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Company Confidential

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The equity equation

Solving thecompensation

problem

Delivering value

to shareholder

Costs

Lobbying with

the law on what

is correct

Delivering valueto employee

Potential

Performance

Ownership

Fairness,

correctness and

structure

Relevance ofstrategy

Equity, criticality,

impact, …





Equity Considerations while designing a Compensation Program

Figur e 12 –7





Developing a Compensation Philosophy





Job Evaluation





Job Evaluation

• Process of systematically determining the relative worth of jobs to create a job

structure for the organization

• The evaluation is based on a combination of job content, skills required, value to

the organization, organizational culture, and the external market

• This potential to blend internal forces and external market forces is both astrength and a challenge to job evaluation





Key Steps

• Job evaluation is a systematic process for determining how ―big‖ jobs is, primarily

to decide how much to pay. For example, typically an engineering job is seen as

being a bigger job than a clerk and a CFO is seen as bigger job than an engineer.

• The key steps in the job evaluation process are:

• Gather information about the jobs: Typically done by writing job descriptions.

• Select people (or a person) to evaluate the jobs: This is critical as the skill of these people

determines the success of the project.

• Evaluate the jobs using a job evaluation system: Each job is given some kind of point score or

ranking based on the understanding of the evaluators

• Review the results: Once all the jobs have been evaluated, the whole result is reviewed for

consistency and reasonableness.





Choices available for approaching job measurement

• decide the level of work to be evaluated: the position, the job, generic ladders of work, or the role.

• consider the method of measurement to be used: hybrid points-based plans, factor comparison methods, levels-based

ranking structures, or classification plans.

• decide the evaluation process or processes to be put in place to ensure reasonable and consistent results. As the diagrambelow illustrates, the evaluation process can be summarized in three basic phases, but within each phase, there are a

number of options available.





Compensable Factors: Definition

• Compensable factors are paid-for, measurable qualities, features, requirementsor constructs that are common to many different kinds of jobs

• These factors are qualities intrinsic to the job and must be addressed in an

acceptable manner if the job is to be performed satisfactorily

• These are:

• Skill

• Responsibility

• Effort

• Work Conditions





Compensable Factors: Skill

• “the experience, training, ability and education required to perform a job under

consideration – not with the skills the employee may possess”

• Technical know-how

• Specialized knowledge

• Organizational awareness

• Educational levels

• Specialized training

• Years of experience required

• Interpersonal skills

• Degree of supervisory skills required





Compensable Factors: Effort

• “The measurement of the physical or mental exertion needed for the performance of the

job”

• Diversity of task

• Complexity of task

• Creativity of thinking

• Analytical problem solving

• Physical application of skills

• Degree of assistance available





Compensable Factors: Responsibility

• “the extent to which an employer depends on the employee to perform the job as

expected, with emphasis on the importance of job obligation”

• Decision making authority

• Scope of the organization under control

• Scope of the organization impacted

• Degree of integration of work with others

• Impact of failure or risk of job

• Ability to perform jobs without supervision





Compensable Factors: Working Environment

• Hazards/ physical surroundings of the job

• Potential hazards inherent in the job

• Degree of danger which can be exposed to others

• Impact of specialized motor or concentration skills

• Degree of discomfort, exposure or dirtiness in doing job





Job Evaluation: Some Guidelines

• Evaluate the job not the person:

Though the person has a big impact on what the job is, particularly for knowledge worker jobs, it is important to keeppersonality issues out of the job evaluation process.

• Understand the job:

You can’t evaluate a job unless you understand it. If there is doubt do not proceed until you learn more.

• Compare jobs against jobs:

The ultimate question is where the job being evaluated fits relative to other jobs. While descriptions are a necessarystarting point and useful reference, focus on job vs. job comparison, i.e. how does the job we are evaluating compareto the other jobs we have evaluated.

• Don’t focus on cost of error : The funniest and most futile arguments in job evaluation revolve around howimportant a job is because of how much damage it could do.

• Another key assumption on the part of the evaluators is that the position is being done at a competent level.Excellent or poor performance in the job should not be a factor in the evaluation - this is what performance reviewsare for.





Methods of Job Evaluation

• There are various systems for job evaluation

• Factor comparison• Points systems

• Classification

• Paired Comparison

• In actual application, most systems deal with the same things in roughly the sameway. The exception is the classification system.

• The central element in job evaluation is some list of factors defining job size





1: Ranking

• This method is one of the simplest to administer. Jobs are compared to each

other based on the overall worth of the job to the organization. The 'worth' of a

job is usually based on judgements of skill, effort (physical and mental),

responsibility (supervisory and fiscal), and working conditions.

Advantages

• Simple.

• Very effective when there are relatively

few jobs to be evaluated (less than 30).

Disadvantages• Difficult to administer as the number of jobs

increases.

• Rank judgments are subjective.

• Since there is no standard used for

comparison, new jobs would have to becompared with the existing jobs to determine

its appropriate rank. Therefore, the ranking

process would have to be repeated each time

a new job is added to the organization.





2: Classification

• Jobs are classified into an existing grade/category structure or hierarchy.

• Each level in the grade/category structure has a description and associated jobtitles. Each job is assigned to the grade/category providing the closest match to the

job.

• The classification of a position is decided by comparing the whole job with theappropriate job grading standard.

• To ensure equity in job grading and wage rates, a common set of job gradingstandards and instructions are used. Because of differences in duties, skills andknowledge, and other aspects of trades and labor jobs, job grading standards aredeveloped mainly along occupational lines.

• The standards do not attempt to describe every work assignment of each positionin the occupation covered. They identify and describe those key characteristics ofoccupations which are significant for distinguishing different levels of work.





2: Classification: Pros & Cons

Advantages

• Simple.

• The grade/category structure exists

independent of the jobs. Therefore,

new jobs can be classified more

easily than the Ranking Method

Disadvantages

• Classification judgements are subjective.

• The standard used for comparison (the

grade/category structure) may have built

in biases

• Some jobs may appear to fit within more

than one grade/category.





3: Factor Comparison

• A set of compensable factors are identified as determining the worth of jobs. Typically

the number of compensable factors is small (4 or 5). Examples (as discussed) are:

• Skill

• Responsibilities

• Effort

• Working Conditions

• Next, benchmark jobs are identified. Benchmark jobs should be selected as havingcertain characteristics.

• equitable pay (not overpaid or underpaid)

• range of the factors (for each factor, some jobs would be at the low end of the factor while

others would be at the high end of the factor).

• The jobs are then priced and the total pay for each job is divided into pay for each factor.Example matrix next:





3: Factor Comparison: Illustration

Factor Comparison: The monthly salary is divided into the following factors

Job

Monthly

Rate

Pay for Skill Pay for Effort Pay for

Responsibility

Pay for

working

conditions

SecretaryRs.9,000 4,500 2,000 2,000 500

Admin.

Assistant

Rs.11000 5500 2500 2500 500

Supervisor Rs.15,000 6,000 3,500 4,000 1,500

Manager Rs.21,000 9,000 3,500 7,000 1,500

This process establishes the rate of pay for each factor for each benchmark job. Slight

adjustments may need to be made to the matrix to ensure equitable rupee weighting of the

factors.

The other jobs in the organization are then compared with the benchmark jobs and rates of pay

for each factor are summed to determine the rates of pay for each of the other jobs.





3: Factor Comparison: Pros & Cons

Advantages

• The value of the job is expressed in

monetary terms.

• Can be applied to a wide range of

jobs.

• Can be applied to newly created

jobs.

Disadvantages

• The pay for each factor is based on

judgements that are subjective.

• The standard used for determining the

pay for each factor may have build in

biases that would affect certain groups

of employees





4: Point Method

• A set of compensable factors are identified as determining the worth of jobs. (Skill, Responsibilities, Effort

& Working Conditions

• The point method is an extension of the factor comparison method. Each factor is then divided into levels

or degrees which are then assigned points. Each job is rated using the job evaluation instrument. Thepoints for each factor are summed to form a total point score for the job.

• Jobs are then grouped by total point scores and assigned to wage/salary grades so that similarly rated

jobs would be placed in the same wage/salary grade.





4: Point Method : Pros & Cons

Advantages

• The value of the job is expressed in

monetary terms.

• Can be applied to a wide range of

jobs.

• Can be applied to newly created

jobs.

Disadvantages

• The pay for each factor is based on

judgements that are subjective.

• The standard used for determining the

pay for each factor may have build in

biases that would affect certain groups

of employees





Hay Guide Chart : Compensable Factors

1.KNOW-HOW: The total of every kind of knowledge and skill, however acquired , needed for competent job

performance. Know-How has three dimensions - the requirements for:

•Practical

•Management

•Human Relations Skill

2.PROBLEM SOLVING: The amount and nature of the thinking required in the job in the form of analyzing,

reasoning, evaluating, creating, using judgment, forming hypotheses, drawing inferences, arriving at

conclusions, and the like. It measures the degree to which thinking processes must be applied to the

required knowledge in order to obtain the results expected of the job. Problem Solving has two dimensions:•Thinking Environment

•Thinking Challenge

3.ACCOUNTABILITY : This is related to the opportunity a job has to bring about some results and the

importance of those results to the organization. Tied closely to the amount of opportunity is the degree to

which the person in the job must answer for (is accountable for) the results. There are three (3) componentsin Accountability:

•Freedom to Act

•Impact (Remote/ Contributory/ Shared/ Primary)

•Magnitude





Weightages

• These compensable factors are weighted. Generally,

• Know-How - 50% of the total points

• Problem-Solving – 20%

• Accountability - 20%

• Working Conditions - 10%.

• This weighting is indicative of the common balance but it may not be the same

in a customized application.

• Also, the Working Conditions factor is not used in every installation.

• In other words, debating at length your working conditions points for a typical white-collar

librarian job will make very little difference in your overall ranking. Focusing on thefairness of the evaluation of your position's requirement for know-how and problemsolving will potentially achieve more.



Hay System Guide Chart Factors Summary





Hay System Guide Chart Factors Summary

1: KNOW HOW

(3 dimens ions)

The sum total of every kind of knowledge and skill, however acquired, needed for acceptable job

performance.

Specialized Know-How Practical procedures, specialized techniques and knowledge within occupational fields, commercial functions, and professional or

scientific disciplines.

Management Know-How Planning, organizing, coordinating, integrating, staffing, directing and/or controlling the activities and resources within an

organizational unit or function. Can be exercised directly or consultatively.

Human Relations Skills Active face-to- face skills needed for various relationships with other people.

PROBLEM SOLVING

(2 dimens ions)

The amount and nature of thinking required in the job in the firm of analyzing, reasoning, evaluating,

creating, using judgment, forming hypotheses, drawing inferences, arriving at conclusions, etc.

Environment The environment in which the thinking takes place.

Challenge The challenge of the thinking to be done

ACCOUNTABILITY

(3 dimens ions)

The answerability for action and its consequences. It is the measured effect of the job on the end

results of the enterprise.

Freedom to Act The extent to which personal or procedural control exists. What controls affect the job

Job Impact on End Results The degree to which the job affects or brings about the results expected of the unit or function being considered.

Magnitude The size of the function or unit measured in the most appropriate fashion (like revenue, production, etc.)





Criticisms of Job Evaluation

• Job evaluation isn’t scientific:

• The focus should be on market rates: There is an important school of thought that we shouldn’t be ranking jobs

against each other within the organization; rather we should be paying market rates for each job. However, manyorganizations have specialist jobs, which simply have no market comparators.

• Job evaluation takes too much time: Too true. Organizations have worked on finding ways to make the processless bureaucratic and more efficient. A good, pragmatic manager or consultant can help ensure that job evaluationdoesn’t turn into a bureaucratic nightmare

• .

• Job evaluation leads to stupid actions:

Eg. an excellent manager needs to hire two unnecessary sub-ordinates to make the job appear bigger and hencemove to the appropriate salary level.

This is real issue because in general things like budget and numbers of staff are indeed good indicators of job size.So the easiest way to make your job look bigger is to build an empire.

The solution to this is simply to have smarter people do the job evaluation, people who understand job size notpeople blindly applying a tool.

O t t A J b Hi h





Output: A Job Hierarchy

• The output is an ordered listing of jobs based on their value to the organization

• The hierarchy not only provides information about which jobs are most and least

valued, but also provides the relative amount of difference between jobs





Market Pricing &

Compensation Benchmarking

The issue is





The issue is …

• Talent shortage is a real problem

• Salary increases of ―Inflation+10%‖ are not sustainable when productivity and

performance are nowhere close to that number

• A strategic view on compensation will become a survival pre-requisite … soon

Benchmarks for one of three reasons





• Determining the pay for select positions

• Determining best pay practices (perquisites, benefits, structure, …) that can help

improve attraction or retention

• Determining pay increases

S





Market Survey Process

Business &

Compensation

Strategies

Job

Analysis

Select Benchmark Jobs

Identify Relevant

Labour Markets

Identify Data

Sources

Gather Data

Analyse Data

Steps Involved





Steps Involved

A. Plan the survey

• Determine the purpose of the survey

• Determine the jobs to include

• Determine the markets to survey

• Determine the firms to survey

• Determine the information to be obtained

• Make the schedules

• Determine the survey method

B. Conduct the survey

• Collect information

• Insure job comparability

C. Tabulate, analyze, and present results

Typical Approach to benchmarking process





1. Steering Committee Formation

To lay the groundwork for the project, agree on expectations, understandbusiness and technology plans and strategies, and project goals.

2. Data Collection and Analysis

Collection of organizational data to get a clear understanding of the work

being performed by employees. This step is essential in accurately

matching to industry compensation information.

3. Job Matching

Matching roles/jobs to an external compensation database is the nextstep. For positions that do not easily match the database, a position

description questionnaire is used to collect job content information.

Typical Approach to benchmarking process





4. Benchmark Jobs Against Market

Using the external database as a benchmark, the competitiveness of the organization'scompensation practices is analyzed .

• Tables and graphs that summarize the comparative data with respect to agreed-upon peer groupsare used as tools.

• Provide the organization with the information required to make effective decisions regardingcompensation levels and overall attraction and retention strategies.

5. Provide Recommendations and Cost Modeling

Based on the understanding of both the marketplace and the organization's compensationphilosophy and business strategy, recommendations are made which may include

• Modifications to the salary structure,

• Adjustments to your competitive positioning

• Adjustments for certain positions or groups.

This process also provides current industry best practices for compensation

Job Pricing





Job Pricing

Job pr ic ing inv olves the establ ishment o f w age rates for job s w i th in an org anizat ion,

by usin g a job evaluat ion metho d (Internal / External).

Internal Job Evaluation Methods

• Slotting - establishing a value for a job based on its similarity to another job or jobs.

• Ranking - a job to job comparison resulting in an ordering of jobs from highest value tolowest value.

• Paired Comparison - each job in an organization is compared to every other job and the

job of most value in each pairing is noted. Jobs are then ranked based on the number oftimes they were found to be more valuable in the comparison.

• Point Factor - involves three basic steps:

• Compensable factors are chosen by the organization based on what is valued for its jobs (suchas education, experience, and responsibility requirements),

• Each compensable factor is weighted and scaled (e.g. no experience required, two years

experience required, five years experience required, etc.),• Each job is measured against each compensable factor and a total score is derived and

compared with the scores of other jobs

Market Pricing





Market Pricing

• Under a market-based pay system, compensation offered to employees for

internal jobs is priced to the various labor markets where the employer competes

for talent.

• Actual pay ranges for internal positions determined using compensation data for

similar positions offered by other companies in the market



Using the output of the survey





• Determine your capacity to pay

• Determine your compensation philosophy

• Market positioning

• Internal positioning (Seniority, Performance, Differentiated)

• Determine your compensation structure

• Fixed, flexible, variable, cash, benefits, deferred etc.)

• Determine the periodicity of review and linkages with company

performance

• Communicate

Compensation Level: Definition





p

• The term compensation level simply means the average compensation paid to workers

at some level of analysis, e.g. the job, the department, the employing organization, an

industry, or the economy. • This has two implications

1. External Implication: how does the organization compare with other organizations? (how the

organization wishes to position itself in the marketplace).

2. Internal Implication : The average compensation is a reflection of the total compensation bill

of the organization. Labor is one of the claimants on organizational resources. The size of the

compensation and benefits bill is a reflection of who gets what within the organization.

Compensation Quartile Strategies





p g

Figur e 12 –5

Decisions About Compensation Levels





p

Compensation Strategies

Above-Market Paying for higher qualified, more productiveworkers.

Middle-Market Attempting to balance of employer costs andneed to attract and retain employees.

Below-Market Paying all that the firm can affordTaking advantage of the abundant supply ofpotential employees in a loose labor market.

Compensation Level Decisions





• The compensation level decision is important both in terms of employee

attraction and cost considerations,

• The applicant pool may dry up

• Some employees (often the best

ones) may leave.

• A low compensation level mayattract only less efficient workers,

with the result that labor costs per

unit of output rise.

• The organization may be

confronted with pressing

compensation demands from

unions & other groups.

Case: Low Compensation Level

• The competitive position of the

organization may suffer

• Turnover rates may drop below

some desirable minimum so thatthe organization tends toward

inflexibility or stagnation.

• Total payroll cost issues

Case: Low Compensation Level

Tips for Benchmarking Jobs





• Select surveys that are appropriate for the positions being surveyed: right job, rightgeographic area, right company size, etc.

• Stay general.

• Select job descriptors based on content, rather than job title.

• Match closely. A job descriptor should be at least 70 percent of an incumbent's current jobresponsibilities.

• Make as many matches as possible.

• Match the job function, not the person.

• Combine judiciously. Job descriptors can be blended, but no more than two descriptorsper survey should be combined to represent an incumbent's job.

• Watch for company levels (example: plant, division, group).

• Review the level guide. Some surveys instruct the user to "See level guide" at the end of adescriptor. This means you should refer to the front of that survey to identify the specificlevel on the data collection form.

• Involve employees as much as possible in benchmarking jobs

The Results





• Ability to manage compensation and ensure alignment to business strategies and

goals

• Adding validity and structure to company compensation management processes

• Increased capability to incorporate market pricing results into the administration

of one’s pay program

• Enhanced pay decision-making based on a full understanding of marketcompetitiveness

Salary Increase in India…





Average incr ement s 5-15% in 2004

Mercer Salary Increase Survey 2004

Actual 2003 Increases 2004 Forecasts

Automobiles/ Ancillaries 9.1 8.1

Chemicals/ Petrochemicals 9.1 9.4

Consumer Durable Goods/ Electronics 10.0 11.5

Engineering 10.5 11.4

Entertainment/ Communications/Publications

11.2 16.0

FMCG/ Retail 10.5 10.8

Hospitality 11.0 12.5

IT Solution Provider 11.2 12.3

Software Development 11.9 13.0

Telecommunications 9.4 13.5

Others 11.3 11.2

Designing the CompensationProgram





Program





In the past, practices have often been made by top management, based on their

own judgement about how they feel about the program.

Today, more effective compensation programs are designed by:

• Starting with a coherent philosophy,

• Considering sound fiscal practices and the broad range of alternatives available, and

• Involving employees at all levels to identify the most effective programs

Designing A Base Pay Structure





After determining internal equity relationships among jobs, and

Identifying competitive pay practices in the market place,

The next order of business is the design of a pay structure.

The Facets of a Compensation Program





• Compensation program objectives

• More than attract, retain and motivate

• Role of different pay components• Desired competitive posture

• Relevant competitors

• Base salary/total compensation

• Internal equity considerations

• Relevant differentiating factors• Performance, seniority, skills, responsibilities, interpersonal abilities

• Individual vs. team vs. organization roles

• Economic factors

• Sharing of risks

• Limits of ability to pay• Differences by function, levels

Designing A Base Pay Structure





The Architects of the Pay Structure Must:

• Establish a pay policy line.

• Design pay grades using pay grade minimum and maximum and desired spreads

of the range.

• Determine overlap between pay grades.

• Determine if the organization needs more than one pay structure and why.

Compensation Approaches





Figur e 12 –4

Compensation Decisions & Determinants





Rs.

There are three core decisions,

those involving:

pay level,

pay structure, and pay system.

Supporting these are three other

decisions, concerning

pay form,

pay treatment for special

groups,

pay administration.

All these decisions are influenced by

a number of environmental and

organizational variables. (the

economic, social/cultural, and legal

environments; and the organization's

structure and work force. )

Core Decision 1: Pay Level





• This decision determines how much the organization will pay for manpower services, or

what its average pay will be.

• Pay level refers to the average pay for jobs, for departments, or for the entire

enterprise. An average pay must be set that will secure and keep a productive work

force.

• Major considerations in the pay level decision are

• public policy,

• pay for comparable work in the community or industry

• company response to economic, political, and social issues.

• These considerations may be weighed unilaterally or together with the unions

representing employees. Some of these decisions end with personal interactions(salaries), some are provided on a group basis (medical insurance, etc.)

Core Decision 2: Pay Structure





• The second core decision is the pay structure decision

• This focuses on the relationships between jobs within the organization and thus

pay.

• Pay structure decisions usually involve arraying jobs in a hierarchy and setting

pay for these jobs relative to their status within the hierarchy.

• It also involves decisions by the organization regarding the amount and type of

benefits to provide.

Pay Structure (Contd.)





• Relationships between the pay of different jobs within the organization may be

more important to employees than pay level.

• Although the pay level may attract qualified employees, inequitable pay

relationships may do the opposite. If, for example, Jai is earning less money

than Ravi, on a job he believes is worth more than Ravi’s, he is likely to

consider the situation unfair and do something about it.

• Preventing such inequities and correcting them if they do occur are two of the

objectives of pay structure decisions.

• Pay structures may be set up by management judgment or constructed through

collective bargaining. The technique traditionally used in the mid 1900s in theU.S. was formal or informal job evaluation (discussed later.)





• Together the pay level and pay structure decisions determine the pay for jobs.

They also involve external and internal standards.

• Pay level decisions ensure that the organization is in line with the

requirements of the external environment, and pay structure decisions ensure

that the pay for jobs is internally consistent.

Pay level is the height of the line above the x-axis. Pay structure is the slope of the line. (Line b

represents a higher pay level than line a, but its structure is the same.)

Core Decision 3: Pay System





• This involves determining the pay of individual employees on the same job.

• It is possible for all employees on the same job to get the same pay, in which case

no decision is needed.

• But once a decision is made to differentiate the pay of employees on the same job,

two further decisions are required:

• how to differentiate among employees: individual pay determination

• whether to pay for time or for output: pay method decision.

• Generally organizations pay

• high-seniority employees more than low-seniority employees,

• higher performers are paid more than lower performers (merit systems).

• Often pay differences among people on the same job are based on a combination of

performance and seniority (reward both membership and effectiveness)

Support Decisions: Pay Form





• Pay form is the composition of the pay the individual receives.

• The major part is money, or take-home pay. But a large proportion is in

benefits of several kinds.

• The growth of benefits, employee differences in benefit needs, and greater

individualization of organization benefit programs are important issues in pay

form decisions

• Employees receive 3 forms of pay

• Membership pay is given employees as a consequence of their joining

and remaining in the organization.

• Job pay is based upon accepting a particular job and performing at a

satisfactory level.

• Performance pay is contingent upon differential employee behavior.

Support Decisions (Contd.)





2: Pay treatment of some special employee groups.

Although the organization wants similar behavior from all employee groups,compensation policies and practices may differ somewhat for salespeople,

professionals, and managers.

3: Pay Administration

Ensuring that pay achieves organization and individual objectives and meets public

policy goals. Those responsible for compensation planning and control seek answers to

questions of efficiency, effectiveness, and legality.

Compensation Strategy Segments





Pay

Philosophy

Pay

Assessment

Pay

Form

Pay

Delivery

Pay Plan

Design



Designing Pay Structures





Developing a Pay Structure





• Pay structures result from pricing job structures.

• Job structures, in turn, result from the application of formal or informal job

evaluation to an organization's jobs

• In order to price a job structure, it is necessary to use rupee amounts from either

current pay rates or the market data collected from compensation surveys

• A pay structure, then, is a combination of the job structure, the labor market,

and the organization's decisions regarding the wage level

Common Pay Structures





• Hourly and salaried

• Office, plant, technical, professional, managerial

• Clerical, information technology, professional, supervisory, management, and

executive

Pay Structure Design: Questions & Issues





• Should there be a difference in changes in base pay progression opportunitiesamong jobs of varying worth ?

• Do employees have a significant opportunity to progress to higher level jobs ? Ifso, what should be the relationship between promotion to a higher job andchanges in base pay

• Does the organization wish to recognize dangerous working conditions in itsbase pay schedule ?

• Will policies and regulations permit incumbents to earn rates of pay higher thanestablished maximums and lower than established minimums ? What shouldbe the reasons for allowing such deviations ?

Pay Structure Design: Questions & Issues





• What is the lowest rate of pay that can be offered and still hire desirable

employees ?

• What is the rate of pay necessary to retain employees ?

• Is it wise or necessary to offer more than one rate of pay to employees

performing either identical or similar kinds of work ?

• What is considered to be a sufficient difference in base rates of pay among jobsin a class-series that requires varying levels of knowledge, skills, responsibilities,

and duties.

• How will the pay structure accommodate across-the-board, cost-of-living, or other

adjustments not related to employee tenure, performance, or responsibility andduty changes ?

Establishing Pay Structures





Pricing Job Structures





• The job structure presents the

compensation decision maker with a

hierarchy of the jobs in the organization.

• A rupee value now needs to be placed

on this hierarchy.

• This rupee value is available in the

current pay rates paid for the jobs and in

the compensation survey datarepresenting the labor market.

• These two sets of data are combined

into a matrix that is used to create a

scatter diagram

Thus, pricing a job structure involves a series of techniques and decisions regardingthe vertical, horizontal, and regression-line dimensions of the scatter diagram.

Scatter Diagram: The Vertical Dimension

• The vertical axis of the scatter diagram is a set of rupee figures from low to high





The vertical axis of the scatter diagram is a set of rupee figures from low to high.

This amount may come from either the current pay rate or range for the job within

the organization or the value placed upon the job in the market survey.

• When current pay rates are used, an initial concern is the exact pay rate to assignto each-job.

• If there is a single job incumbent and/or a single pay rate for the job, then the particular rupee amount

paid could be used, although this person could be paid high in the pay range.

• But if there is a pay range and a number of incumbents, then the exact figure to use must be

determined.

• If the average pay is used, the pay for the job may be overstated or understated depending on how

long the incumbents have been on the job or what their performance has been.

• The alternative is to use the midpoint of the pay range. This gives a good indication of the relative

value of the job and not the incumbents.

Scatter Diagram: The Vertical Dimension





• When survey data are used, the figures need to be adjusted in a number of ways. Since

the wage data does not provide a single rate but a range of figures, therefore the best

single figure to use, such as the mean or median, needs to be determined.

• Second, any data collected in the wage survey predate the effective date of the wage

structure presently being built. Thus, the data needs to be updated to the effective date of

the new wage structure.

Pay Level Strategies: 1This decision involves determining how competitive the organization wishes to be

while the wage structure remains in effect There are three basic strategies:





while the wage structure remains in effect. There are three basic strategies:

Lag the Market:

The organization updates the wage survey data to the current date and then

installs the new wage structure. If a change in the labor market of 10 percent is

assumed for the next year, then the only time the organization will be competitive

with the market is at the beginning of the year. By the end of the year any

decisions based upon the wage structure will be 10 percent behind the market.



Pay Level Strategies: 3

Lead the Market





Lead-the Market

In this strategy the organization wishes to pay above the market rate and does so

by starting the year at 10 percent above the wage survey data. By the end of the

year the organization will be paying the market rate.

Scatter Diagram: Horizontal Dimension

• The horizontal axis is the hierarchical ranking of all the organization's jobs The pricing process may





• The horizontal axis is the hierarchical ranking of all the organization s jobs. The pricing process may

work with either individual jobs or pay grades

• The major question involving the horizontal dimension is how the hierarchy of jobs was arrived at.

• Market Rates.

• The organization may assume that it wishes to pay strictly market rates for its jobs and may therefore place rupee values on both

axes, making a totally consistent structure. Clearly this assumes that there is a market rate for all of the organization's jobs and

that this rate is satisfactory.

• Job Evaluation Rates.• Depending upon the method of job evaluation used, these ratings may consist of a ranking of jobs from low to high, a series o f

classification levels, or a range of points.

• Negotiated Rates.

• Where there is a union, the hierarchy of jobs may be a negotiated ranking based upon custom or the relative power of a group of

unions.



Determining A Pay Policy Line

• The procedure most organizations follow is to

id tif th k t t f i





identify the market rates for various

benchmark jobs that cover the entire

spectrum from lowest to highest rates of pay.

• By plotting on a chart the pay-rate information

obtained through surveys, a scatter diagram

or scatter plot can be developed.

P a y ( C o m p . S u r v e y ) I n . R s . T h o u s

a n d

Developing the Pay Policy Line

• Once the horizontal and vertical dimensions of the scatter diagram have





• Once the horizontal and vertical dimensions of the scatter diagram have

been settled upon, all the jobs or the key jobs can be plotted by their

values on both axes.

• To create a smooth progression between pay grades, a pay-policy line is

fitted to the plotted points.

• The line may be straight or curved and may be fitted by a number of

different methods.

• When plotting job structures of single job clusters, a straight line is

usually employed. The most frequently used types of lines are the low-

high line, the freehand line, and the least-squares line.

Examples of Pay Policy Line

• Low – high Line: This is a straight line connecting the

hi h d h l f h l d i ( h f





highest and the lowest of the plotted points (these are often

called anchor points).

• The rates of all intervening jobs are made to fall on the line.

• The low-high line appears especially useful in union

bargaining of the wage structure because of its flexibility.

When a final bargain is reached, it may be implemented by

raising either end or both ends in such a way as to reflect

the contract.

• Freehand line. After the points have been plotted the trend of the datacan often be easily visualized.

• In this case it is possible to draw a freehand line that best describes the

plotted points. In drawing such a line, vertical deviations from the line

are minimized if the line follows the obvious slope of the data. Although

the line may be straight or curved, its advantages are greatest when it

is straight. The obvious advantages of using a freehand line are that it

is easy to plot and simple to explain.

Wage Survey Results: Quartiles

• In using wage survey results, instead of present

rates in determining the wage line, it is useful to

l h t i hi h lt h b





employ a chart in which survey results have been

presented as quartiles representing the pay grades

of the organization

• The medians (midpoints) or averages of survey

results may be used in place of present wage rates

in determining the wage line.

• The starting rate of a pay grade must be sufficient to

attract employees to those jobs, and wage survey

results provide evidence of what that rate must be.

• If the organization already has a series of pay

grades in place, jobs may be slotted into the

appropriate pay grade on the basis of the market

rates that have been determined in the wage survey

(Called a rank-to market job evaluation)

Multiple Structures

• While we have considered only a single wage structure, an organization may have several

wage structures one for each broad job cluster





wage structures – one for each broad job cluster.

• It is not unusual for large organizations to have at least three pay structure lines:• Blue collar manual labor, craft, and trade workers.

• Nonexempt white collar salaried workers.

• Managerial, administrative, and professional exempt employees

• Some organizations have a fourth pay structure for their highly paid executives.

Reasons for multiple pay structures could be:

The Need For Multiple Pay Structures





• It may be difficult to compare these different types of jobs, in which casethe horizontal axis of the scatter diagram is not useful

• The slope of the pay-policy line for these groups may be very different. At

opposite extremes would be the blue-collar workers, with a very flat slope,

and the managerial group, with a very steep slope. Further, the pay-policylines will start and stop at different places, so that there will be little overlap

between them.

• A major reason for using multiple pay structures is that rates of pay for

more advanced jobs increase geometrically rather than linearly.

Completing the Wage Structure: Pay Grades

• At this point, the wage structure consists of a horizontal dimension and a vertical dimension with ali li d i d f th l tti f j b th





pay-policy line derived from the plotting of jobs on them

• On the horizontal dimension, jobs are grouped into pay grades; on the vertical dimension, money is

grouped into rate ranges.

A pay grade is defined as a group of jobs that have been determined by job

evaluation to be approximately equal in difficulty or importance.

• If a point plan is employed in job evaluation, a pay grade consists of jobs falling

within a range of points;• if factor comparison is used, a range of evaluated rates;

• if ranking is used, a number of ranks.

• In the classification method of job evaluation, a pay grade consists of all jobs that are

comparable to the level description.

Pay grades are nothing more than convenient groupings of a wide variety of jobs

or classes similar in work difficulty and complexity requirements but possibly

having nothing else in common.

Pay Grades

• There appears to be no optimum number of pay grades for a particular wage





pp p p y g p g

structure. In practice, pay grades vary from as few as 4 to as many as 60.

• If there are few grades, the number of jobs in each will be relatively large, as willthe increments from one grade to another.

• If, on the other hand, there are many pay grades, the number of jobs in each

grade and the increments between grades will be relatively small.

• Although organization practice varies greatly, there has been a tendency toreduce the number of pay grades.

Pay Grades (contd.)

• The actual establishment of pay grades is a decision-making process designed





to

• place jobs of the same general value in the same pay grade• ensure that jobs of significantly different value are in different pay grades

• Provide a smooth progression, and

• ensure that the grades fit the organization and the labor market.

• Because jobs in a pay grade are treated as identical for pay purposes, it isextremely important that grade boundaries be accepted. For this reason, it is

often useful to move jobs that are very close to the maximum cutoff point into

the next higher grade

• There are a number of ways of grouping jobs into a limited number of grades.Let's examine four of them

Developing Pay Grades

• It may provide for a single rate, or it may allow for a range of pay within a





It may provide for a single rate, or it may allow for a range of pay within a

certain grade.

• The top or maximum rate of pay of a pay grade states that this is the most

that work produced by a job in this grade is worth to the organization.

• The bottom places a minimal value on the contributions of the assigned job.

• The distance between minimum and maximum recognizes the range of

performance and experience of incumbents in the assigned job(s).



1: Cluster Approach to Pay Grades

• The simplest approach is to make a scatter

diagram of the organization's jobs, as is done





diagram of the organization s jobs, as is done

in establishing the pay-policy line.

• When this is done it can often be observed

that the jobs tend to cluster rather than

scattering evenly.

• This effect can be taken advantage of by

encasing the clusters horizontally and

vertically, as illustrated

• This provides all three dimensions, but none

of them is arrived at consistently, nor are they

likely to be symmetrical. It may have a

negative impact on salary and career

progression in the organization.

• This has the advantages of simplicity andflexibility; small organizations are most likely

to use this

2: Division Approach

• Use the horizontal dimension of the wage

structure the job evaluation points to





structure – the job evaluation points – to

determine the number of pay grades.

• This is done by determining a set number of

points for each pay grade and, starting with

the least number of points, marking off the

lines between adjacent grades. In the figure,

each pay grade is 40 points "wide."

• The job rate for each grade should be set by

placing the range midpoint at the point wherea vertical line from the point value in the

middle of the grade, say 200 points for level

3 in the figure meets the pay-policy line.

3: Mid-point Progression Approach• It focuses on the pay-policy line and the vertical

axis of the wage structure.

• The number of pay grades is obtained by





• The number of pay grades is obtained by

determining a standard distance between the

midpoints of adjoining grades. (10% is thedistance decided upon between grades in the

e.g.)

• Starting at the midpoint of the lowest grade, weplace the midpoint for each succeeding grade 10percent higher than the lower one.

• The dividing line between grades is halfwaybetween the two midpoints. As can be seen, the

horizontal dimension of job evaluation points

widens with each higher grade.

• This approach is often combined with

increasingly broad rate ranges to make the wage

structure balloon out at the higher levels. Therationale is that at higher levels, positions are

harder to define and evaluate accurately, and

greater variation in performance is possible.

4: Continuum Approach

• Each job evaluation point on the

horizontal axis has its own rate range;





there is no grouping of jobs.

• The pay-policy line constitutes the

midpoints. A standard maximum and

minimum which are a set percentage

above and below the midpoint are

defined.

• These lines widen as the wage levelrises, making the range broader at

the top than at the bottom.

• A system like this requires a lot of

confidence in the job evaluation

system; it has gained popularity with

the Hay’s plan

Pay Ranges

• A range of pay allows an organization to move beyond pay for the

job to pay for the person.





• Since a pay grade incorporates a range of job evaluation points, it

is useful to have some range of pay for the grade.

• Ordinarily, the midpoint of the range will be the job rate, the mean

or median of the compensation survey data.

• The other points to define are the minimum and maximum of the

range. The range spread (the distance from minimum to

maximum) varies greatly but is usually within a 25 to 60 percent

range.

• Many large wage structures with a variety of jobs are narrow at

the bottom and spread out at the higher levels.

• Once pay grades and rate ranges are designed, the wage

structure is complete (see figure)

Discussed later in more depth

Broad banding

• The practice of using fewer pay grades having broader pay ranges that in

traditional systems





traditional systems.

• Benefits

• Encourages horizontal movement of employees

• Is consistent with trend towards flatter organizations

• Creates a more flexible organization

• Encourages competency development

• Emphasizes career development

Tradi t ional Pay Structure vs. B roadbanding





Figure 12 –13

Rs.

30,000

Rs.

56,000

Rs.

40,000

Rs.35,000

Rs. 49,000

Rs.

43,000

Rs.

56,000

Rs.

30,000

Narrow Vs Broad Bands





Pay

Rate

Pay Grade

= narrow

= broad

Typical Pay Range Widths





Figure 12 –15

Issues Involving Pay Increases

• Seniority

• Time spent in an organization or on a particular job





• Time spent in an organization or on a particular job.

• Used to determine eligibility for organizational rewards and benefits.

• Maturity Curve

• A curve that depicts the relationship between experience and pay rates.

• Assumption is that as experience increases, proficiency and performance increase.

Issues Involving Pay Increases

• Cost-of-Living Adjustments (COLA)

• A percentage increase in wages that allows employees to maintain the same real





• A percentage increase in wages that allows employees to maintain the same real

wages in a period of economic inflation.

• Adjustments are tied to changes in an economic measure (e.g., the Consumer Price

Index).

• Lump-Sum Increases (LSI)

• A one-time payment of all or part of a yearly pay increase.

• Lump-sum payments do not increase base wages

Pay A djustm ent Matr ix





Figure 12 –17

Pay plan characteristics that differentiate pay plans between more and less uncertain environments

Firms in less uncertain environments show Firms in more uncertain environments show





• Greater use of market- lag pay-level policy

• Greater emphasis on seniority awards

• Greater use of lump-sum pay adjustments

•

Greater use of cash bonus awards• Greater emphasis on creating competition among

individuals

• Greater use of internal standards for evaluating pay plan

for effectiveness

• Greater use of market-match pay-level policy

•

Greater emphasis on performance awards• Greater use of distributive pay adjustments

• Greater emphasis of stock bonus awards

• Greater emphasis on creating cooperation with team of employees

• Greater use of external comparisons for evaluating pay plan

effectiveness





Forms of Compensation

Components of a Compensation Program





Cost to Company

The cost of every employee to the company. In any given structure, it indicates theentire financial expenditure that the company incurs for the particular employee

including future provisions and expenses incurred.

Direct Compensation

Compensation Type





Base Pay The basic monetary compensation that anemployee receives, usually as a wage orsalary.

Wages Payments calculated on the amount of timeworked.

Salary Consistent payments made each period

regardless of the number of hours worked inthe period.

Variable Pay Compensation linked to individual, team, ororganizational performance.

Benefit An indirect reward given to an employee or

group of employees as a part oforganizational membership.

It is direct cash compensation.



Non – Cash Perquisites

1. House Rent Allowance: It is only a non-cash perquisite for employees who receiveaccommodation from the company but if the employees do not receive accommodation fromcompany then the employee receives the a percentage Basic Salary as H.R.A.





2. House Maintenance- A percentage of the non-cash perquisites is allotted for house maintenance.This again is a non-cash perquisite for individual who receive accommodation from the companyand where the maintenance expenditure is borne by the company. Employees who do not receiveaccommodation from the company will receive it as cash

3. Leave Travel Allowance- A portion the non- cash perquisites is allotted for leave travel allowance.LTA depends on rules of the income tax Department. As of now, employees can utilise this benefit

in a block of four years (The Government of India decides slabs of 4 years). Two LTA payments arefree of tax subject to the submission of the evidence of travel.

Non – Cash Perquisites

4. Medical- Private medical benefits are any plans, which have the purpose of paying for

medical treatment of employees and their spouse/dependants, ensuring that support is

available to meet medical expenses should they occur in a timely and effective





available to meet medical expenses, should they occur, in a timely and effective

manner.

5. Different organisations may have other allowances based on their company policy. Eg.

Utilities, Education Allowance, Uniform Allowance etc.

Benefits:

• Total compensation consists partly of the pay of the employee and partly of a set of other rewards

that are loosely called benefits.





• Benefits are unlike base pay in that they are awarded for different objectives, they are notperiodically given, they are oftentimes deferred rather than current, and they require different types

of administration

• Benefits are ordinarily given to employees on the basis of being members of the organization, not

on the basis of the job held or performance on that job

• There is no common definition of what is included in the benefit package. For instance, some will

include legally required benefits, and others only the ones that are voluntary

• Unlike the paycheck, many of these benefits are hidden from the employee, especially if they are

deferred for long periods. This suggests that benefit administration requires a large component ofcommunication.

Why Benefits?

• They are required by law





• They are desired by employees. They increase the satisfaction of employees orat least reduce dissatisfaction.

• They are demanded by unions.

• They help to develop an atmosphere of trust in the organization. Taking care ofemployees through benefit programs increases the feeling that the relationshipbetween the organization and the individual goes beyond an economictransaction.

• The more that benefits are oriented toward reduction of insecurity among

employees, the more stable is the economic environment.

Examples of Benefits

1. Extra payments for time worked: (Holiday premiums or Shift premiums)





2. Non-production awards and bonuses: (Anniversary awards/ Attendancebonus/ Quality bonus/ Safety awards/ Service bonus/ Suggestion awards)

3. Payments for time not worked: (Family allowances, Paid Holidays, Paid SickLeave, Severance Pay)

4. Payments for employee security: (Contributions toward accident insurance,hospitalization & life insurance)

5. Payments for employee services: (Canteen service, Company Housing,Educational assistance, employee discounts for purchases, voluntary medical

examination, festival gifts)

Retirement BenefitsRetirement benefits, which is a benefit/final salary arrangement where the employee’s retirement benefits

are based on a formula linked to his/her earnings near retirement. The employee pays an agreed level of

contributions and the Company meets the balance of the costs.

Provident Fund





Provident Fund

Provident fund is a defined contribution/money purchase arrangement, where the employee and the Company paycontributions into an individual account that earns investment returns over time. A contribution of 12% of the basic

salary of every employee credited in the employee’s the provident fund account. The company’s contribution

towards the provident fund is another 12%.

Superannuation

Is a retirement benefit and is paid annually to the Super annuation fund. Once member enter into employment and

is paid more than 1500 he is entitled to Super annuation. 15% of his annual salary is deducted and accumulated

with interest on the investment that the company makes on his behalf.

Gratuity

An individual is entitled for gratuity under the Gratuity Act after completion of 5 years of service. The sum that an

employee receives is the last drawn basic salary multiplied by the number of years in service.

Prevailing Environment - Global Scenario

Employers are increasingly taking a view that Retirement benefit costs arebut one component of an employee’s total remuneration.





Employers can maximize their return on total remuneration costs byallowing individual employees flexibility (within regulatory & legalprovisions) in deciding how they will receive their money.

Retirement benefit program is a facility offered by the employer.

It makes sense to allow individual employees to tailor their benefits &contributions to their personal circumstances.

Employees have different needs at different stages-hence need to look atdifferent cross section of the employees differently.

Prevailing Environment – Indian Scenario

Retirement benefits in India are usually organized under the following :

• Employees Provident Fund (Statutory , DC)

• Gratuity Scheme (Statutory DB)





Gratuity Scheme (Statutory , DB)

• Pension Plans (Non-statutory, DB or DC)

• Leave Encashment Scheme (Non-Statutory)

• Medical Benefit Scheme (Non-Statutory)

What needs to be Post Retirement Income?

Need for Regular Income after Retirement

• Maintaining standard of living

• Need to look after oneself





• Improving longevity• Absence of social security

Factors affecting Level of Income required

• Inflation

• Higher cost of health care in old age



Needs Vary Across Companies & Business Lines

Age of the organization

High Low





g

High

Low F u t u r e g

r o w t h n e e d s

Talents

Retenti

on

VRS

Skilled

labor

VRS

Skilled

labour

Labour

intensiv

e

Younge

r age

group

Labour

intensiv

e

Retention

Global talents

High sjkilled

Younger age

group

High tech

Competitors

MNCs

Two preliminary approaches :

• Defined Benefit Scheme: the employee upon retirement is guaranteed a set income for as long as he

or she lives. There is usually also a clause that allows a percentage continuance beyond that for the

person's spouse.

Pension Scheme Designs





• Defined Contribution Scheme : Employees do not know what income they will receive upon

retirement but do know how much money there is in the retirement plan fund earmarked for them.

Customizing through Hybrid Options

Benefit Certainty (Member)

Cost certainty (Company)

Final Salary

Defined Contribution



Individual Salary Determinants





• From the viewpoint of the employee, the end product of any compensation

program is a paycheck.

• The wage determination must be personalized by making a further set of





The wage determination must be personalized by making a further set of

decisions.

• the wage level, is an external organizational decision that determines the

organization's competitive posture

• internal organizational decision involving the structuring of the jobs within the

organization

• Although pay rates are determined for jobs, it is people who receive paychecks - thenext decision is whether all people on a particular job are to receive the same pay or

different pay; and if different, on what basis and how?

• compensation inputs can be classified into three general areas — job,

performance and personal.

• Pay system decisions must incorporate the performance and personal factors





Pay system decisions must incorporate the performance and personal factors

into compensation, in order to provide a regular paycheck perceived asequitable to the employee

• The major way in which organizations allow for factors other than the job to

enter into the determination of an individual's pay is to develop a range of pay

for each job or grade of jobs.

• Pay range is a range determined by the organization to be appropriate foranyone who occupies a particular job.

• A pay range consists of a minimum pay rate (the beginning hire rate), a midpoint

(the market or job rate), and a maximum (the highest rate the organization is

willing to pay for the job).

Rationale for Pay Ranges

• Need for performance differences

• Retention: critical personnel can be paid above the market rate for the job





p p j

• Employee expectation s : (Manage internal equity issues, performance, length of service,

doing specific jobs/ special projects)

• Collective bargaining: In contract negotiation, the organization may agree to rate ranges

or to an expansion of rate ranges as an alternative to a general increase.

1:Single Rate Pay Systems

• There is a single rate is paid for the job and the individual receives just that rate. This

pay rate is the market rate and may be paid to either a job or a pay grade (option [a]

below)





• A job rate is used, the wage line provides the job rate.• The individual is paid in accordance with the number of points assigned to the job by

the job evaluation system,

• This type of system is useful where performance variation and/or other personal

characteristics are nonexistent or unimportant

• This system places the market rate not at the top of

2: Step Ranges• Consists of a series of steps, usually a specified distance apart, either in percentages or flat amounts.

• Step ranges may vary considerably in number of steps and the total range the steps cover.

• The first consists of a starting rate & a job

(market) rate





the range but in the center of it.

• Employees are hired at the starting rate, and

progress to the midpoint over time on the basis of

learning job

• Thus, a person at the midpoint of the range is

assumed to be a satisfactory performer.

• Movement above the midpoint is assumed to be for

performance, or other characteristics beyond thenormal or average. (Option [c])

(market) rate

• New employees brought in at the starting rate and

then moved up to the job rate in a series of steps.

• If done properly, this movement corresponds with

the learning curve of the job.

• The market rate is the maximum, since it is

assumed that once the person has learned the job,

performance differentials are minimal (Option [b])

3: Open Ranges• In this system organization defines the midpoint, the maximum and the minimum of the

range. An employee may be paid anywhere within this defined range

• This helps focus more clearly on performance

• The average performer would be paid at the midpoint.





• New employees would start at the bottom and move to the midpoint as they learn the job andbecome average performers.

• Payment above the midpoint reserved for above-average performance.

The person's pay is not automatically

adjusted when the pay structure is

adjusted. At this point, the person's

performance is reviewed and adjustment is

made in relation to that performance

Option d has a series of steps up to the

midpoint and an open range above the

midpoint; option e has an open range from

minimum to maximum.

Dimensions of a Pay StructurePay Structures have three dimensions

• The Range Breadth





• The number of pay grades

• The overlap

Dimension 1: Range Breadth

• The breadth of the rate range is the distance from the top to the bottom of the range – a

to b in the prev. figure. It is the vertical dimension of the range.





• The breadth may be stated in rupee amounts or in percentages. The latter is morecommon .

• Assuming that performance is the criterion, the breadth would represent the opportunity

for performance differences in the job. Where ranges are narrow, the assumption is that

performance differences are narrow and vice versa.

• Organizations that promote intentionally fast encourage narrow ranges, since

people do not stay within one grade very long. A wide range is encouraged if

adjustments need to be large to be noticed by employees

Range Maximums

• Establishing range maximums is particularly difficult

• There is some logical maximum value for any job, regardless of how well it is performed.





Ideally when this point is reached the person is promoted, either to a new job or byupgrading the tasks of the present job.

• Some organizations provide steps beyond the maximum of the range. There are usually

two rationales for this –

• seniority – long term employees who are solid performers but ill never be promoted

• recruiting and retaining mission critical employees



Considerations for number of grades:

• Organisation size: larger the size, more the number of grades





• Comprehensiveness of the job structure: A structure that covers the whole organization will tend tohave more pay grades than one that deals only with one job cluster.

• the type of jobs : Production jobs whose pay policy line is relatively flat will tend to have fewer pay

grades than a managerial structure that has a steep slope.

• pay-increase and promotion policy of the organization. A large number of pay grades allows for manypromotions but entails narrow ranges and a narrow classification of jobs.

Dimension 3: Overlap

• The final pay range determinant is the degree of overlap between any one pay grade andthe adjacent grade (c to d in figure).





• Overlap allows people in a lower pay grade to be paid the same as or more than those ata higher grade.

• The rationale for such a phenomenon is that a person at a lower pay grade whoseperformance is very good is worth more to the organization than a new person at thehigher pay grade who is not yet performing effectively.

• Overlap will work well where there are many wide pay grades.

Methods of Progression:

Moving Employees through Rate Changes

• Rate ranges make possible different pay rates for individuals in the same joband/or grade level.





• All methods of progression specify how a person moves from the bottom of therange to the top of the range.

• The major methods are

• automatic progression,

• a combination of merit and automatic progression and• merit progression.

• An organization does not have to restrict itself to only one method; it may usedifferent methods for different jobs or even different methods for a single job atdifferent parts of the rate range

Automatic Progression

• Consists of pay increases based automatically on length of service.

• Sometimes referred to as scheduled increases





• In some situations, such as basic industries, there are a small number of

increases often in rapid succession (every three months) to the maximum rate

for the job. These are jobs in which proficiency can be gained in a short time.

This is used when organizations are interested in encouraging learning on the

job.

• On the other hand, some organizations may have many steps (five or more) and

grant increases once a year. In these situations longevity on the job leads to

higher proficiency, and the organization wishes to reward continuity of

employment

Automatic Progression (Contd.)

• Automatic progression does not have to be totally automatic. A fully automatic

progression plan is actually a variation of the single-rate or flat-rate system.





• If all employees can expect to reach the maximum of the pay range after a given periodon the job, the assumption is that the maximum is the real rate for the job

• Variation can be introduced in two ways.

• First the time period may vary from step to step. Eg. some systems move people rapidly to the midpoint and

then much more slowly; the extended steps beyond the midpoint are clearly tied to longevity.

• The second variation introduces a little merit into the system by either denying movement to the next step

for poor performance, giving good performers a double-step jump, or shortening the time period between step

increases.

Combination of Automatic/ Merit

• It is possible also to design progressions that try to balance merit and longevity. These

let employees focus on different criteria at different places in the pay range.

• The usual combination is automatic progression to the midpoint – the market rate – and

i b d th id i t th b i f it





progression beyond the midpoint on the basis of merit.

• By this method:

• all employees can be expected to reach average proficiency within a certain time on the job

(this period matches the automatic movement to the midpoint).

• However, not all employees exceed average performance on the job, and movement from the

midpoint on should be based on performance that is above average.

• It is important to do a good job of matching time taken to reach the midpoint with time

taken to reach proficiency in the job. Only then are the labor costs equalized; if these are

out of balance, then labor costs are higher or lower than is optimum.

Combination of Automatic/ Merit (contd)

One can also combine longevity and merit while determining how an

employee’s pay will progress. Under this arrangement





• All employees receive an automatic adjustment,

• Those with above-average performance receive more, such as a two-step

jump.

• It is also possible to hold back those who are not performing well. The latter

action is rare but can be effective in probationary situations.

Merit Progression

• A pure merit progression employs an open pay range with only the minimum, maximum,

and midpoint defined

• Movement within the range is based strictly on performance, and there are no

dj t t f l i





adjustments for general increases.• This pay-for-performance system requires an integration of performance appraisal with

pay determination

• In practice, a merit progression is usually a combination of merit and longevity.

• In this method, the good performer should get to the top of the pay range faster than the

average or poor performer

The Rationale

• The movement to proficiency is actually an improvement in performance and should

be treated as such;

• people differ in their rate of improvement to proficiency, and this should be taken intoaccount;

• it is performance that the organization wants and should pay for

Pay Ranges & Recruitment

• We have assumed that the organization has been hiring people who are just

qualified and moving them up in the range as they learn the job

• In cases of hiring a person who can do the job from the beginning, he should be

hi d t th k t t (th id i t)





hired at the market rate (the midpoint).• In actuality, then, people are likely to be brought into the organization anywhere

up to the midpoint of the range, based upon their qualifications.

• Thus, a system in which the ranges ends at the market rate has a flat rate for

hiring fully qualified employees.

Pay Ranges & Recruitment

• The labor market may complicate the pay range when there is a shortage of

applicants.

• When it is hard to recruit, one way organizations adjust is to raise the starting pay

to wherever in the range it must go in order to obtain people





to wherever in the range it must go in order to obtain people.• This may result in hiring rates at the top of the pay range or above.

• This extreme situation makes any upward movement within the grade difficult or

impossible for the person.

• A person who is then expected to stay in the grade for three or more years before

promotion can only look forward to general increases.

Correcting Out-of-line Pay

• Green Circle Pay:

The pay range defines the minimum and maximum that a person may be paid for a

given job. For a number of reasons an individual's pay may be more or less than the

prescribed range. The organization needs policies for dealing with these out-of-line

pay.





• Green Circle Pay:

It refers to the case in which a person is paid

less than the minimum of a grade. This occurs,

for example, when a person is promoted into a

position in a higher pay grade, but not given a

pay increase

• Red Circle Pay:

Refers to the case where a person is paid

above the maximum of the range for his or her

job. Other names for this situation are ringed,

flagged, or personal pays, red allowances,overrates, and personal out-of-line

differentials.

C u r r e n t E m p l o

y e e P a y ( I n R s . )

Green Circles: Underpaid Employees

• This situation usually occurs when the wage structure is changed upward and the

individual was at the bottom of the rate range.

• The underpaid employee should have his/ her pay raised to the minimum of the

range, immediately if possible or in a couple of steps. If the person is performing

adequately





adequately,

• Usually there will be a few underpaid employees, and a policy of bringing their rates

into line immediately protects the integrity of the pay system.

• But if many employees are underpaid, a careful review is required: not only may the

costs of adjustments be high but also equity between the newly raised employees andother employees on the job may require a phasing in of increases.

Green Circles: Underpaid Employees

• It is possible, for a number of reasons, that the employee is not worth the

minimum of the range.

• If the labor market is very tight and marginal workers must be hired and

retained, a lower classification involving job redesign to accommodate the

person's skills would be in order This same reasoning could apply to older and





person s skills would be in order. This same reasoning could apply to older andhandicapped employees who cannot fully carry out their jobs

• Redesign may be unnecessary where there is already a lower-level job to which

the person can be assigned.

• Or a trainee rate may be appropriate if the employee is still learning the job.

Red Circles: Overpaid Employees

• Solutions to overpay vary from doing nothing to reducing the pay to the top of

the range. The most common solutions are:

• Freeze the pay until general increases catch up with the current pay.

• Transfer or promote the person to a job in an appropriate pay grade





• Transfer or promote the person to a job in an appropriate pay grade.

• Freeze the pay for a limited period, such as one year. Then attempt either of the

previous strategies. If this is unsuccessful, reduce the pay at the end of the period.

• Red-circle the job and not the person.

• Eliminate the differential after a period such as a year or gradually over time.

Overpaid Employees: Other Approaches

The Adder:

• This is a payment to the employee in quarterly installments of the difference between his

or her rate and the maximum of the range

• The employee is given 100 percent of the differential the first year 75 percent the next





The employee is given 100 percent of the differential the first year, 75 percent the nextyear, and so on until there is no differential.

• Advantage: The top rate for the job is made clear and both the person and the

organization are aware of the exceptional and temporary character of the differential.

Lump Sum Payment.

• For example, the employee may be paid the difference for the year as a lump sumpayment and have his or her pay rate brought immediately into line. Any solution to

overpay involves questions of equity. Overpayment is usually not the fault of employees,

and any reduction in pay will be seen as unfair by them. On the other hand, there is also

the perception of equity by other employees, so some action is always called for

Other Variables Influencing Pay

• The person's performance appraisal,

• Pay history

• Present position in the range,

• Experience;





Experience;

• Time since the last pay increase;

• The amount of that increase;

• Pay relationship within the work area and other parts of the organization;

• Labor-market conditions;

• The financial condition of the company;

• Previous decisions regarding wage level and structure.

The interaction of these forces determines whether a person receives an increase, and if so

the amount of that increase

Pay Compression

• A situation in which pay differences among individuals with different levels of

experience and performance in the organization becomes small

• This occurs when new people are brought into a pay grade at the same a higher





This occurs when new people are brought into a pay grade at the same, a higher,or even a somewhat lower rate than people currently in it.

• This is most obvious in the case of new hires who are brought in at pay rates

almost the same as those of employees who have been there a year.

Pay Compression (contd.)

• Rates for new hires are determined by the external labor market. Unless onepays that amount, the new employee will not accept the job offer.

• Current employees have their wages set by the internal labor market, which isan administrative decision





Current employees have their wages set by the internal labor market, which isan administrative decision.

• The result is that new hires make too much in relation to those already working

• Compression is also likely to occur with• first-line supervisors of nonexempt employees who are paid overtime;

• with sales managers, whose sales staff can make more selling on commission thanthe manager; and

• with middle management, who are squeezed between top management and theincreases given to lower-level employees

Pay Compression: Solutions

• One obvious solution is to ignore it. This is possible if people are moving rapidly

and the problem is mostly one of timing. The person feeling the inequity can be

told that it will disappear shortly.





Or

• Adjust the internal structure more completely to the external realities. This may

be an expensive alternative but is necessary if the organization is experiencing

turnover and employee discontent.

Summary

• Organizations wish to pay for more than just the job that the employee does.

Employees contribute both in terms of membership (staying on the job) and being

productive while on the job. Both of these sets of contributions need to be

rewarded by the organization.

hrm_pay determine

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