Compensation 101: What is Compensation Analysis?

Compensation analysis is a mystery to most people. The matter is not helped by the use of arcane mathematical functions that don't resonate in any way with the average person. While people now have become somewhat familiar with the term "statistics" and what it means, they still find themselves shivering when they see the database repositories or stacks of survey books, piles of graphs, and the puzzling formulas noted on the graphs.

Before we enter the world of compensation, let's review compensation's place in the human resources department of most corporations. Human resources functions include: 1) workforce planning and staffing, 2) learning and development, 3) organizational development, 4) employee relations, 5) benefits, 6) diversity, 7) generalists, 8) human resource information systems, and 9) compensation. The responsibility for performance management, job analysis, job evaluation, and rewards normally falls within the compensation domain of human resources. While each human resource function has its own responsibility, they are very much intertwined. This has become more of a trend as we define rewards to include: a) base salary, b) incentives, c) benefits, d) perquisites, e) work life, and f) opportunity for growth. The policies and programs developed in these functions need to be integrated with the other human resource functions so that they may support a common goal. With that in mind, let's focus on the job of compensation analysis within the organization.

The compensation analyst, similar to a statistical analyst, culls implications and conclusions from the study of massive amounts of data, numbers, and models. From the analysis, they draw conclusions about both their own organization's goals and the goals of other companies (as evidenced through their salary data and employment practices). So, the process of compensation analysis performs both analysis and synthesis on the data they study. This compensation analysis information plays a critical role for one's company. It determines if a company's strategic goals are supported by its compensation and employment practices. Compensation, therefore, plays a crucial strategic role in supporting the company's overall strategic goals set forth by upper management. and then managed by the human resources department with line management.

Compensation analysis includes many things such as: plan development of executive compensation, sales compensation, incentive compensation, and international compensation. Along with the above just mentioned, compensation analysis is also involved within the planning and creation of job descriptions, job evaluations, salary structure development, and performance appraisals. In the next section, we will focus on the annual salary plan development process. This process is cyclical, but when done well is one that is continual.