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What Are Compensable Factors?
Compensable factors help employers decide how much a job is worth by identifying the most valuable elements of each position in your workforce: the factors on which you base compensation. Examples include skills, experience, and education. Companies must not only decide what factors are necessary for successful performance in each job but also how to reward employees according to these elements. Generally, the more strengths an employee has that relate to their performance on the job, the more value they create for the company. Their pay should reflect this value.
Why Are Compensable Factors Important?
Appropriately creating pay structures and setting pay rates is a big advantage for companies in attracting and retaining employees. It also impacts employee motivation and performance and promotes a culture of fairness and equity.
- Competitive pay. Companies need to offer a competitive total rewards package, including salary, in order to attract and retain employees. While there are many non-financial reasons that employees join and leave companies, salary remains a top priority for job seekers and current employees alike. Evaluating compensable factors can ensure compensation aligns with the job description and the value employees bring to their roles.
- Performance. Using compensable factors helps employers reward the most important criteria for success at their companies. Perhaps those with more experience perform better than those without, or maybe certain competencies, such as communication, are highly valued. You can strengthen performance and the probability of success by rewarding the competencies that matter most to the company.
- Budget control. Likewise, an employee may expect greater compensation for competencies they have that aren’t required for the job or that don’t equate to greater value for the company. An employee may have a master’s degree, for example, although the job doesn’t require this level of education. By clearly defining what the company chooses to reward, employers can preempt requests for additional pay by clearly communicating the competencies they are rewarding.
- Internal equity and trust. Regardless of what factors the company chooses to reward, it must be able to articulate a compensation strategy that corresponds to those factors to create a culture of trust and fairness. While employees may disagree with the company’s priorities (such as valuing supervisory responsibilities over seniority), everyone is aware of what the company values and how they can increase their earning potential if they want greater rewards.
- Legal protection. Claims of pay inequity are reduced when compensable factors are clearly stated and administered consistently regardless of gender or other protected status. Litigation claims due to unequal pay are all too common, such as the 2021 lawsuit by the EEOC brought against Dell. In this case, a female employee was paid much less than her male counterpart for doing substantially the same work. The employer was unable to defend its reasons for the pay disparity.
Common Compensable Factors
The Equal Pay Act of 1963 sets forth broadly used factors—namely skill, effort, and responsibility under similar working conditions–that may be used to compare the value of the jobs in the workplace. Most companies separate these into specialized subfactors. Let’s explore a few of the most commonly used factors.
Experience can include industry knowledge gained in other companies as well as experience within your company. Employers often reward seniority as a retention incentive because an employee’s ability to contribute increases over time. New hires with significant industry experience are usually able to onboard and contribute more quickly than less experienced candidates, increasing their value as well.
Some employers observe that employees with formal education, certifications or other specialized training add more value than those who don’t have such backgrounds. Rewarding employees for education and training can motivate employees to seek additional training opportunities as a way to increase their earning potential.
Supervisory responsibility may include the number of employees supervised or the complexity of supervision required. The ability to train and mentor team members can also be considered in this category. Generally, the more difficult the task, the more supervision, and training may be required. More team members to oversee also increases the burden on the supervisor. Companies often provide additional compensation for those with such supervisory responsibilities.
Employees who manage large projects with large budgets are typically rewarded with extra compensation over those whose fiscal authority is limited.
Does the job require critical thinking and decision-making skills? Can the employee work with minimal supervision? The complexity of the role typically influences how much the job is worth.
Mental and Physical Demands
Challenging and stressful positions, such as leadership roles, generally command more compensation than less demanding positions. Hazardous positions and positions requiring frequent physical exertion may also be factors that increase pay.
Other Examples of Compensable Factors
Each job has a unique mix of valued criteria that are linked to successful outcomes for the company. Other examples of compensable factors may be communication skills, technical proficiency, consequences of errors, job knowledge, and time management.
How to Determine Compensable Factors
Determining compensable factors is part of the larger job evaluation process. Eddy has a great article that provides more detail on job evaluation and some different methods that can be used. While quantitative job evaluation methods rely specifically on compensable factors, other methods incorporate these in a less data-driven way. Whichever job evaluation method you use, selecting and documenting appropriate compensable factors will influence the success of your compensation strategy. Here are a few steps to begin the process.
Identify and Define the Criteria that Are Valued in Your Company and in Each Job
Consider your organizational values and objectives. What you reward will be visible to those inside and outside your company. For each job, identify the top three to five factors or more that influence success.
Prioritize the Success Factors
Determine the relevance of each factor in the larger view of determining overall pay rates. If you are using a quantitative job evaluation method, assign a weight to the criteria.
Match the Criteria to the Job Description
Ensure job descriptions are up to date and that the compensable factors in the compensation plan are aligned with and clearly listed in job descriptions. When recruiting, make sure your candidates are aware of what is valued and rewarded in your company. This can be especially helpful when competing with other companies for talent, as candidates are looking for opportunities to grow and increase their earning potential.
Audit Job Descriptions and Corresponding Compensable Factors Regularly to Ensure Relevance
Audit and update job descriptions as part of your regular review of your positions and compensation plans. Make sure that what you reward is still relevant to your company’s success, as jobs and the needs of companies change over time. Some companies do this at fixed intervals, while others utilize the process when they undergo restructuring, during a growth phase, or at other significant crossroads.
Communicate Compensation Strategy Regularly
Excellent communication helps employees understand and buy into the company’s compensation philosophy. Transparency in communication is especially important when compensable factors or other aspects of job evaluation change how employees are paid.
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Carol Eliason Nibley, SPHR, GPHR and Principal Consultant at PeopleServe, has more than 25 years of experience in human resources, most recently serving as Vice President of Human Resources for a technology company in Utah County. Carol has taught HR certificate courses at Mountainland Technical College and in other settings for more than 12 years.
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