This week’s column is the first in a series that I co-author with Ray Everett, the chief executive of Aon Hewitt in the Middle East, a position that he has held for the past year, and Asia-Pacific and Middle East and Africa regional head of McLagan (a division of Aon Hewitt focusing on financial services). Aon Hewitt is one of the world’s pre-eminent human resources consulting companies and I have worked with it in the past to help me unravel one of the toughest issues that I have faced in building and managing various businesses: how to think about compensation when recruiting and promoting or awarding raises and bonuses.

This area of business haunts many managers, starting with how much to offer when recruiting. The widespread approach of simply asking for a salary receipt from the candidate’s employer is simply an admission that the hiring company has little idea on how to think about pay. The extension of this ad hoc approach to raises can lead to unfair pay differentials that are not based on merit, which harms morale and the company.

In short, the more opaque or uncertain a decision-making process is, especially with regards to human capital, the greater the damage to the company, most notably via low morale and difficulty in hiring and retaining top talent. The answer is a transparent, well-defined approach.

To understand how to structure compensation a business has to first lay the foundation of understanding what the actual jobs it needs are and then benchmarking against the actual organisational structure in terms of potential gaps as well as redundant overlaps. This step is important to ensure that the organisation is effective, by having the right work done, and efficient, by ensuring that it is not done by more than the necessary number of people.

Workforce planning is the best way to ensure your organisation is structured effectively for growth or decline. Companies such as Aon Hewitt assist organisations to do this because they have extensive normative databases. For example, if a hospital is planning to grow to take in up to 100 inpatients a day and 1,000 outpatients it would require a certain number of doctors and nurses. Too many people and the hospital loses money, too few and worst case they lose patients.

Once a company has a clear idea of the type of work it needs done the next step is to detail the required experience for the successful candidate. One mistake here is simply to add on as much required experience as possible. The problem is that this needs to be balanced with what is budgeted for the job.

Preparing job descriptions is probably the most tedious job in people management – but they are an important tool to ensure that you recruit and evaluate jobs on a consistent basis. A job description does not need to be 10 pages long but it does need to list out the key roles of the job as well required skills and education. Again, companies such as Aon Hewitt have job dictionaries that can help organisations efficiently prepare job descriptions.

The penultimate step is linking job evaluations to job grading – in other words, how much to pay for each position. This is an iterative process as there are at least two main issues. The first is an internal valuation based on the business and revenue models of the company. If you understand your business then you should be able to understand how much each job adds to the value chain of the company.

The more difficult one is linking this to what the rest of the market is willing to pay for a particular type of candidate. It is no use for your internal process to result in a job grade of Dh50,000 per month if the median market pay is Dh80,000 per month. On the other hand, paying Dh70,000 per month for candidates who can only get Dh40,000 per month in the market is inefficient.

This external information can only be generated by independent consultants such as Aon Hewitt. There are a number of approaches to job evaluation systems but the most comprehensive approach using a Point Factor system where:

1. A consultant working with a firm will assist in defining the factors that are to be used in the process – for example, Knowledge, Problem Solving, Decision Making, Scope, Impact and Communication.
2. A relevant degree is then selected for each factor.
3. Each of these factors have points/scores aligned to them.
4. The sum of scores is used to form a total point score.
5. Jobs are then graded based on aligning this total score with job grading system.

Once job evaluation is completed you can then assign salary, allowance and benefit bands to the various job grades.

In the next article of this series we shall discuss short-term incentives and in the third article we shall discuss long-term incentives. Incentives help companies pay their teams based on annual and longer-term performance and help avoid high fixed costs.

As we face a contracting economy and we right size to what is happening, getting job design, job evaluation, job grading and incentives is imperative. We want to be able to differentiate and pay our best people to keep them and to keep them motivated.

Stay tuned as we delve into the details of managing incentive compensation, a critical function in today’s fast moving human capital markets.

This article was originally published in The National.