Compensation Definitions:
The Second Article in a Series
This article will deal with some of the terminology used
when describing a compensation program.
If you missed the first article which covered basic
Compensation
Terminology you can still read it here.
Compensation Philosophy:
An organization should have a pay philosophy which dictates how the
compensation within the company compares to compensation at other organizations
– called the external market. Organizations
will look at salary surveys to determine what other companies are paying for the
same or similar work. This is the market value of a job. They will generally look at the average rate paid.
The Compensation Philosophy should indicate either that the organization
would like to stay even with the external market or that it would like to stay
ahead or behind the market by a given percent.
It may also describe how rates will be set for new job titles.
The organization will use either internal or external comparisons, or a
combination of both.
Market Value of a Job:
The average rate paid for the same or similar jobs in the defined labor
market.
Labor Market: The
labor market refers to the area from where a replacement worker for a given job
would generally originate. It can
vary for each job in the organization based on where a replacement worker would
likely be found. For instance, the
labor market for a CEO will likely be defined as average rate paid for CEO’s
at similarly-sized organizations nation-wide.
Since it could very well take a nation-wide search to fill a position
like this, it is important to be competitive at a nation-wide level.
For a position like Secretary or Customer Service Representative the
labor market will generally be defined as local to the organization but may not
vary by size of organization as a qualified pool of candidates could very well
exist in the local area.
Total Compensation:
Refers to the value of all things that an organization has to offer for
working there. This includes things
that you can place a monetary value on as well as things that just make a job
more satisfying. Examples of
items you can place a monetary value on are vacation days, holiday pay, tuition
reimbursement, health insurance, dental insurance, short term disability and, of
course, your hourly or salary pay. Examples
of items that you cannot so easily place a monetary value on are:
rewarding work, opportunity for advancement, opportunity to learn new
things, a nice office, having good working relationships with co-workers,
convenient parking, flexible work arrangements.
Internal Equity:
Is the comparison of pay rates for jobs within the organization.
If a job has internal equity it is paid fairly compared to the rates paid
for similar jobs inside the organization. Some
organizations will base compensation for new jobs on internal equity alone.
Often there will be a compensation committee that looks at jobs within
the organization to compare job requirements (years of experience, education,
special skills, certifications) and responsibilities (managing others vs. taking
direction, entering data vs. analyzing data, decision-making power, budget
management, client service). A new
job will be paid similarly to other jobs with the comparable requirements and
levels of responsibility.
External Equity:
Is the comparison of pay rates for similar jobs outside of the
organization. External equity is
achieved if an organization’s average rate paid for a given job is equal to
the market average for the same or similar job.
Some organizations will base their entire compensation program on the
external market by using salary survey data.
They will match the middle of a pay range to the market average rate
paid.
Pay Grade Progression:
This refers to how quickly the organization expects employee pay rates to
move through the pay grade. In
other words, if an employee is hired in at the minimum of a pay range, how long
can they anticipate working there at a satisfactory level before reaching the
middle or max of the pay range? An
organization may set a standard that, with satisfactory performance, an employee
can expect to move 3% per year through the range.
Compa-ratio: This
a fancy way of indicating how a pay rate compares to either the average market
rate or to the median of a pay range. If
your organization says that your pay rate is a .97 compa-ratio to your pay grade
middle, that means that you are 3% below the middle of your pay grade.
If, on the other hand, the compa-ratio is 1.03, that indicates that you
are 3% above the middle. 1.00 means
that you are at the pay grade middle. It’s
actually very simple!
Kirsten Ross is mother of two sons and is
a Certified Human Resource Professional (SPHR) dedicated to helping women
achieve more life balance and to transforming the design of work.
Visit Womans-Work.com at http://www.womans-work.com
to search our revolutionary flexible work job board featuring more than 35,000
fresh work from home, part time, job share, flex time and telecommuting
opportunities, search for a job share partner or
read valuable career, life balance and family articles. You may also email
her at mailto:KRoss@Womans-Work.com
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