitability ˜

will be hard-to-find positions. • Geography

• Industry
As a starting point, try to use
• Employee count
a first-level job and the highest
• Organization type (e.g., nonprofit/profit)
executive job in the study, along
• Budget
with selected positions in that range. • Specific peer group comparisons
This will help frame all positions • Net income
and ensure they are appropriately
anchored in the market. The jobs
that you do not market price will need to be “slotted” into the organizational
hierarchy after you are satisfied with the benchmarked market-pricing results.

Successful Market Pricing

Upon completion, check pricings against the current incumbent average, job by job.
When the market and current incumbent pay levels are markedly different, experienced
market analysts evaluate the company’s documentation, then the incumbent’s history
and contributions to determine the reason for the mismatch. It may be that the
job is undervalued or overvalued, or perhaps the job documentation is inaccurate.
Every aspect of the job should be analyzed to ensure accurate matches. This is the
cornerstone of the market-pricing process. Once the process is complete, you are ready
to start using your data to analyze your company’s position against the market.

About the Authors

Deb Grigson is an assistant vice president with Aon Consulting and has been a WorldatWork
member since 1998.
John Delaney is a senior consultant with Aon Consulting and has been a WorldatWork
member since 2002.
Bob Jones, JD, CPA, CEBS, is a senior vice president and regional practice leader of the
Northeast Region for Compensation for Aon Consulting and has been a WorldatWork
member since 1997. They can be reached at 610/834-2100.

Reprinted from workspan October 2004.

Articles & Perspectives | 101

Linking Compensation Policies and Programs
to Organizational Effectiveness
By Dow Scott, Ph.D., Richard S. Sperling, CCP,
Thomas D. McMullen and Marc Wallace

There is little agreement on which pay philosophies are best in any given situation.
With the exception of executive compensation, few empirical studies attempt to link
compensation policies and programs to organizational effectiveness. Lack of empirical
evidence, however, has not prevented compensation managers, academicians and
consultants from prescribing a variety of policies and programs aimed at providing
organizations with a competitive advantage. Since labor represents a major cost
of operating a business, it would be in the managers’ best interests to learn which
pay policies and programs are most prevalent in successful organizations.
Consequently, recent research tried to determine which base pay compensation
programs are most commonly used in organizations today, and if a relationship exists
between compensation programs and organizational effectiveness.

Research Methods
Identifying the Research Population
The goal of the first phase of the study was to identify the pay policies and practices
organizations are using today by reviewing literature and interviewing academics,
consultants and practitioners. The research team drew heavily upon its more
than 80 years of combined experience in the compensation field. Differences
in terminology and program definitions used in the compensation field created
a significant challenge to the research. To meet this challenge, the team tried to
find the most common or universally used terminology and to provide definitions
for policies or programs to minimize confusion for respondents.
The team also recognized that there are variations in pay policies and programs
across different organizational levels and occupations within the same organization.
For example, exempt and nonexempt employees within the United States often are
paid very differently. Consequently, research focused on managerial and professional

102 | Elements of Base Pay Administration

employees since most organizations tend to have a uniform set of policies and
practices for this group. The senior executive team was excluded from the study
because its pay policies and practices often are unique. Furthermore, compensation
managers would have substantial knowledge of the policies and programs for
professional and managerial employees, especially since they are probably included
in this group for pay purposes. Finally, this employee group tends to have a
significant impact on total organizational performance, making this a critical group
to understand in terms of pay policies and programs and organizational effectiveness.
Developing the Survey Instrument
In Phase 2, the team constructed a data-collection instrument with statements
and response categories that would generate a set of standardized responses so the
data could be quantitatively analyzed. To enhance the richness of the findings, open-
ended items were included to ensure that nonstandardized responses were captured.
During Phase 2, there were three cycles of pilot tests with compensation managers,
consultants and academicians before the survey instrument was finalized.
The final version of the survey instrument asked participants to describe and evaluate
their managerial and professional pay policies and programs as they related to the
following:
• Compensation philosophy and goals
• Methods of valuing work
• Base salary structure and design
• Pay administration and communication.
The study did not examine incentive pay programs because a lengthened survey
might have discouraged compensation managers from responding. A second study
is in progress that will examine the relationship between incentive pay plans and
organizational effectiveness.
Defining ‘Successful’
Three measures determined the effectiveness of the pay policies and programs.
First, the team compared the pay policies and programs between companies that
received Fortune magazine’s 2002 “America’s Most Admired Company” designation
for their industry sector and those that did not receive that designation. Fortune’s
“Most Admired Companies” is a highly regarded annual survey of corporate
reputations of more than 10,000 executives, directors and analysts. Conducted by Hay
Group, the survey invites them to rate companies, overall and within industry
groupings, on criteria ranging from financial soundness and use of corporate assets
to quality of management and quality of products and services.
Second, the team collected 2002 total shareholder return (TSR) information
for the publicly traded companies that responded to this survey. TSR is defined
as the monthly percentage growth in stock price and dividends paid over the

Articles & Perspectives | 103

five-year period. The team divided the TSR data into quartiles and compared
survey responses for the highest TSR quartile (i.e., the top 25 percent of companies)
with data from companies in the lowest or bottom quartile of TSR (i.e., the lowest
25 percent of the companies).
Finally, survey respondents were asked to make a personal assessment of the
effectiveness of their compensation policies and practices. Although this measure
may be subjective, a compensation manager’s perception of the degree of program
effectiveness is a reliable indicator of success.
Response Rate
More than 9,000 WorldatWork members were invited to complete the survey.
The membership sample targeted the highest-level compensation manager for each
company. The survey was posted on the WorldatWork Web site for two weeks prior
to the December 2002 holiday season. An e-mail communication was sent to each
compensation manager from the sample requesting that the selected compensation
managers access the Web site and complete the survey. There were 1,226 responses
— a 12-percent response rate. Typical response rates are usually well below 10
percent. Over 99 percent of respondents completed the entire survey and were
included in the analysis. Figures 1, 2 and 3 on pages 104 and 105 show how the
sample represented virtually all industries and organization sizes.
The analyses reported here are descriptive statistics and t-tests comparing
responses between “Most Admired” and other companies, and comparing companies
with the highest TSR (i.e., top quartile) and those with the lowest TSR (i.e., bottom
quartile). Findings are examined in three sections:
• Pay communication and employee understanding of the pay programs
• Direct compensation policies and practices
• Methods companies used to value work.
˜
FIGURE 1: Organization Size (Number of Employees)
Pay Communication
and Employee 100-499
13%
Understanding 20,000 and Over
Limited information 22%
is communicated about pay 500-999
10%
programs to managerial and
professional employees.
10,000-19,999
When asked how much 9%
information was shared 1,000-2,499
15%
with employees about their
5,000-9,999
pay, respondents indicated 15%
the following: 2,500-4,999
16%

104 | Elements of Base Pay Administration

• 23 percent provided minimal FIGURE 2:
˜
Organization Unit
information.
• 59 percent provided Subsidiary/Group/Division
information regarding the 17%
design of the pay program.
Regional HQ 4%
• 7 percent provided the base
Plant/Branch 1%
salary for the employee’s pay Other 3%
grade.
• 23 percent provided base
salary ranges for all pay Headquarters 75%
grades or jobs.
• 3 percent provided actual
pay levels for all employees.
Organizations used a variety of channels to communicate the pay program, with a
heavy reliance on communications through management, including the following:
• 86 percent communicate via individual discussions with a supervisor.
• 54 percent utilize individual discussions with the HR or compensation department.
• 41 percent communicate via e-mails and memos.
• 34 percent communicate via employee meetings.
• 31 percent post
information on the FIGURE 3: Industry
company Web site. Percent
• 2 percent never Number of (May not add to
Respondents 100 due to rounding)
communicate. Manufacturing 225 19%
The frequency of Health care 144 12%
pay communication High Tech 118 10%
is low, with 52 percent Finance/Banking 106 9%
Wholesale/Retail Trade 82 7%
of the respondents
Insurance 69 6%
indicating that they ˜
Business Services 46 4%
only communicate Utilities 40 3%
with employees once Communications 40 3%
a year, 35 percent two Service – Nonprofit 34 3%
or three times a year Transportation 28 2%
and 10 percent four Oil/Gas/Natural Resources 26 2%
to six times a year. Construction/Real Estate 19 2%
Government 16 1%
There were no
Education Services 15 1%
substantial differences
Publishing/Newspaper 11 1%
in how employers Other 156 13%

Articles & Perspectives | 105

communicate to employees across different levels of TSR and companies that either
held or did not hold “Most Admired” designations.
More than two-thirds (68 percent) of respondents evaluated their pay communications
to be not effective or marginally effective. Interestingly, companies identified as “Most
Admired” or those in the top quartile of total shareholder return (TSR) did not evaluate
their communications any more positively than the companies that were rated less
effective. However, a more in-depth examination of how pay philosophy information
is communicated reveals differences between effective and less effective companies.
Ninety-one percent of respondents indicated that their company had a compensation
philosophy. However, only 62 percent of these compensation managers said their
philosophy was documented. Articulating the pay philosophy in writing was a
distinguishing characteristic of “Most Admired” companies and those companies
with the highest TSR. ˜
FIGURE 4: Prevalence of Compensation Philosophy
(See Figure 4.)
A written philosophy
indicates senior 91%
Have a Philosophy
management
understands and is 62%
committed to aligning Have a Written Philosophy
its business strategy
with pay, suggesting
that alignment can have a positive impact on organizational effectiveness.
A documented philosophy also may be interpreted as evidence that management is
attempting to communicate its business and compensation strategies to employees.
If a written compensation policy facilitates communication of the business strategy,
employees may respond to this message by working more effectively. As might be
expected, survey results indicate that employees are more likely to understand their
company’s pay philosophy when it is documented than when it’s not documented.

Base Pay
Compensation managers overwhelmingly reported that base salaries and total cash were
positioned at the middle of the market. Over 80 percent of respondents said their goal
for base pay for managerial and professional employees was the 40th and 60th percentile,
and, in fact, 72 percent believed that their actual pay levels were at or near median.
(See Figure 5 on page 107.) Although statistically it is impossible for everyone to be
median, compensation managers may either be targeting different labor markets or
considering such a large variety of jobs that they covered most of the overall pay
distribution.
Most pay ranges for managers and professional employees were less than 70 percent
wide. There was no discernable difference in range width between companies in the top

106 | Elements of Base Pay Administration

quartile of TSR and those FIGURE 5:
˜
Target and Actual Compensation Levels
companies not providing that Compared to Market
level of return. Unlike what
Target Pay
the compensation literature
81%
implies, the survey data
Base Salary
indicates that few companies
56%
have implemented
Total Cash
“broadbanding” for their
professional and managerial Actual Pay
employees. 72%
When asked how base Base Salary
salary increases were 55%
determined for managerial Total Cash
and professional employees, Median = 50%

the following was reported:

• 68 percent said that individual performance was compared to job standards.
• 50 percent compared performance to pre-established objectives or MBOs.
• 50 percent used the market value of the position.
• 22 percent judged performance on skill or competency acquisition.
• 9 percent based increases on years of service.
• 8 percent gave general increases to everyone.
These data indicate that most pay increases are based on individual merit, such as
performance, compared to job standards, competency acquisition or MBOs. Less than
10 percent of respondents indicated that their organizations used years of service
or general increases. However, 50 percent said they would give pay increases based
on the job value in the marketplace. This represents a major change in how pay-
increase budgets are used today compared to even five years ago. This change may
be because merit budgets have been modest in recent years and increases have not
been substantial enough to move employees with good performance records toward
the top of the range. Nearly one-third (33 percent) of the respondents indicated
that their performance-rating system does not, at least directly, drive pay increases.
This is a significant minority given the current emphasis on pay for performance.
Variation in pay increases between high and average performers was surprisingly
narrow. Almost one-third (32 percent) of respondents said that pay increases were
more than double the increases given to average employees. Although the idea that
top employees should be highly rewarded, even during economically difficult times, has
received considerable press, this does not seem to be occurring in most organizations.
Survey findings indicated that base pay structures are adjusted annually (74 percent);
market pricing or pay surveys are conducted annually (60 percent); and most salary

Articles & Perspectives | 107

ranges are less than 70 percent FIGURE 6:
˜
Measures of Compensation
(72 percent). Effectiveness
When asked which
34%
performance measures senior
Business Operating Results
management use to judge pay-
16%
program effectiveness, more
Employee Productivity Metrics
than two-thirds (69 percent)
69%
said “employee turnover or
Employee Turnover or Retention
retention.” (See Figure 6.)
40%
The second most common
Employee Satisfaction Survey
evaluation criterion was
26%
through employee satisfaction
Labor Cost is Controlled or Lowered
surveys (40 percent). Business
30%
operating results and employee
Leadership Tells Us that it is Working
productivity were likely not
29%
reported as being used as
Employees Tell Us that it is Working
frequently as evaluation
19%
criteria since the study focused
We Do Not Evaluate Pay Programs
on base pay and not incentive
pay. Interestingly, companies
˜
designated as “Most Admired” FIGURE 7: Use of Retention as a Measure
and top TSR were more likely to of Effectiveness
use employee retention
72%
as primary criterion for
America’s Most Admired
evaluating the effectiveness
65%
of their pay systems than
Other Respondents
other surveyed companies.
(See Figure 7.) This is a clear Five-Year TSR
indicator of how successful 77%
organizations view base pay. Top Quartile
63%

Valuing Work Bottom Quartile

A substantial majority 69%

(between 82 percent and All Respondents
96 percent) of compensation
managers indicated that they used
some form of job evaluation, and 98 percent of organizations market price their jobs
(i.e., conducted pay surveys). In fact, the vast majority of organizations do both —
up to 93 percent of organizations evaluate and market price jobs. This finding
demonstrates that some of the HR discussions regarding the debate on the
appropriateness between job evaluation and market pricing are essentially moot,

108 | Elements of Base Pay Administration

at least for professional and managerial employees. Thus, it seems that most
compensation professionals recognize that both job evaluation and market pricing
are critical, and engage in both processes.
There are no clear patterns, however, in how organizations resolve conflicts
between market pricing and job evaluation information. When there are conflicts
between the job evaluation and market data, 38 percent of compensation managers
give priority to job evaluation and the same percentage give priority to market
pricing. Eleven percent of the respondents combine the two approaches, relying on
job evaluation to set the job grade or level and market pricing to set pay levels.
Ninety-seven percent of survey respondents reported that their organization has
some form of job documentation, but only 32 percent said that they had up-to-date
job descriptions on almost all (over 90 percent) of their jobs. Thirty-four percent
reported that most job descriptions are not up-to-date. This is a serious problem
not only for organizations that use job evaluation, but also for those that use market
pricing since the accuracy of these tools depends to a degree on having an up-to-date
understanding of the work, which in many cases is obtained via job descriptions.
While there has been much talk of line management taking a stronger role in
valuing work and making pay decisions, HR managers are primarily accountable
for this process. In 60 percent of the surveyed companies, HR alone assigned jobs
to grades. HR and line managers collaborated on the job evaluation process in only
28 percent of the surveyed companies. Successful companies were even more
likely to have HR alone assign jobs to a salary grade. (See Figure 8.) In addition,
60 percent of organizations indicated that job grades are reviewed only in response
to a request from managers or incumbents. Only 18 percent of organizations
proactively review or audit job grades periodically.
Given the overall context created by out-of-date job descriptions, limited
involvement of line management and reactive review of job grades, it was not
surprising to find that
41 percent of survey ˜
FIGURE 8: Role of HR in Work Evaluation
participants believe that
Human Resources is Doing the Work ... Reactively*:
at least 20 percent of their
organization’s jobs are placed 60%
in the wrong grades. There HR Alone Assigns the Salary Grade

are serious cost implications 28%

for assigning jobs to the HR and Line Managers Collaborate on Evaluations
wrong grade. For example, 60%
if 20 percent of a company’s HR reviews Evaluations Only in Reaction to Requests
positions are in an incorrect 18%
grade, and grades typically HR has a Program to Proactively Review Positions
are 10 percent apart, then * Percentage total does not include blank responses or miscellaneous.

Articles & Perspectives | 109

the company is misallocating 2 percent of its payroll. This is a significant cost since
this error is more than one-half of most merit increases awarded this year. Of course,
if an incorrect grade assignment is to a higher grade, then the company is paying
employees more than its stated policy or what the market demands. Likewise, if
employees are placed improperly in a lower grade, then the company has the
increased cost of replacing its employees who might pursue better-paying jobs
elsewhere as a result of not earning what the work is worth. This is particularly
dangerous because the employees who typically leave are the “best and brightest” and
are more likely to find employment opportunities elsewhere.
Designing and administering systems that determine the value of work or the
value of the employee doing the work is, perhaps, the compensation professional’s
primary accountability. The data collected from more than 1,200 respondents
indicated that companies might be paying a substantial financial price for not
investing the necessary organization resources into valuing work. First, only
58 percent of compensation professionals who responded to the survey believed
that 60 percent or more of their positions could be matched to the market.
This combined with the observation that positions that cannot be matched
to external compensation surveys are quite often positions that are designed
uniquely within the organization, as well as those that provide the organization
with competitive advantage. What reason, other than competitive advantage and
value creation, would cause companies to design jobs so differently from other
organizations that they cannot be matched to the market? Therefore, it is quite
likely that organizations who do not have adequate market-pricing information
on these unique positions nor an adequate internal work-valuing system are
incurring risks of either overpaying these positions or increased probability
of losing these critical employees if they are paid below where they should be.

The Perceived Effectiveness of Pay Programs

Compensation professionals were asked to evaluate the perceived effectiveness
of various attributes of their compensation programs. These results, which are
shown in Figure 9 on page 111, reveal some interesting findings.
• More than half of compensation professionals responding to the survey believe
their job analysis and documentation process, and job evaluation processes, are
effective or very effective, at 59 percent and 64 percent, respectively.
• Market-pricing processes are deemed effective or highly effective by 84 percent
of respondents.
• Individual performance appraisal is judged effective or very effective by 59 percent
of responding compensation professionals.
Overall, compensation professionals judge their compensation programs to be
effective or highly effective as they relate to managing internal equity (75 percent),

110 | Elements of Base Pay Administration

managing external competitiveness (80 FIGURE 9: Effectivenesses
percent) and the ability to attract and of Pay Practices as Evaluation
by Respondents
retain talent (81 percent). However, they
judge their program’s ability to motivate Job analysis and documentation
processes
employees less positively (38 percent). The Do not use 17
effectiveness of communicating the Not effective 2
Marginally effective 21
pay program is rated effective or Effective 51
highly effective by only 27 percent Very effective 8
of respondents. The relatively higher Job evaluation or grading method
effectiveness ratings on internal equity Do not use 18
Not effective 1
and external competitiveness management Marginally effective 18
Effective 53
may also be attributable to the fact that the Very effective 11
compensation department largely controls
Process for employees to appeal
these programs. The relatively low job grading or salary decisions
effectiveness rating on the motivational Do not use 48
Not effective 4
value may be due to the fact that line Marginally effective 20
managers within the organization need Effective 26
Very effective 3
to work with the HR function to create
Salary ranges
an impact here — and this is challenging Do not use 9
work for the organization. Not effective 2
Marginally effective 14
Another potential cause for the perceived Effective ˜ 58
Very effective 18
weak linkage between pay and motivation
may rest with the finding that 68 percent Market-pricing processes
Do not use 3
of compensation professionals gave pay Not effective 1
increases of less than two times the average Marginally effective 12
Effective 62
increase to their high performers as Very effective 22
compared to the average performers. Merit pay (i.e., salary increases
A higher percentage of “Most Admired” based on performance)
Do not use 6
companies reported rewarding top Not effective 4
performers at two times or more than the Marginally effective 32
Effective 49
average increase. There are clearly Very effective 9
significant opportunities for HR to improve
the quality of compensation through Individual performance appraisal
effective program implementation. Do not use 2
Not effective 6
Marginally effective 33
Effective 50
Future Directions Very effective 9
The information collected from this Alignment between organization
study offers insights and opportunities and individual performance goals
Do not use 7
for creating higher-impact pay systems. Not effective 11
First, it’s important to recognize that Marginally effective 38
Effective 38
the attributes of pay policies and program Very effective 7

Articles & Perspectives | 111

design for professional and managerial employees have not changed substantially
over time. There is a predominance of more traditional, time-tested compensation
program designs than the literature and variety of compensation experts might lead
one to believe. In fact, most organizations do the following:
• Use both job evaluation and market pricing to place a value on their jobs.
• Attempt to pay near the middle of the labor market.
• Have pay ranges between 30 to 70 percent of midpoint.
• Adjust salary ranges annually.
• Make HR the dominant role in evaluating positions and assigning pay ranges.
• Provide base salary increases based on individual performance.
• Provide minimal pay communications to employees.
Research findings indicate that while the design of pay systems may indeed be
“time tested,” there is considerable room for improving the implementation of new
pay policies and programs and enhancing the effectiveness of existing pay systems.
Determining what constitutes a successful pay practice is critical because of the
cost and motivation implications of pay systems that are either not designed or
implemented effectively. The impact of pay policies and programs on employee
behavior and motivation is significant, and HR has a major role to play: First, by
guaranteeing that scarce organizational financial resources are focused where they
should be, and second, by making sure that the organization has the right alignment
between the business strategy and pay programs. Finally, compensation professionals
need to ensure that the pay programs are effectively administered and kept up-to-date.
This research has confirmed the linkage between pay policies and programs and
organizational effectiveness. Consequently, compensation professionals need to help
management understand how compensation decisions are going to affect company
competitiveness. By clarifying how compensation impacts the organization and
taking leadership on compensation issues, enterprising HR has a critical role in
building a successful organization.

Authors
Dow Scott, Ph.D., is a professor of human resources at Loyola University Chicago and
president of Performance Development International Inc. His practical approach to teaching,
research and consulting focuses on helping business leaders create more productive
organizations and committed employees. He has been published in more than 100 journals,
books and conference proceedings and also received national recognition for
team/productivity improvement and HR research from the Academy of Management and the
Society of Human Resource Management (SHRM). Scott’s research and consulting has
focused on employee retention, creation of effective teams, performance-improvement
strategies, pay and incentive systems, evaluation of HR programs and the development of
high-performance organizations.

112 | Elements of Base Pay Administration

Thomas D. McMullen (tom_mcmullen@haygroup) is a senior consultant and Midwest
rewards practice leader in the Chicago office of Hay Group. He has 20 years of combined
human resources practitioner and consulting experience. His work focuses primarily on total
reward and performance program design, including rewards strategy development, incentive
plan design, employee pay and job evaluation.
Prior to joining Hay, McMullen was in senior compensation roles with Kentucky Fried Chicken
Corp. and Humana Inc. He holds a BS degree in mathematics and a master’s degree in
business administration from the University of Louisville.

Richard S. Sperling, CCP ([email protected]) is a senior consultant in the

Chicago office of Hay Group. He works with clients to design and value jobs, build effective
organization structures, and develop and implement total rewards systems.
Sperling has designed leading-edge approaches to analyzing, understanding, designing
and valuing work in clients’ increasingly complex and varied organizational settings.
He is a recognized expert in work comparison and valuing.
Sperling serves as client relationship manager for several of Hay Group’s large clients,
serving as the focal point to integrate the full range of Hay’s consulting services to those
clients in ways that support that client’s business results and strategy.

Marc Wallace ([email protected]) is an experienced consultant in performance

management and compensation. He has presented for several regional organizations as well
as at the WorldatWork annual conference on multiple occasions and national conferences on
variable pay. As a consultant at Hay Group, Wallace works with organizations to develop
strong rewards and performance management systems. Wallace holds a master’s degree in
international management from Thunderbird and a bachelor’s degree in economics from the
University of Wisconsin at Madison.

Reprinted from WorldatWork Journal Fourth Quarter 2003.

Articles & Perspectives | 113

New Ways to Manage Pay
Upgrading Base Pay, Pay Progression and Variable Pay Plans
to Attract and Retain Talent
By N. Frederic Crandall, Ph.D.

Downsizing, outsourcing, offshoring, new technology and basic changes in work design
have radically changed the nature and value of work performed in organizations today.
As a result, millions of jobs have been lost. More importantly to total rewards
professionals, these changes have introduced new employee-skill requirements: broader
jobs with upgraded skills and a shift from “doing” work to “coordinating” and “problem
solving.” The combination of job eradication and changes in skill requirements has left
many companies with completely altered job structures. However, these structures are
a result of more fundamental shifts in business strategy. For example, many companies
have moved from a manufacturing to a marketing focus, or from a product to a service
orientation. Overall, changes in the nature and value of work today are directly tied to
the evolution of business strategy, which is moving at a rapid pace.
In the past, when job scope and value changed, compensation programs typically
reacted through pay-realignment mechanisms, such as the re-evaluation of individual
jobs or the assignment of temporary premium pay for “hot” jobs. But the massive
changes in job structures we face today are different and more fundamental. As we
have moved into economy recovery and growth, many companies are experiencing
a shift in strategic emphasis that translates into new job structures, and in turn
should translate into new metrics for base pay, progression pay and variable pay.
To meet these challenges, total rewards professionals need to understand the
external forces that are causing jobs and job structures to change. In turn, we must
understand the drivers of change inside the organization — how jobs and job
structures are adapting to these external forces. Finally, we need to identify the
requisite pay-management tools to attract new talent and retain top performers.
To gain this understanding, this article starts with an overview of five basic trends
causing change, then discusses the introduction of pay-program value drivers and
new tools for pay management.

114 | Elements of Base Pay Administration

Five Basic Trends and Their Impact
Five basic trends are driving the need for new pay-management tools:
• Continual downsizing and reductions in staff over the past 10 years have
resulted in expanded work roles crossing traditional occupational boundaries.
• During the same period, enterprise IT platforms have led to upgraded skills
required in jobs throughout organizations.
• Outsourcing and offshoring initiatives have moved much work out of the
organization, resulting in redefined work objectives for remaining jobs.
• Transformations from departmental structures to process-based structures have
changed the focus in many organizations from functional work to process-based work.
• Process-based work, in turn, has led to team-based work that replaces individually
paced work.
To be sure, not all of these trends have had the same impact on all organizations.
However, collectively they all have driven the nature of work unmistakably and
unambiguously from a one-dimensional repetitive focus to a multidimensional
knowledge-based and problem-solving focus. Figure 1 summarizes these trends.
The overriding theme of these five trends is the movement from jobs that are done
independently to jobs that are focused on coordinating with other associates, and
from work that is routine to work that is focused on problem solving. Traditional
ways of defining and valuing work, through job duties and responsibilities, provide
neither an accurate picture of these changes nor a meaningful index of value.
A new way of defining work are needed to deliver value now and in the future. Value-
driven metrics for pay programs also is needed to attract new talent and keep top
performers. For example, new metrics are required to place value on solving unique
problems and coordinating solutions that arise in the course of a normal day’s work.
Following is an overview of the core elements of work that are emerging as value
drivers and can be translated into new tools of pay management. They are focused
on the skills and competencies required to deliver value today and in the future.

FIGURE 1: The Changing Nature of Work

Trend: From: To:

Expanded Work Roles Single-skilled job Multiskilled job

Upgraded Skill Components

of Work Repetitive tasks
˜ Problem-solving tasks

Outsourcing and Offshoring “Doing” the work “Coordinating” the work

of the organization of the organization

Process-based Work Functions operate Functions collaborate

as silos to manage process and projects

Team-based Work Individuals complete Members of team share

work independently the work

Articles & Perspectives | 115

Defining Skills and Competencies
There are three distinct types of competencies:
• Strategic Competencies: mission-critical skills that are required to achieve
competitive advantage
• Process Competencies: reflect the knowledge and skills involved in the work itself
• Individual Competencies: the characteristics that underlie an individual’s ability
to be effective.
Strategic competencies define what sets us apart from the rest, process competencies
describe what we do and individual competencies define who we are. Following is a
brief overview of the three competency types.
Strategic Competencies
Mission-critical skills (MCS) contribute to competitive advantage and differentiate
an organization from its competitors. They represent the foundation for creating
value in an organization. For example, product innovation is critical for 3M Corp.,
consistency is critical for McDonald’s and high-quality service is critical for
Ritz-Carlton Hotels.
Process Competencies
Process competencies are derived from an organization’s business processes that
cross functional boundaries and represent how an organization delivers value to
customers. The focus of process competencies is on the work itself. Work can be
tangible and linear as in manufacturing processes, or nonlinear and nonroutine,
as in technical, financial and service processes.
Individual Competencies
Individual competencies are the underlying characteristics of the people who
deliver value to the organization. Examples include flexibility, conscientiousness,
a detail-oriented nature, sound judgment and a high-achievement orientation.

The Emerging Role of MCS

MCS are emerging as the key factor in transforming work. MCS are important for
two reasons: First, MCS capture functionality across occupational boundaries and
redefine organizational objectives. Second, they are directly tied to the organization’s
strategy drivers. By cutting across occupations in the organization, MCS become
a common bond, promoting effective teamwork, flexibility and communication.
Figure 2 on page 117 demonstrates examples of MCS.
Because MCS span across traditional occupational boundaries, a competency that
embodies “value creation,” for example, may include engineering, marketing and
financial staff. In effect, MCS make the organization unique and can propel it ahead
of the competition. MCS may change when an organization’s overall mission or strategy

116 | Elements of Base Pay Administration

 FIGURE 2: Examples of MCS

Skill Area Description

Productivity Getting the best use of your current asset base

˜
Value Creation Creating customer loyalty; lengthening product life cycle;
focusing on new markets

New Product/Service Application of the organization’s creative talents to new

Development opportunities with new or existing customers

changes. For example, an implication of outsourcing may be a change in strategy for

an organization, which results in a need to change MCS. It is critical for compensation
management to translate MCS into pay-program value drivers, and then use these
value drivers as pay-management tools.

Pay-Program Value Drivers

Compensation involves an exchange from an organization to an individual or group
for work performed. Compensation is a “value driver” if the exchange maintains and
strengthens the chain of value from the combination of capital and human assets that
creates the value and ends with the ultimate customer. While compensation takes
many forms, let us consider three components of direct compensation, which include
the following:
• Base Pay. The competitive market-based hourly or weekly/monthly salary earned
for performing a specific role.
• Base Pay Progression. Base pay movement over time for individual performance,
competency development, skill acquisition and/or job growth.
• Variable Pay. Incentive or bonus pay that is paid in addition to fixed components.
Earnings may be based on preset goals or paid at the discretion of the company
for individuals, groups or the whole company.
Because value drivers are based on the three levels of competency, the value
of each element of direct compensation also is based on a combination of these three
competencies. Following is an overview of each element of direct compensation.
These elements are summarized in Figure 3 on page 118.
Base Pay Value Drivers
Value is delivered through base pay by individual competencies, process
competencies and MCS. Base pay value in most organizations is based primarily
on the external competitive marketplace. The job market places a value on the
individual competencies (e.g., tickets to the ballpark) as a foundation. Atop this
foundation, process competencies represent the value of the experience and
skill required to do the work. Finally, MCS represent the value of the capability
to drive the organization’s strategic objectives.

Articles & Perspectives | 117

 FIGURE 3: Pay Program Value Drivers

Competencies Base Pay Value Base Pay Progression Variable Pay Value
Driver Value Driver Driver

Individual Value based on Must exhibit individual Must exhibit individual

Competencies innate individual competencies to be competencies to be
characteristics and eligible for full pay eligible for full variable
behaviors (e.g., progression award pay award
“tickets to the
ballpark”)
˜

Process Value based on Value based on additional Must exhibit process

Competencies process process competencies competencies to be
competencies (e.g., acquired and eligible for full variable
work activities) demonstrated pay award
possessed and
demonstrated

Mission Value based on Value based on additional Value based on

Critical Skills MCS (e.g., skills MCS acquired and achievement of goals
related to business demonstrated driven by MCS
strategy) possessed
and demonstrated

Progression Pay Value Drivers

Progression pay is allocated to individuals both as an annual base pay adjustment and as a
promotion to a higher position in the organization. Progression pay is derived from each
of the three competency sources: continuing to exhibit the innate personal characteristics
embodied in individual competencies; acquisition and demonstration of additional
process competencies; and the acquisition and demonstration of additional MCS.
Variable Pay Value Drivers
Value embodied in incentive or bonus pay also is derived from all three sources. Similar
to pay progression, continuing to exhibit individual competencies is a foundation for the
value attached to variable pay. Now add the demonstration of process competencies as
a core expectation, as well. The lack of value is observable if these characteristics are not
exhibited, which leads to the withholding of incentive bonuses. Positive value is derived
from MCS through the achievement of strategic objectives and organizational goals.

Pay-Management Tools
The tools of pay management (competitive pay positioning, a pay-for-performance
pay-adjustment matrix and positioning incentive targets at competitive pay levels) can
be used to transform the value drivers that are summarized in Figure 4 on page 119
into a comprehensive direct pay program. Following is an overview of these tools.
Base Pay Tools
Competitive pay positioning at a premium level for MCS (e.g., 75th percentile)
provides a means to attract and retain MCS-related jobs. (A thorough analysis of jobs

118 | Elements of Base Pay Administration

 FIGURE 4: Pay-Management Tools

Competencies Base Pay Tools Progression Pay Tools Variable Pay Tools

Individual 50th-percentile Downward adjustment Downward adjustment

Competencies match on and/or ineligibility for not and/or ineligibility for not
comparable skills possessing and possessing and
from peer demonstrating individual demonstrating
organizations with competencies individual competencies
parallel individual
competencies
(presumes hiring-
process screens for
individual ˜
competencies)

Process 50th-percentile Pay adjustment based on Downward adjustment

Competencies match on acquisition and and/or ineligibility for not
comparable skills demonstration of process possessing and
from peer competencies demonstrating process
organizations with competencies
relevant process
competencies

Mission- 75th-percentile Pay adjustment premium Incentive targets based

Critical match on jobs that for jobs that are MCS on financial, operational
Skills are MCS heavy heavy; promotion and customer goals;
premium for jobs that are incentive premium for
MCS heavy jobs that are MCS heavy

and job families is required to correctly identify MCS-related jobs before assigning
a premium. These jobs are not necessarily in high demand in the marketplace,
but are nevertheless critical for the organization.)
Progression Pay Tools
If associates do not possess or demonstrate individual competencies, then progression
pay adjustments should be downward adjusted or withheld. The pay adjustment
matrix should have a premium for MCS-heavy jobs. Also, promotion policy should
include a premium for MCS-heavy jobs.
Variable Pay Tools
Variable pay should be treated similarly to progression pay by downward adjusting
or withholding pay if individual or process competencies are not possessed or
demonstrated. For MCS-heavy jobs, there should be a premium for incentive targets.

Looking Ahead
As business strategy and operations undergo a generational shift, total rewards
professionals need to change the tools of pay management to attract new talent
and retain top performers. By linking pay to individual competencies, process
competencies and mission-critical skills, a clear line of sight is established between
mutual expectations and rewards.

Articles & Perspectives | 119

Authors
N. Frederic Crandall, Ph.D., ([email protected]) is the director of CWE/Crandall Ltd. His
primary role involves assisting clients in executing strategy through effective organizations
and compensation systems. Crandall was a faculty member of the Cox School of Business
at Southern Methodist University. He holds an A.B. from the University of California at
Berkeley; and M.S. in business administration from the Anderson School of Management
at the University of California at Los Angeles; and a Ph.D. in industrial relations from the
University of Minnesota.

Author’s Note
Material for this article is drawn from Chapter 42, “New Tools for Pay Management,” of
The Compensation Guide, edited by William Caldwell and published by Thomson/West Inc.
The chapter is written by N. Frederic Crandall and John M. Bremen of Watson Wyatt
Worldwide. Material also is drawn from an earlier version of chapter 42 of The Compensation
Guide, authored by N. Frederic Crandall, Marc J. Wallace Jr., John M. Bremen and
Mary Schulze.

Reprinted from WorldatWork Journal Third Quarter 2004.

120 | Elements of Base Pay Administration

Compensation in the Hot Seat
By John M. Bremen

For the past 10 years, compensation professionals have worked to earn a “seat at the
table.” In practical terms, this has involved changing the role of compensation to one
of strategic adviser and business partner to senior management, as opposed to that
of administrator. Regular workspan readers may have noticed several articles on this
topic in recent years.
The current dramatic changes in corporate governance standards, coupled with
emerging tax, accounting and reporting regulations (not to mention a turbulent economic
environment), have thrust routine aspects of the compensation function into the
spotlight. Suddenly, compensation not only has a seat at the table, but that seat is hot.
Accordingly, compensation leaders across industries are asking themselves, “Now what?”
The good news is that compensation professionals — many of them already serving
as trusted business advisers to management — have a greater opportunity to drive
the bottom lines of their businesses in several ways. The bad news is, the level
of change in the profession is somewhat overwhelming to many groups.

Why the Change?

Traditionally, businesspeople have viewed compensation as a cost center. In fact, for
many businesses, compensation has represented the single largest set of costs. As a
result, cost management has been the name of the game for the compensation function.
In the 1980s, businesses realized that compensation programs — when
strategically designed — could actually encourage specific levels of employee
performance and help drive both the top and bottom lines of the income statement.
This realization not only shifted the priorities of many compensation professionals,
it also made vice presidents of operations, sales, marketing and finance aware of
compensation’s potential benefits to the business.
In the 1990s, the rapid economic growth and subsequent “war for talent” put
additional emphasis on compensation. Again, compensation professionals had —

Articles & Perspectives | 121

and took — the opportunity to affect the business, this time by reducing turnover,
helping increase the company’s competencies and talent and using pay to drive growth.
Perhaps nothing could have prepared the profession, however, for what was to
come following the turn of the millennium. Three simultaneous sets of factors
transformed the focus on pay virtually overnight (see Figure 1).
Economic Turbulence
The economic downturn that began in the early 21st century put immediate pressure
on compensation. Merit budgets shrank dramatically or disappeared altogether.
Incentive plans missed payouts for the first time in recent memory. Issues such as
underwater stock options and high overhang plagued long-term incentive plans.

FIGURE 1: Factors that Transformed Pay

Corporate Accounting
Governance Standard
Crisis Changes

NYSE/
Sarbanes- NASDAQ
Oxley Listing FASB
Standards

˜
Compensation IASB

Reduced
Rising Budgets Shareholder
Costs Concerns

Economic
Turbulence

122 | Elements of Base Pay Administration

 Surprisingly, however, many companies still found it difficult to attract and retain
high performers and critical-skill employees. Suddenly, senior management was
tapping compensation professionals on the shoulder to find ways of doing more with
less, asking the tough business question, “How can we continue to drive performance
with substantially fewer resources?” As it became apparent that the downturn would
not be a short one, compensation professionals became involved with senior
management for the long haul.
Corporate Governance Crisis
The ensuing corporate governance crisis, which led to the Sarbanes-Oxley Act
and revised listing standards for the major stock exchanges, put compensation
professionals into uncharted territory as governance and compliance issues had
new and substantive impact on many existing plans and routine pay transactions.
Further, boards of directors deepened their focus on compensation matters, with
compensation committees, audit committees, finance committees and governance
committees initiating broad reviews of all aspects of pay, often down to the level
of performance measures, funding formulas and individual payout amounts.
Compensation professionals, who had long struggled to get into the executive
conference room, now found themselves in the boardroom.
Accounting Standard Changes
Subsequent changes to accounting standards by the International Accounting
Standards Board (IASB) and the Financial Accounting Standards Board (FASB)
deepened the relationship between compensation professionals and the CFO. While
compensation experts had long dealt with issues such as tax treatment, 162(m) and
280G regulations, the new rules created a new dimension in complexity for long-term
incentive plans. Combined with new governance standards relating to performance-
measure goal setting and calculation, the context surrounding incentive design was
made even more complex.
As a result of these changes, it became common in any given month for senior
compensation professionals to interact with the heads of human resources, sales,
marketing, operations, accounting, audit, legal and compliance, as well as the CFO, CEO
and board of directors. Suddenly, compensation was a long way from the back office.

Areas of Impact
Compensation’s role has evolved from being focused on pure people issues to a more
fundamental focus on business issues. As Figure 2 on page 124 illustrates, many
traditional compensation responsibilities have been elevated in prominence to the
strategic level. For example, a traditional focus on cost management has given way
to treatment of compensation as a major investment. As such, companies are
considering each compensation program as an investment vehicle — one is

Articles & Perspectives | 123

 FIGURE 2: Changing Compensation Responsibilities

Old World New World

Cost management Portfolio management (ROI)

˜
Attraction and retention Talent management (driving mission-critical skills and
competitive advantage)

Motivation Employee engagement and performance-management,

(revenue growth, customer retention, operational productivity)

Compliance Corporate governance and accountability

(public opinion, shareholder opinion, risk management)

short-term, one is long-term, one focuses on value creation, another focuses on

growth. In today’s executive suite or boardroom, the discussion does not focus on
program design, but rather on return on investment (ROI) and the bottom line.
What once was “attraction and retention” has given way to “talent management,”
or using compensation to drive the acquisition and development of mission-critical
skills that enable a company to achieve a competitive advantage in its industry.
What once was “motivation” is now “employee engagement and performance
management.” Coincidentally, in the February 2004 Harvard Business Review, balanced
scorecard founders Robert Kaplan and David Norton identified direct links between
human-capital management and company performance to factors such as revenue
growth, customer retention and operational productivity — all areas that directly
affect financial outcomes.
Finally, what once was “compliance” has given way to “corporate governance and
accountability,” aspects of which compensation professionals impact every day,
ultimately leading to short- and long-term direction in public opinion, shareholder
satisfaction and risk management.

Impact on Compensation’s Role

“The role of the compensation professional has evolved to play a much more value-
added role in the business,” according to Dave Gustat, a WorldatWork Compensation
Advisory Board member,
who is director of FIGURE 3: The Evolution of Compensation’s Role

compensation at Sears
Old World New World
Roebuck & Co. As Figure 3 • Transactions • Strategy
shows, this evolution • Administration • Design
˜
• Conference room • Board room
involves many facts of the • Internally focused • Externally focused
• Middle management • C suite
role, including • Enforcer • Enabler
a shift from internal to • HR skills • HR skills plus finance and strategy
• Implementer • Adviser
external focus, and from
implementer to adviser.

124 | Elements of Base Pay Administration

What to Do about It
“The most important thing compensation professionals can do is be holistic —
acknowledging multiple constituencies with competing interests; courageous —
advocating your best thinking may create conflict with powerful people; and
independent — respectfully managing influences in order to maintain your
professional integrity and ethics,” said Mark Englizian, CCP, GRP, director
of global compensation with Amazon.com and chairman of the WorldatWork Society
of Certified Professionals.
Following are four distinct actions that compensation leaders and professionals
can take to maximize their contributions “at the table” and maintain their position
there as true business partners:
• Be a “Business Person” First and a “Compensation Person” Second. While
compensation professionals cannot and should not ever violate or abandon the
basic tenets of sound compensation design, they should focus on the broader
business issues at hand. As such, consider beginning each management or board
interaction with a discussion of key business issues at hand, then transition into
specifics surrounding pay design or administration. The conclusion of any
interaction should include a clear and specific statement regarding business impact
(e.g., ROI, competitive advantage, revenue growth, customer satisfaction,
productivity, shareholder opinion), as well as a mutual understanding of all relevant
process issues, outcomes and next steps.
• Develop Requisite Financial Skills. In the past, it was possible for senior-level
compensation experts to get by without deep financial or accounting skills.
Increasingly, compensation leaders are expecting professionals to possess new
skills. In fact, many leaders have shifted potential sources of talent from the
HR generalist track to the finance track. While the long-term direction of this
shift remains unclear, compensation and other HR professionals can significantly
increase their career potential by growing requisite financial and accounting skills.
According to WorldatWork Compensation Advisory Board Member Connie L.
Haney, CCP, GRP, director of global compensation services at Cargill Inc., “If you
can demonstrate both HR and financial skills, you’ve got a very powerful value
proposition to your employer.”
• Develop a Clear Compensation Governance Process. With all of the diverse
stakeholders focused on compensation today, compensation groups are wise
to develop a process that does the following:
- Satisfies all regulatory, statutory and exchange governance standards
- Aligns with the company’s business strategy and culture
- Meets the needs of the various executive stakeholders from a business perspective
- Remains appealing to and engages the employee population

Articles & Perspectives | 125

 - Remains market competitive
- Does not drive you crazy.
Due to the complexity of related interactions, a poorly conceived process will
be ineffective on many levels (e.g., governance design) and cause high levels of
professional frustration and burnout.
• Consider Longer-term Skill Requirements and Career Paths. As the role
of the compensation professional continues to evolve, so too will the skill
requirements and career paths across the profession. As such, compensation
leaders would be well served by planning for the future today. If financial skills
are needed, start training now. If board-level presentation skills are required,
acquire them before the next meeting. If sources of talent need to be adjusted,
the process could take some forethought and several iterations.
(See “Key Questions to Consider in Relation to Your Company.”)
SIDEBAR: Key Questions to Consider in Relation to Your Company

• Do compensation professionals have the business acumen and financial knowledge to be

responsive to these new demands? If not, how can these competencies be gained?

• Is there a clear and ongoing partnership between compensation and finance? If not, is this
a gap?

• Is the career path between HR and compensation becoming limited? If so, what should
be done?

• What additional skills/knowledge do compensation professionals need to be effective in

meetings with senior leaders/board members?

In short, members of the profession should embrace their newfound seat at the table —
and be prepared to sit there for many years to come as an active, value-added business
partner and contributor, which may require a change in their own mindsets, as well.

126 | Elements of Base Pay Administration

About the Author
John M. Bremen leads Watson Wyatt’s compensation practice in Chicago. He has been
a WorldatWork member since 1988 and is a member of the Compensation Advisory Board.
He can be reached at [email protected] or 312/525-2208.

Author’s Note
The author wishes to recognize the contributions of all members of the Compensation
Advisory Board. Their input was a core element of and vital to the content of this article.

Reprinted from workspan August 2004.

Articles & Perspectives | 127

The Future of Compensation Professionals:
According to Your Colleagues
By Barbara Manny, Thomas D. McMullen and Richard S. Sperling, CCP,
and Dow Scott, Ph.D.

As Bob Dylan sang, “The times they are a changing.” With opportunities to be more
involved in major business decisions, compensation professionals have been asked
to solve more difficult problems and face more difficult challenges. In turn, the
profession needs to be able to step out of the comfort zone and be ready to seize
these opportunities. From a survey of compensation professionals, it has become
clear they feel their roles in the organization’s strategic business plans are growing.
Only time will tell if compensation professionals’ perceptions will become reality.
In May 2005, the authors conducted a survey to find out what compensation
professionals think about the future of the profession. From the two groups of
compensation and HR professionals who had compensation responsibility — Chicago
Compensation Association (CCA) members and a sample of WorldatWork members
— there were 200 survey respondents.

Looking Ahead
Surprisingly, 75 percent of survey respondents believe that their companies are
going to add more resources in the compensation function. However, past experience
has shown compensation professionals need to prove their value to the organization
through increased efficiencies and use of technology. Even more, they need to be
valued business partners to organizations’ line executives.
In general, the survey indicated that compensation professionals feel they will
have greater involvement across the board in terms of providing design, administration
and control support to their organizations. They also predict they will be substantially
more involved in the design and administration of incentive programs over the next
three to five years (See Figure 1 on page 129.) Given the shift away from stock
option grants to other types of incentive vehicles, this comes as no surprise.

128 | Elements of Base Pay Administration

 Survey respondents also report they will be more involved in salary budget planning
in the future. Given the global competitive pressures most businesses are experiencing
in today’s economic environment, focusing on the size and allocation of the
organization’s compensation budget has become a priority. Compensation is one of

FIGURE 1: Compensation Professionals-Five-Year Predictions

Predictions Mean Much Less (2) No More (4) Much

Less (1) Change (3) More (5)
Responsible for designing
incentive pay programs 3.98 1% 2% 19% 55% 23%
Involved in designing
executive pay programs 3.94 0% 3% 25% 54% 18%
Responsible for developing
the organization’s
compensation strategy 3.93 0% 2% 24% 55% 19%
Involved in designing
international or global
compensation 3.92 1% 3% 24% 47% 25%
Involved in managing
international or global
compensation 3.87 1% 5% 24% 48% 22%
Involved in legal issues 3.78 0% 4% 34% 46% 16%
Involved in developing
compensation budgets 3.70 0% 2% 37% 51% 10%
Responsible for recognition
plans 3.66 0% 5% 35% 51% 9%
Involved in market-pricing
or pay surveys 3.63 1% 4% 42% 39% 14%
Responsible for performance
management 3.62 2% 9% 35% 43% 11%
Responsible for career
pathing or leveling 3.54 0% 6% 34% 52% 8%
Responsible for administering
incentive pay programs 3.47 2% 12% 29% 48% 9%
Involved in work valuing or
job evaluation 3.45 1% 10% 41% 41% 7%
Involved in establishing pay
ranges 3.40 1% 4% 59% 29% 7%
Involved in using pay for skills
or knowledge programs 3.37 1% 15% 37% 40% 7%
Involved in establishing pay
grades 3.36 1% 6% 57% 30% 6%
Involved in job analysis 3.35 1% 12% 47% 32% 8%
Outsourced by companies
(excluding employee benefits) 3.22 5% 17% 37% 37% 4%
Responsible for individual
employees’ pay decisions 2.94 7% 25% 36% 28% 4%

Articles & Perspectives | 129

the largest expenditures for most organizations, and it often is the largest controllable
expenditure. Compensation professionals are primary stewards in one of the key
financial areas of the business, and they should embrace their role in order to add
value to the bottom line.
Global and executive compensation also were high on the lists of predicted
responsibilities that would require greater involvement of compensation
professionals, along with the responsibility for the development of the organization’s
compensation strategy.

From the Boardroom

The highly publicized mishandling of executive pay has moved compensation
philosophy and strategy into the spotlight and the boardroom. Compensation
professionals have had to transition from being viewed as the “compensation cops,”
i.e., monitoring and controlling costs, to being seen as a major business partner and
contributor to the organization’s success (or failure).
Effective compensation professionals today must play multiple roles: financial
analyst, psychologist, coach, trusted adviser and problem solver. To accomplish this,
they must immerse themselves in the organization’s business, understanding its
strategy, products, services, markets, revenue streams, critical success factors and, of
course, employees’ impacts on the business, as well as their needs and wants.
The survey results support the perception that compensation professionals must take
on more responsibility for many areas impacting organization effectiveness, including
performance management, career pathing and leveling, recognition plans and legal
issues. The context in which the compensation professional operates also is becoming
more challenging. The survey signals substantial perceived changes occurring in the
following areas — employment law, global pay practices, performance management,
executive pay and short-term variable pay.
In addition, recent research conducted by Hay Group, Loyola University of Chicago
and WorldatWork shows that compensation professionals typically think more time
and emphasis will be spent in most compensation programs and processes — from
design to communication. But how can this be true if the staffing levels within the
compensation function are expected to hold constant or increase only slightly? Some
plausible explanations are the following:
• The continued trend toward outsourcing
• More leveraging of technology to support the administrative side of compensation
• Sharing the accountability for the design, administration and control of the
compensation program with line management and/or the financial function.
There is a tendency for compensation to partner with line management and finance
in the management of a compensation program. As shown in Figure 2 on page 131,

130 | Elements of Base Pay Administration

 ˜
FIGURE 2: Compensation/HR Role in Program Design

Spot and Recognition Bonuses

Long-term Variable Pay

Short-term Variable Pay

Base Salary Increase Budget

Pay Structure

Market Comparison Companies

Compensation Policies

Compensation Philosophy

Inform Advise Share Control

the compensation function tends to be more directly accountable for the design
aspects of the compensation program, especially in the areas of compensation
philosophy, policy development, market comparisons and development of pay
structures. Line management and/or senior management tends to take a more active
role in the design of spot and recognition programs and in the design of variable pay
programs.
However, compensation tends to have more of an impact on compensation
program design than on the administration and control of the compensation program.
(See Figures 3 and 4 on page 132.) In addition, management and finance tend to
take either shared or direct accountability for these dimensions of compensation
program management. The administration or determination of base salary, variable
pay or special compensation expenditures is typically an advisory to shared role of
the compensation professional. And line managers have significant decision- making
ability. Monitoring compensation expenditures, whether it’s base salary, variable
pay or recognition pay, is not predominately controlled by compensation, although
the compensation professional typically would have an advisory role to management
in the control of these expenditures.
It seems that the role of compensation professionals will continue to trend toward
strategic organization counselors as opposed to administration and compliance
officers, since the time just will not be available. While the fiscal control of
compensation programs still remains a key strategic objective for compensation

Articles & Perspectives | 131

 ˜
FIGURE 3: Compensation/HR Role in Program Administration

Individual LTI Awards

Individual LTI Eligibility & Targets

Individual STI Awards

Individual STI Eligibility & Targets

Spot & Recognition Awards

Special Pay Equity Adjustments

Adjustments for Key Contributors

Hot Skills/Market Adjustments

Individual Promotional Increases

Individual Pay

Individual Employee Pay Rates

Placement of Jobs in Grades/Structure

Inform Advise Share Control

˜
FIGURE 4: Compensation/HR Role in Program Monitoring and Control

Spot and Recognition Award Expenditures

LTI Expenditures

STI Expenditures

Base Salary Increase Expenditures

Inform Advise Share Control

132 | Elements of Base Pay Administration

professionals, the real key will be the methods used to effectively leverage technology
and outsourcing to make this viable.
The top five competencies identified by the 2005 WorldatWork survey for
compensation professionals were:
• Strategic thinking
• Understanding company operations
• Project management
• Developing the business case for change
• Executive-level presentation skills.

What Will the Future Hold?

Survey respondents believe that the role of the compensation professional will
be more challenging and demanding, and indeed, much more interesting. As such,
compensation professionals must maintain and enhance the body of knowledge
and find new ways to add value. With this more strategic role, compensation
professionals should be prepared to take responsibility for business success.
Survey respondents are positive about the opportunities for compensation. Only
time will tell if they have accurately predicted the future.

About the Authors

Barbara Manny is the president of Benefits & Compensation Resources (BCR), a
compensation and benefits consulting firm. She can be reached at [email protected]
or 847/236-1208.
Richard S. Sperling, CCP, is a senior consultant in the Chicago office of Hay Group.
He can be reached at [email protected] or 312/228-1837.
Thomas D. McMullen is a senior consultant and Midwest Reward practice leader in the
Chicago office of Hay Management Consultants. He can be reached at
[email protected] or 312/228-1848.
Dow Scott, Ph.D., is a professor of human resources in the School of Business
Administration at Loyola University Chicago and president of Performance Development
International Inc. He can be reached at [email protected] or 312/915-6597.

Reprinted from workspan January 2006.

Articles & Perspectives | 133

Glossary
A
across-the-board increase
An identical pay raise — either in a flat rate such as cents per hour or as a percentage
of salary — given to all eligible employees. Also known as a general increase.

aging survey data

The practice of increasing market-survey data by an assumed percentage
representative of wage movement to bring the data to a consistent point in time.
This practice also is known as “advancing” or “trending” the data.

Americans with Disabilities Act of 1990 (ADA)

A federal law that creates nondiscrimination protections for people with disabilities,
similar to Title VII of the Civil Rights Act of 1964, which is extended to other minorities.
Under the law, employers may not refuse to hire or promote a person because of a
disability, and employers are required to make “reasonable accommodations” to allow
people with disabilities to perform essential functions. Regulations are enforced by
the Equal Employment Opportunity Commission (EEOC).

anniversary date
1) The date used by insurance companies for the purpose of determining the experience
rating for the completed accounting period and establishing the premium rates for the
next period. (2) The date used in some pay systems to trigger a review of the employee’s
salary and/or to trigger a potential salary increase. It may be the anniversary of hiring,
last pay increase, promotion or some other reference point.

annual bonus
Usually a lump-sum payment (cash, shares, etc.) made once a year in addition
to an employee’s normal salary or wage for a fiscal or calendar year. Generally
nondiscretionary and not based on predetermined performance criteria or standards.

annualized increase percent

A salary increase expressed as an annual rate of increase. It is calculated by dividing
the number of months since the last increase (denominator) into 12 (numerator) and
multiplying the result by the actual percent increase: (12/number of months since
last increase) x (percent increase).

Glossary of Terms | 137

average frequency (of salary increases)
Used to determine how often a salary increase is granted. It is determined by
summing the months between increases granted for the employee groups and
dividing by the number of increases and employees. Normally calculated on a
departmentwide or companywide basis.

average hourly earnings

Used to determine the amount an employee has earned over a period of time. It is
determined by dividing hours worked per period into the total wages earned for that period.

average percent increase

Used to determine the average salary increase given. It is calculated by dividing the
sum of salary increase amounts for all eligible employees by the eligible payroll. Both
the numerator and the denominator include those who were eligible and participated
but received no increase.

B
base pay
The fixed compensation paid to an employee for performing specific job responsibilities.
It is typically paid as a salary, hourly or piece rate.

base pay structure

The hierarchy of job grades and pay ranges established within an organization. The salary
structure may be expressed in terms of job grades, job-evaluation points or policy lines.

benchmark job
A job that is commonly found and defined, and used to make pay comparisons, either
within the organization or to comparable jobs outside the organization. Pay data for
these jobs are readily available in published surveys.

benefits
Programs that an employer uses to supplement the cash compensation an employee
receives. Benefits include publicly mandated and voluntary private “income
protection” programs that often are provided through insurance, pay for time not
worked and other employee perquisites.

broadbanding
A pay structure that consolidates a large number of pay grades and salary ranges
into much fewer broadbands with relatively wide salary ranges, typically with
100 percent or more difference between minimum and maximum.

138 | Elements of Base Pay Administration

Bureau of Labor Statistics (BLS)
The principle fact-finding agency for the federal government in the broad field of
labor economics statistics. Useful statistics include: CPI, NCS data, labor statistics,
and other wage and benefits data.

C
cash compensation
The sum of all cash payments made to an individual for services (i.e., employment)
during a given year.

central tendency
In statistics, some clustering around a central value in a distribution of data usually
determined by one of the measures of location; i.e., mean, median or mode.

classification method of job evaluation

A nonqualitative form of job content evaluation that compares jobs to predefined
class descriptions established for each job grade. Jobs are placed in whichever
classification best describes them.

COLA
See cost-of-living adjustment.

collective bargaining agreements

Agreements between employee groups and employers detailing work conditions
including working hours, vacation and holiday entitlements, termination-of-service
provisions and sometimes benefit entitlements. These agreements may be specific to
one company or industry or apply nationally.

common review date

The date on which all (or a group of) employees receive pay increases. For example,
a company may implement increases for all employees on April 1; employees hired
off cycle usually receive prorated increases. Also known as focal point review date.

comparable worth
The doctrine that men and women who perform work of the same “inherent value”
should receive similar levels of compensation. According to this doctrine, jobs have
an inherent value that can be compared across jobs of quite different content.
Those accepting this position maintain that women performing jobs of comparable
worth to those performed by men should be paid the same as men, excepting
allowable differences (for example, seniority plans, merit plans, production-based
pay plans or different locations).

Glossary of Terms | 139

compa-ratio
The ratio of an actual pay rate (numerator) to the midpoint or some other control
point for the pay range (denominator). Compa-ratios are used to measure and monitor
an individual’s actual rate of pay to the midpoint or control point of his or her range.
A compa-ratio can be calculated for a group, a department or an entire organization.

compensable factor
Any factor used to provide a basis for judging job value to create a job worth
hierarchy (job evaluation). The generic compensable factors established by the Equal
Pay Act of 1963 are skill, effort, responsibility and working conditions.

compensation
Cash provided by an employer to an employee for services rendered. Compensation
comprises the elements of pay (e.g., base pay, variable pay, stock, etc.) that an
employer offers an employee in return for his or her services.

compensation cost
The total cost to the organization, including the unrealized or unknown future cost
effects of today’s compensation decisions regarding the total compensation program.
Included are base pay, incentive opportunities, benefits costs and liabilities,
perquisite costs, time-off programs (vacations, sick pay, etc.).

compensation philosophy
Ensures that a compensation program supports an organization’s culture.

compensation policy
Ensures that a compensation program carries out the compensation strategy while
supporting the compensation philosophy.

compensation strategy
The principles that guide design, implementation and administration of a
compensation program at an organization. The strategy ensures that a compensation
program, consisting of both pay and benefits, supports an organization’s mission,
goals and business objectives. It may also specify what programs will be used and
how they will be administered.

competency
A behavior, attribute or skill that is a predictor of personal success.

competitive pay policy

The strategic decision an organization makes about which labor markets to use
as comparison groups and how to set pay levels with respect to those groups. After
choosing the comparison group, the organization must decide its market position
with respect to the group.

140 | Elements of Base Pay Administration

compression
Pay differentials too small to be considered equitable. The term may apply to
differences between 1) the pay of supervisors and subordinates, 2) the pay of
experienced and newly hired personnel of the same job and 3) pay-range midpoints
in successive job grades or related grades across pay structures.

control point
The point within a salary range representing the desired pay for a fully qualified,
satisfactory performer in a job or group of jobs at a given time (usually the midpoint
of the salary range).

corporate culture
The norms, beliefs and assumptions adopted by an organization to enable it to adapt
to its external environment and internally integrate people and units. It is strongly
influenced by the values and behavior of an organization’s management. In turn,
corporate culture influences both the behavior of the members of the organization
and the quality of the work experience.

cost-of-living adjustment (COLA)

An across-the-board wage and salary increase or supplemental payment designed to
bring pay in line with increases in the cost of living to maintain real purchasing power.

cost-of-living index
See Consumer Price Index.

D
Department of Labor (DOL)
A regulatory agency that administers and enforces several federal laws including the Equal
Pay Act of 1963, Fair Labor Standards Act of 1938 (FLSA), Employee Retirement Income
Security Act of 1974 (ERISA) and Family and Medical Leave Act of 1993 (FMLA).
Agencies under the DOL include the Bureau of Labor Statistics (BLS), Employment
Standards Administration and the Pension and Welfare Benefits Administration (PWBA).

direct observation
A job analysis technique that involves the direct observation of employee(s) actually
performing work in order to understand job content. The method is typically used
for highly repetitive production jobs.

disclaimer statement
A provision in a job description that states that job descriptions typically do not
specify every duty or responsibility that an employee may be asked to perform;
e.g., “May perform other duties as required.”

Glossary of Terms | 141

E
earnings
Total wages or cash received during a specified period of time (e.g., pay period,
month, year) for time worked or service rendered, including all regular pay, overtime,
premium pay, bonuses, etc.

effective date
(1) The date on which a benefits plan or insurance policy goes into effect, and from
which time coverage is provided. (2) The date on which increases in salary or pay rate
go into effect.

Equal Pay Act of 1963

An amendment to the Fair Labor Standards Act of 1938 (FLSA) that prohibits gender-
related pay differentials on jobs that are substantially equal in terms of skill, effort,
responsibility and working conditions, and that are performed in the same location.

equity
Anything of value earned through the provision or investment of something of value.
(1) In the case of compensation, an employee earns equity interest through the
provision of labor on a job. Equity often is used as a fairness criterion (i.e., “equal
treatment”) in compensation. (2) On an organization’s balance sheet, equity represents
the book value of the owners’ stake in the firm. See also shareholders’ equity.

exempt employees
Employees who are exempt from the Fair Labor Standards Act of 1938 (FLSA)
minimum wage and overtime provisions due to the type of duties performed. Include
executives, administrative employees, professional employees and those engaged
in outside sales as defined by the FLSA.

external equity
A measure of an organization’s pay levels or bands or “going market rates” compared
to those of its competitors. As a fairness criterion, external equity implies that the
employer pays wages that correspond to prevailing, external market rates, as
determined by market pricing.

F
Fair Labor Standards Act of 1938 (FLSA)
A federal law governing minimum wage, overtime pay, child labor and record-keeping
requirements.

142 | Elements of Base Pay Administration

feedback
Information about the state or outcome of a system that can be used to modify or
correct a system’s operation. As the term usually is used with respect to compensation, it
relates to the process in which supervisors give employees information about the status
of their performance. Performance appraisals are an example of a feedback mechanism.

G
general increase
See across-the-board increase.

geographic differentials
Pay differences established for the same job based on variations in costs of living
or costs of labor among two or more geographical areas.

green circle rate

A rate paid to an employee that is below the established pay range minimum for
a specific job.

H
hourly
The rate of pay per hour for a job being performed. An “hourly” worker may be
assigned to various rated jobs during any pay period and is paid the “rate” applicable
to each job while working on it. The term hourly also is used to distinguish between
nonexempt and exempt employees.

I
incumbent
A person occupying and performing a job.

internal equity
A fairness criterion that directs an employer to establish wage rates that correspond
to each job’s relative value to the organization.

J
job
The total collection of tasks, duties and responsibilities assigned to one or more
individuals whose work has the same nature and level.

Glossary of Terms | 143

job analysis
The systematic, formal study of the duties and responsibilities that constitute job
content. The process seeks to obtain important and relevant information about
the nature and level of the work performed and the specifications required for an
incumbent to perform the job at a competent level.

job component method of job evaluation

A quantitative form of job content evaluation that uses multiple regression of market-
pay levels versus two or more independent variables to establish a job worth hierarchy.

job content evaluation method(s)

Methods that use job content as the primary determinant in developing a job worth
hierarchy. With these methods, market-pay levels typically are a secondary influence
on the job worth hierarchy. Point factor is the most commonly used method.

job description
A summary of the most important features of a job, including the general nature
of the work performed (duties and responsibilities) and level (e.g., skill, effort,
responsibility and working conditions) of the work performed. It typically includes
job specifications that detail employee characteristics required for competent
performance of the job. A job description should describe and focus on the job itself
and not on any specific individual who might fill the job.

job documentation
Written information about job content typically resulting from job analysis efforts.
Documentation includes, but is not limited to, job descriptions, completed
questionnaires, interview notes and efficiency study reports.

job evaluation
A formal process used to create a job worth hierarchy within an organization.
The two basic approaches are market data and the job content.

job specifications
A description of the worker characteristics (i.e., knowledge, skills, abilities and
behaviors) required to competently perform a given job. These characteristics must
be bona fide occupational qualifications (BFOQs). Specifications, which commonly
are referred to as “hiring” or “background” requirements, should be written before
advertising or interviewing candidates for an open position. They should support
the essential functions identified during job analysis to reduce potential liabilities
under the Americans with Disabilities Act (ADA).

144 | Elements of Base Pay Administration

job title
The descriptive name for the total collection of tasks, duties and responsibilities assigned
to one or more individuals whose positions have the same nature of work performed
at the same level. Job titles should describe the nature and level of work performed.
Titles often include the organizational function (e.g., corporate remuneration analyst)
or geographic responsibility (e.g., Eastern region sales manager).

job worth hierarchy

The perceived internal value of jobs in relationship to each other within an
organization. The job worth hierarchy forms the basis for grouping similar jobs
together and establishing salary ranges.

L
lag structure policy
This strategy dictates that the company will consciously set its pay equal to current
market levels at the beginning of the year. The company will be “lagging” the market
until the increase is implemented at the end of the year.

lead structure policy

The company has decided to “outpace” the market. Pay is not set at current market
levels, but at anticipated market levels.

lead-lag structure policy

A salary practice that is halfway between a lag and a lead policy. An organization’s
structure is set at the beginning of the plan year to its anticipation of the level the
competition will reach by the middle of the plan year. It leads the market during
the first six months, matches the competitive pay at the middle of the year and
lags the market during the past six months.

lump-sum increase
Any increase in pay that is made in the form of a single cash payment. The most
common form is the lump-sum merit increase.

M
market adjustment
The percentage increase to organization, group or individual pay that is necessary
to adjust it to the estimated market level.

Glossary of Terms | 145

market pricing
Relative to compensation, the technique of creating a job worth hierarchy based on
the “going rate” for benchmark jobs in the labor market(s) relevant to the organization.
Under this method, job content is considered secondarily to ensure internal equity after
a preliminary hierarchy is established based on market-pay levels for benchmark jobs.
All other jobs are “slotted” into the hierarchy based on whole-job comparison.

mean
A simple arithmetic average obtained by adding a set of numbers and then dividing
the sum by the number of items in the set.

median
The middle item in a set of ranked data points containing an odd number of items.
When an even number of items are ranked, the average of the two middle items is
the median.

merit increase
An adjustment to an individual’s base pay rate based on performance or some other
individual measure.

midpoint
The salary that represents the middle of a given salary range or pay grade.

midpoint differential
The difference in wage rates paid in the midpoints of two adjacent grades. A midpoint
progression is calculated by taking the difference between two adjacent midpoints as
a percentage of the lower of the midpoints. Also known as the midpoint differential.

midpoint progression
See midpoint differential.

midpoint-to-midpoint differential
See midpoint differential.

mode
The category or value that occurs most frequently in a set of observations. In a
frequency distribution, it is the category with the highest frequency. Sometimes there
is more than one mode.

N
nature of work
Critical data about a job that reflect the job’s duties and responsibilities.

146 | Elements of Base Pay Administration

nonexempt employees
Employees who are not exempt from the minimum wage and overtime pay provisions
of the Fair Labor Standards Act of 1938 (FLSA).

nonquantitative job evaluation

A method that creates a job worth hierarchy based on the perceived value of the
“whole job(s)” but does not employ quantitative methods (i.e., assigning evaluation
“points”). Examples of nonquantitative methods are classification and ranking.

O
O*NET
O*NET OnLine is an application that was created for the general public to provide broad
access to the O*NET database of occupational information. The O*NET database includes
information on skills, abilities, knowledges, work activities and interests associated
with occupations. This information can be used to facilitate career exploration, vocational
counseling and a variety of human resources functions, such as developing job orders and
position descriptions, and aligning training with current workplace needs.

occupation
A generalized job or family of jobs common to multiple organizations or industries.

organizational culture
See corporate culture.

overtime
Under the Fair Labor Standards Act of 1938 (FLSA), nonexempt employees must
be paid one-and-a-half times their normal wage rates for all hours worked in excess
of 40 in any workweek. Some states require overtime be calculated by other than
a 40-hour week or at greater than 11/2 times normal wage rate.

P
pay for performance
Links pay (base and/or variable), in whole or in part, to individual, group and/or
organizational performance.

pay grade
The grade to which a given type of job is assigned.

pay policy line

The level at which the organization decides to set its pay against the external market.
Usually the midpoint of the salary structure is set as an estimate of the market going rate.

Glossary of Terms | 147

pay range
The range of pay rates, from minimum to maximum, established for a pay grade or
class. Typically used to set individual employee pay rates.

pay-range overlap
The degree to which the pay ranges assigned to adjacent grades in a structure overlap.
Numerically, the percentage of overlap between two adjacent pay ranges.

pay-range width
The width or spread of a pay range, measured by the ratio: width = (maximum pay –
minimum pay)/minimum pay.

pay-trend line
A line fitted to a scatter plot that treats pay as a function of job values. The most
common technique for fitting a pay-trend line is regression analysis.

percentile
A measure of location in a distribution of numbers that defines the value below
which a given percentage of the data fall. For example, the 90th percentile is the
point below which 90 percent of the data fall.

point-factor method of job evaluation

A quantitative form of job content evaluation that uses defined factors and degree levels
within each factor (usually five to seven levels, which are also defined). Each factor is
weighted according to its importance (to the organization). Job content descriptions are
compared to definitions of the degree levels, and the corresponding points assigned to
the appropriate level are then awarded to the job and added for all factors to determine
the total job score. The total scores are used to create a job worth hierarchy.

position
The total duties and responsibilities requiring the employment of a single employee.
The total number of positions in an organization equals the number of employees
plus vacancies.

Q
quantitative job evaluation
A method that creates a job worth hierarchy by analyzing jobs in terms of specific
factors and numerical indices. Examples of quantitative methods are job component
and point factor.

148 | Elements of Base Pay Administration

R
range
(1) For a set of data, the difference between the maximum value and the minimum value.
(2) For a pay grade, the percentage by which the maximum pay exceeds the minimum.

range penetration
The level of an individual’s pay compared to the total pay range (rather than
compared with midpoint, as in compa-ratio). Range penetration is calculated as:
RP = (Pay – Range Minimum)/(Range Maximum – Range Minimum).

range spread
See pay-range width.

ranking method of job evaluation

The simplest form of job evaluation. A whole-job, job-to-job comparison, resulting
in an ordering of jobs into a job worth hierarchy from highest to lowest.

rate
See wage rate.

reclassification
The (re)assignment of a job to a higher or lower grade or range in the organization’s
job worth hierarchy due to a job content (re)evaluation and/or significant change
in the going rate for comparable jobs in the external labor market.

red circle rate

An individual pay rate that is above the established range maximum assigned to the
job grade. The employee is usually not eligible for further base pay increases until
the range maximum surpasses the individual pay rate.

S
salary
Compensation paid by the week, month or year (rather than per hour). Generally
applies to jobs that are exempt from the provisions of the Fair Labor Standards Act
of 1938 (FLSA), but in some cases, nonexempt jobs can be salaried as well.

salary grade
A group of jobs of the same or similar value, used for compensation purposes. All
jobs in a salary grade have the same salary range: minimum, midpoint and maximum.

Glossary of Terms | 149

salary increase cost
(1) The cost of the increase in the current (i.e., first) year is determined by
multiplying the eligible payroll by the average-increase percent and the participant
rate, adjusted for the percent of the year the increase is in effect. (2) The annualized
cost of the increase (future-year cost) is determined by multiplying the eligible
payroll by the average-increase percent and the participant rate.

salary structure
The hierarchy of job grades and pay ranges established within an organization. The salary
structure may be expressed in terms of job grades, job-evaluation points or policy lines.

scope
A set of quantifiable job characteristics that ascribe value to a job. Typical measures
include sales volume, asset size of the organization, number of subordinates and
size of budget managed.

secondary source of job information

See scope.

seniority
Status determined by the length of time an employee has worked for a given
employer, often as the basis for rights, privileges and benefits. The term also may
be used to reflect time worked for a division, group or specific occupation. Union
contracts often provide for multiple seniority calculations.

Sherman Anti-Trust Act (1890)

A federal law passed to protect the public from abuses of corporate monopolies.
However, in 1908, the Supreme Court ruled that it applied to unions, as well. In
terms of compensation, the exchange of wage information can be seen as “price fixing”
wages.

shift differential
Extra pay allowance made to employees who work on a shift other than a regular
day shift (e.g., 9 a.m. to 5 p.m., Monday through Friday) if the shift is thought
to represent a hardship, or if competitive organizations provide a similar premium.
Shift differentials usually are expressed as a percentage or in cents per hour.

skill-based pay
A person-based compensation system based on the repertoire of skills an employee
can perform, rather than the specific skill that the employee may be doing at a
particular time. Pay increases generally are associated with the addition and/or
improvement of the skills of an individual employee, as opposed to better
performance or seniority within the system. The pay level generally is not
dependent on whether any of the skills are utilized.

150 | Elements of Base Pay Administration

skills inventory
A planning tool that specifies all people currently employed by the organization and
classifies them according to their skills, job assignments, age, gender and other
factors relevant to human resources planning. The device is employed primarily as a
way of classifying internal labor supplies for human resources planning.

slotting
The act of placing a job into a job worth hierarchy established by some other job-
evaluation method. The method involves comparing the job to one or more jobs in an
already established hierarchy. Consequently, it cannot be used as a stand-alone method.

step rates
Standard progression pay rates that are established within a pay range. Step rates
usually are a function of time in grade and often are referred to as automatic.
However, they also can be variable or can be used in conjunction with merit programs.

survey
The gathering of information about a situation. Often, surveys consist of sampling
data from a population. Examples include a benchmark salary survey that collects pay
data for benchmark jobs from a defined labor market; a maturity salary survey that
collects both pay and experience data from a defined labor market for benchmark jobs
or jobs in a given discipline at a given degree level; and a benefits survey that collects
benefits data from a defined labor market.

T
target compa-ratio
The organization’s planned average salary for the organization, group or individual
divided by the corresponding average (or total) midpoint. Can also be calculated
on total salaries and total midpoints.

total rewards
The monetary and nonmonetary returns provided to employees in exchange
for their time, talents, efforts and results. Total rewards involve the deliberate
integration of five key elements that effectively attract, motivate and retain the
talent required to achieve desired business results.

V
variable pay
Compensation that is contingent on discretion, performance or results achieved.
It may be referred to as pay at risk.

Glossary of Terms | 151

Selected References I
Selected References
Articles

Astron Solutions. 2001. How Can I Create Employee Ownership Without Using
Stock Options? Part II. October 15 Issue.

Compensation Consulting Consortium LLC. 2002. Effective Market-based Pay Systems.

Conference Board. 2002. Canadian Variable Pay Offers a Bonus for Unionized
Workplaces. Newsline.*

Crowe, Barbara; Siscovick, Ilene; Marjorie Pieper. 2003. Designing a Work Force
Architecture for Merger Success. WorldatWork Journal, Third Quarter, 39-46.

Ellis, Christian M.; Halliburton, Amy J. 2002. Looking into the Crystal Ball
of Base Pay. WorldatWork Journal, Fourth Quarter, 14-20.

Foote, David. 2001. The Whirling World of IT Pay. workspan, October, 30-35.

Gherson, Diane J. 2000. Getting the Pay Thing Right. workspan, June, 47-51.

Handel, Jeremy. 2002. Does It Matter What Employees Know About Pay?
A Recent Study Says Yes. Canadian News. Second Quarter, 15-17.

Heneman, Robert L.; Mulvey, Paul W.; LeBlanc, Peter V. 2002. Improve Base Pay ROI
by Increasing Employee Knowledge — WorldatWork Journal, Fourth Quarter, 21-27.

Heneman, Robert L. 2001. Work Evaluation: Current State of the Art and Future
Prospects. WorldatWork Journal, Third Quarter, 65-70.

Hewitt Associates. 2004. Companies Revamping Executive Long-term Incentive

Programs. Newsline.*

Hill, Brad; Tande, Christine. 2006. New Rules: Paying for Performance. workspan,
May, 44-46.

Ibanez-Frocham, Martin. 2002. Executive Pay the Latin Way: The Evolution in
Compensation. workspan, May, 34-41.

Jantz, Amy. 2005. Total Compensation Mix. WorldatWork White Paper.

Manas, Todd. 2000. Combining Reward Elements to Create the Right Team
Chemistry. workspan, November/December, 46-52.

154 | Elements of Base Pay Administration

Mercer Human Resource Consulting. 2006. Global Report Confirms Executive
Pay Gap. Newsline.*

Mercer Human Resource Consulting. 2005. U.S. Compensation Planning 2006:

Caution Gives Way to Optimism. Perspective Newsletter, October.

Mercer Human Resource Consulting. 2003. Globalization Prompting Multinationals

to Change Pay, Benefits Strategies. Newsline.*

Mercer Human Resource Consulting. 2000. Shaping Performance with Base Pay.

Morris, Elizabeth. 2005. Job Component Method. WorldatWork White Paper.

Perspectives, 2005. Wage Bias — DOL Tackles Compensation Discrimination.

workspan, March, 12-18.

Satterfield, Terry. 2000. Pay the Job or the Person, But Why Not Both? workspan,
November/December, 6-8.

SMCL/Mercer. 2005. Salaries and Bonuses Generally Higher in Continental Europe

than in the UK. Newsline.*

Sung, Amy; Todd, Emory. 2004. Line of Sight: Moving Beyond the Catchphrase.
workspan, October, 65-69.

Wanderer, Mike. 2000. Dot-comp — A ‘Traditional’ Pay Plan with a Cutting Edge.
WorldatWork Journal, Fourth Quarter, 15-24.

Weeks, Sandra. 2002. Job Evaluation Is Alive and Well ... at Least in Canada.
WorldatWork Journal, Fourth Quarter, 10-13.

Wright, Al. 2004. Making the Case for Automation. workspan, July, 50-54.

Zingheim, Patricia K.; Schuster, Jay R. 2003. Getting Back to Basics. workspan,
May, 54-58.

*Available to WorldatWork members only

Live Chat Transcripts (www.worldatwork.org/library)

Base Pay Solutions — Chat Transcript

Guest Speaker: Peter V. LeBlanc

Total Rewards Strategies — Chat Transcript

Guest Speaker: Steve Gross.

Selected References | 155

WorldatWork Research & Surveys
(www.worldatwork.org/library/research/surveys)

Changing Role of Compensation — 2005

Fiscal Management of Compensation Programs — 2005

Survey of Compensation Policies and Practices — 2003

WorldatWork Bookstore (www.worldatwork.org/bookstore)

Clampitt, William H. 2005. Employee Compensation Basics. Scottsdale: WorldatWork.

Evans, Elaine M. 2006. Compensation Basics for HR Generalists. Scottsdale: WorldatWork.

Henderson, Richard I. 2003. Compensation Management In A Knowledge Based World.

Upper Saddle River: Prentice Hall.

Martocchio, Joseph J. 2004. Strategic Compensation: A Human Resource Management

Approach — Third Edition. Upper Saddle River: Prentice Hall.

Milkovich, George; Newman, Jerry. 2004. Compensation — Eighth Edition.

New York: McGraw Hill.

Mulvey, Paul W.; LeBlanc, Peter V.; Heneman, Robert L. 2002. The Knowledge
of Pay Study: E-mails from the Frontline. Scottsdale: WorldatWork.

Reynolds, Calvin. 2006. Compensating North American Expatriates. Scottsdale:

WorldatWork.

Rubino, John A. 2004. Communicating Compensation Programs. Scottsdale:

WorldatWork.

Sotherland, Jude. 2006. When Pay Plans Go Wrong — Managing Compliance Issues
Before the Audit. Scottsdale: WorldatWork.

Total Rewards Glossary. 2006. Scottsdale: WorldatWork.

156 | Elements of Base Pay Administration

WorldatWork Courses (www.worldatwork.org/education)

Compensation Fundamentals

C1: Regulatory Environments for Compensation Programs

C2: Job Analysis, Documentation and Evaluation

C4/GR4: Base Pay Management

C17: Market Pricing — Conducting a Competitive Pay Analysis

T1/GR1: Total Rewards Management

T9/GR7: International Remuneration: An Overview of Global Rewards

Compensation Fundamentals

Selected References | 157

If you’re new to the compensation profession or need a refresher lesson on the
fundamental aspects of base pay programs, this book provides the perfect starter
tool. As the compensation function evolves and new pay issues arise, it is vital
to understand what your employees value and how that value system has a direct
impact on employee engagement.
This book helps readers build a foundational understanding of the internal and
external factors that influence the design, delivery and administration of base pay
programs. Moreover, it teaches how to incorporate these influential factors into
plan design.
This book succinctly describes a variety of base pay programs and offers explanations
of why one form of base pay might be better to use than another. It offers tips and
practices on plan implementation and includes articles, research and case studies to
help keep your organization adrift in today’s competitive rewards environment.

Jason C. Kovac, CCP, CBP, develops instructional course content

for WorldatWork in the disciplines of compensation regulations,
job analysis/documentation/evaluation, base pay management,
market pricing, statistical applications, and mergers and acquisitions.
Kovac has more than eight years of compensation training and
general human resources experience in health care and retail
settings. He has been invited to numerous speaking engagements for his
expertise concerning
the U.S. Fair Labor Standards Act (FLSA) and general compensation.
L. Kate Beatty, CCP, is a certified compensation professional with
more than 25 years of experience in compensation program design
and management. She is president of LKB Associates, a Tulsa-
based consulting firm. Her areas of expertise include compensation
strategy, job analysis and evaluation, custom pay surveys, market
pricing, performance management and individual/group incentive plans.
Beatty is involved in a variety of public speaking and writing assignments on
compensation issues and concerns. She serves on the faculty of WorldatWork,
where she is involved in design and delivery of certification courses on
job evaluation and market pricing. She teaches these and four additional
WorldatWork certification courses at Tulsa Community College.

www.worldatwork.org