Compensation Systems

No issue generates more emotion, controversy, and frustration within an organization than pay. Therefore, the compensation system and an organization's members' understanding of that system is a key ingredient in the success of the organization. The compensation system is the set of rules and logic an organization uses to determine the pay of individuals within the organization. It consists of direct compensation (base pay, differential pay, bonuses, and cash recognition awards) and indirect compensation (benefits, income replacement programs, and employee services). The compensation system is developed with the following considerations: legal requirements, internal equity, external competitiveness, reward strategies, and compensation administration. Each of these components of a compensation system is discussed here.

Both state and federal government have enacted laws that define aspects of the employment relationship between an employer and an employee. Laws such as the Fair Labor Standards Act of 1938, the prevailing wage laws (such as the Davis-Bacon Act of 1931), and equal rights legislation, which also govern employee benefits, are all examples of how government affects compensation systems. The maze of federal and state laws present both challenges and opportunities for compensation systems in health care organizations. Many hospitals have significantly changed their present packages to meet federal regulations and reduce costs. Managers and compensation specialists must be aware of the laws and how they may directly or indirectly affect the compensation system.

Within an organization, internal equity establishes equal pay for work of equal value and pay differences for work of unequal value. This principle focuses attention on a pay structure that reflects the relative worth of jobs within the organization. The pay structure, then, is a system of differing pay rates for different work or skills within a single organization. The pay structure is divided into various pay grades. Individual pay differences within pay grades may be supported by three criteria: work performed, competencies (such as certification), or work outcomes. In addition, the pay structure may group jobs into families. Job families are jobs of the same nature but requiring different skills and responsibility levels. For example, a nursing job family might consist of nurse assistant, licensed practical nurse, registered nurse, and nurse practitioner. Compensation experts may develop pay structures that are appropriate to particular job families within an organization.

A fundamental tool in determining a job's value to an organization is the job evaluation method. The job evaluation method should have two characteristics. First, it should provide a quantifiable method of ranking or rating jobs [Page 91]within an organization, and second, it should involve a process designed to gain acceptance of the pay structure by those within the organization. The job evaluation process, then, involves systematic data collection on jobs, analysis of those jobs according to a predetermined criterion, and a method of placing jobs into a pay structure that is perceived as fair. Because the pay structure is constantly revised, this task is never fully completed.

Five job evaluation methods are currently used by organizations. The method varies from qualitative to quantitative and according to whether it involves job-to-job comparisons or job-to-standard comparisons. The least quantitative job evaluation is a job-ranking approach in which all jobs are ranked from lowest to highest on overall job importance. This method is easy to administer but is inappropriate for large organizations because it lacks reliability, and it does not measure the relative value of one job compared with another. The job classification method involves grouping jobs into a predetermined number of classifications or grades. The job classification method is easily understood by employees, is used by the U.S. government, and is easily administered. However, this method focuses on the whole job and may be ambiguous and subjective. The point factor method, the most frequently used method, involves using specific factors (such as know-how, problem solving, and accountability) to evaluate relative job worth. This method produces reasonably objective and defensible results, good documentation, and a systematic process. It is, however time-consuming and difficult to explain to employees. The factor comparison method is rarely used, because it does not respond to market conditions and it is labor intensive. The factor comparison method involves ranking jobs on comparable factors, identifying weights to those factors, and then assigning a dollar amount to those factors. The market-based evaluation is not a job evaluation at all but involves using market salary data to determine the relative worth of jobs in an organization. This method is less legally defensible than the traditional job evaluation methods.

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