Managing Compensation. 1.Explain employer concerns in developing a strategic compensation program. 2.Indicate the various factors that influence the setting.

Managing Compensation

1. Explain employer concerns in developing a strategic compensation program.

2. Indicate the various factors that influence the setting of wages.

3. Explain the purpose of a wage survey.

4. Define the wage curve, pay grades, and rate ranges as parts of the compensation structure.

Compensation

• Pay is a statement of an employee’s worth by an employer.

• Pay is a perception of worth by an employee.

Total CompensationTotal CompensationTotal CompensationTotal Compensation

DirectDirectDirectDirect IndirectIndirectIndirectIndirect

BonusesBonusesBonusesBonuses

GainsharingGainsharingGainsharingGainsharingSecurity Plans• Pensions

Security Plans• Pensions

Employee Services• Educational assistance• Recreational programs

Employee Services• Educational assistance• Recreational programs

CommissionsCommissionsCommissionsCommissions

Wages / SalariesWages / SalariesWages / SalariesWages / Salaries

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Common Strategic Compensation Goals

1. To reward employees’ past performance

2. To remain competitive in the labor market

3. To maintain salary equity among employees

4. To link employees’ future performance with organizational goals

5. To control the compensation budget

6. To attract new employees

7. To reduce unnecessary turnover

Strategic Compensation Policy Concerns

1. The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate.

2. The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities.

3. The pay level at which employees may be recruited and the pay differential between new and more senior employees.

4. The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises.

Designing a Pay-for-Performance System

• How will performance be measured?• How will allocation be done for compensation

increases.• Which employees will be eligible?• How will payouts be made?• How often will payouts occur?• How large will the payouts be?• Will employees perceive the rewards as

valued?

The Bases for Compensation

• Hourly Work Work paid on an hourly basis.

• Piecework Work paid according to the number of units

produced.

• Salary Workers Employees whose compensation is computed

on the basis of weekly, biweekly, or monthly pay periods.

Factors Affecting the Wage MixFactors Affecting the Wage Mix

The Wage Mix—Internal Factors

• Employer’s Compensation Strategy– Setting organization compensation policy to lead,

lag, or match competitors’ pay.

• Worth of a Job– Establishing the internal wage relationship among

jobs and skill levels.

• Employee’s Relative Worth– Rewarding individual employee performance

• Employer’s Ability-to-Pay – Having the resources and profits to pay employees.

The Wage Mix—External Factors

• Labor Market Conditions– Availability and quality of potential employees

is affected by economic conditions, government regulations and policies, and the presence of unions.

• Area Wage Rates– A firm’s formal wage structure of rates is

influenced by those being paid by other area employers for comparable jobs.

The Wage Mix—External Factors

• Cost of Living– Local housing and environmental conditions

can cause wide variations in the cost of living for employees.

– Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.

Job Evaluation Systems

• Job Evaluation– The systematic process of determining the

relative worth of jobs in order to establish which jobs should be paid more than others within an organization.

Job Evaluation Systems

• Job Ranking System– Oldest system of job evaluation by which jobs

are arranged on the basis of their relative worth.

– Disadvantages • Does not provide a precise measure of each job’s

worth.

• Final job rankings indicate the relative importance of jobs, not extent of differences between jobs.

• Method can used to consider only a reasonably small number of jobs.

Job Evaluation Systems

• Job Classification system– A system of job evaluation in which jobs are

classified and grouped according to a series of predetermined wage grades.

– Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.

Point System• Point System

– A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it.

– Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.

The Compensation Structure

• Wage and Salary survey– A survey of the wages paid to employees of

other employers in the surveying organization’s relevant labor market.

– Helps maintain internal and external pay equity for employees.

• Labor Market– The area from which employers obtain certain

types of workers.

Collecting Survey Data

Conducting Employer-initiated Surveys

– Select key jobs.

– Determine relevant labor market.

– Select organizations.

– Decide on information to collect: wages/ benefits/ pay policies.

– Compile data received.

– Determine wage structure and benefits to pay.

Characteristics of Key Jobs

• Key Jobs– Jobs that are important for wage-setting purposes

and are widely known in the labor market.

• Characteristics of Key Jobs1. They are important to employees and the organization.

2. They contain a large number of positions.

3. They have relatively stable job content.

4. They have the same job content across many organizations.

5. They are acceptable to employees, management, and labor as appropriate for pay comparisons.

The Wage Curve

• Wage Curve

– A curve in a scatter gram representing the relationship between relative worth of jobs and wage rates.

• Pay Grades

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

• Rate Ranges

– A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade.

• Red Circle Rates

– Payment rates above the maximum of the pay range.

Freehand Wage CurveFreehand Wage Curve

Wage Structure with Increasing Rate RangesWage Structure with Increasing Rate Ranges

The Wage Curve (cont’d)

• Competence-based Pay, (also skill-based pay or knowledge-based pay)

Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category.

• Greater productivity, increased employee learning and commitment to work, improved staffing flexibility to meet production or service demands, and the reduced effects of absenteeism and turnover,

• Broadbanding

Collapses many traditional salary grades into a few wide salary bands.

Approaches of compensation management

• There are 3P approach of developing a compensation policy centered on the fundamentals of paying for

• Position,

• Person and

• Performance.

• The management of any organization considers three parameters while deciding the salary as well as incentives

• Pay for position• Broad banding• Through broad banding the traditional narrowly

structured pay grades generally determined through job evaluation are replaced by fewer and wider bands, and a grading structure is created.

Broad Banding

• It is a compensation technique that reduces many different compensation categories to several broad compensation bands. A banding procedure takes place when jobs are grouped together by common characteristics

• On recruitment or promotion, employee compensation may be set at levels in the broadband deemed to be appropriate to an employee’s qualifications, education, training and experience. Employees typically progress up through the broad band if their performance ratings are good, rather than progressing up through a grade by steps based on time in the grade.

Broad Banding

Pay for Person

• Pay for person takes into account a person’s capabilities and experience in setting a pay level that is both equitable and competitive. It also considers the market demand of a person’s unique skills and experience.

• Pay for person is associated with competency based pay. It also incorporates market based pay approach.

• Pay for performance• An individual’s performance is managed through

a performance contract which comprises the clarification of the role, the setting up of objectives, and the review of performance. As an outcome a measure of performance at the corporate, unit and individual level becomes the basis for setting the performance pay.

• DA forms a variable component of pay packet since rate of dearness increases more than once every year, whereas the basic pay scales are revised after long spells of time.

• Perquisites:• These are normally provided to managerial

personnel either to facilitate their job performance or to retain them in the

organization.• Such perquisites include company car, club

membership, free residential accommodation, paid holiday trips, stock

options, etc.

• Incentives:-• Incentives are paid in addition to wages and

salaries and are also called ‘payments by results’. Incentives depend upon productivity, sales, profit, or cost reduction efforts. There are: (a) Individual incentive schemes, and (b) Group incentive programs.

• Individual incentives are applicable to specific employee performance. Where a given task demands group efforts for completion, incentives are paid to the group as a whole. The amount is later divided among group members on an equitable basis.

• Bonus:-

• The bonus can be paid in different ways. It can be fixed percentage on the basic wage paid annually or in proportion to the profitability. The Government also prescribes a minimum statutory bonus for all employees and workers. There is also a bonus plan which compensates the Managers and employees based on the sales revenue or Profit margin achieved.

Separation

Employee Separation is the termination of service agreement between the employee and the employer when either of them decides to put an end to the service.

Resignation Layoff

Retirement Retrenchment

VRS

Death

VRS

Rule 48 A of Pension Rule-1972

--- Any time after completing 20 years of service

-- By giving notice of not less than 3 months in writing to the appointing authority

-- 25 days salary(B+DA) for the remaining days of service until retirement