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Sarah W.

HRD5 Compensation Administration


A general model of compensation administration encompasses the creation and management of
a pay system based on four basic, interrelated policy decisions: internal consistency
compensation managers to compare, external competitiveness, employee contributions, and
administration of the compensation program. Compensation professionals work with these
policy decisions according to individual corporations needs, keeping in mind the ultimate
objectives of compensation administrationefficiency, equity, and compliance.

Compensation manager seek to achieve internal equity and consistencyrationalizing
pay within a single organization from the chief executive officer on downthrough the
analysis, description, evaluation, and structure of jobs. Thus policy requires
compensation managers to compare jobs or skill levels to determine the contributions
employees with different job titles or skill levels make toward accomplishing company
goals. Compensation managers, therefore, should consider internal consistency when
determining pay rates for employees who do the same work and employees who do
different work. The objective of internal consistency for compensation managers to
determine equitable rates of pay by considering the similarities and differences in work
content or job skills as well as the different contributions employees with different jobs
reflect the perceived importance of the various jobs or skill levels to achieving company
Internal consistency depends on how a company is structuredi.e., its hierarchy.
Companies traditionally maintained larger hierarchies with several levels, but the
corporate restructuring and recognizing trend of the 1990s has resulted in flatter
corporate structures with just a few levels. The pay structure of a company is its range of
pay rates for different jobs and skill levels within the organization. In other words, pay
structure reflect corporate structures.
An emphasis on internal consistency forces employees to allocate pay fairly across a
companys levels. Consequently, a company with the pay and corporate structure
outlined above would have deemed it fair that executives earn twice as much as
professionals, which seems reasonable in that some companies pay their highest-paid
employees 10 to 200 times as much as their lowest-paid employees.

Achieving external competitiveness in the area of compensation means balancing the
need to keep operating costs (including labor costs) low with the need to attract and
retain quality workers. External competitiveness is how a companys rates of pay
compare to those of its competitors.
Compensation managers achieve external competitiveness by comparing wage levels
within their industry, examining their companies resources and goals, and establishing
their own pay levels accordingly. Contemporary compensation policies include variable
pay, where pay levels reflect the fluctuation of the firms success or decline, and
positioning as employer of choice.
employer of choice emphasizes the total compensation package, and may include
employment security, educational opportunities, and the promise of intellectual
challenges or latitude. In the practice, some employers use different policies for different
units and/or job groups.
Establishing the pay level balances a companys profit requirements with competition for
competent employees. Factors determining pay level include:
1. Competition in the labor market: the supply and demand for employees with various
2. Pf demand for product market conditions: the degree of demand for specific products
and the level of industry competition.
3. Organizational characteristics: industry, management philosophy, size and

Weighing these considerations, firms can choose to pay more than the industry average,
and therefore favor attracting and retaining quality employees, or pay less than their
competitors average hoping to attract and retain employees through non compensation
means such as recognition events, achievements, celebrations, and working in a
pleasant environment.
This policy area involves the weight companies choose to place on employee
performance in determining a compensation program. Some companies may choose to
pay all employees the same wage, while others decide to reward employees for seniority
and productivity. Companies that the latter route tends to emphasize incentive and merit
aspects of compensation programs. This policy assumes that employees are
significantly motivated by pay, which studies fail to confirm or refute conclusively.
Compensation based on employee contribution generally is distributed on the basis of
employee evaluations.
In order to carry out evaluations perceives as being fair by employees, companies must
establish performance standards. To do so, companies should maintain a list of updated
job descriptions that indicate what aspects of employee performance will be measured
for each job. The aspects of employees performance to be measured should be
reasonably attainable. Furthermore, employees should participate in establishing
standards and they should know the standards at the beginning of the review period.
The administrative policy refers to the tasks of the compensation managers in designing
and implementing a pay program. Administration also involves determining whether the
pay program will attract and retain needed employees successfully, whether employees
consider the pay program fair, how competitors pay their employees and if competitors
are more less productive.
Compensation also must reinforce the organizations strategic conditions. Intensifying
competition in many industries has brought about shifts in overall corporate strategies
and changes in competition.
Environmental and regulatory factors have also become very practical consideration of
compensation management. The increasing diversity of the workforce, for example; is
one significant trend. Compensation managers at E.I. du Pont de Nemours & Co., for
example, have promoted child care, flexible work schedules, career breaks, and other
progressive benefits in response to the needs of increasing numbers of women in its
workforce. Compensation management has been strongly influenced by regulatory
Companies also adopt different approaches to compensation administration
responsibilities. Some rely on a centralized approach where the design and
administration programs are performed by a single company department. Creating
compensation task forces with members drawn from various departments helps avoid
this problem. This approach may make it difficult to transfer employees from one
department to another and may bring about a lack of internal consistency, consequently,
compensation administrators frequently adopt general guidelines that all departmental
compensation policies must follow, but allow departments to develop their own policies,
such as those for incentives, as long as they adhere to the general guidelines. A
compensation program must be flexible enough to reflect the different needs of the
individual and the organization; just investments in ongoing training; the abb and the flow
of an employees contributions without creating expectations of permanence, and each
employees changing needs over time.