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Compensation Definitions: More Must Knows For the Entrepreneur

Written by: Kirsten Ross

Article Overview: As an entrepreneur you must be a jack of all trades at times. As your business grows, you will need to become at least minimally versed in the area of compensation. After all, paying people is a key to keeping them around. This article will deal with some of the terminology used when describing a compensation program.

Compensation Definitions: More Must Knows For the Entrepreneur

As an entrepreneur you must be a jack of all trades at times. As your business grows, you will need to become at least minimally versed in the area of compensation. After all, paying people is a key to keeping them around. This article will deal with some of the terminology used when describing a compensation program.

Compensation Philosophy: An organization should have a pay philosophy which dictates how the compensation within the company compares to compensation at other organizations – called the external market. Organizations will look at salary surveys to determine what other companies are paying for the same or similar work. This is the market value of a job. They will generally look at the average rate paid. The Compensation Philosophy should indicate either that the organization would like to stay even with the external market or that it would like to stay ahead or behind the market by a given percent. It may also describe how rates will be set for new job titles. The organization will use either internal or external comparisons, or a combination of both.

Market Value of a Job: The average rate paid for the same or similar jobs in the defined labor market.

Labor Market: The labor market refers to the area from where a replacement worker for a given job would generally originate. It can vary for each job in the organization based on where a replacement worker would likely be found. For instance, the labor market for a CEO will likely be defined as average rate paid for CEO’s at similarly-sized organizations nation-wide. Since it could very well take a nation-wide search to fill a position like this, it is important to be competitive at a nation-wide level. For a position like Secretary or Customer Service Representative the labor market will generally be defined as local to the organization but may not vary by size of organization as a qualified pool of candidates could very well exist in the local area.

Total Compensation: Refers to the value of all things that an organization has to offer for working there. This includes things that you can place a monetary value on as well as things that just make a job more satisfying. Examples of items you can place a monetary value on are vacation days, holiday pay, tuition reimbursement, health insurance, dental insurance, short term disability and, of course, your hourly or salary pay. Examples of items that you cannot so easily place a monetary value on are: rewarding work, opportunity for advancement, opportunity to learn new things, a nice office, having good working relationships with co-workers, convenient parking, flexible work arrangements.

Internal Equity: Is the comparison of pay rates for jobs within the organization. If a job has internal equity it is paid fairly compared to the rates paid for similar jobs inside the organization. Some organizations will base compensation for new jobs on internal equity alone. Often there will be a compensation committee that looks at jobs within the organization to compare job requirements (years of experience, education, special skills, certifications) and responsibilities (managing others vs. taking direction, entering data vs. analyzing data, decision-making power, budget management, client service). A new job will be paid similarly to other jobs with the comparable requirements and levels of responsibility.

External Equity: Is the comparison of pay rates for similar jobs outside of the organization. External equity is achieved if an organization’s average rate paid for a given job is equal to the market average for the same or similar job. Some organizations will base their entire compensation program on the external market by using salary survey data. They will match the middle of a pay range to the market average rate paid.

Pay Grade Progression: This refers to how quickly the organization expects employee pay rates to move through the pay grade. In other words, if an employee is hired in at the minimum of a pay range, how long can they anticipate working there at a satisfactory level before reaching the middle or max of the pay range? An organization may set a standard that, with satisfactory performance, an employee can expect to move 3% per year through the range.

Compa-ratio: This a fancy way of indicating how a pay rate compares to either the average market rate or to the median of a pay range. If your organization says that your pay rate is a .97 compa-ratio to your pay grade middle, that means that you are 3% below the middle of your pay grade. If, on the other hand, the compa-ratio is 1.03, that indicates that you are 3% above the middle. 1.00 means that you are at the pay grade middle. It’s actually very simple!

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Article Tags: ceo, compensation philosophy, compensation program, customer service representative, entrepreneur, jack of all trades, job titles, jobs, local area, new job, pool, replacement worker, salary surveys, sized organizations



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