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December 18, 2009
Compensation Administration 101

A formal compensation administration program is the basic management tool for ensuring that employees are satisfied, that both internal and external equity are maintained, and that control is maintained over compensation costs. Compensation policies should reflect all of these elements. Such a compensation administration program will help attract top talent, retain core employees, and encourage longevity while efficiently using compensation resources. An effective compensation administration program covers the following activities: Job Analysis, Job Evaluation, Job Pricing, and Salary Increases.

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What is Job Analysis?

Each job in the organization should be thoroughly analyzed and described under the compensation administration program. Job descriptions typically include a job summary; a list of the job's "essential" functions and related duties; and the necessary skills, experience, and educational requirements.

What is Job Evaluation?

Job evaluation determines what jobs are worth on an absolute basis and relative to other jobs in the organization. It can be done in a variety of ways, but usually involves assigning "points" based on complexity, impact, budget, supervisory duties, and so on, and attaching job ranks based on the total number of points. Jobs that are of greater value to the organization have a higher labor grade; jobs of lesser value fill the lower grades.

What is Job Pricing?

Job pricing involves establishing rate ranges as part of the compensation administration program; that is, minimum, midpoint, and maximum dollar values for each labor grade. By studying wage and salary surveys, employers can relate comparable wages in the labor market to the jobs within their organization. The end result is a scale of wages that allows the employer's compensation administration program to compete in the labor market while ensuring that jobs that are worth more to the organization are paid more than those of lesser worth.

How are Salary Increases Determined?

 Several approaches are commonly used for determining salary increases. One of the most common is performance based compensation (otherwise known as incentive based compensation or the merit system). Across-the-board or general increases are also commonly tied to increases in the cost-of-living index. Increases in the cost of living should be a major consideration when deciding on a budget for pay raises. The primary tool for measuring the cost of living is the Consumer Price Index (CPI), which is issued each month by the U.S. Bureau of Labor Statistics. Some organizations have an "escalator plan," which grants employees across-the-board increases in proportion to increases in the CPI.

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