Compensation Management

HUMAN RESOURCEMANAGEMENT

COMPENSATIONMANAGEMENT

CHAPTER NO. 8

AFTER STUDYING THIS CHAPTER YOU SHOULD BE ABLE TO:

Understand and differentiate between performance management and performance appraisal.

Identify the factors that effect performance.

Narrate performance management cycle.

Describe two major purposes of performance management.

Understand three job criteria and information types.

Discuss the pros and cons of using different raters to appraise a person’s performance .

Develop , evaluate, and administer at least four appraisal methods to measure performance

Explain several rater errors by giving examples of them.

Perform an effective appraisal interview.

Design Appraisal form to measure employee performance effectively.

WHAT IS COMPENSATION

COMPENSATION

Compensation is what employee receives in exchange for their contribution to the organization.

WHAT IS COMPENSATIONMANAGEMENT

Compensation management help the organization to obtain,

maintain and retain a productive Workforce.

COMPENSATION

MANAGEMENT

OBJECTIVES OFCOMPENSATION MANAGEMENT

Acquire Qualified Personnel

Further Administration

Efficiency

Retain Present Employee

Reward Desired Behavior

Comply with Legal

Regulations

Ensure Equity

Control Cost

Facilitate Understanding

TYPES OF COMPENSATION

Types of Compensation

1. Intrinsic Compensation

2. Extrinsic Compensation

TYPES OF COMPENSATION Cont . . .

Rewards once receives from job itself such as pride in One’s work, a

feeling of accomplishment, or being

a part of a team.

Rewards one gets from employer usually money, a promotion or benefits

1. INTRINSIC COMPENSATION

2. EXTRINSIC COMPENSATION

FINANCIAL Vs. NON FINANCIAL REWARDS

Financial Rewards

Non Financial Rewards

Individual

Group

Organization Wide

Fringe Benefits

TYPES OF VARIABLE PAY PLANS

INDIVIDUAL

GROUPORGANIZATIONWI

DE

Piece Rate Sales Commissions Bonuses Special Recognition

Gain Sharing Labor Cost Reduction

Profit Sharing Employee Stock Options Executive Stock Options

PHASE WISE MODEL OFCOMPENSATION MANAGEMENT

Job Analysis

Job Evaluation

Salary & Wages Survey

Pricing Job

Phase 1Identity and Study

jobs

Position Description Job Description Job Standard

Phase 2Internal Equity

Phase 3External Equity

Phase 4Matching Internal and

External Work

Job Ranking Job Grading Factor Comparison Point System

Dept. Of Labor Employee AssociationsProfessional AssociationSelf Conducted Survey

Job Evaluation WorthMatch Rate & Range for Each JobLabor Market Worth

PHASE WISE MODEL OFCOMPENSATION MANAGEMENT

Phase 1Identity

and Study jobs

Job Analysis

PositionDescription

JobDescription

JobStandard

JOB ANALYSIS

JOB ANALYSIS

A Systematic way of gathering and analyzing information about the Content, Context, and the Human Requirements of

jobs for the purpose of developing Job description, Job specification & Job

evaluation.

PHASE WISE MODEL OFCOMPENSATION MANAGEMENT

Phase 2Internal Equity

Job Evaluation

JobRanking

JobGrading

FactorComparison

PointSystem

JOB EVALUATION

Systematically determining the relative worth of the jobs to create job

structure.

Determining the worth of job for reward, benefits & compensation

system.

Or

JOB EVALUATION METHODS

1. Job Ranking Method

2. Job Grading

/ Classific

ation Method3.

Factor Compari

son Method

4. Point System

1. JOB RANKING METHOD

Arrangement of job in a simple rank order form highest to lowest or form lowest to

highest.

DEFINITION

Raters examine the JD of the each job.

Arrange in order according to value. e.g. starting from lowestto highest

Janitor ranked 1 Secretary gets 2 Office manager gets 3

2. JOB GRADING METHOD

• These classification are created by identifying a number of job related factors such as, education, experience and responsibilities with the goal to determine classes or grades of Job.

Step 1

•After classifications, jobs are ranked in an overall order of importance according to criteria chosen and each job is placed in its appropriate grade

Step 2

•The standard description that most nearly matches the JD determines the job’s grading/classification.

Step 3

Assigned a grade or class for each job.

3. FACTOR COMPARISON METHOD

The each compensable factor such as responsibility, skill, mental effort, physically effort and working conditions is compared one at time with the same factor for other key job and then evaluated.

i. Determine the Compensable Factor

ii. Determine Key Jobs

iii. Apportion Present Wages for Key Jobs

iv. Place Key Jobs on a Factor Comparison Chart

v. Evaluate Other Jobs

Steps Of Factor

Comparison Method

4. POINT SYSTEM METHOD

An approach to job evaluation in which numerical values are assigned to specific job factors and the sum of those values

provides a quantitative assessment of a job’s relative worth.

Determine Sub-factor

Determine the levels of factors

Allocate points to factorunder each level

Develop a point manual

Apply the point system

2

3

4

5

6

Determine the Critical factor 1

Steps Of Point

System Method

Factors 1st Degree

2nd Degre

e

3rd

Degree

4th

Degree

5th

Degree

SKILL

• Education 15 30 45 60 75

• Experience 20 40 60 80 100

• Initiative and Ingenuity 15 30 45 60 75

EFFORT

• Physical demand 10 20 30 40 50

• Mental or visual demand 5 10 15 20 25

RESPONSIBILITY

• Equipment or process 5 10 15 20 25

• Material or product 5 10 15 20 25

• Safety of others 5 10 15 20 25

• Work of other job conditions 5 10 15 20 25

JOB CONDITIONS

• Working conditions 10 20 30 40 50

• Unavoidable hazards 5 10 15 20 25

A Point Manual Description of “Responsibility:Equipment and Material”

1. RESPONSIBILITY

b. Equipment and materials: each employee is responsible for conserving the company’s equipment and material. This includes reporting mal functioning, equipment or defected material, keeping equipment and material clean or in proper order, and maintaining , repairing, or modifying equipment and materials according to individual job duty. The company recognizes that the degree of responsibility for equipment and material varies widely through out the

organization Level1: Employee reports mal functioning equipment or defective materials to

immediate superior.Level 2: Employee maintain the appearance of equipment or order of materials and

has responsibilities for the security of such equipments and materialsLevel 3: Employee performs preventive maintenance and minor repairs on

equipment or corrects minor defects in materials Level 4: Employee performs major maintenance or overhauls of equipment or is responsible for deciding type, quantity, and quality of material to be used.

Phase 3External Equity

Wage & Salary Survey

Department ofLabor

EmployeeAssociations

ProfessionalAssociation

Self-ConductedSurveys

PHASE WISE MODEL OFCOMPENSATION MANAGEMENT

WAGE AND SALARY SURVEY

A collection of data on existing compensation rates for workers performing similar jobs in other organizations.

i. Identifying Key Jobs

ii. Selecting the Organizations to Survey

Steps in Wage And Salary Survey

iii. Data Collection Sources

iv. Interpreting the Data

Department of Labor

Employee Associations

Professional Association

Self-Conducted Surveys

On live Surveys

PRICING JOB

Allocate the Value to the job After matching the job evaluation worth with the market worth.

Steps in Pricing Job

Establishing Pay Structure

Establishment of Pay Grades

Establishment of Pay Ranges

• Used for tying pay survey information to job evaluation data.

• The line on a graph showing the relationship between job value, as determined by job evaluation points, and pay survey rates.

• A grouping of individual jobs having approximately the same job worth.

• It involves collapsing multiple salary grades and ranges into a few wide levels known as

bands.

• Using the market line as a starting point, the employer can determine maximum and minimum

pay levels for each pay grade by making the market line the midpoint line of the new pay

structure.

WageCurve

MarketLine

PayGrades

BroadBanding

PayRanges

ESTABLISHING PAY STRUCTURE

ESTABLISHING PAY STRUCTURE

EstablishingPay Structure

Pay ScatterGram

Pay Grades &Pay Ranges

INCENTIVE SYSTEMS & GAIN SHARING

Incentive

System

• links compensation and performance by rewarding performance instead of

seniority or hours being worked.• Incentive system could be individual

based

Gain SHARING

• Matches an improvement (gain) in

performance with a distribution (sharing) of the benefits with

employees.

INCENTIVE SYSTEMS & GAIN SHARING

INCENTIVES DESCRIPTION

Piece Work Compensates the worker for each unit of output

Production Bonuses

Paid to workers for exceeding output goals

Commissions The seller may be paid a percentage of selling price or a flat amount for each unit sold

Merit Raises Pay increases given after an evaluation of performance

Pay for knowledge/pay for Skills Compensation

Rewarding employees with higher pay as an incentive for increased knowledge or skills they acquire.

Non Monetary Incentive

e.g. recognition programs in which employee receives certificates, time off, vacations etc

Executive Incentive

Stock option: the right to purchase the company’s stock at a predetermined price.Weighted incentive systems: reward executives on the basis of improvements in the multiple areas of business

INCENTIVE SYSTEMS & GAIN SHARING

GAIN SHARING

DESCRIPTION

Employee Ownership

Many company have stock purchase plans that allow workers to buy shares in the company, so owing the fractional part of the firm and sharing its success

Production Sharing Plans

Allow groups of workers to receive bonuses for exceeding predetermined levels of output.

Profit Sharing Plans

Share profits with the employees

Cost Reduction plans

Scanlon Plan: Employees aim to reduce costs and then share in the savings that result.Bonuses on improvements in quality of labor costs compared with the historical norms

EQUITY FACTOR APPROACH

The perceived fairness of the relation between what a person does (inputs) and what the

person receives (outcomes).

EQUITY FACTOR APPROACH Cont . . .

My Rewards (Outcomes)

My Contributions (Inputs)

My Rewards

My Contributions

My Rewards

My Contributions

PERSONCOMPARISON

OTHER

Other’s Rewards

Other's Contributions

Other’s Rewards

Other's Contributions

Other’s Rewards

Other's Contributions

Equity

Inequity(Under-

Rewarded)

Inequity(Over-

Rewarded)

EQUITY FACTOR APPROACH Cont . . .

PROCEDURAL JUSTICE

The perceived fairness of the process used to determine the distribution of rewards.

DISTRIBUTIVE JUSTICE

Perceived fairness of the amount and allocation of rewards among individuals.

Phase 4Matching

Internal and External

Work

Pricing Job

Pay above theMarket Rate

Pay Market Rate

Pay below theMarket Rate

PHASE WISE MODEL OFCOMPENSATION MANAGEMENT

MARKET RATE & COMPENSATIONPLANS

1. Pay Above the Market Rate

Advantages Disadvantages Attracts better employees. Additional Compensation

Cost

Minimize voluntary

turnover.

Sense of entitlement

Fosters Strong culture &

competitive Superiority

MARKET RATE & COMPENSATIONPLANS

1. Pay Market Rate

Advantages Disadvantages Higher quality of Human

Resource at midrange of

market-driven Compensation.

Does not attract huge

factor forever

Turnover will vary with

labor demand of

competitively firms.

MARKET RATE & COMPENSATIONPLANS

1. Pay Below Market Rate

Advantages Disadvantages Lower Compensation Costs Lower Quality Employee

Useful in labor Market

where Unemployment rate

large

Low Moral / Job Satisfaction

High Turnover, Especially

wage

COMPENSATION MANAGEMENT

Objectives of Compensation Management

Types of Compensation

Intrinsic Compensation

Extrinsic compensation

Financial Rewards

Non Financial Rewards

Wages & Salaries Incentives Gain

Sharing

Fringe Benefits

Scientific Management

PHASE 1Job Analysis

(Identify & Study the Job)

Scientific Management• Position

Description• Job Description• Job Standard

Scientific Management

PHASE 2Job Evaluation(Internal Equity)

Scientific Management

PHASE 3External Equity

(Salary & Wages Survey)

Scientific Management

PHASE 4Pricing Job

(Matching Internal & External Equity)

Scientific Management• Job Ranking

• Job Grading• Factor Comparison• Point System

Scientific Management

• Department of Labor• Employee Associations• Professional Associations• Self Conducted Survey

Scientific Management

• Job Evaluation Worth• Match Rate & Range for each Job• Labor Market Worth

Phases of Compensatio

n Management

Market Rate & Compensation

Plans

• Pay Above the Market Rate• Pay Market Rate• Pay Below the Market Rate

Acquire Qualified Personnel

Retain Present Employee

Ensure Equity

Control Cost

Reward Desired Behavior

Comply with Legal

Regulations

Facilitate Understanding

Financial Rewards Vs. Non Financial

Rewards

CHAPTER 8

Management Quality Circle

THOUGHT OF THE DAY

If you pick the right people and give them the opportunity to spread their wings and put compensation as a carrier behind it you almost don't have to manage them.

“Jack Welch”