12 a - compensation management

Compensation

• Cash and non-cash rewards employees receive in exchange for their work

• Effective compensation management– Employees more likely to be satisfied and motivated

• Compensation perceived to be inappropriate– Performance, motivation and satisfaction may decline

dramatically– Employee turnover may occur– Dissatisfaction with absolute or relative pay

Objectives of Compensation

EffectiveCompensation

LegalLegalcompliancecompliance

AdministrativeAdministrativeefficiencyefficiency

ControlControlcostscosts

RetainRetainemployeesemployees

AcquireAcquirepersonnelpersonnel

EnsureEnsureequityequity

RewardRewardbehaviourbehaviour

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Corporate Policies, Competitive Strategy,and Compensation

• Aligned Reward Strategy– The employer’s basic task:

• To create a bundle of rewards—a total reward package—that specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy.

– The HR or compensation manager along with top management creates pay policies that are consistent with the firm’s strategic aims.

11–6

Compensation Policy Issues

• Pay for performance• Pay for seniority• The pay cycle• Salary increases and promotions• Overtime and shift pay• Probationary pay• Paid and unpaid leaves• Paid holidays• Salary compression• Geographic costs of living differences

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Equity and Its Impact on Pay Rates

External Equity

Procedural Equity

Internal Equity

Individual Equity

Forms of Equity

11–8

Addressing Equity Issues

Salary Surveys

Job Analysis and Job Evaluation

Performance Appraisal and Incentive Pay

Communications, Grievance Mechanisms, and Employees’

Participation

Methods to Address Equity

Issues

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Establishing Pay Rates

1

2

3

4

5

Steps in Establishing Pay Rates

Determine the worth of each job in your organization through job evaluation (to ensure internal equity).

Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity).

Group similar jobs into pay grades.

Price each pay grade by using wave curves.

Fine-tune pay rates.

11–10

The Salary Survey

To price benchmark

jobs

To make decisions

about benefits

Step 1. The Wage Survey:Uses for Salary Surveys

To market-price wages

for jobs

11–11

Sources for Salary Surveys

Employer Self-Conducted

Surveys

Government Agencies

Consulting Firms

Sources of Wage and Salary Information

Professional Associations

The Internet

11–12

Important Compensation Related Acts in India

Minimum Wages Act, 1948Payment of Wages Act, 1936Equal Remuneration Act, 1976Companies Act, 1956 Payment of Bonus ActPayment of Gratuity ActEmployee Stock Scheme (ESOS)Employee Stock Purchase (ESPS)

11–13

Establishing Pay Rates (continued)

Skills

Effort

Responsibility

Working Conditions

Step 2. Job Evaluation:Identifying

Compensable Factors

11–14


1

Performing the actual evaluation

Getting the cooperation of employees

Preparing for the Job Evaluation

Identifying the need for the job evaluation

Choosing an evaluation committee

2

3

4

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Ranking Factor Comparison

Job Classification

Methods for Evaluating Jobs

Point Method

Compensable Factors

16

Factors in a particular jobs which should be compensated for they directly or indirectly contribute in successful completion of that particular job are called compensable factors.

11–17

Job Evaluation Methods: Ranking

• Ranking each job relative to all other jobs, usually based on some overall factor.

• Steps in job ranking:1. Obtain job information.

2. Select and group jobs.

3. Select compensable factors.

4. Rank jobs.

5. Combine ratings.

11–18

Job Evaluation Methods: Job Classification

• Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.– Classes contain similar jobs.

• Administrative assistants– Grades are jobs similar in difficulty but

otherwise different.• Mechanics, welders, electricians, and machinists

– Jobs are classed by the amount or level of compensable factors they contain.

11–20

Job Evaluation Methods: Point Method

• A quantitative technique that involves:– Identifying the degree to which each

compensable factor is present in the job.

– Awarding points for each degree of each factor.

– Calculating a total point value for the job by adding up the corresponding points for each factor.

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Point Method

Ranking Method

Classification Methods

Step 3. Group Similar Jobs

into Pay Grades

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• Step 4. Price Each Pay Grade—Wage Curve – Shows the pay rates paid for jobs in each pay

grade, relative to the points or rankings assigned to each job or grade by the job evaluation.

– Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.

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Plotting a Wage Curve

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• Step 5. Fine-Tune Pay Rates– Developing pay ranges

• Flexibility in meeting external job market rates.• Easier for employees to move into higher pay grades.• Allows for rewarding performance differences and

seniority.

– Correcting out-of-line rates• Raising underpaid jobs to the minimum of the rate range

for their pay grade.• Freezing rates or cutting pay rates for overpaid (“red

circle”) jobs to maximum in the pay range for their pay grade.

11–25

Wage Structure

11–26

Pricing Managerial and Professional Jobs

Base Pay

Executive Benefits and

Perks

Short-term Incentives

Long-Term Incentives

Compensating Executives and Managers

11–27

Pricing Managerial and Professional Jobs

• What Really Determines Executive Pay?– CEO pay is set by the board of directors taking

into account factors such as the business strategy, corporate trends, and where they want to be in the short and long term.

– Firms pay CEOs based on the complexity of the jobs they filled.

– Boards are reducing the relative importance of base salary while boosting the emphasis on performance-based pay.

11–28

Compensating Professional Employees

• Employers can use job evaluation for professional jobs.

• Compensable factors focus on problem solving, creativity, job scope, and technical knowledge and expertise.

• Firms use the point method and factor comparison methods, although job classification seems most popular.

• Professional jobs are market-priced to establish the values for benchmark jobs.

11–29

Competency-Based Pay

• Competencies– Demonstrable characteristics of a person,

including knowledge, skills, and behaviors, that enable performance.

• What is Competency-Based Pay?– Paying for the employee’s range, depth,

and types of skills and knowledge, rather than for the job title he or she holds.

11–30

Competency-Based Pay (continued)

Support High-Performance

Work Systems

Support Performance Management

Why Use Competency-Based Pay?

Support Strategic Aims

11–31

Competency-Based Pay in Practice

• Main elements of skill/competency/knowledge–based pay programs:1. A system that defines specific skills, and a

process for tying the person’s pay to his or her skill.

2. A training system that lets employees seek and acquire skills.

3. A formal competency testing system.4. A work design that lets employees move among

jobs to permit work assignment flexibility.

11–32

Competency-Based Pay: Pros and Cons

• Pros– Higher quality– Lower absenteeism– Fewer accidents

• Cons– Pay program implementation problems– Costs of paying for unused knowledge, skills, and

behaviors– Complexity of program– Uncertainty that the program improves productivity

11–33

Other Compensation Trends

• Broadbanding– Consolidating salary grades and ranges into just a

few wide levels or “bands,” each of which contains a relatively wide range of jobs and salary levels.

– Pro and Cons• More flexibility in assigning workers to different job

grades.

• Provides support for flatter hierarchies and teams.

• Promotes skills learning and mobility.

• Lack of permanence in job responsibilities can be unsettling to new employees.

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Broadbanded Structure and How It Relates to Traditional Pay Grades and Ranges

11–35

Other Compensation Trends (continued)

• Comparable Worth– Refers to the requirement to pay men and

women equal wages for dissimilar jobs that are of comparable (rather than strictly equal) value to the employer.

– Seeks to address the issue that women have jobs that are dissimilar to those of men and those jobs are often consistently valued less than men’s jobs.

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The Pay Gap

• Factors Lowering the Earnings of Women:– Women’s starting salaries are traditionally lower.

– Salary increases for women in professional jobs do not reflect their above-average performance.

– In white-collar jobs, men change jobs more frequently, enabling them to be promoted to higher-level jobs over women with more seniority.

– In blue-collar jobs, women tend to be placed in departments with lower-paying jobs.

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Improving Productivity Through HRIS: Automating Compensation Administration

• Benefits of Compensation Automation:– Allows for quick updating of compensation programs.

– Eliminates costs of formerly manual processes.

– Coordinates centralized compensation budgets to prevent overages in compensation and raises.

– Can integrate and automatically administer other pay actions.

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Quantitative Job Evaluation Methods

• Factor Comparison Job Evaluation MethodStep 1. Obtain job informationStep 2. Select key benchmark jobsStep 3. Rank key jobs by factorStep 4. Distribute wage rates by factorsStep 5. Rank key jobs according to wages

assigned to each factorStep 6. Compare the two sets of rankings to

screen out unusable key jobsStep 7. Construct the job-comparison scaleStep 8. Use the job-comparison scale

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Sample Definitions of Five Factors Typically Used in Factor Comparison Method

1. Mental RequirementsEither the possession of and/or the active application of the following:A. (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression,

ability to get along with people, and imagination.B. (acquired) General education, such as grammar and arithmetic; or general information as to sports, world events, etc.C. (acquired) Specialized knowledge such as chemistry, engineering, accounting, advertising, etc.

2. Skill RequirementsA. (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful coordination's, dexterity, assembling, sorting, etc.B. (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by performance of the work and not to be confused with general education or specialized knowledge.

It is very largely training in the interpretation of sensory impressions.Examples1. In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill.2. In automobile repair, the ability to determine the significance of a knock in the motor would be skill.3. In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be

shoveled over the surface would be skill.

3. Physical RequirementsA. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc.; both the amount exercised and the degree of the continuity should be taken into account.B. Physical status, such as age, height, weight, sex, strength, and eyesight.

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Sample Definitions of Five Factors (continued)

4. ResponsibilitiesA. For raw materials, processed materials, tools, equipment, and property.B. For money or negotiable securities.C. For profits or loss, savings or methods’ improvement.D. For public contact.E. For records.F. For supervision.1. Primarily the complexity of supervision given to subordinates; the number of subordinates is a secondary

feature. Planning, direction, coordination, instruction, control, and approval characterize this kind of supervision.2. Also, the degree of supervision received. If Jobs A and B gave no supervision to subordinates,

but A received much closer immediate supervision than B, then B would be entitled to a higher rating than A in the supervision factor.

To summarize the four degrees of supervision:Highest degree—gives much—gets littleHigh degree—gives much—gets muchLow degree—gives none—gets littleLowest degree—gives none—gets much

5. Working ConditionsA. Environmental influences such as atmosphere, ventilation, illumination, noise, congestion,

fellow workers, etc.B. Hazards—from the work or its surroundings.C. Hours.

11–41

Ranking Key Jobs by Factors1

11 is high, 4 is low.

Mental Requirements

Physical Requirements

Skill Requirements Responsibility

Working Conditions

Welder 1 4 1 1 2

Crane operator 3 1 3 4 4

Punch press operator 2 3 2 2 3

Security guard 4 2 4 3 1

11–42

Ranking Key Jobs by Wage Rates1

11 is high, 4 is low.

HourlyWage

Requirements

WorkingConditions Mental Physical Skill Responsibility

Welder $9.80 4.00(1) 0.40(4) 3.00(1) 2.00(1) 0.40(2)

Crane operator $5.60 1.40(3) 2.00(1) 1.80(3) 0.20(4) 0.20(4)

Punch press operator $6.00 1.60(2) 1.30(3) 2.00(2) 0.80(2) 0.30(3)

Security guard $4.00 1.20(4) 1.40(2) 0.40(4) 0.40(3) 0.60(1)

11–43

Comparison of Factor and Wage Rankings

Mental Requirements

Physical Requirements

Skill Requirements Responsibility

Working Conditions

A1 $2 A1 $2 A1 $2 A1 $2 A1 $2

Welder 1 1 4 4 1 1 1 1 2 2

Crane operator 3 3 1 1 3 3 4 4 4 4

Punch press operator 2 2 3 3 2 2 2 2 3 3

Security guard 4 4 2 2 4 4 3 3 1 1

1Amount of each factor based on step 3.

2Ratings based on distribution of wages to each factor from step 5.

11–45

The Point Method of Job Evaluation

Step 1. Determine clusters of jobs to be evaluated

Step 2. Collect job information

Step 3. Select compensable factors

Step 4. Define compensable factors

Step 5. Define factor degrees

Step 6. Determine relative values of factors

Step 7. Assign point value to factors and degrees

Step 8. Write the job evaluation manual

Step 9. Rate the jobs

11–46

Evaluation Points Assigned to Factors and Degrees

First-Degree Points

Second-Degree Points

Third-Degree Points

Fourth-Degree Points

Fifth-Degree Points

Decision making 41 82 123 164 204

Problem solving 35 70 105 140 174

Knowledge 24 48 72 96 123

Compensation Challenges

CompensationCompensationChallengesChallenges

PrevailingPrevailingwage rateswage rates

UnionUnionpowerpower

ProductivityProductivity

GovernmentGovernmentconstraintsconstraints

Wage & salaryWage & salarypoliciespolicies

Pay-for-Performance

• Incentive systems provide a clear link between pay and performance or productivity

• Incentive pay– Directly linked to an employee’s

performance or productivity

Incentive Systems BenefitsBenefits ProblemsProblems

Performance is reinforced

regularly

Reinforcement is quick and

frequent

Effective behaviours are likely

to continue

Wages paid in proportion with

performance

Administration can be complex

May result in inequities

Employees may not achieve

standards due to uncontrollable forces

Union resistance

Focus efforts on one aspect

Individual vs. Team-based Incentives

Individual

• PieceworkPiecework

• Production bonusesProduction bonuses

• CommissionsCommissions

• Executive incentivesExecutive incentives

• Team resultsTeam results

• Production incentivesProduction incentives

• Profit-sharingProfit-sharing

• Stock ownership (ESOP)Stock ownership (ESOP)

• Cost reduction plansCost reduction plans

Team-basedTeam-based

Pay Secrecy AdvantagesAdvantages

DisadvantageDisadvantagess

Most employees prefer to have their pay kept secret

Gives managers greater freedom

Covers up inequities in the internal pay structure

May generate distrust in the pay system

Employees may perceive that there is no relationship between pay and performance

New Approaches to Pay• Skill- or knowledge-based pay

– Based on the employee’s skills or knowledge• Variable pay

– Performance-linked approach• Broadbanding

– Consolidation of pay grades• Tailor-made perks

– Employees choose• International pay

– Need to develop polices to meet global needs

Changing Compensation Systems

TraditionalTraditional ModernModern

Entitlement-baseEntitlement-baseincreases increases

Performance-drivenPerformance-drivengains gains

Pay = 100% basePay = 100% basesalarysalary

Variable componentVariable componentaddedadded

Few incentive/bonusFew incentive/bonusplans, restricted toplans, restricted toexecutives executives

Many kinds of plans, Many kinds of plans, extended throughout extended throughout

the organizationthe organization

Pay & Organizational Strategy

Areas that impactAreas that impactpay systemspay systems

Attract &Attract &retainretain

Identifying Identifying valued rewardsvalued rewards

MotivatingMotivatingdevelopmentdevelopment

Relating toRelating toperformanceperformance

SettingSettinggoalsgoalsConsequencesConsequences

MotivatingMotivatingperformanceperformance

Employee Motivation

• To be committed and productive employees must be motivated

• Motivation– A person’s drive to take action because

that person wants to do so• Expectancy model is comprehensive

– Shows the application of all human resource functions

12 a - compensation management

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