E compensation tools in the job evaluation process

Reference:

Gueutal H., & Stone, D. (2005). The brave new world of eHR: Human resources management in the digital age. San Francisco: Jossey-Bass.

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).