Friday, January 22, 2010
The analyst has competed the process of constructing the initial salary structure with new range Minimums, Mid-points, and Maximums for the new plan year. Many organizations will “renew” their salary structures on an annual basis, a few may even renew on a bi-annually cycle. Depending on the approval processes for a given organization, an analysis of the estimated cost impact of implementing a new salary structure must be conducted prior to management approval.
As discussed earlier, individual employees who are below the range Minimum (green circle) may need to be brought to the Minimum dollar value of their respective range. How this is accomplished is dependent upon the organization’s pay practices policies, which is controlled by the overall compensation strategy. Regardless, the impacted employee should be made aware of how the adjustment will be made to avoid any negative employee relation issues. If the adjustment to the new range Minimum is in a single step, the cost of doing so is recorded when the new ranges become effective. If the adjustment to the new range Minimum is executed in a series of steps over time, the cost of doing so may have to be recorded at various times. The organization’s accounting and finance function should provide guidance on this topic.
For those employees who are above the range Maximum (red circle) adjustments may be needed to lower them to a point within the new range. Once again, organization’s pay practices policies should direct what actions are taken and when. As with a green circled employee, the over Maximum employee should be told of adjustment to minimize any negative employee relations. If the adjustment to the new range Maximum is in a single step, the cost-savings of doing so is recorded when the new ranges are effective. If the adjustment to the new range Maximum is in a series of steps over time, the cost-savings of doing so may have to be recorded at various times. As with a cost increase, the organization’s accounting and finance function should provide direction on how this action is to be reported.
Depending on the sophistication of the organization’s HR and/or Payroll systems, a report can be written to identify those employees below the Minimum and above the Maximum. That same report can calculate the amount that each impacted employee has to be increased or decreased to meet the pay practices policies of the organization. In addition to estimating the cost increase or decrease associated with a new salary structure, the analyst must review how annual merit/performance adjustments will be effected. If the organization uses a “merit matrix” that takes into consideration both the employee’s position in range and their performance level, an additional cost associated with merit/performance may occur. This additional cost occurs since the employee is now at a lower Comp-Ratio under the new salary structure. That lower Comp-Ratio may allow for a larger merit/performance increase under the new range than would have been allowed under the prior structure. Example: Merit increase guidelines for an organization recommends a 3% increase for an employee with a Comp-Ratio of 90 with a “Meets” level of performance. The same organization recommends a 4% increase for an employee with a Comp-Ratio of 85 for a “Meets” level of performance. The organization placed a new salary structure in place with range Mid-points 5% higher than the prior structure. Assuming no other adjustments have been made, the employee’s Comp-Ratio decreases from 90 to 85 resulting in an additional 1% merit/performance increase.
Since the cost estimates for merit/performance increases with the new structure must make certain assumptions concerning the numbers of employees, their Comp-Ratios, and their performance levels, the use of a range of scenarios may be helpful. The analyst would calculate the mostly likely cost estimation and then create an estimate 1% to 5% lower and higher. The actual deviation would be determined based on forward-looking estimates of such factors as projected turnover, promotions, demotions, and planned new additional hires into the organization’s workforce.
The analyst has competed the process of constructing the initial salary structure with new range Minimums, Mid-points, and Maximums for the new plan year. Many organizations will “renew” their salary structures on an annual basis, a few may even renew on a bi-annually cycle. Depending on the approval processes for a given organization, an analysis of the estimated cost impact of implementing a new salary structure must be conducted prior to management approval.
As discussed earlier, individual employees who are below the range Minimum (green circle) may need to be brought to the Minimum dollar value of their respective range. How this is accomplished is dependent upon the organization’s pay practices policies, which is controlled by the overall compensation strategy. Regardless, the impacted employee should be made aware of how the adjustment will be made to avoid any negative employee relation issues. If the adjustment to the new range Minimum is in a single step, the cost of doing so is recorded when the new ranges become effective. If the adjustment to the new range Minimum is executed in a series of steps over time, the cost of doing so may have to be recorded at various times. The organization’s accounting and finance function should provide guidance on this topic.
For those employees who are above the range Maximum (red circle) adjustments may be needed to lower them to a point within the new range. Once again, organization’s pay practices policies should direct what actions are taken and when. As with a green circled employee, the over Maximum employee should be told of adjustment to minimize any negative employee relations. If the adjustment to the new range Maximum is in a single step, the cost-savings of doing so is recorded when the new ranges are effective. If the adjustment to the new range Maximum is in a series of steps over time, the cost-savings of doing so may have to be recorded at various times. As with a cost increase, the organization’s accounting and finance function should provide direction on how this action is to be reported.
Depending on the sophistication of the organization’s HR and/or Payroll systems, a report can be written to identify those employees below the Minimum and above the Maximum. That same report can calculate the amount that each impacted employee has to be increased or decreased to meet the pay practices policies of the organization. In addition to estimating the cost increase or decrease associated with a new salary structure, the analyst must review how annual merit/performance adjustments will be effected. If the organization uses a “merit matrix” that takes into consideration both the employee’s position in range and their performance level, an additional cost associated with merit/performance may occur. This additional cost occurs since the employee is now at a lower Comp-Ratio under the new salary structure. That lower Comp-Ratio may allow for a larger merit/performance increase under the new range than would have been allowed under the prior structure. Example: Merit increase guidelines for an organization recommends a 3% increase for an employee with a Comp-Ratio of 90 with a “Meets” level of performance. The same organization recommends a 4% increase for an employee with a Comp-Ratio of 85 for a “Meets” level of performance. The organization placed a new salary structure in place with range Mid-points 5% higher than the prior structure. Assuming no other adjustments have been made, the employee’s Comp-Ratio decreases from 90 to 85 resulting in an additional 1% merit/performance increase.
Since the cost estimates for merit/performance increases with the new structure must make certain assumptions concerning the numbers of employees, their Comp-Ratios, and their performance levels, the use of a range of scenarios may be helpful. The analyst would calculate the mostly likely cost estimation and then create an estimate 1% to 5% lower and higher. The actual deviation would be determined based on forward-looking estimates of such factors as projected turnover, promotions, demotions, and planned new additional hires into the organization’s workforce.
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