E compensation tools in the job evaluation process

E-Compensation

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CHAPTER 6 e-Compensation The Potential to Transform Practice?

James H. Dulebohn Janet H. Marler

In most U.S. organizations since the 1990s, the employment relationship has shifted from being lifelong with career management provided by the organization into being more short-term with employees having to manage their careers as they move between multiple organizations with flatter organizational structures. As a consequence, the role of compensation has become an important management tool for attracting, retaining, and motivating the talent needed to be competitive. In this chapter we discuss how e-compensation tools have the potential to transform the administration of existing compensation plans to better adapt to the dynamic demands of this evolving competitive landscape.

In the past, firms primarily hired employees at the lowest organizational levels, placed workers on career tracks, trained them for higher-level jobs, and promoted from within. The focus at that time for most jobs was on internal equity of compensation and less on external competitiveness. Today, however, organizations hire at all levels. Consequently, they must pay more attention to external market rates of compensation, thus increasing the demand for market salary data as well as tools to access, analyze, and communicate this data to hiring managers and to employees.

Through e-compensation tools organizations can adapt to shifting demands for information. e-Compensation tools enhance the practice of designing and administering compensation programs in a dynamic and competitive environment in three key ways. First, e-compensation tools can increase access to critical compensation information without the need for sophisticated or dedicated IT staffs and sophisticated technology infrastructures. They can simply access key information electronically on an as-needed basis. Second, e-compensation tools enable round-the-clock availability of meaningful compensation information to senior managers, HR managers, and employees. Third, e-compensation tools can streamline cumbersome bureaucratic tasks through the introduction of workflow functionality and real-time information processing.

Human Resource Information Systems and e-Compensation

e-Compensation represents a web-enabled approach to an array of compensation tools that enable an organization to gather, store, manipulate, analyze, utilize, and distribute compensation data and information. The term e-compensation connotes web-based software tools that enable managers to effectively design, administer, and communicate compensation programs. What distinguishes e-compensation from previous compensation software is that e-compensation is web-based, rather than client-server based or stand-alone PC-based. Using an Internet browser, the Internet and the World Wide Web, individuals access electronically distributed compensation software, databases, and analytic tools from anywhere—their office, their home, on vacation, on the other side of the globe.

Most HRIS systems provide data storage, transaction processing (that is, automated handling of data for HR functional activities), and management information system (MIS) functionality (that is, functionality to convert raw data from transaction processing systems into a meaningful form; an example would be reporting total compensation of each direct report to the manager). Systems that are web-enabled also allow related data entry and data processing to be performed remotely by managers and employees (for example, through self-service portals and workflow functionality), and other stakeholders through an Internet browser. For example, a manager can review a list of the proposed merit increases for his or her direct reports.

Many human resource information systems, however, do not yet provide integrated analytic features needed for compensation planning and decision support, such as the ability to also see related real-time competitive market salaries. Instead, the compensation functionality provided by most software focuses on database administration and record keeping related to compensation activities such as payroll, merit pay increases, and benefit enrollment. Migration and effective use of web-enabled integrated compensation design and analysis capabilities are still in their infancy. Many larger organizations have implemented sophisticated human resource information systems (HRIS) from enterprise resource programs (ERP) vendors such as PeopleSoft, SAP, Oracle, and Lawson, yet these ERP HRIS systems have yet to provide a full suite of integrated analytic features needed for compensation planning and decision support.

While large-system vendors such as PeopleSoft have been adding analytic tools and some compensation planning functionality to their HRIS system software, this is the exception rather than the rule. Therefore, e-compensation planning software programs are typically add-ons to a larger HRIS system or separate systems altogether. This is illustrated in Figure 6.1 . The figure portrays the typical HRIS, which does not provide capabilities to perform compensation system design. HRIS systems generally provide administrative functionality at the transactional processing and management information system levels. It is through add-on software programs, or stand-alone programs, that HR specialists are able to perform higher-level functions such as designing compensation systems that represent more strategic activities. e-Compensation add-ons allow HR managers to focus on important strategic compensation issues.

e-Compensation and Strategic Design

Whether computerized or manual, the process of designing, adjusting, and administering organizational compensation systems is based on procedures for establishing internal equity, external equity, and individual equity. Internal equity refers to establishing the relative worth of jobs inside the organization. External equity, or external competitiveness, involves determining an organization’s pay in relation to the external labor market. Individual equity involves recognizing and rewarding individuals for their contributions.

Figure 6.1 . Current e-Compensation Systems.

An organization’s compensation system consists of policies and practices that address how the organization establishes and maintains internal, external, and individual equity. This configuration of policies and practices is considered strategic if it supports achieving critical business goals, including how the cost of total compensation is controlled, managed, and communicated.

We review how e-compensation tools can reduce the challenges inherent in designing and implementing an effective compensation system. To do this, we organize our discussion around using e-compensation to better achieve internal equity, external equity, individual equity, and strategic administration. Within this framework, we highlight some of the available software that, as noted earlier, are typically stand-alone compensation systems or HRIS add-on programs. We also illustrate how e-compensation technology can: (1) facilitate access to sophisticated databases and decision-support tools; (2) enable round-the-clock availability of key compensation information; and (3) streamline processes. At the end of each section, we conclude with challenges that HR managers still need to address despite advances in technology.

Objective One: Internal Equity

Researchers have shown that employees’ perceptions of fairness affect their work-related attitudes, such as job satisfaction and organizational commitment, and their behaviors, such as turnover and productivity (see Dulebohn, 1997; Rynes & Gerhart, 2001). Consequently, an important consideration to organizations is that the pay differentials between jobs should accurately reflect differences between positions in terms of their requirements, responsibilities, and complexities. An organization’s pay structure should logically convey that jobs with greater requirements and responsibilities are paid more.

Organizations achieve internal equity through performing job analyses and job evaluations. Job analysis is a systematic process of collecting information about jobs: identifying and describing what knowledge, skills, abilities, and other characteristics are required to do a job. Drawing on the output of job analyses, job evaluation is a formal procedure for hierarchically ordering a set of jobs or positions with respect to their value or worth, usually for the purpose of setting pay rates. The outcome of job evaluation is a rating of a job’s worth (not rating the incumbent), and ultimately provides a rationale for paying jobs differently inside the organization.

While there are several job evaluation methods, the most widely used approach in larger companies is the point method. This approach evaluates jobs based on a set of compensable factors that represent what the organization wants to pay for. A compensable factor is an element of skill, ability, responsibility, or competency that can be described at various levels. For each compensable factor, a scale is devised representing increasing levels of worth. Each level is assigned a given number of points. The range of possible points is constant across all jobs. Each job is rated on each factor separately and is assigned point values. After rating all jobs, the end result is a job structure or hierarchy, which ranks all the organization’s jobs based on their total point values (that is, summation of point values received for each compensable factor level).

e-Compensation Tools for Establishing Internal Equity

The job evaluation process is associated with bureaucracy, hierarchy, and over-attention to internal structure to the detriment of flexibility and market competitiveness. But while external competitiveness garners greater attention when labor markets are tight and competition for talent fierce, achieving internal equity can be critical to successfully managing mergers, acquisitions, and reorganizations. Keeping existing employees productive and maintaining morale is best achieved by managing internal equity and meshing disparate compensation systems in a systematic and equitable way. Consequently, despite declining popularity, job evaluation is essential to deriving and maintaining pay structures that promote fairness and reduce perceptions of inequity.

Thompson and Hull (2003), executives of Link HR Systems, believe that intranet/Internet-based technology will transform the job evaluation process and restore its earlier popularity. The range of products that use the Internet and web access to enhance either job analysis or job evaluation illustrate how e-compensation tools can transform designing and maintaining internal equity policies from a bureaucratic hassle to an effective automated competitive practice. The Internet and web access make best practices more accessible and available and can also streamline existing internal equity practices.

Increasing Accessibility

Internet technologies level the playing ground by making available expert information to a much broader audience. For example, HR managers can electronically access advanced job analysis techniques developed by well-regarded experts such as Personnel Systems and Technology Corporation’s (PSCT) web-based job analysis tools. Subscribers to PSCT do not need sophisticated hardware or to be HR specialists in job analysis or job evaluation ( www.pstc.com ). For example, subscribers can access PSCT’s flagship job analysis instrument, the Common Metric Questionnaire (CMQ), a web-based questionnaire designed and validated by I/O researchers to accurately describe both managerial and nonmanagerial occupations ( www.cmqonline.com ). PSCT also offers web hosting and reporting services to administer online tests and surveys, custom webprogramming, and test design.

Knowledgepoint (Shair, 2001) ( www.knowledgepoint.com ), a subsidiary of CCH, offers another job analysis product accessed over the web. The advantage of Knowledgepoint is that it provides low-cost access to an extensive job description library, along with search capabilities. Knowledgepoint’s web-accessed software and database illustrate how e-compensation makes sophisticated “knowledge management” databases available to even smaller companies, potentially reducing competitive advantages larger organizations have.

A caveat to these marketed online compensation tools, however, is that it is hard to determine the value of the information before you pay. For example, while William M. Mercer Inc.’s description of its eIPE job evaluation tool provides screen shots, descriptions, and demos to convey in more detail what you are purchasing in advance, it still costs money to acquire ( www.imercer.com ). Job evaluation tools and information are easily available on the web, but are not necessarily low cost.

Not all job evaluation tools on the web carry hefty price tags. With patient searching, if you have time, at the other end of the spectrum, organizations can find free web-based services such as HR-Guide’s job evaluation tool. This interactive web-based tool found at www.hr-software.net/cgi/JobEvaluation.cgi provides an online point-method job evaluation instrument. Using this tool, an HR specialist can specify the number and type of compensable factors; the number of levels within each factor; and the points associated with the factors. Completely free, customizable, and simple to use, this tool is a quintessential example of the value of sharing resources and knowledge on the web.

Increasing Availability of Job Analysis and Job Evaluation Tools

Web-based compensation software increases the accessibility of information, making it available 24/7 using corporate networks, servers, PCs, and handheld devices. Managers and employees have access to key information to make completing a job analysis or job evaluation project relatively easy. Furthermore, best practices in both these activities are built into the software. For example, JPS Management Consulting ( www.jpsmanagement.com ) provides webenabled standardized questionnaires that collect information from a constituent manager or job incumbent. Because the system is webenabled, HR specialists can electronically distribute them to target employees or managers via the corporate intranet. Intranet technology, therefore, enables the responsibility for job evaluation to be decentralized to the desktop of the hiring manager, if desired.

Streamlining the Process

With online JPS Management Consulting Questionnaires, once the manager completes the online survey, the data is automatically collected and summarized. A standardized job description is automatically generated, converted to job evaluation format, and given a job evaluation point score. Because production, distribution, collation, and analysis are all automated and electronically distributed, the HR specialist is freed from multiple time-consuming and transactional tasks to spend more time on careful design and on developing practices that leverage the job evaluation information.

Challenges to Achieving Web-Enabled Internal Equity

Web-enabled technologies can increase the amount of information available to decision makers and speed up the process of developing and distributing this information. There are several factors, however, that can hamper companies from fully realizing the potential of web-enabled internal equity tools. First, most of these tools are not generally integrated across software packages. While there are a growing number of software programs in the market that support the design and maintenance of internal equity policies and practices, relatively few are currently both integrated and web-enabled. A survey of compensation administration software conducted by Advanced Personnel Systems in 2003 reveals that, of the thirteen web-based products with software supporting internal equity practices, only three companies also integrated external equity, individual equity, or administration practices (Advanced Personnel Systems, 2003).

InfoTech Works Inc. provides one of the few integrated web-based compensation software solutions that automates and integrates internal equity and external equity software applications and can be used stand-alone, over an intranet, or over the web on an outsourced basis. The job evaluation module automates any point-factor plan, including Hay or modified Hay point plans. Its job evaluation software comes bundled with market pricing modules, a salary range/bands module, and salary budgeting and records management modules. The job evaluation data are then used to create grades or bands and to interface with the other modules.

A second challenge facing organizations in implementing these e-compensation tools is that these tools are only as good as the data they access. This means there must be organizational commitment to gather, manage, and maintain accurate and relevant data. Organizations often assume IT tools will save money through reduced headcount, but many find that database software still requires employees’ time to collect and manage more data. Third, proper training is required to ensure user acceptance and competent use of the technology. Companies frequently skimp on this aspect of software implementation to their detriment. Fourth, some users find data entry tends to be slower and less flexible using web applications than client-server-based software, particularly with nonlinear processes (that is, moving around to various screens without losing data). Faster servers and networks, however, are alleviating this early criticism.

Finally, while web-based software tools increase access to and distribution of information, the quality and efficiency with which decisions are made still remain ultimately with the manager. Thus, web-based technology makes information accessible and available and can streamline the whole process, but it is still ultimately a tool to be used by, not to replace, a HR specialist.

Objective Two: External Equity

Organizations have to offer competitive rates of pay if they wish to attract and retain competent employees (Barber & Bretz, 2000). While job evaluation provides an acceptable approach for deter mining relative worth of jobs within an organization, the organization still has to ensure that the value they attach to the job is competitive outside, in the external labor market. External equity, or external competitiveness, refers to an organization’s pay in relation to the external labor market. Managing external equity is essential because employees also compare their pay to the pay for similar jobs in competitor organizations (Dulebohn, 2003). If an organization does not consider policies on external equity in its compensation designs, it stands to lose valuable employees and will fail to attract new ones.

Organizations establish external equity in compensation system design through conducting wage and salary surveys whereby data are gathered on the amount competitors are paying for key or benchmark jobs. Salary survey data provide organizations with a basis for evaluating their rates of pay as compared to their competitors. The process for conducting wage and salary surveys includes several steps. First, organizations determine on which benchmark or key jobs to gather wage or salary data. In practice, organizations do not gather market data on all jobs. Instead they gather survey data for a number of key jobs, which typically have the following characteristics: the jobs are defined quite precisely; the content of the jobs is relatively stable over time; and the jobs occur frequently in the organization and in competitive organizations that will be surveyed. The jobs chosen are representative of the range of jobs in the job hierarchy produced from the job evaluation.

In the second step, organizations determine which organizations to survey. The selection of survey companies depends on the product and labor markets in which the organization competes for talent. After relevant competitive organizations are chosen, the organization must verify that the job descriptions of the surveyed competitor organizations closely match the benchmark jobs the organization wishes to price. If necessary, the organization has to make adjustments to the collected wage data. For example, if an organization’s job does not include supervision of subordinates, but a comparison job does, this has to be factored into the wage analysis.

Finally, an organization must also consider the date at which the wage survey data were collected. If the data are old, it may need to be adjusted (that is, aged) using the CPI or a similar index to account for price changes in the external market. Once the data are carefully matched and adjusted, only then can compensation analysts use the wage survey data to compute central tendency statistics. These metrics are then used to determine how competitive a particular job within the organization is compared to its competitive counterparts.

e-Compensation Tools for Managing External Equity

Online salary survey data is what most people think about when the term e-compensation is used. Online surveys and salary survey websites give users, both employer and employee, electronic access to salary information formerly available only on paper-published survey statistics for benchmark jobs (Gherson & Jackson, 2001). Since their introduction a few years ago, web-enabled surveys have proliferated. Salary survey websites are easy to use, easy to access, and increasingly used by both companies and employees.

Increasing Accessibility of Competitive Information

In facilitating the collection and distribution of benchmark job survey information, the Internet has accelerated a shift from focusing on internal equity to a greater emphasis on achieving external competitiveness. The outsourcing of these activities is also common. Salary survey participation, job matching, managing of salary surveys, and job pricing are some of the most frequently outsourced compensation practices (Brink & McDonnell, 2003).

With the increased accessibility and management of salary survey information, even smaller organizations with smaller HR staffs can develop relatively sophisticated external market analyses. Spreadsheets are available for download from the Internet that provide forms for consolidating multiple salary surveys along with automated features such as aging and weighting data. Compensation consulting firms that collect the salary survey information also make available downloadable spreadsheets that save hours in matching jobs, summarizing, and auditing data (Brink & McDonnell, 2003).

Increasing Availability of Salary Data

The salary survey data available over the Internet, while accessible 24/7, nevertheless does not represent real-time data. Much of the survey data published on the web represent the collation of job

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