Many times we have had the opportunity to get in contact with entrepreneurs who run a small or medium-sized company (SME), we have encountered a certain resistance from the employer to even talk about how they compensate their staff; that is, in the way they determine the salaries, the incentives, if they exist, and the benefits that they grant to the personnel. In this situation, we often formulate certain working hypotheses that help us to work with the entrepreneur on this topic and, as often happens, for the entrepreneur himself to discover that the preconceived ideas he has to avoid talking about the How you pay your staff are very often false.
Indeed, the SME entrepreneur often feels that he is paying his staff relatively little; although here it is always worth asking, Little about what ?; He himself feels that the affective closeness he has towards his staff influences more than the contribution that the job and the employee himself make to the final results of the company; Imagine that managing compensation on a minimum technical basis is something very complex and not needed in your SME, because he knows very well the contributions each employee makes to the success of his company; Or do you think having a compensation management system, anyway, will hardly make your business do better; or that, simply and simply, talk about reviewing the way personnel are paid, automatically,it will involve spending a larger budget on employee compensation; and so on.
Basically, and from our experience of working with SME entrepreneurs, we believe that these and other explanations are elaborated by them because they themselves are very aware that in the way they reward their staff there are some issues that may need to be reviewed, but above all, order. Indeed, when working on these issues, it is often striking how surprisingly fast employers discover that the working hypotheses we have formulated are false; In other words, when a minimum of basic technical concepts, principles, and tools are used to compensate personnel, the compensation administration process often brings enormous benefits both to the well-being of the personnel and to the work environment that is brewing in the organization and of coursein the company's business results. It is worth noting that an inadequate administration of compensation in companies, and particularly in SMEs, often brings with it significant "hidden costs" that derive from dissatisfaction, or unfair treatment, experienced by staff when they do not perceive a correspondence between the dedication he has to the company, and the results he achieves in his work, and the compensation he receives. We will return to this point later.what the staff feel when they do not perceive a correspondence between the dedication they have to the company, and the results they achieve in their work, and the compensation they receive. We will return to this point later.what the staff feel when they do not perceive a correspondence between the dedication they have to the company, and the results they achieve in their work, and the compensation they receive. We will return to this point later.
In this context, this guide attempts to answer the following basic questions: What is compensation? What are the main elements that make up staff compensation in our environment? Why is the total compensation package made up of wages, incentives and benefits and how can its motivational effect be maximized? If the compensation package has several elements, how can decisions about the level of employee compensation in the company be made? Which is more effective in determining the salaries to be paid to staff: the market approach or the one based on the responsibility content of your position? Why should the performance of staff first be assessed to determine percentages of salary increases? And if I review the way you compensated the staff, necessarily,This implies an increase in the budget planned for the salary reviews of the year ?. These are, among other fundamental questions, those that this compensation administration guide tries to answer, which is especially addressed to the entrepreneur of SMEs.
What is compensation?
The term compensation is used to "designate everything that people receive in exchange for their work" as employees of a company. Of this that people receive for their work, a very important part is the salary, incentives, if any, and benefits, both in cash and in kind. The other important part of the compensation corresponds to the satisfaction that the staff obtains, directly, with the execution of their work and the conditions in which it is carried out.
If one consults the Dictionary of the Royal Academy of the Spanish Language, one finds that the term compensate has, among other meanings, that of "giving something or making a profit in compensation for the damage, prejudice or displeasure that has been caused." This means that, in a strict sense, compensation would be what the company grants to its employees to compensate for the damage or harm that their work causes. Obviously, at least that's how we hope, that today, in most companies such a situation does not occur. Therefore, perhaps it would be more convenient to use, instead of the term compensation, the term remuneration, remuneration or reward. Notwithstanding this situation and given that the term compensation is more commonly used in our environment,In this guide, the term compensation or pay will be used to mean the remuneration, remuneration or reward that the company grants its employees for their work.
What are the main elements that make up staff compensation in our environment?
In the introduction to the guide, it was established that staff compensation is made up of two fundamental parts: the first of these two parts corresponds to salary; incentives, when they exist in the company; and the benefits granted to personnel. This component of compensation is generally generally identified as the “total (financial) compensation package,” although it should be noted that it is only made up of those cash payments and the benefits, services or benefits that the staff receives, which, finally, also represent an equivalent of income (money) that undoubtedly contributes to raising the well-being and the standard of living of the employee and his family.
The second part of the compensation was said to correspond to the direct satisfaction that the staff receives from the performance of their work, the working conditions in which they work and, of course, the environmental conditions of the workplace. This second component of compensation is generally known as the work environment. Sometimes it is thought that the company must have a good climate so that the employees "are at ease or feel happy" in their work. This is an incorrect view of the work climate. When we talk about the climate here, we refer to the extent to which the company has the conditions to maximize the performance potential of people, work teams and the organization as a whole; to what extent the company promotes the commitment and satisfaction of employees with their work;and to what extent a fair or equitable management style and management principles prevail in the company. When such a work environment exists, we have no doubt that that workplace is also a significant part of staff compensation.
Why is the total compensation package made up of wages, incentives and benefits and how can its motivational effect be maximized?
Above lines, it was established that an effective total compensation package is made up of salary, incentives and benefits. In this paragraph we will further analyze these elements of the company's total compensation package.
The concept of salary is used to designate the monthly cash remuneration that employees normally receive on the basis of one month of work. Generally, this element is the most significant part of the payments, in cash and periodic, that the employee receives and it is crucial that the company has technical elements to determine the "salary level" of its personnel, among other reasons, because this level Payment is what allows you to attract, retain and motivate the personnel that the company's business demands. It should also be mentioned that, strictly speaking, salary is normally recognizing the performance that people have already demonstrated; in other words, past performance.
The incentive concept is used to designate any amount of contingent, that is, conditional, money that personnel receive when certain predefined conditions are met; for example, productivity bonuses awarded for achieving a certain level of productivity, incentives for meeting sales quotas, or bonuses that some managers receive when they meet previously negotiated levels of performance. Unlike salaries, which reward demonstrated performance and, consequently, past performance, the company can use incentives to stimulate staff interest in achieving better results for its personnel in the future and to mold certain distinctive characteristics that the employer considers desirable in the company. culture of your company; for example,a certain managerial style or certain work habits in their staff. The important thing is that incentives stimulate future performance.
The concept of benefits is used to designate both cash payments (bonus, vacation bonus, for example), in addition to the salary received by the staff, and services or benefits received in kind, such as medical insurance or of life, among other benefits in kind that employees receive. In this sense, from the point of view of the compensation administration, we generally speak of cash benefits and benefits in kind or benefits. From another perspective, for example from the legal one, one can speak of benefits of law, or obligatory, and benefits of company, or discretionary.
Unlike salaries and incentives that reward performance, benefits, although they undoubtedly influence staff performance, are actually more effective in awakening the identification of staff with your company and the sense of belonging to the company. organization; These characteristics undoubtedly have a very important effect on the overall performance of the company.
If the compensation package has multiple elements, how can decisions about the level of employee compensation in the company be made?
Under these concepts, the characteristics of a compensation package can be analyzed and compared at different levels of integration. Indeed, when talking about the compensation package, one must be clear about the degree of integration or structure that is being talked about: Let's explain this point more fully: We talk about the «base compensation structure«, when we refer to « nominal monthly salary multiplied by twelve months "; "guaranteed cash compensation structure", when we refer to the "base compensation plus all guaranteed cash benefits", such as vacation bonus and Christmas bonus or pantry vouchers or savings fund, when awarded; people talk about the "total cash compensation structure",when one refers to "guaranteed cash compensation, plus all contingent payments or incentives staff receive"; we are simply talking about the "total compensation structure", when we are referring to the "total compensation in cash, plus all benefits in kind or benefits received by staff, valued at their equivalent economic value. In some particular case, different compensation structures can be integrated to the previous ones. However, what we want to emphasize is that, from the point of view of the decision-making process regarding staff compensation, we must always be clear about the outline of the reference structures that are being used because, for example, a payment practice of a company can show internal equity, or be competitive,at one level of compensation package integration, but not another.
Which is more effective in determining the salaries to be paid to staff: the market approach or the one based on the responsibility content of your position?
If we are to speak of the effectiveness of a particular approach, or system, for making staff compensation decisions, it is necessary, first, to ask what objectives are pursued with the management of staff compensation.
Compensation administration objectives:
- Internal equity. The concept of internal equity has its foundation in the legal precept that establishes that "equal work, performed in a job, working hours and conditions of efficiency also equal, must also correspond equal salary" and, as a rational consequence, "more work, performed also in equal conditions of position, working hours and conditions of efficiency, a higher salary must also correspond. " From this precept, it is essential that the company can measure, on the one hand, "how big a job is for people", which is technically known as the valuation of jobs and, on the other hand, what and how many are the results that the person contributes to the company; that is, that the company also has the possibility of measuring the performance of its personnel.
In other words, internal equity is a balance that the person perceives between his contributions for the purposes of the company and what he considers a fair compensation for those contributions, compared to what the people who work around him contribute and receive. To the extent that personnel perceive a discrepancy between these aspects in the company, to the same extent they feel unfairly treated and, under these conditions, it is practically impossible for them to channel their energy at work; In addition, with this dissatisfaction it contaminates the people who work around it, generally deteriorating productivity and the organizational climate, before leaving the company.
- External competitiveness.It is a fact that different companies compete to get the human talent required by their business strategy from the labor market. For this reason, regardless of the internal fairness of their compensation practices, companies find it necessary to decide on a level of payment that will allow them to attract, retain and motivate the qualified personnel they need to achieve the results they are raised in your business strategy. This situation is no more and no less what causes companies to decide on a level of payment to their personnel that is competitive with the level of payment that other companies have within their geographical environment. Strictly speaking, the level of staff compensation that a company must establish depends, to a large extent, onof the characteristics of the economic sector in which the company competes and for the availability of the type of personnel -directive, managerial, employees and workers- that is required to be able to compete effectively with advantages in said sector.
Consequently, to determine the external competitiveness of a company's compensation practices, it is necessary to make a comparison of the compensation practices of that company with those of the group of companies that constitute its reference labor market. Indeed, to manage the competitiveness of compensation, the company needs to have information from labor market compensation surveys that provides it with the human talent it needs.
- Stimulate higher levels of staff performance. Carrying out a staff compensation management process without keeping this objective as fundamental is pointless. Now, what are the critical aspects that must be taken into account so that, in effect, our compensation management process maximizes its potential to stimulate higher levels of performance in company personnel? Without a doubt, a scheme, or system, of compensation administration that allows creating a climate of internal equity in the organization; to consider a level of compensation that is competitive with the company's competing labor market; that contemplates a compensation package that is in accordance with the composition of the average package (salary, incentives and benefits) paid by the company's reference labor market; and finally,but not least, it is essential that the company has a performance measurement procedure that allows it to stimulate better levels of staff performance. Only in this way will the company be in the best conditions to effectively manage the only intelligent resource it has: people.
How to determine how much to pay staff:
There are currently two basic approaches to determining how much to pay people in the company. Both approaches require that the person be located in a specific position in the organization, for example, production manager, editorial consultant, secretary, courier or assistant general, and that the position is known, at least, the following aspects: their title, the raison d'être of the position in the organization, its main responsibilities, the number of results that the position must achieve or the resources on which it operates, its most important activities, the characteristics or human profile that are essential in the person who perform the position and some significant aspects of the work environment in which the position is performed. Usually,This information is reflected in what is technically called "the job description," which is normally a 2-4 page document, although its length may vary, depending on the company.
The Market Value Payment Approach:
Step 1. Obtain information from the compensation market. This approach determines how much to basically pay a position for a compensation market survey. For example, if you wanted to determine how much to pay for the accountant position in a small company, it would be enough to know how much other accountant positions earn in other companies of a similar size to the one we are dealing with and that is the information contained in compensation surveys. It is very important to note that, strictly speaking, and this sometimes presents some difficulty in our environment, the survey sample would have to be from companies of similar size, from the same economic line, from the same geographical region and accountant positions. They should be similar in terms of the roles, responsibilities and resources they manage.Only in this way would there be certainty that the information we use will be comparing compensation packages for comparable accountant positions, that is, comparable or equivalent. Often, the same organizations that carry out salary surveys give some indicators so that the user of their information, in the event that there are, for example in this case, statistics from various accountant positions, can identify which of them is the most similar to yours and for which you are trying to know how much to pay.Statistics from various accountant positions, you can identify which of them is the most similar to yours and for which you are trying to know how much to pay.Statistics from various accountant positions, you can identify which of them is the most similar to yours and for which you are trying to know how much to pay.
Step 2. Decide the level of competitiveness of the compensation we need to pay.Once you have the information of the job compensation market, which in the example is that of an accountant, the crucial decision of the employer is, as mentioned before, deciding what professional quality he wants the person who holds his position as an accountant to have. and, to the extent that you want to have an accountant with greater preparation, experience and capabilities, the more competitive the level (package) of compensation that is awarded to the occupant of the position should be. This decision is generally made considering the significant range of compensation included in the survey, between the minimum and maximum of the reference market. The decision may be to pay in the middle part of the market, technically known as the median (Md); the lower part of the market, technically the first quartile (Q1), or pay in the upper part of the market,or third quartile (Q3). Another very important aspect is to identify how the survey you have integrates the different compensation structures it uses, that is, how it calculates, where appropriate, the base compensation, the guaranteed cash compensation, the total compensation, or any other compensation structure you use.
Step 3. Build a salary range that allows the job seekers to be located, according to their performance level.So far there has been talk of determining how much to pay the position, not how much to pay the people who hold it. However, previously, it was said that people who hold a position often have different levels of performance and if you want to maintain internal equity in the company, at different levels of performance, in the same position, different levels must also correspond. of compensation. For this reason, once the level of competitiveness of the compensation that is required, can be and wants to be paid has been decided (company compensation policy), it is necessary to build a range around that level of payment that has been determined and, thus, within this range, the company is able to pay differential compensation at different levels of performance of the job holder. For example,see the following range:
Payment policy
Position Minimum Average Maximum
Counter 80% 100% 120%
This range, whose amplitude by the way is the most common in our environment, is constructed by placing the salary level that has been defined as policy at the midpoint, and calculating, the minimum at 80% and the maximum at 120%, from that quantity. The set of ranges used to manage the salaries of an organization is known as the salary tab. In this way, different salaries can now be assigned to different levels of performance of the occupants of the position; that is, staff compensation can now be managed, as explained below.
The reader may have observed that this pay-per-market approach places greater emphasis on the external competitiveness of company offsets and assumes that the market already
it reflects aspects that would determine, to a greater or lesser extent, the internal equity of compensation within the organization. However, when the labor markets show some distortions, as it is in our environment, this assumption is not always fulfilled and the employer must review to what extent the compensation structures that arise from a market value approach, create within their company a reasonable degree of internal equity. This point is developed in more detail in the following paragraph.
The pay-for-content approach to job responsibility:
Step 1. Assess the responsibility content of the posts . As in the previous case, it is assumed that you have a «job description», which in some way identifies the raison d'être of the position in the organization, its main responsibilities, the results figures that the position impacts, the resources on which it operates, its main activities and the most relevant aspects of the work environment in which the position is carried out.
On the other hand, since in this case the payment is based on the responsibility content of the position in the particular organization, the essence of this approach is that the company has a method that allows it to measure that responsibility content that the positions have. of the organization; that is, with a valuation method of positions. Once the positions are valued, this approach allows a more precise diagnosis to be made, both of the internal equity of the company and of the external competitiveness of its compensation practices; then decide your level (policy) of compensation; build their salary ranges and finally have a firm technical basis for managing staff salaries based on performance. In our experience, we have found this focus,Although it requires more time and effort for its implementation within the company, its results are often more effective in achieving the objectives that are pursued with the administration of compensation, and that were previously presented.
Job accountability content can be measured by various methods. The general rationale for these methods lies in identifying "compensable factors" in the positions, and these factors vary according to the particular method being studied. However, most identify them with the preparation and previous work experience that the job performance requires; the mental effort required by the position to face and solve the situations it faces; the responsibility to act of the position, especially regarding the management of results, resources, processes and personnel; and, when the posts are operational, that is, from the factory, special working conditions, such as, extreme temperatures, physical effort, rarefied atmospheres, special risks, are often incorporated as a compensating factor.dust and noise, mainly. Normally, the methods have a precise definition of the factor and a scale that allows to appreciate the different degrees of the content of the factor in the positions and, as a consequence of these evaluations, to determine the total value or valuation of the responsibility content of the positions. The main classes of job valuation methods are hierarchical, ranking, point, factorial and hybrid.they are those of hierarchization, classification, points, factorials and hybrids.they are those of hierarchization, classification, points, factorials and hybrids.
The hierarchical methods are the simplest and easiest to apply, although their results are less precise. These methods are particularly applicable in the case of SMEs. The valuation process consists of comparing, globally, the different positions in the organization and building a hierarchy in which the positions are ranked from most important to least important. Only a global compensable factor is used that reflects the total content of responsibility of the position for the purposes of the company. For example, the following ranking may be the result of job valuation work for a midsize company:
Another limitation of the ranking method is that one position can be seen to be more or less important than another, but it tells us nothing about "how much." This occurs because the method does not incorporate a unit of measurement that allows us to appreciate the differences between the contents of the positions that are being valued. A rule can be introduced that can help us quantify the differences and then a fixed scale of importance levels can be established and within that scale and using the rule the results that can be obtained with this method are significantly improved. This process involves the following: First, define a scale of levels that, for example, for a small company can be 16 levels and, for a medium-sized company, it could be 18 evaluation levels; Secondly,apply the following rule that, although it is arbitrary, can be given some technical basis: (a) when there is not a minimal difference in the importance that they have for the company between two positions, there is no difference between those two positions, that is, they have the same level; (b) when there is a minimal appreciable difference between the two jobs being compared, the one that is seen as the most important has a higher level than the other with which it is compared; (c) if comparing the two shows a clear significant difference between the importance of these two positions for the company, the one that is seen as the most important is two levels higher than the other with which it is compared; and (d) when between the two positions being compared there is an obvious, or obvious,difference between the importance they have for the purposes of the company, then we say that between both positions they have 3 or more levels of difference in importance and, in these conditions, it is better to look for intermediate positions for the comparison between these positions. If we assume that the positions in the previous table are from a medium-sized company, applying this modification of the ranking method, possibly, the positions would be valued as follows:
As observed, with the application of these rules, it is possible, although still in a very approximate way, to make a better discrimination of the relative importance that the positions have for the company. See also that, at a certain moment, there may be empty levels; that is, they do not include positions.
In the classification methods Classes, or categories, are defined using the compensable factors that will be applied to distinguish the importance of the positions for the company. The definition of the classes specifies the quantities, or the degree, in which each compensable factor must appear in the positions defined for the class. Furthermore, the different classes are normally hierarchical. Once the classes are defined, the valuation process consists of comparing each position, and its content of compensable factors, with the classes, which in fact define the scale of the valuation method, and once a reasonable coincidence of the position with the class specification, the position is assimilated to that class. He takes another position and continues to assimilate all the positions in the organization with some class.The results of a job valuation process using this method could be the following:
It is important to mention that the previous classes are hierarchical and range from highest to lowest importance. As in nesting methods, this method does not let us know "how much" is the difference between two consecutive classes. A fundamental difference between ranking and ranking methods is that the valuation process in the former takes place by comparing one position vis-a-vis to another position and measuring the differences in content between the positions being compared. On the other hand, in the classification methods, on the one hand, there are the categories, that is, the scale and, on the other, the valuation process consists of comparing each position with the scale, until finding that category with which the position it is comparable. At that moment the valuation process of the positions is concluded.
In point methodsA precise definition of the "compensable factors" to be measured in the posts and a scale specifying the different "degrees or intensities" with which the factor will be measured are required. Each compensable factor of the method has a «certain weight or weight» in the total valuation of the position and each grade, or intensity, of the scales is assigned a certain number of points, which are those that indicate the measurement of the compensable factor that the position contains particular. Compensatory factors, degrees and their point value are normally specified in a Valuation Manual, which is the instrument used during the valuation process of positions. The valuation process consists of appreciating the content of the position, in each of the factors; designate the points that appreciate the content of each factor in the position,specified in the Method Manual, and add the points to obtain the total valuation of the position.
Point valuation methods are very accurate, widely used in companies, and are particularly useful when many positions have to be valued, as is the case in medium and large companies. The results of a job valuation process, with a point method, yields a result, such as the one shown below:
When point methods are used, normally the valuation points are converted to "valuation levels". These levels correspond to point ranges, which are assigned a level 1,2,3, etc., to facilitate the management of job valuations.
Factorial methods. Analogous to point methods, they require a precise definition of the factors, and once these definitions are in place, a monetary scale is specified for each compensable factor. In the construction of this scale, the real salaries that the company is paying to a set of positions that are chosen as representative of the company are used. Typically, a committee is used to define scales, and the committee's job is to identify "how much" of the salary paid to each of the positions in the representative sample is paid for each of the compensable factors. This distribution of the salaries of the positions in the sample, to each compensable factor, is in fact what constitutes the scale itself. Later,The valuation process consists of determining how much the position must be paid according to the scales built and in this way the monetary value of the position is obtained directly. The development and application of these methods have decreased greatly because their construction and operation are complex and because inflationary processes introduce distortions in the labor markets, the relative value that a company pays for a position can vary in a short time and, if the position is part of the sample that was used to define and calibrate the method, it would have to be revised.The development and application of these methods have decreased greatly because their construction and operation are complex and because inflationary processes introduce distortions in the labor markets, the relative value that a company pays for a position can vary in a short time and, if the position is part of the sample that was used to define and calibrate the method, it would have to be revised.The development and application of these methods have decreased greatly because their construction and operation are complex and because inflationary processes introduce distortions in the labor markets, the relative value that a company pays for a position can vary in a short time and, if the position is part of the sample that was used to define and calibrate the method, it would have to be revised.
Hybrid methods,they are methods that somehow use concepts and principles of the previously reviewed methods. Normally, they were developed by consulting firms; They are quite accurate and reliable, although they can sometimes be relatively expensive for a small and medium business. However, when analyzing the "hidden costs" and consequences of inadequate company compensation management, investing in these consulting processes is often profitable, even for small and medium-sized companies. On the other hand, normally consulting firms, in addition to job valuation processes, provide information from salary market surveys, which generally have the advantage of ensuring to a high degree the equivalence of jobs and, as a consequence,,facilitate decision-making about the level of payment to be adopted by the company.
Step 2. Diagnosis of the company's compensation practices.
As previously explained, if the positions are valued on a numerical scale, levels or point valuation, a very precise diagnosis can be made of the internal equity and external competitiveness of the company's compensation practice and, as a consequence, the pertinent decisions can be made to order internal equity or move towards the level of competitiveness that the company needs to maximize its chances of success. These analyzes can be done at any level of integration of the company's compensation package: base compensation, guaranteed cash compensation, etc.
Internal equity It was previously defined as a relationship that exists within the organization between the relative importance of the position for the purposes of the company, the compensation received by the occupant of the position and the effectiveness of their performance. This means that internal equity can be analyzed by drawing a graph like the one shown in figure # 1; finding that the relation (line) that statistically represents the dispersion of points that results from graphing the compensation of the position versus its valuation; and drawing limits of internal equity to ± 20% of the payment practice, which would be the maximum and minimum extremes within which the company would be stimulating the differential performance of its occupants. This means that each point (position) that is outside these limits would be, or overpaid or underpaid,regarding the organization's internal equity practice. If there are 25% of the positions outside these equity limits, the organization is said to really have internal equity problems as a company.
Figure # 1. Graph of the internal equity of the compensation
External competitiveness was defined as the possibility of the company's compensation practice to attract, retain and motivate the personnel required by the organization's business strategy. This means that we must compare the payment practice of the particular company whose competitiveness of compensation is analyzed, with the market.
When interpreting both the internal equity and the external competitiveness of compensation graph, no value judgments should be made about the situation of the company. In other words, we should not judge whether it is right or wrong, but rather focus our attention on the consequences of situations of internal equity and external competitiveness of the company's payment practices. These consequences were discussed when discussing the objectives of the compensation administration.
On the other hand, as this diagnosis is made at different levels of integration of the compensation package, other aspects can be determined, such as, for example, how competitive the company's compensation package is compared to the market; how is the internal equity and the external competitiveness in the different compensation structures: shows the same pattern or changes, etc.
Why to determine the percentages of salary increase must first evaluate the performance or skills of staff?
Once we know what the internal equity and external competitiveness of the company's payment practices are like, we can now make the decisions that are needed to ensure that the compensation effectively meets the objectives that were previously established. A first decision consists of determining the level (policy) of payment to be adopted by the company and the scheme of the compensation package to be implemented, that is, how much will be in salary, how much in incentives and how much in benefits. A second decision will be regarding the opening of salary ranges and how this salary range will be managed in terms of performance, as is traditionally done, or in terms of people's skills, as is the current trend. For example, if the decision is to use performance,Certain target brands within the salary range should be defined for each possible performance level, as illustrated.
SALARY RANGE
Brands Target Performance Level
Maximum 120% - - - - - - - - - - - - - - - - - - Maximum
116% - - - - - - - - - - - - - - - - - - - Excellent
108% - - - - - - - - - - - - - - - - - - Remarkable
100% Policy - - - - - - - - - - - - - - - - - - Satisfactory
92% - - - - - - - - - - - - - - - - - - Minimum acceptable
84% - - - - - - - - - - - - - - - - - - Marginal or newly entered
Minimum 80% - - - - - - - - - - - - - - - - - - Entry level
Now, from the point of view of internal equity, any position that is located, at a certain moment, outside the objective mark that corresponds to it according to the level of performance of the occupant of the position, will be in a situation of iniquity; that is, it may be overpaid or underpaid. As a consequence, the salary increases that must be granted to these positions would be less, or greater, than the average that is decided as the average increase of the company. Both minor or major, both greater or lesser the inequity, as illustrated in figure # 4.
POSITION PERFORMANCE
This figure, which is commonly known as the matrix or guide of increases, graphically illustrates that if the positions that are in equity are increased by the expected average of the company, their equity will be maintained; if those who are paid below the mark that corresponds to their level of performance, make an increase greater than the expected average, their iniquity for underpayment will decrease and; If those who are above the reference mark that corresponds to their performance are granted less than the expected average increases, their condition of iniquity due to overpayment will decrease. Over time, in both cases, positions in situations of inequality will tend to be located in the part of the range that corresponds to them, according to their level of performance.
On the other hand, see figure # 5, when the range is administered based on the labor competencies of the personnel, the marks of the range define, not so much a level of performance, but a cumulative level of labor competences, so, when the person demonstrates, through a certification process that you have additional labor competency, your compensation is automatically placed in the corresponding mark of the range. Typically, ranges are greater than 20% wide around the policy line, and generally become asymmetric as well; that is, the minimum can be located at 80% of the policy brand and the maximum can reach percentages of up to 100%, or higher, even above that brand. This way of managing salary ranges is currently booming,among other reasons, due to the general flattening of the organizations that causes, among other consequences, a decrease in the possibilities of hierarchical promotions to positions of greater responsibility and, as a consequence, of greater possibilities of compensation for personnel, even while remaining in the same post.
As the reader will have already imagined, if the range is administered by performance, a certain administrative infrastructure is required, whose center is the performance evaluation procedure. On the other hand, if the range is administered by labor competencies, the center is the procedure for training competencies in personnel, as well as the process required to certify these competencies. These processes of development of competencies, individual, group and even organizational (core competencies) are the beginning of the new forms of management that knowledge-creating organizations will require, both from employers and managers of the human resources areas of companies, including small and medium-sized ones.
And, if the way in which the staff is compensated is reviewed, does this necessarily imply an increase in the planned budget for payroll and salary reviews for the year?
In the previous paragraph, you discussed how you can do to apply the compensation budget "in those positions where it is most needed." In other words, those who were found to be in a situation of iniquity in the analysis of internal equity, either because they are underpaid or overpaid, depending on the performance of their occupants. This way of reviewing compensation is precisely where the employer is administering staff compensation, through “budget resource allocation” decision-making that maximizes the effectiveness of the compensation process and, definitely, makes Progress is being made towards the objectives set forth as basic for said process, without the need to apply more financial resources to the payroll than those anticipated.
Now another decision will be made that can help the employer to improve the efficiency of the compensation processes of his company, as well as its results and, above all, without necessarily requiring more financial resources than those provided for in the company's "normal" budget.. This decision refers to the incorporation into the composition of the compensation package, which offers its personnel a significant part of contingent (or variable) compensation, and which is only received by personnel when it causes company results that are above the economic results considered in the formulation of the "normal" budget of the company. To these additional amounts of contingent compensation that employees may receive, as explained above,They are known as incentive plans and there are different ways to implement these plans.
Incentive plans incorporate several factors that make them attractive, both from the point of view of the company, and from the perspective of the employer and the employees. Even from a social perspective. Among these factors, the following may be mentioned: (1) As previously stated, unlike the base salary which, in theory at least, recognizes past performance and demonstrated by staff, incentives have the potential to spark staff interest for achieving better future performance; (2) It is assumed, and apparently there is research showing this, that if people's behavior is rewarded, it can be stimulated in a direction that produces better results that are in the interest of the company; and (3) It is assumed that, at present,There is an increasing risk in the business environment and a way for SMEs to share this risk with employees is precisely by establishing compensation plans in the company that incorporate significant amounts as contingent, or non-guaranteed compensation. This means defining a possibility of obtaining compensation amounts that are only earned if the company or the employee achieve certain predefined results, depending on the way the fund that is distributed as incentives is generated and distributed.they are only earned if the company or the employee achieve certain predefined results, depending on the way the fund is distributed and distributed as incentives.they are only earned if the company or the employee achieve certain predefined results, depending on the way the fund is distributed and distributed as incentives.
Establishing an incentive plan requires precisely specifying the following elements:
- Participants in the plan. Formula to generate the incentive fund to be distributed. Performance measurement procedure, preferably by objectives and results of a business nature. Formula to distribute the incentive fund. Dates and method of payment. Plan documentation.
It is very important that these elements of the incentive plan are clearly documented. This to ensure that the plan will be applied with the same regulations, independently of the people who are responsible for the implementation of the decisions that derive from the operation of the plan. In our professional practice, we have had knowledge of situations in which, due to lack of
A complete and precise documentation, the potential of the plan to create motivation in its participants, gave rise to discrepancies in interpretation and, as a consequence, to conflicts that caused that potential of the plan to be lost, with the consequent loss of credibility in the businessman who promoted the plan. This is more important as the time between communicating the plan to participants and the time benefits, or disappointments, are received from the plan increases. If an incentive plan is designed and implemented according to these criteria, it becomes a powerful instrument for motivating personnel and does not increase the proportion of personnel cost in company budgets,since the resources that are distributed are generated by additional results to those set forth in the company's "normal" budget.
Conclusion:
In this article, a personnel compensation administration scheme has been proposed that has proven to be effective in achieving, in relative terms, better productivity and work environment results in the company, including small and medium-sized ones. The concepts, principles and main tools needed to design and implement, in small and medium-sized companies, this way of managing staff compensation and which, in brackets, we call it the management approach to compensation management, were reviewed. In the various parts of the article, the critical decisions that the entrepreneur must take when he intends to establish this process in his company have been pointed out. In graph # 6,The steps that must be followed to establish this compensation administration scheme in the company are presented in a synthetic way, as well as the main instruments that are required in each step and which are those that have been explained in this article.
Figure # 6: The administration of compensation as a continuous management process.
Article 86 of the Federal Labor Law.
An explanation of the concepts median, first quartile and third quartile can be found in any elementary statistic book and even in the help of electronic sheets, such as EXCEL, which even have the concepts programmed and are very easy to apply.
More information about job valuation can be found at Rivas Tovar, Luis Arturo. Job Valuation. PEMEX, Mexico (No publication date). It can be obtained at the CICA of the Superior School of Commerce and Administration, Casco de Santo Tomás, of the IPN
See Weber's Law in any book on Psychophysiology. This Law governs the judgments that people make in relation to perceptual differences on phenomena or objects, when there are no measurement instruments.
Cfr. Prahalad, CK and Gary Hamel. The core Competence of the Corporation, published in Mongomery, Cynthia A. and Michael Porter (Eds.), Strategy: Seeking and Securing Competitive Advantage, A Harvard Business Review Book, Boston, MA. (19991).
The following can be consulted, among other publications: Nonaka, Ikujiro and Hirotaka Takeuchi, The Knowledge Creation Organization: How Japanese companies create the dynamics of innovation, Oxford University Press, Mexico (1999); Yeung, Arthur, K., David O. Ulrich, Stephen W. Nason and Mary Ann Von Glinow, The Learning Capacity of Organizations, Oxford University Press, Mexico (1999); and Senge, Peter M., The Fifth Discipline: How to promote learning in intelligent organization, 1st. Ed., Editorial Granica, México (1998).
Cf. McKenzie, Richard B. and Dwight R. Lee, Managing Through Incentives: How to Develop a More Collaborative, Productive and Profitable Organization, Oxford University Press, New York (1998) and Alfile Kohn, Punished by Rewards, Houghton Mifflin, Boston, MA (1993). Both books are the result of exhaustive research: McKenzie and Lee's generally present a favorable perspective, while Kohn's presents a critical position on incentives.
See EA Locke, Toward a Theory of Task motivation and Incentives, Organizational Behavior and Human Performance, (1998), pgs. 157-189; A Bandura, Social Foundations of Thought and Action: A Social Cognitive Theory, Prentice Hall, Englewood Cliffs, NJ (1998).
We particularly recommend Chapter 3: Equity Theory, from the book Motivation and Work Behavior, edited by Richard M. Steers and Lyman W. Porter, «a. Ed., MaGraw-Hill Company, New York (1979). This chapter synthesizes the articles by J. Stacy Adams (1965), Inequity in Social Exchange and the one by Richard T. Nowday (1979), Equity Theory Predictions of Behavior in Organizations, which we find extremely interesting in understanding the behavioral consequences that equity internal has on the staff of the company.
See EA Locke, Toward a Theory of Task motivation and Incentives, Organizational Behavior and Human Performance, (1998), pgs. 157-189; A Bandura, Social Foundations of Thought and Action: A Social Cognitive Theory, Prentice Hall, Englewood Cliffs, NJ (1998).
In particular we recommend Steers M. Richard and Lyman W. Porter (Eds.), Motivation and Work Behavior, 2nd. Ed., McGraw-Hill Company, New York (1979); Lawler III, Edward E., Pay and organizational effectiveness: A psychological Review, McGraw-Hill, New York (1971); Lawler III, Edward E., Pay and Organization Development, Addison Wesley Publishing, Reading, Mass., (1981); Lawler III, Edward E.- Strategic Pay, Jossey-Bass, San Francisco, Cal., (1990).
See, Juárez Hernández Othón, Compensation Administration: Salaries, incentives and benefits, Oxford University Press, first edition, Mexico (2000).
Download the original file
