c3 & c4 compensation & incentives_2
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Compensation
Management
Chapter 3
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Definition - JE
A systematic process of analyzing &
evaluating jobs to determine their worth
in the organization
Indicator of managements attitude
Enable to attract, retain & motivateemployees
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Compensation Traditional approach importance to
work in an org
Contemporary approach worth of anindividual in an org
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Objectives - JE
Determine organizational hierarchy
Identify responsibility & authority
Updated data on JD &JS
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Objectives contd
Internal & external consistency
Ensure employee satisfaction
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Principles - JE
Proper selection of job dimensionsrating
Define the dimensions
Define the evaluation program to e/es
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Principles contd
Active participation of e/es
Consider market factors demand forjobs
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Process JE
1. Preparation of job evaluation planneed + method adopted
2. Job Analysis collection ofinformation related to jobs
3. Job Description tasks &responsibilities associated to the
job
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Process contd
4. Job Specification knowledge +skill + attitude required
5. Selecting job dimensions &
assigning monetary values
6. Classification of jobs based onmonetary values
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Process contd
7. Implementation & Evaluation
8. Maintenance
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Techniques of job evaluation
Quantitative Non
Quantitative
Factor comparison Ranking
methodPoint Rating Job classification
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Quantitative Methods
1. Point Rating Method
Jobs are evaluated using scales
Similar jobs are evaluated using
common scale
Steps
Prepare JD + JS on a sample jobidentify common job factors
Job factors are broken down to
concrete sub factors
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Point Rating Method contd
Assign degree statements (specific
requirement of each sub factor)five degrees, in the form of phrases
Assign points to factors, sub factors
& degrees
Degree 1= 20 points = experience less than 6
months
2= 40 points = experience 6 months to 1 year
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Point Rating Method contd
Preparation of chart
Jobs are ranked on the basis of points
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Point Rating Method contd
Advantages
Accurate
Long lasting
Job description is consideredhigher validity
Disadvantages
Time consuming
Costly, more clerical wk
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Factor Comparison MethodBased on the principles of Point Rating & Ranking Method
Steps
Select common factors across all jobs
Identify bench mark jobs
Bench mark jobs are compared & ranked on theirrelative importance factor comparison
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Factor Comparison Method
contd Each factor is assigned a monetary value & in total =
pay of bench mark job factor evaluation
All jobs are then compared as against bench mark jobs
Advantages
Analytical & Reliable
Easy to communicate to supervisors
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Factor Comparison Method
contd Logical approach monetary values
assigned on factor importance
Disadvantages
Procedure is complex
High dependence on the bench mark
jobs
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Decision Band Method
Developed by Prof.Emeritus Thomas T.Paterson 1970
Refined by Ernst & Youngs compensation specialists
Monetary value = decision making requirements of the
job
Decisions are divided in to 6 data bands (levels of
decisions) simple to complex
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Non Quantitative Techniques
1. Ranking Method
Jobs are assessed on the basis of,
Knowledge, Skill, Effort, Job
Dimension
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Ranking Method contd
Steps
Job description
Assign ranks on the basis of worth to
the organization
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Ranking Method contdAdvantages
Simple
Appropriate to small organization
Quick & inexpensive
Disadvantages Job specification not considered
Does not differentiate the jobs
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Job Classification/Grading
Jobs are graded on the basis of their
significance & worth to the
organization
Steps
Defining the organization structure
Identify dimensions managerial,
supervisory, data entry
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Job Classification/Grading
Determine the job grades grade1, grade
II job dimension & org structure
Using i/p from e/e, TU no. of grades,
grade description, job classification
Freezing the grades assign monetaryvalues to key grades then to all grades
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Job Classification/Grading contd
Advantages Technique incorporated JD & Grade
definition
Better understanding of theorganizational structure
Comprehensive in nature
Disadvantages
Time consuming
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Advantages of Job Evaluation
Helps to remove discrepancies in thewage structure
Gives logical explanation wage relatedissues
Facilitates the entry of new jobs to theorganizational wage structure
Helps to compare the wage structure
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Limitations of job Evaluation Dynamic environment bring about change in job factors
outdated evaluation techniques
Poor formulation leads to grievances
Rigid pay systems no discretion to mgrs
Imbalance b/w designed pay structure & financialstrength of the org.
Cannot stick to the demands as union demands have tobe met
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Wage & Salary Administration
Compensating e/es in a fair manner
Maintaining principle of equity
Matching e/es expectations
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Compensation
What an e/e receives in return for his or her
contribution to the organization
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Components of compensation
Wage & salary Incentives
Fringe benefits
perquisite
Non monetary benefits
P i i l G i
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Principles Governing
Compensation Administration Principle of equity
Matching competitiveness in wage market
Matching e/e expectations
Eliminating discrepancies
Devise system to suit the org
Maintaining good IR
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Purpose of Wage & Salary
Admn.
Attract Talent
Retain & Motivate Talent
Financial Mgt
Legal Requirement
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Concepts of Different Wages1. Minimum Wages
Minimum wages act 1948
Enable an average worker to fulfill all his obligation
Minimum piece rate/ minimum time rate
Fixed by law
Revised every 5 years
Current min wage rate is Rs 133 / day - Karnataka
http://www.paycheck.in/main/officialminimumwages
http://www.paycheck.in/main/legal-outlook/salary
http://www.paycheck.in/root_files/MW%20Karnataka.pdf
http://www.paycheck.in/main/legal-outlook/salaryhttp://www.paycheck.in/main/legal-outlook/salaryhttp://www.paycheck.in/main/legal-outlook/salaryhttp://www.paycheck.in/main/legal-outlook/salary -
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Minimum Wages contdMinimum wages are fixed on 6 components,
Standard working class family considered earningsof women, children, adolescents - disregarded
Minimum food intake / member net calories
Rent
Per capita clothing (73 yards for a family of 4)
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Minimum Wages contd
20% allotted to miscellaneous fuel,lighting etc
25% allotted to other requirementschildrens education, medical
requirements, minimum recreation
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Concepts of Different Wages
contd2. Fair Wage Also consider the financial capacity of the e/r
Higher then minimum wage & less then living wage
fair wage committees recommendation
Related to productivity of the e/e
Prevailing wage rates considered
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Concepts of Different Wages
contd3. Living Wage
Highest in value
Not only for basic necessities but other
comforts
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Basic Wage Plans
1. Time Wage Plan Basis time period of employment
Implemented where o/p cannot bestandardized
Fixed amount irrespective of o/p
Extra benefit only through extra time
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Basic Wage Plans contd2. Piece Wage Plan
Basis o/p of the e/e
o/p is measurable
Implemented where o/p can be standardized
Direct incentives compromise on qualitye.g. call centers
Payment by results
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Basic Wage Plans contd
3. Skill Based Pay/ Knowledge Based Pay Basis job related skill
Recruitment below market rates
hotter the skills,the better the pay
Promoted & rewarded on acquisition of skillse.g. software industry better skills = better pay
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Basic Wage Plans contd.
4. Competency Based Pay Basis knowledge, skills, behavior of
e/e
Competency of the best performing e/e
is identified
Comparative analysis
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Basic Wage Plans contd
5. Broad banding Salary bands are defined
Overlapping is possible
HR Manager flexible on fixing thesalary with in a band
Non-promotional income opportunities
for em lo ees
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Variable Compensation
Basis performance not on organizational hierarchy
Differentiates b/w performers & non performers
American Management Association Study 83comp grievances(83%), absenteeism(84%), lost-time(64%) comes down
Components production incentives, profit sharing,bonus
Variable Compensation
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Variable Compensationcontd
Motivational tool at individual level &group level
Worker level piece rate/time rate (OT)
Manager level monetary & nonmonetary incentives, challenging
assignments, increased responsibility,
reward for innovative contributions Group level entire gp rewarded
motivate towards a common goal
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Components of Executive
Compensation Packages
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Executive Compensation
Reasonableness of ExecutiveCompensation
Would another company hire this person as
an executive?
How does the executives compensation
compare with that for executives in similar
companies in the industry
Is the executives pay consistent with pay for
other employees within the company?
What would an investor pay for the level of
performance of the executive?
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Executive Compensation Compensation paid to top mgt.
Steps to design an EC package
Review of existing package identify the flaws
Analyze organizational objectives link the pay
- ST
bonus linked
increase in profit- LT stock options growth rate
LT objective retention (restrictive stock option)
E ti C ti
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Executive Compensation
contd Analyze the financial status of the
company
Detailed EC plan designed
Maintain transparency
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Common Executive Compensation Issues
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Other Issues in Compensation Administration
1. Pay secrecy or openness
2. Pay security guaranteed annualwage, cost of living adjustments
3. Pay compression Narrow differenceb/w own pay & colleagues pay
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Wage DifferentialsDifferences in wage paid for same or similar job work
schedule, hazards, cost of living
Individual level competence, experience,knowledge, gender
Organizational level size, stage of business cycle,image
Industry level business trend (high pay in IT,
service) changing Regional level India & US (Indians are preferred)
R d
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Rewards e/e earns as a result of his employment
with the organization Stimulates e/es to perform
financial rewards (basic and
performance pay) and employeebenefits, which together comprise totalremuneration
Extrinsic tangible (promotion, bonus) Intrinsic intangible (informal
recognition, challenging tasks)
Financial bonus, incentives Non financial cafeteria benefit
Incentives
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Incentives Variable rewards granted to employees
according to variations in theirperformance
Rewards to an e/e over & above his
base wage or salary, in recognition ofhis performance & contribution
Also called payment by results
Vary from individual to individual
Types of Incentives - Short
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Types of Incentives Short
term IncentivesShort term Incentives (Blue collar workers)
1. Halsey Plan
Standard time + o/p is fixed
Guaranteed minimum wage on time basis
Incentives paid if work completed before time
Incentives = plan% * time saved * hourly rate
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Types of Incentives contd.e.g. St. time = 8 hrs Actual time = 6 hrs
Plan % = 50% Hourly rate = Rs. 5/hr
Pay = 30 + 5
2. Rowan Plan Guaranteed minimum wage on time basis
Incentives = (Time saved * time taken *hourly rate)/
std. time
Pay = 30 + 7.50
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Types of Incentives contd.
3. Barth System No guaranteed min. wageWage = (std. time * time taken) * hourly ratePay = (8 * 6) * 5 = 6.9 * 5 = 34.50
4. Task Bonus System
Std. pay & task is predetermined
Used for groups
Emphasis on team work & coordination Incentives issued only if individual tasks are
performed
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Types of Incentives contd.
5. Point Rating System Job is rated in terms of std. time
At the end of a specified period o/p is
assessed paid accordingly
e.g. std time value 10 units /hr
no. of working hrs/ day 8/ Rs. 5
end of the day e/e produces 100 units
(equivalent to 10 hrs of production)
a = Rs. 50
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Types of Incentives contd.
6. Progressive Bonus Based on efficiency of the e/e
Incentives start = o/p cross % of std o/p
If performance does not reach specific
% then daily hourly wages are paid
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Long Term Incentives1. Annual Bonus one time cash bonus paid at the
end of the year
Basis profit + individual performance
Payment of Bonus Act 1965 8.33% of wage/salaryearned or Rs. 100 which ever is higher
2. Profit Sharing 1st implemented by Walt DisneyCorporation e/e earns a share of comp profit - %of the total profit
Distribution Plan annual or quarterly cash bonusis paid according to pre determined formula
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Long Term Incentives contd Deferred Plan credit system, paid on retirement/
e/e leaves the organization
Combination Plan combination of 1+2 plans
- e/e receive a portion of profit cash bonus, restwill be put in deferred plan
3. Gain Sharing
External factors are not considered Rewarding groups for their successful performance
(team wk, coordination)
Independent of profit earned
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Long Term Incentives contd
4. E/e stock plans issued at lower price than the market
price
Enhances accountability & loyalty Best form of reward
Types:
1. E/e stock purchase plan (ESPP)2. Restricted stock plan
3. E/e Stock Option Scheme (ESOS)
4. Stock Appreciation Rights (SAR) Phantom Shares
5. Phantom Stock
6. Premium priced options/ performance vesting options
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Non Monetary Incentives
Recognize e/es contribution
Delegate challenging assignments
Additional responsibility + Authority
Free gifts & free tours
Why incentive plans fail?
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Why incentive plans fail?
1. Performance pay cant replace good mgt.
ambiguous instructions, no clear goals, hostilewk force/mgt
2. You get what you pay for
Rewards a gp how many pieces producedrushed production, low qly
Incentive for reducing accidentsreduce no ofreported accidents
3. Pay is not a motivator
Adequate rewardthen other effective
motivatorsHerzberg
Wh i ti l f il? td
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Why incentive plans fail? contd
4. Rewards rupture relationships
Encourage individuals or individual gpsto
pursue rewards for themselves
5. Rewards can have unintended consequences
Suppose income depends on performance
rating & productivitye/e focus on nos,
manipulate, engage in unethical or illegal
behavior
Guidelines for Effective
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Guidelines for Effective
Incentive Plans
IP should be linked to the e/e performance
increase morale
IP should be transparent should becommunicated
e/e suggestion should be considered
Least importance to external factors
Guidelines for Effective Incentive
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Guidelines for Effective Incentive
Plans contd.
Should be flexible
Should add value no negative influence
on bottomline
Should include both monetary & non
monetary incentives
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Individual vs. Team Rewards
Distribute variable rewards at the team level
Make system simple and understandable.
Using Team-Based Reward Systems
Use skill-based pay for the base.
Use variable pay based on business entity performance
Maintain a high degree of employee involvement
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Compensation
Administration
Process
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Employee Benefits & Services
Meaning
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Meaning
Which include any benefits that the e/e
receives in addition to direct remuneration
Indirect financial or non financial payments
e/e receive for continuing with theiremployment with the company
Also knownfringes, service Programmes,
hidden pay roll
Why Benefits & Services?
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Why Benefits & Services?
Mitigate fatigue
Discourage labour unrest
Satisfy e/e objectives
Aid recruitment
Reduce turn over
Minimize overtime cost
Do Benefits motivate e/es?
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Do Benefits motivate e/e s?
No satisfactory answer
Satisfaction at wk placeplays imp role
Fringe benefits fail in their motivationaleffectnot with performance, but with org
membership
Fringe benefits result inunhealthy
competition
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Fringe benefits
Described as welfare expenses, wage
supplements, perquisites other than wages
Principles of Fringes
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Principles of Fringes
Provided to the e/eprotect & promote their
well being
Must satisfy a real need
Cost-effective
Sound planning
e/e should educateto use these benefits
Types of Fringe Benefits
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yp g
1. Legally required
Social security
Disability insurance
2. Contingent & Deferred
Pension plans
Gp life/health insurance
Guaranteed annual wage
Maternity, child care, sick leave
Dental benefits
Severance payone time payment when
terminating an e/e
Types of Fringe Benefits contd..
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Types of Fringe Benefits contd..
3. Payment for the time not worked
Vacations
Holidays
Voting pay allowances
4. Other benefits
TA
Comp car & subsidies Uniform allowances
Meal allowances
Types of Non monetary Rewards
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/ f S
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Modern E/e Benefit Schemes
1. Golden Parachute
For top mgt executives
Provision of compensation for the lossof a job acquisition by another firm(not severance)
Bonus & other benefits, perquisites
Retirement benefits
M d E/ B fit S h td
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Modern E/e Benefit Schemes contd.
2. Cafeteria Benefit Plan Flexible benefit plans
e/e can select the most suitable plan
Customized benefit plans after assessing
e/e needs
top related