Compensation Management Part 2

Compensation Management

Objectives of Compensation

EffectiveCompensation

LegalLegalcompliancecompliance

AdministrativeAdministrativeefficiencyefficiency

ControlControlcostscosts

RetainRetainemployeesemployees

AcquireAcquirepersonnelpersonnel

EnsureEnsureequityequity

RewardRewardbehaviourbehaviour

Compensation

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

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

motivated

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

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

Factors Influencing Pay

Market

Forces

Work

Value

Organisation

Policy

Individual

Performance

INTERNAL EQUITIES

EXTERNAL EQUITIES


• Labour supply & demand

• Job family differences

• Different industries

Market Forces


• What do we want to pay

• What can we afford to pay

• Ratio of labour costs to total costs

• Do we provide remuneration by way of benefits

• Will we have an incentive/bonus scheme

• Collective bargaining agreement

• Emphasis on quality, customer service, individual or group performance

Organisation Policy


• Knowledge and experience

• Task complexity

• Supervisory responsibility

• Interpersonal skills

• Other ability and skill levels

Work Value


• Bargaining power

• Actual achievements of the individual compared to expectations

Individual Performance/Merit

Compensation Challenges

CompensationCompensationChallengesChallenges

PrevailingPrevailingwage rateswage rates

UnionUnionpowerpower

ProductivityProductivity

GovernmentGovernmentconstraintsconstraints

Wage & salaryWage & salarypoliciespolicies

Remuneration & Rewards

Financial Non-Financial

DIRECT(cash)•Wages•Salaries•Commissions•Bonuses

INDIRECT(benefits)•Insurance•Holidays•Medical and health•Child care•Employee assistance•Flexible work schedule

JOB•Interesting work•Challenge•Responsibility•Recognition•Advancement

ENVIRONMENT•Good policies and practices•Competent supervision•Congenial coworkers •Safe and healthy work environment•Fair treatment

Components of Employee Remuneration

Examples of Traditional and Non-traditional Pay

Job-based

Contribution-based

Traditional Pay Focus•Create order•Reinforce the hierarchy•Direct behaviour

Non-traditional Pay Focus•Encourage involvement•Highlight organisational needs•Reward positive results

RecognitionAwards

IndividualIncentives

PerformanceAppraisal

ProfitSharing

Merit Increases

CompetencyPay Team/Group

Incentives

JobEvaluation

Gainsharing

Non-traditionalPay

TraditionalPay

Remuneration Choices

Low Base Salaries

Internal Equity

Individual Performance

Standard, Fixed Package

Lag the Market

No Incentives

Job

Performance

Hierarchical

High Base Salaries

External Equity

Group Performance

Flexible Package

Lead the Market

Many Incentives

Skills

Tenure

High Participation

DESIGNING COMPENSATION SYSTEM

• SUPPORT BEHAVIOR & ATTITUDES• PARTICIPATIVE APPROACH IN PAY SYSTEM

DESIGN & ADMINISTRATION• COMMUNICATION & ACCEPTANCE• MULTIPLE SYSTEMS• SAME DAY ANNOUNCEMENT FOR WORKERS

/MANAGEMENT INAPPROPIATE

The Compensation Structure

Job Evaluation

Rate Ranges

Pay Grades

Issues Involved in

Setting Compensation

Structures

Issues Involved in

Setting Compensation

Structures

Wage and Salary Surveys

Compensation Management Step 1

Phase IPhase IJob AnalysisJob Analysis Identify and study jobs

• Position descriptions

• Job descriptions

• Job standards

Compensation Management Step 1 &2

• Determine relative worth or value of jobs

• Provides for internal equity

• Job evaluation methods:• Job ranking

• Job grading

• Point system

Phase IPhase IJob AnalysisJob Analysis

Phase IIPhase IIJob EvaluationJob Evaluation

Compensation Management Step 1-3

• Discover what other employers are paying for specific key jobs

• Provides for external equity



Phase IIIPhase IIISalary SurveysSalary Surveys

Compensation Management Step 1-4

• Establishing the pay level for each job• Combines job evaluation

ranking, survey wage rates, and other considerations e.g. organization’s pay policy

• Wage-trend line developed

• Grouping the different pay levels into a structure that can be managed• Job classes and rate ranges



Phase IIIPhase IIISalary SurveysSalary Surveys

Phase IVPhase IVPricing JobsPricing Jobs

Match

Job Analysis: Step 1

Relationship between Job Requirements and HRM Functions

• JOB-a group of related activities and duties• POSITION- The different duties & responsibilities

performed by only one employee • JOB FAMILY- a group of individual jobs with similar

characteristics

JOB DESCRIPTION

• TASK- DISTINCT WORK ACTIVITY THAT IS IDENTIFIABLE FROM BEGINNING TO END

• DUTIES- SEVERAL TASKS RELATED BY SOME SEQUENCE OF EVENTS

• POSITION- COLLECTION OF TASKS & DUTIES WHICH ARE PERFORMED BY ONE PERSON

Relationship between Job Requirements and HRM Functions

• JOB DESCRIPTION- Statement of the tasks, duties & responsibilities of a job to be performed

• JOB ANALYSIS-Process of obtaining information about jobs by determining what the duties, tasks, or activities of jobs are

• JOB CLASSIFICATION -grouping or categorizing of jobs

• JOB SPECIFICATION-statement of needed knowledge, skills & abilities of the person who is to perform the job

JOB DOCUMENTATION/DESCRIPTIONJOB DOCUMENTATION/DESCRIPTION

• Recording job content information -job description.

• Ideal job description used for pricing/compensation reflects not just information concerning ‘what “ a job does, but also “how” and “why” of the duties.

JOB RANKING-RATINGJOB RANKING-RATING

• Ordering jobs from the highest to lowest based on some definition of value or contribution in the organisations goals.

• Two approaches followed-alternate ranking,paired comparison.

JOB CLASSIFICATIONJOB CLASSIFICATION

• Each job measured against a preexisting set of job classes. Within this method job evaluation involves comparing a position with these generic job level or class.

INTERNAL BENCHMARKINGINTERNAL BENCHMARKING

• Intuitive evaluation by comparing the job under review with any internal benchmark job which is believed to be properly graded and paid and slotting the job under consideration into the same grade as the benchmark job

JOB ANALYSIS & WORK DESIGN As complementary interventions

JOB ANALYSIS WORK DESIGN

INPUT •Data on work, worker & work environment•Org environment

•Job Description•Job Specification

PROCESS •Job /Task analysis•Performance Analysis

•Work Design•Human factors•Quality Imp

OUTPUT •Job Description(work)•Job Specification(worker)

•Blueprint on perf reqts•Blueprint for org eff & emp satisfaction

JOB ANALYSIS & WORK DESIGN INTERVENTIONS FROM ENHANCED HPT MODEL

• JOB ANALYSIS Job Description Job Specifications• WORK DESIGN Job Design Job Enlargement Job Rotation Job Enrichment

• HUMAN FACTORS Ergonomics Safety Engineering Preventive

Maintenance• QUALITY

IMPROVEMENTS• TQM• Continuous

Improvement• Value Analysis/Value

Engineering

INPUT-OUTPUT RELATIONSHIP OF JOB ANALYSIS, JOB DESCRIPTION & JOB SPECIFICATIONS

JOB ANALYSIS•ORG ENVIRONMENT

•WORK ENVIRONMENT•WORK WORKER

•Standards•Consequences

•Feedback

•JOB DESCRIPTIONS(work)

•JOB SPECIFICATION (worker)

JOB ANALYSIS INPUTS-PROCESSES-OUTPUTS

• Inputs to job analysis Purpose Location Frequency Importance Qualification Tools

• Job analysis process-procedures, difficulty

• Outputs to job analysis- Standards Consequences Feedback

Step 3. Salary Surveys• Salary surveys compare an organisation’s salaries to

those offered in other organisations.

Does the organisation want to compare itself with:

• Organisations in the same or related industries?

• Organisations in the same geographic area?

• ‘Best practice’ companies?

• Domestic companies?

• Multinationals?

Compensation Management Step 3Establishing a Salary Structure

• Step 3 Group similar jobs into Pay Grades or Job Classes

– jobs of equal difficulty

• Step 4 Establish the Wage Curve

Wage Curve shows relationship between value of job and average wage paid for the job

Compensation Management Step 4: Pricing Jobs- Pay Grade & Pay Progression

Pay Grades

Groups of jobs within a particular class that are paid the same rate or rate

range

PAY

JE Points

Wage CurveWage Curve

80 120 160 200 240 280 320

monthlysalary

(Rs.000)

8

7

6

5

4

3

2

1

40

Line of Best Fit :using Market-Survey data

Jobs AB CDEF GHIJ KLM 0P QRS TUVGrades 1 2 3 4 5 6 7

Establishing a Salary Structure

• Step 5Formulate a Rate Structure• Single Rate Structure vs Rate Range

• Single Rate Structure GR JOBS SALARY (Rs.)

I AB 5000

II CDEF 7000

III GHIJ 9000

• Rate Range

5000 – 250 – 6500 – 300 - EB - 500 – 9000

Non–Overlapping Rate Range

GR JOBS SALARY (Rs.)

I AB 3000–250–4500–500-9000

II CDEF 9000–400–11400–750-17400

III GHIJ 17400–600–21000–900-28200

Overlapping Rate Range

GR JOBS SALARY (Rs.)

I AB 3000–250–4500–500-9000

II CDEF 6000–400–8400–750-14400

III GHIJ 10000–600–13600–900-20800

Pay Structure39.50

37.00

34.50

32.00

29.50

27.00

24.50

22.00

22.00

19.50

17.00

14.50

12.00

9.50

Ra

tes

(Rs

.)

0 50 100 150 200 250 300

Maximum Rate

Wage Curve (or line)

Minimum Rate

I II III IV V VI

Elements of the Rate Range

Red & Green Circle Jobs

39.50

37.00

34.50

32.00

29.50

27.00

24.50

22.00

22.00

19.50

17.00

14.50

12.00

9.50

Ra

tes

(Rs

.)

0 50 100 150 200 250 300

I II III IV V VI

Pay Structure - Broadbanding

39.50

37.00

34.50

32.00

29.50

27.00

24.50

22.00

22.00

19.50

17.00

14.50

12.00

9.50

Ra

tes

(Rs

. 00

0)

0 50 100 150 200 250 300

Previous Maximum Rate

Wage Curve (or line)

Previous Minimum Rate

I II III IV V VI

Minimum Rate

Maximum Rate

STEPS INVOLVED IN THE DETERMINATION OF WAGE RATES

JOB ANALYSIS

JOB DESCRIPTION &

JOB SPECIFICATIONJOB EVALUATIONJOB EVALUATION

PERFORMANCE NORMS & STANDARDS

WAGE SURVEYS WAGE STRUCTUREWAGE STRUCTURE

WAGE PAYMENTWAGE PAYMENT

MIN WAGEMIN WAGE

ADMINISTRATION OF

WAGE STRUCTURE

PERFORMANCE PERFORMANCE APPRAISALAPPRAISAL

Employee Stock Ownership Plan

• Is a contribution plan that operates like a qualified stock option bonus plan

• as a kind of employee benefit trust

• Purpose is to encourage employee stock ownership.

Employer Benefits of ESOP

• Assists in establishing and maintaining stable, high performance workforce

• Acts as GOLDEN HANDCUFFS to retain desired employees

• Employer also obtains certain tax benefits

CHANGING ENVIRONMENTAL PRESSURES

• GLOBALISATION

• RAPIDLY CHANGING TECHNOLOGY

• DEMOGRAPHIC COMPOSITION

• CHANGING STRUCTURES & SYSTEMS– Need for Flexibility– Team Based Structures– Self managed teams

Pay-for-Performance

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

• Incentive pay– Directly linked to an employee’s

performance or productivity

Incentive Systems

BenefitsBenefits ProblemsProblems

Performance is reinforced regularlyReinforcement is quick and frequentEffective behaviours are likely to continueWages paid in proportion with performance

Administration can be complexMay result in inequities Employees may not achieve standards due to uncontrollable forcesUnion resistanceFocus efforts on one aspect

Pay Secrecy

AdvantagesAdvantages

DisadvantageDisadvantagess

Most employees prefer to have their pay kept secretGives managers greater freedomCovers up inequities in the internal pay structure

May generate distrust in the pay systemEmployees may perceive that there is no relationship between pay and performance

New Approaches to Pay

• Skill- or knowledge-based pay– Based on the employee’s skills or knowledge

• Variable pay– Performance-linked approach

• Broadbanding– Consolidation of pay grades

• Tailor-made perks– Employees choose

• International pay– Need to develop polices to meet global needs

Changing Compensation Systems

TraditionalTraditional ModernModern

Entitlement-baseEntitlement-baseincreases increases

Performance-drivenPerformance-drivengains gains

Pay = 100% basePay = 100% basesalarysalary

Variable componentVariable componentaddedadded

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

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

the organizationthe organization

Pay & Organizational Strategy

Areas that impactAreas that impactpay systemspay systems

Attract &Attract &retainretain

Identifying Identifying valued rewardsvalued rewards

MotivatingMotivatingdevelopmentdevelopment

Relating toRelating toperformanceperformance

SettingSettinggoalsgoalsConsequencesConsequences

MotivatingMotivatingperformanceperformance

Compensation Management Part 2

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