List the steps for building internally consistent compensation systems.

Your question asks about the steps for building internally-consistent compensations systems.  Well-planned compensation systems have multiple aspects and are strategically crucial to successful human-resource management. 

The literature in business strategy and human resource management currently links business strategy and compensation.  The strategic and contextual factors of compensation represent intrinsic and extrinsic motivational outcomes for employees and businesses.  What follows is a summary of the steps for building internally-consistent compensation systems.

1. Gather background information regarding current compensation systems in the specific industry.

2.  Define the compensation philosophy.

3. Create internal, external, and individual equity by doing an internal analysis.  

• Determine benchmark jobs,


• Develop job analyses and evaluations based on work and worker-oriented activities, tools used, tangibles and intangibles, work performance, job context, and personal requirements of each job,


• Rank and group positions, and


• Create benchmark positions.


• Do salary surveys and employee censuses.


• Verify work locations, and 


• Determine direct and indirect compensation for each position: base and merit pay, production programs, pay for time off, employees assistant programs and benefits, incentives, deferred pay, etc.

4. Select data source for external comparisons of step three, factor comparisons and weigh comparisons of the individual, internal, and external data in following areas.

• Skill


• Effort  


• Responsibilities

6. Link surveys and comparisons to compensation philosophy and adjust as necessary.

7. Ensure equity in the analysis by employing a non-biased review of all findings and comparisons.

9. Apply statistical determinants to the adjusted compensation philosophy, and adjust as necessary.

10. Create market pay line for benchmark positions.

11. Develop a pay-structure outline by grading jobs within each benchmark to the compensation philosophy and the market pay line.

12. Calculate pay ranges for benchmark positions.

13. Calculate the gross cost of benchmark positions.

14. Present findings and recommendations to the necessary decisions makers and adjust the compensation as necessary.

15. Implement and evaluate the compensation in the following areas.

• Policy for compensation updates, effective dates, roles and responsibilities, and security and information access to compensation structures.

16. Identify and communicate the revised compensation system to the appropriate stakeholders.

17. Train the appropriate stakeholders on the revised compensation system.

18. Create evaluation benchmarks and comparisons, and timeline for doing each.

18. Review evaluations benchmarks and comparison, and adjust the compensation system as necessary.

While it may seem less complicated to streamline these steps, no business is static, so the compensation system should not be either.  To create an internally consistent compensation system, each step should be completed, further defined, and documented.  As times change, and the business expands, contracts, or stabilizes, so should compensation to create internal, external, and personal equity to reduce attrition and better manage the cost of employ acquisition and retention.