Developing a Complete Compensation System:
A Term Project

PHASE I: Internal Alignment

STEP 1: RECOMMEND COMPENSATON STRATEGIES AND OBJECTIVES

Read pages 1 – 12 in Cases in Compensation (CIC) to get familiar with this step. Develop a set of objectives that you will use in later steps to guide your development of a compensation strategy. Focus your efforts on specifying the performance, labor cost, attitudes/behaviors, and legal compliance objectives that FastCat should pursue. Here are two examples: (1) Generic compensation system objectives are to attract, retain, and motivate employees. (2) Another set of objectives is that a compensation system should be Efficient (performance, quality, customer and stockholder, and cost), Fair, Legally Compliant, and Ethical. These come from the pay model in your textbook.

At this stage, you are looking to link organizational objectives to HR objectives to compensation objectives. Page 48 in your text provides a 4-step model on how to do this. Exhibit A shows another approach. You choose which one best meets your needs.

NOTE: the terms “objectives” and “strategies” are difficult to define. In some instances they are the same. In other situations, they are different. Generally speaking strategies ought to lead to objectives. But, these terms are relative. For example, HR objectives may serve a “strategy” for an organization objective.

Deliverable #1: A written report on objectives for FastCat’s compensation system. In CIC, page 10, the section on “Your First Project at FastCat: Recommended Objectives” sets the stage for this report. Pages 11 to 12 act as a general guideline for the rest of your report. Your write-up ought to be 1 to 2 written pages (single-spaced, 1 inch margins, minimum font size of 12). This is due at the same time your internal alignment report is due.

STEP 2: RECOMMEND AN INTERAL STRUCTURE

I strongly recommend you continuously refer to page 14 in CIC for an overview of Phase I. (The remaining pages are sometimes very confusing.) Refer to pp 13-26 in Cases in Compensation (CIC) for details on completing this step, EXCEPT for the following deviations:

• Do not develop an evaluation system from scratch. Instead, select three factors from the job evaluation system in “Exercise 16”. (I will explain in class what Exercise 16 is.) You will find Exercise 16 in the “Term Project” Folder. It constitutes two PDFs, Exercise 16, part I and Exercise 16, part II. Refer to pages 470 – 478, showing different compensable factors.

IMPORTANT NOTE: I encourage you to print both PDFs of Exercise 16. We will refer to many pages in it. If you don’t print it, you will find it very difficult to stay up with class. An electron version takes a long time to scroll through pages. It is unbelievably slow.

• Then add one additional compensable factor of your choice. This factor should be chosen to capture whatever is uniquely important about what is needed to perform the most important jobs at FastCat (in terms of being central to achieving its objectives and executing its strategy).
You need not change the definitions of the 3 factors you choose from Exercise 16, nor the definitions of each level. However, you will need to rescale levels and the weights of the three factors from the “Exercise”.

• Total number of evaluation points of the four compensable factors should equal 1000.

• Develop a job-based structure. Do not develop a person-based structure.

• Use only one structure.

STEP 3: RECOMMEND AN IMPLEMENTATION THE PLAN

Refer to p. 24 in CIC for detailed ideas to include in this step. Also refer to p. 14 in CIC for a summarized version of this step.

Deliverable (due on final-exam date): A Report on the Development of an Internal Structure. Your report should include the following general elements:

1. An executive summary (to be placed after your cover sheet)
2. A recommended internal structure (with tables and/or graphs)
3. Recommended implementation plan
4. A manual on how to use the system
5. A summary and rationale

In addition to above, I offer a checklist of items below to include in Deliverables 1 and 2: Reports for Compensation Objectives + Internal Structure, respectively. For grading purposes, I will look for these items (which are merely specific items in the five elements listed above), and the quality of them.

• Does the internal structure strategically align with business (and HR) and compensation objectives?
• Does the report (internal structure) define consistency decisions?
• Does the report discuss the relationship between resulting structure and compensation objectives?
o How does the structure help managers?
o How will the structure affect employee behaviors and attitudes?
o How does the structure affect fair treatment (Compliance)?
• Is the job evaluation adequately linked to the internal structure?
• How well is the developed factor constructed? Defined? Levels defined and scaled?
• How well are all four factors weighted and rescaled?
• Does the report spell out how the structure will be evaluated for its effectiveness?
• Does it account for costs?
• Is there a manual included?

Report Dimensions: Limit your executive summary to no more than a page (single-space, font size of 12, 1 inch margin). Limit your internal structure report between 4 to 6 typewritten pages (single-spaced, 1 inch margins, font size of 12). Use up to 3 exhibits. One exhibit should report job evaluation points (total and for each compensable factor) for each job. Keep in mind that the most important part of the assignment is to explain how your recommended internal structure will help FastCat achieve its objectives. For more ideas, see the sample table of contents of a previous class below.

SOFT-DUE DATE: Your report for Phase I must be submitted on 10/7 if you want feedback. I will not accept them after this date. The report must be better than 50% completed or I will not review it. I will return it ASAP so you can address my comments. The final version is due on your final-exam date.

Side Note: The Phase I report will ultimately be integrated with the Phase II report to form one comprehensive report. (The integration should be seamless)

For Your Information: Establish internal equity by ensuring jobs worth more to the organization are paid higher than jobs worth less. Job evaluation achieves this end by identifying a hierarchy of jobs. Several job evaluation exists. The job point method is most popular and the one we use in this class. This approach contains compensable factors with points deemed important to compensation objectives being achieved. Four factors are adequate for most applications: Skill/Knowledge; Responsibility/Accountability; Effort, and Problem Solving. Obviously, other factors are possible

Developing a Complete Compensation System:
A Term Project

PHASE II: External Competitiveness (Pricing the jobs)

You will need several sources to complete this Phase: CIC, Belcher Ch11.pdf, Belcher Ch 12.pdf, Exercise 16, and your Textbook.

STEP 1: RECOMMEND STRATEGY FOR COMPETITIVENESS

• Skip this step.

STEP 2: DESIGN A SALARY SURVEY

• Identify benchmark jobs. Benchmark jobs are internal jobs that serve as market anchor points because they closely resemble job performed in other organization and/or industries. Additionally, these jobs should: (a) be important in the organizations’ internal hierarchy; and (b) represent many organizational levels.

• Identify the labor market. This step constitutes selecting organizations who compete for similar jobs in the organization under study. Common criteria include: organizations in the same industry, size of company, location, and similar positions. Companies use salary surveys for acquiring salary data to price benchmark positions. (Note: Not all benchmark jobs have market equivalents. Make sure to include the highest and lowest valued benchmark jobs.) Several types of salary surveys exist for this purpose. A salary metric must also be decided. This is simply an aggregation statistic of salaries collected from competing organizations. Three common metrics exist: weighted mean, average, and medium. The compensation specialist must identify the best metric, with a rationale for his decision. Moreover, a rationale for identifying the “labor market” must be stated.

• To determine your labor market, refer to the term project folder in Black Board. There are several reports with salary data related to market jobs (or “Jobs Included in the Survey”). Note: these are text files that can be opened in MS Word. The documents have salary data for all surveyed jobs. Below is a list of reports containing these salary data:
• Finance Industry, includes all companies (finance industry.rtf)
• Finance-Small Firms (Finance-small.rtf)
• Hardware Industry, includes all companies (Hardware.rtf)
• Manufacturing Industry, includes all companies (Manufacturing Industry.rtf)
• Manufacturing-Medium firms (Manufacturing-Medium.rtf)
• Semi-Conductor Industry, includes all companies. (Semi-Conductor Industry.rtf)
• Software Industry, includes all companies (Software Industry.rtf)
• Software – Small Firms (software-small.rtf)
• Software- Medium Firms (Software-Medium.rtf)
• Software- Large Firms (software-large.rtf)

• Surveyed job in the market contain two dimensions: Industry by organizational size. For example, Software industry, Software-small companies, Software-medium sized companies, Software-large companies. You must describe which salary surveys/data serve you best. Include which data you used and a rationale for your decisions.

• NOTE 1: These documents with salary data are analogous to the salary data on page 496 in Exercise 16, part II (PART C, Form 12 Salary Survey Data for Six Small Municipalities in the Northeast United States)

• NOTE 2: Each Word document has multiple pages. You’ll find it easier to collapse the data and eliminate superfluous pages.

STEP 3: CHOOSE PAY POLICY LINE

• Refer to p. 56 in CIS and Belcher Ch11.pdf. In this step, you determine the initial market line as an anchor. (See below on how to complete this) Next, you decide if you want to change it to meet your pay policy. Three policies are as follows: Lead the Market” (Shift the initial market line upward by a factor index); Lag the Market (Simply leave the initial market line as it is), and Lead-Lag the Market (Shift the initial market line slightly upward by a factor index). Note: this decision usually occurs AFTER you develop the initial market line.

STEP 4: INTEGRATE INTERNAL AND EXTERNAL STRUCTURES

• Plot benchmark jobs on a scatter diagram. NOTE: You can skip “Use of Microsoft Access” section. Or, any reference to the computer program in Phase II. Instead, we will use Microsoft Excel. We will spend time in class on how to do this. That said, the Y axis constitutes market salaries. The X axis represents job evaluation points. Once the positions are plotted, a market line can be established. This is accomplished with linear regression. How does this work? Using Excel > Data Analysis > Data Toolbar > Regression, highlight Y column with salary data for the benchmark position. Then highlight the job evaluation points for the same positions. Check “create chart with trend line”. Decide what other things to include. Press Enter. You will see a table with regression data and a chart. Inspect the data. The regression line constitutes the initial market line. Finally, you must decide on your pay policy-lag, lead, lead-lag. (See Step 3 above. Also refer to Belcher Ch11.pdf to understand the difference between these curves/lines.

• Establish salary grades. The number and width of salaries depend on various policies. A common way to accomplish this is to locate clusters of jobs. This may constitute a salary grade, assuming the jobs are the same. Different jobs should be placed in different grades. For example, an Accountant I and Human Resource Generalist I, if clustered together, should be placed in the same salary grade. Conversely, two different positions closely clustered (e.g., Engineer 1 and Engineer 2) should be placed in different salary grades. One way to remedy this is to change the points on one of the jobs. (Don’t worry about redoing the entire JE points. Just change the overall points). I recommend using the equal point method (or the cluster method) to establish salary widths. (See Belcher Ch11.pdf for details.)

• Determine salary minimum, midpoint, and maximum. For simplicity, salary grade widths are 100 points. The center is half way. For example salary one is 0 to 100 points. The salary half-width-half is 50 point. First we establish the midpoint for each salary range. (If you use the cluster method, grade widths may differ from one grade to the next) We plug in the mid-width figure into the regression formula and determine the dollar value of the midpoints for any salary grade. Maximums and minimums are calculated using Exercise 16, page 468. YOU must decide the salary range. Phase II on page 57, Cases in Compensation, Exhibit 23 can help you. However, YOU must provide a justification for your decision. Check R2 for the degree to which the internal structure mirrors the external market. An R2 above .85 is a good indicator.

• Slot FastCat non-benchmark jobs (jobs without market equivalents). When a company position does not have an external benchmark, you simply slot that job into a salary grade based on its job evaluation points. For example, a FastCat job has 460 points. Locate the salary grade whose width (the range of job evaluation points) includes that figure. Slot the job into that salary grade. There is no single dollar attached to the slotted position. Instead, it has a range from the grade maximum to the grade minimum.

• Develop a salary schedule. See page 497 in Exercise 16. Include all information except % overlap (the last column). You must include all Fast Cat positions.

STEP 5: EVALUTE YOUR DECISONS

Evaluate the wage structure. All jobs should be placed in a salary, within the maximum and minimum. If a job resides outside, you must decide how to handle it. These are known as Read-Circle Rates (overpaid job or employee) and Read-Circle Rates (underpaid jobs or employee). Read CIC, p. 67, Step 2: Assess current salaries. Or, page 247 of “Belcher Ch12.pdf” for suggestions. As mentioned above, one way to remedy this in the initial stages of developing the salary structure is to move jobs up or down to the adjacent salary grade (allocate more or less points in the evaluation of that job).

STEP 6: DECIDE ON INDIVUAL PAY: Starting Pay, Pay Increases, and Promotions.

• Decide on how to pay individuals for different reasons. Decide on starting base salaries. Should a new employee be paid at the minimum of the salary range, or somewhere above? Prepare a policy on how you will decide this. Also, state how pay increases will be decided. These include, but are not limited to, cost of living adjustment (COLA), merit pay, seniority, incentive pay, bonus pay, and/or a combination of these. Make sure to describe how and why you decided this. Also, explain how promotions will be handled. How will you decide what to do with jobs that fall outside a salary grade? Develop a policy for this. Finally, how will you audit/evaluate that the compensation system is achieving its goals? See Belcher Chapter 12, CIC for ideas on how to complete this step.

Deliverable: A report describing Phase II in its entirety. This report includes, but is not limited to, the following elements:

• A graphic of the salary structure using MS Excel or another medium. No matter what method you use to graph your salary structure, it must look professional.
• A salary schedule. This is a table that includes various salary information for all jobs at FastCat. Refer to Exercise 16, part II for an example of this table. (Specifically, page 497, Part C, form 13, Part I: Salary Structure for Six Eastern Shore Jobs)
• Description and rationale for all important decisions listed above
• The professional look of the entire report.
• How well are Phase I and Phase II integrated?
• Does the combined report have a table of contents?
• Summary.

STEP 7: FINAL REPORT: INTEGRATING PHASE I AND PHASE II

This is your final step. I want you to integrate both phases. Below is a sample of table of contents of a paper from a previous class. The group produced an outstanding product. They posed themselves as consultants giving FastCat recommendations. The group’s name is Association of Compensation Experts (ACE). This is very clever approach. I provide this for illustration of a comprehensive report of a group going above and beyond expectations. Sufficient to say, the group received a grade of A+

• Report Dimensions: Limit your external structure report between 4 to 6 typewritten pages (single-spaced, 1 inch margins, font size of 12). Use up to 3 exhibits. A graphic of the salary structure using MS Excel or another medium. (No matter what method you use to graph your salary structure, it must look professional.) Keep in mind that the most important part of the assignment is to explain how your recommended external structure integrates with the internal structure. For more ideas see the sample table of contents below.
FastCat Complete Compensation Plan and Recommendations
Table of Contents
Executive Summary
Our Company
Association of Compensation Experts (ACE)
Compensation Plan 2015
Recommended Strategy and Objectives
Recommended Job-Based Internal Structure
Design of Plan
Pay Structure
Single Structure with Multiple Job Families
Compensable Factors
1. Complexity/Problem Solving
2. Extraordinary Service
3. Knowledge/Experience
4. Supervision Exercised
Point-Based Evaluation Picture
Evaluation of Job–Based Structure
Recommended Implementation Plan
Application Plan Manual
Maintenance of Structure
Management of Process and Communication of Issues

Recommended Strategy for External Competitiveness
Best Alternatives for FastCat
Pay Level and Mix of Forms
Integration of Internal and External Structures
ACE Ideas
Select Key Benchmark Jobs
Defining the Labor Market
Complete Table of Pay Grade Strategy
Graphs
Rationale for Phases II Graphs
Appendix A
FastCat’s Compensation Implementation Plan Manual
FINAL DUE DATE: Your final paper must be submitted on the final-exam date. This will be announce later or you can check online.

 
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