ERI Blog

Creating an effective compensation strategy is vital for an organization’s ability to attract, motivate, and retain talent critical for business success. The strategy must deliver salary structures that result in external competitiveness and internal equity, while supporting business objectives. Job analysis is a key component in this endeavor; it is the process of gathering relevant information about a job, the essential functions, as well as the factors that influence successful performance, and its corresponding value based on the organization’s specific criteria. This criteria, compensable factors, is then used in establishing the hierarchy of jobs, as well as setting and reviewing salaries and structures, assessing competitive external market position, and conducting pay equity audits.

Compensable factors are simply job components that are used as a basis for assessing job value, usually based on the values and objectives of the organization. Typically, compensable factors include such job components as skill and relevant experience needed in order to perform a job, responsibility, direct reports, supervision received and exercised, working conditions, and impact of decisions. These factors are used to establish and compare job worth, resulting in a job hierarchy, which then provides the basis for setting a wage structure and compensation strategy. To facilitate comparison, compensable factors should be a common element in all jobs, definable and measurable, and vary across the organization.

The Equal Pay Act of 1963 defines the four most basic compensable factors as effort, skill, responsibility, and working conditions. This provides the basis for pay differentiation and evaluation of pay inequities.

• Skill – This is the skill required for the job, not skills that the individual employee may have. Skill is measured by factors such as the experience, ability, education, and training required to perform the job.

• Effort – This is defined as the amount of physical or mental exertion (degree and amount of concentration or the level and frequency of physical effort, as defined by the ADA) needed to perform a job.

• Responsibility – This is defined as the number of direct reports, fiscal accountability, and the list of responsibilities of the position itself; the depth and importance of knowledge necessary to perform the work; or the required specialized or technical expertise.

• Working Conditions – These are the overall environmental factors, such as location and hazards, as well as physical surroundings like temperature, fumes, and ventilation. What percentage of the time and how often is the employee exposed to these conditions?

Additional compensable factors may include the following:

• Education – What is the minimum education required, not preferred, to do the job successfully in terms of formal schooling, training, certification, or knowledge of a specialized field? The minimum refers to the most basic level required to successfully perform the job duties.

• Complexity – Does the job require independent judgment or initiative to make decisions? What is the impact of the decisions made in this role, consequence of error, and financial impact to the organization?

• Supervision received – Does the role require hands-on supervision (i.e., review the work or outline specific methods or procedures)? This includes accountability, independence, and freedom to act or direct one’s own work.

• Supervision exercised – What is the number of positions reporting, directly and indirectly? What is the level of authority for controlling policy decisions, costs, or work methods? What are the scope and impact across the organization?

• Contacts – What internal and external contacts or interactions are required? With whom and at what level and frequency are these contacts needed?

• Confidential data – To what extent is the incumbent responsible for confidential information? What would be the consequences of unwarranted disclosure? To what extent are integrity and discretion important?

• Does the job entail required decision making and/or analytical skill?

The compensable factors are used for weighting and comparison and will support in managing pay equity and compression issues. For example, a new hire has ten years of relevant experience as an IT Programmer. Current incumbents in the position have fewer than three years of experience. With all other factors the same (for illustration purposes), one would expect to pay a higher salary to the incumbent with more experience. However, if the position requires a special skill set or is a “hot job” in the current market, it may be justification for paying more even with fewer years of experience in comparison.

Compensable factors are yet another tool in the HR arsenal and must be used judiciously and wisely, while being periodically reviewed. Any compensable factors used to differentiate pay must be based on bona fide occupational requirements and not organizational preferences. There must be a legitimate reason that is connected to the ability to do the job. An organization may prefer to hire only college graduates, but, if the minimum education required to do the job successfully is a high school diploma, then the company cannot legally differentiate based on that preference.

As with any tool, HR must work diligently to ensure fairness, equity, and consistency throughout the organization. Visit ERI for more information on how to benchmark pay and to find additional information on salary assessment.