Question

I need to write an essay describing the steps for the construction of compensation structures. 
The essay should mention and explain:

1- what are the steps for the construction of compensation structures.

2- Explain the following concepts:
Rank
Middle point
Maximum
Minimum
Range range

3- Explain the importance of compensation structures in companies, regardless of their organizational size.

Answer 1

Answer 1:-

Companies have to determine the best way to provide equitable compensation for their employees or risk losing them to other employers. According to Martocchio, there is a five-step process that companies use to determine the way to compensate employees. “Companies recognize these differences by paying individuals according to their credentials, knowledge, or job performance” (Martocchio, 2014).

     Step one involves “deciding on the number of pay structures” (Martocchio, 2014). In this step companies are deciding how to separate the pay structure of their employees, are the employees exempt or non-exempt to determine if overtime pay is applicable. A determination must be made on the level the employee is in the organization. Entry-level employees and hourly employees are going to punch a clock and will be paid accordingly. However, usually executives and upper-level employees are paid based on a yearly salary; these employees usually are not eligible for overtime. Their pay rate is based on an annual commitment to the company rather than based on the immediate daily effects.

     Another determination to decide on pay structure could be based on geography or job family. If based on geography, pay rates are going to differ in different geographical areas. A good example of this is RN pay schedules. My wife recently researched RN salaries in New York versus Tampa, FL. The average rate of pay is considerably higher in New York based on the cost of living in New York versus the cost of living in Tampa, FL. Job family has to do with breaking down the company employees into groups or “families”. Companies can elect to pay executives higher according to market conditions than data entry clerks. There are some examples of companies with federal contracts that have to conform to federal guidelines for hiring certain contractors doing specific work. The main objective of this step is to establish the structure in which the company is going to separate the different pay groups.

     The next step in constructing a pay structure is “determining a market pay line”. In this step, the company, after determining the number of pay structure they are going to use is to determine the rates they are going to pay to stay competitive in the current market. If looking to hire a number of cashiers to run cash registers all day, the company must look around at nearby competitors to find out how much they are paying their cashiers. “Pay levels that correspond with the market pay line are market-competitive pay rates” (Martocchio, 2014). If a company tries to pay employees below the market pay line they will find it difficult to retain employees. This is typical with entry level jobs often found in fast-food restaurants. The wage is high enough for entry-level employees (typically high school students), however after the student achieves enough skills to find a higher paying job, they usually move on.

     These types of jobs usually have fewer requirements needed to get and maintain the job allowing the employer to be able to draw from a large labor pool, however this low level of requirements usually lead to a higher level of turnover among employees. A job with a higher pay line is going to be consistent with that of increased job skills and education.

     The next step in constructing a pay structure is to “define the pay grades”. Using pay grades to group employees allows employers to pay employees based on similar skills. Evaluating employees working together to determine who is doing the required work versus employees that maybe; are not understanding the work or simply not doing it will, determine the formula used to separate the employees into different pay grades. Different jobs will be grouped according to how much to pay for the work being performed. Companies will choose how to separate the groups possibly by separating clerks from salespeople, paying clerks a certain range of salary while paying salespeople a different range of salary due to the differences in skills needed to perform their jobs. Management will choose how to separate the pay groups and how much to pay the different groups. Companies will typically assign new employees to a lower pay group due to the lower level of job knowledge or skills that the new employee has while training. This is sometimes referred to as a “probationary period”. During this time, companies will train the employee on the skills needed to perform the task they were hired to do.

     Step four of the process includes “calculating pay ranges for each grade”. This step is usually performed by management or owners where, after determining the separate pay groups, the pay range for each group needs to be determined. The pay range is going to determine the minimum, middle, and maximum amount of pay that will be offered to a potential employee to be hired for a specific position. Keeping in line with previous steps; if looking to hire a team of cashiers for a new store about to open, after the interviews have been performed and the field has been narrowed down, certain requirements will be viewed to determine why employee X would deserve to be paid more than employee Y. Depending on the situation, employee X may have more experience in the specific job being hired for or may have interviewed better showing more skills to work with. The minimum pay is usually the lowest pay rate that companies will pay for a particular job. Most new hires are paid at this rate during their training period. In some situations, employees will be hired at a rate lower than the minimum pay rate (green circle rates). This can be done with some employees that are determined to have the necessary skills but may be lacking the experience. Typically, these employees are hired on at the lower rate to show what they can do and are brought up to the minimum rate as quickly as possible. Alternately, some employees are hired above the maximum rate of pay (red circle rates). These employees are usually hired due to a high level of previous job experience relevant to the position being hired for or to keep current employees from being recruited from a competing company.

     Finally, the last step in the process is to evaluate the results. HR professionals continually evaluate the results of the previous steps to constantly analyze the effects of a company’s value for each individual job over the current market value for the same jobs with competing companies. Decisions must be made whether the value of each employee warrants the compensation to be paid in relation to the midpoint of the pay grade. “Thus, each job’s base-pay level should fall within the minimum and maximum rates for its respective pay grade” Martocchio, 2014). There are different methods that can be used for evaluating the results. These include: Job ranking, job classification, and point ranking. These methods involve ranking the jobs in order of preference to determine a ranking of the jobs, giving possibly more weight to higher educated individuals.

In conclusion the main philosophy behind designing a pay structure is to attract and retain qualified employees and point them in the direction of helping the company meet or exceed its goals. The difficult part is trying to determine the lowest acceptable point and the maximum rate you’re willing to pay to get the job done right and on time. Every company is going to vary in terms of how they compensate their employees; some companies are going to overpay their employees to maximize their footprint in the community while others are trying to see how much they can get out of people for as little as they can. In the end, the employee has to feel as though their services bring value to the company and that they are appreciated or they will move on.

Companies have to determine the best way to provide equitable compensation for their employees or risk losing them to other employers. According to Martocchio, there is a five-step process that companies use to determine the way to compensate employees. “Companies recognize these differences by paying individuals according to their credentials, knowledge, or job performance” (Martocchio, 2014).

     Step one involves “deciding on the number of pay structures” (Martocchio, 2014). In this step companies are deciding how to separate the pay structure of their employees, are the employees exempt or non-exempt to determine if overtime pay is applicable. A determination must be made on the level the employee is in the organization. Entry-level employees and hourly employees are going to punch a clock and will be paid accordingly. However, usually executives and upper-level employees are paid based on a yearly salary; these employees usually are not eligible for overtime. Their pay rate is based on an annual commitment to the company rather than based on the immediate daily effects.

     Another determination to decide on pay structure could be based on geography or job family. If based on geography, pay rates are going to differ in different geographical areas. A good example of this is RN pay schedules. My wife recently researched RN salaries in New York versus Tampa, FL. The average rate of pay is considerably higher in New York based on the cost of living in New York versus the cost of living in Tampa, FL. Job family has to do with breaking down the company employees into groups or “families”. Companies can elect to pay executives higher according to market conditions than data entry clerks. There are some examples of companies with federal contracts that have to conform to federal guidelines for hiring certain contractors doing specific work. The main objective of this step is to establish the structure in which the company is going to separate the different pay groups.

     The next step in constructing a pay structure is “determining a market pay line”. In this step, the company, after determining the number of pay structure they are going to use is to determine the rates they are going to pay to stay competitive in the current market. If looking to hire a number of cashiers to run cash registers all day, the company must look around at nearby competitors to find out how much they are paying their cashiers. “Pay levels that correspond with the market pay line are market-competitive pay rates” (Martocchio, 2014). If a company tries to pay employees below the market pay line they will find it difficult to retain employees. This is typical with entry level jobs often found in fast-food restaurants. The wage is high enough for entry-level employees (typically high school students), however after the student achieves enough skills to find a higher paying job, they usually move on.

     These types of jobs usually have fewer requirements needed to get and maintain the job allowing the employer to be able to draw from a large labor pool, however this low level of requirements usually lead to a higher level of turnover among employees. A job with a higher pay line is going to be consistent with that of increased job skills and education.

     The next step in constructing a pay structure is to “define the pay grades”. Using pay grades to group employees allows employers to pay employees based on similar skills. Evaluating employees working together to determine who is doing the required work versus employees that maybe; are not understanding the work or simply not doing it will, determine the formula used to separate the employees into different pay grades. Different jobs will be grouped according to how much to pay for the work being performed. Companies will choose how to separate the groups possibly by separating clerks from salespeople, paying clerks a certain range of salary while paying salespeople a different range of salary due to the differences in skills needed to perform their jobs. Management will choose how to separate the pay groups and how much to pay the different groups. Companies will typically assign new employees to a lower pay group due to the lower level of job knowledge or skills that the new employee has while training. This is sometimes referred to as a “probationary period”. During this time, companies will train the employee on the skills needed to perform the task they were hired to do.

     Step four of the process includes “calculating pay ranges for each grade”. This step is usually performed by management or owners where, after determining the separate pay groups, the pay range for each group needs to be determined. The pay range is going to determine the minimum, middle, and maximum amount of pay that will be offered to a potential employee to be hired for a specific position. Keeping in line with previous steps; if looking to hire a team of cashiers for a new store about to open, after the interviews have been performed and the field has been narrowed down, certain requirements will be viewed to determine why employee X would deserve to be paid more than employee Y. Depending on the situation, employee X may have more experience in the specific job being hired for or may have interviewed better showing more skills to work with. The minimum pay is usually the lowest pay rate that companies will pay for a particular job. Most new hires are paid at this rate during their training period. In some situations, employees will be hired at a rate lower than the minimum pay rate (green circle rates). This can be done with some employees that are determined to have the necessary skills but may be lacking the experience. Typically, these employees are hired on at the lower rate to show what they can do and are brought up to the minimum rate as quickly as possible. Alternately, some employees are hired above the maximum rate of pay (red circle rates). These employees are usually hired due to a high level of previous job experience relevant to the position being hired for or to keep current employees from being recruited from a competing company.

     Finally, the last step in the process is to evaluate the results. HR professionals continually evaluate the results of the previous steps to constantly analyze the effects of a company’s value for each individual job over the current market value for the same jobs with competing companies. Decisions must be made whether the value of each employee warrants the compensation to be paid in relation to the midpoint of the pay grade. “Thus, each job’s base-pay level should fall within the minimum and maximum rates for its respective pay grade” Martocchio, 2014). There are different methods that can be used for evaluating the results. These include: Job ranking, job classification, and point ranking. These methods involve ranking the jobs in order of preference to determine a ranking of the jobs, giving possibly more weight to higher educated individuals.

In conclusion the main philosophy behind designing a pay structure is to attract and retain qualified employees and point them in the direction of helping the company meet or exceed its goals. The difficult part is trying to determine the lowest acceptable point and the maximum rate you’re willing to pay to get the job done right and on time. Every company is going to vary in terms of how they compensate their employees; some companies are going to overpay their employees to maximize their footprint in the community while others are trying to see how much they can get out of people for as little as they can. In the end, the employee has to feel as though their services bring value to the company and that they are appreciated or they will move on.

Answer 3:- Pay is equally important to both the employee and the organization. An organizations compensation program is strongly related to the organizations financial performance. Employees want to know that they are valued for their time, effort, performance and results. The amount of pay and benefits can motivate, energize, and direct behavior. It plays an important role in an organizations ability to retain and attract high-performance employees. The cost of compensation also plays an important role in the success of an organization.

A company’s total compensation system can be intrinsic and extrinsic. The psychological mindset that occurs when employees perform their job is known as intrinsic compensation. Whereas extrinsic compensation encompasses monetary and nonmonetary compensation. “Organizations use compensation as a mechanism to enhance the image of the organization in the minds of applicants” . Compensation is considered to be animportant element of the Human Resource Management strategy in respect to the impact it has on the organizations reputation. According to Gatewood, Gowan & Lautenschager (1993), “Organizational reputation influences decisions made by prospective employees in terms of applying and joining the organization” Compensation practices within Organizations can have greater effects on its competitive advantage