BUSI 440 Week 7 Final Project Deliverable II: Compensation Structure Example

A Point-Factor Compensation Structure Modeled on the Hay Method: Lakeview Community Credit Union

Purpose and Approach

Lakeview Community Credit Union asked the group to replace its informal pay practices with a structure that values jobs consistently and keeps pay competitive. Milkovich et al. (2017) describe a pay structure as the array of pay rates for different jobs within one organization, shaped both by internal alignment, the relative value of the jobs, and by external competitiveness, what other employers pay. The group's wage survey supplied the market side. This deliverable supplies the internal side with a point method modeled on the Hay plan and then joins the two.

The point method was chosen because it measures each job on the same defined factors, which makes the reasons for pay differences visible and easier to defend. Koss (2008) notes that the value of any job evaluation method lies in its consistency: the same factors, applied the same way, by people who can explain their judgments.

The Hay Factors

The Hay Guide Chart-Profile Method, developed by the Hay Group and now offered by Korn Ferry, evaluates jobs on three main factors, with a fourth for jobs where conditions are demanding. The licensed method uses detailed guide charts; the group built a simplified teaching version with the same factors.

Know-how is the total of knowledge, skill and experience a job requires, including technical knowledge, the breadth of management required and the human relations skill needed to work with and through others. Problem solving is the thinking a job requires to apply that know-how, including the freedom to think and the complexity of the problems; in the full Hay method it is scored as a percentage of know-how, since people think with what they know. Accountability is the job's answerability for actions and their results, including freedom to act and the size and directness of the job's effect on the organization. Working conditions capture physical effort, hazards and unpleasant surroundings.

Factor Weights and Scales

Points between levels may be assigned when a job falls between two definitions; for example, a job slightly above level 1 know-how might receive 130 points. Know-how carries the most weight because the credit union's jobs differ most in the knowledge and licensing they require. Working conditions carry little weight because most jobs are in offices and branches; the factor mainly recognizes the standing, cash-handling and security exposure of teller work.

Evaluating the Benchmark Jobs

Two group members scored each job independently using the job summaries and Lakeview's job descriptions, and the full group resolved differences. The scores below reflect agreement.

A few judgments deserve explanation. The collections specialist scored above the member service representative on accountability because the job's decisions about repayment plans and charge-off recommendations directly affect loan losses. The mortgage loan officer outscored the consumer loan officer on know-how because mortgage work requires licensing and knowledge of complex regulations. The information security analyst received the highest know-how score because the job requires specialized technical knowledge and certifications, and the branch manager received the highest accountability score because the job answers for a branch's service, lending and staff.

The Market Pay Line

The group paired each job's points with the weighted market median from the wage survey and plotted the results.

Nine of the ten jobs fall close to a straight line. The information security analyst sits well above it, because that job is priced in a national market where demand for security skills is intense. Including it would tilt the line upward and overpay every senior job, so the group fitted the line through the other nine and treated the analyst separately, a practice Milkovich et al. (2017) describe for jobs whose market rates reflect conditions outside the organization's main labor markets. The fitted line is approximately: market pay equals $14,200 plus $118 for each point. At 210 points the line gives about $39,000, and at 595 points about $84,400, both close to the survey medians.

Grades, Midpoints and Ranges

The group grouped jobs into six grades by point bands. Each grade's midpoint is the market line's value at the center of the band, which carries out Lakeview's policy of matching the market median. Range spreads are 40 percent for the two entry grades, 50 percent for the two professional grades and 60 percent for the two senior grades. Each minimum equals the midpoint divided by one plus half the spread, and each maximum equals the minimum multiplied by one plus the spread.

Midpoints rise by roughly 15 to 18 percent from grade to grade, enough that a promotion brings a meaningful raise, and neighboring ranges overlap, letting a seasoned employee in a lower grade out-earn someone just hired into the grade above. Grade 3 currently holds no benchmark jobs; jobs outside the benchmark set, the marketing coordinator among them, will be scored on the same factors and placed there.

Placing the Jobs

Tellers and contact center representatives fall in grade 1; member service representatives and collections specialists in grade 2; consumer loan officers, human resources generalists and staff accountants in grade 4; mortgage loan officers in grade 5; and branch managers in grade 6. Mortgage loan officers will keep production pay on top of base pay, as the survey showed competitors do, so their base range stays within grade 5 while their total cash pay reflects their results.

The information security analyst will be placed in grade 6 for internal purposes but paid on a market reference rate of $104,000, reviewed each year against national data. The exception carries out the board's decision to pay above market where vacancies are hardest to fill, and documenting it openly prevents it from looking like favoritism.

Checking the Results

Before finalizing the structure, the group tested it in three ways. First, it compared the evaluation scores with Lakeview's existing informal hierarchy and found that the ranking matched managers' expectations in every case but one: the collections specialist, which managers had treated as an entry job, now sits a grade above tellers. The group kept the higher placement because the job's accountability for loan losses justifies it, and it recommends explaining that change carefully. Second, it checked that no grade's midpoint differs from the survey median of its benchmark jobs by more than 5 percent, apart from the security exception. Third, it asked a branch manager outside the group to read the factor definitions and score two jobs; the manager's scores fell within 20 points of the group's, which suggests the definitions are clear enough for others to use when new jobs are added.

Employees Outside the New Ranges

Lakeview's current pay was compared with the new ranges. Seventeen employees, mostly tellers and mortgage loan officers hired years ago at low rates, fall below their new minimums; raising them to the minimum will cost about $48,000 a year and will take effect immediately. Three long-tenured employees are paid above their new maximums. Their pay will not be cut. Instead, they will receive future increases as lump-sum payments that do not raise base pay, until the range moves up to include them. Compa-ratios, each employee's pay divided by the range midpoint, will guide future raises, with larger increases for strong performers paid low in their ranges.

Fairness, Communication and Legal Review

Employees who distrust a structure will resist it, however well it was built. Colquitt et al. (2001) found in their meta-analysis that perceptions of procedural justice, the fairness of the processes behind decisions, were strongly related to outcomes such as job satisfaction, commitment and trust, alongside perceptions of distributive justice. Lakeview will therefore explain the process, not only the results: managers will receive a short guide describing the factors, the market data and the grades, and every employee will learn the grade and range for the job. Shaw (2014) concluded in a review that the effects of pay differences depend on whether employees see them as legitimate, which reinforces the value of explaining the factors behind them.

Chapter 17 of Milkovich et al. (2017) reviews the laws that govern pay, including the Equal Pay Act and Title VII of the Civil Rights Act. Before adoption, human resources will compare pay within each grade by sex and by race and ethnicity, look into any difference that experience, performance or another lawful reason does not account for, and fix it. The structure will be reviewed each year against new survey data and adjusted by the market's movement. When a new job is created, it will be evaluated on the same four factors by two trained raters before a grade is assigned, so that the structure stays consistent as Lakeview grows.

Group Roles and Peer Evaluation

Jamie Ortiz and Taylor Kim scored the benchmark jobs independently, and the full group resolved differences in a meeting. Morgan Lee fitted the market line and calculated the grades and ranges. Riley Chen wrote the sections on employees outside the ranges and on communication, edited the deliverable and submitted it for the group. The peer evaluation for this deliverable will be submitted individually by all four members.

Conclusion

The new structure gives Lakeview a consistent, explainable basis for pay. Job evaluation with Hay-style factors ranks the jobs by what they require and answer for, the wage survey ties that ranking to the market, and six grades with widening ranges leave room for growth and performance. With $48,000 to bring underpaid employees to their minimums, a documented exception for security talent and a plan to explain and audit the structure, the credit union can address the turnover that prompted the project while treating every employee by the same rules.

References

Colquitt, J. A., Conlon, D. E., Wesson, M. J., Porter, C. O. L. H., & Ng, K. Y. (2001). Justice at the millennium: A meta-analytic review of 25 years of organizational justice research. Journal of Applied Psychology, 86(3), 425-445. https://doi.org/10.1037/0021-9010.86.3.425

Koss, S. (2008). Solving the compensation puzzle: Putting together a complete pay and performance system. Society for Human Resource Management.

Milkovich, G. T., Newman, J. M., & Gerhart, B. (2017). Compensation (12th ed.). McGraw-Hill Education.

Shaw, J. D. (2014). Pay dispersion. Annual Review of Organizational Psychology and Organizational Behavior, 1, 521-544. https://doi.org/10.1146/annurev-orgpsych-031413-091253