Compensation

Employee Compensation
All forms of p
pay
y or rewards g
going
g to employees
p y
and arising from their employment.
Direct Financial Payments
Pay in the form of wages, salaries, incentives,
commissions and bonuses
commissions,
bonuses.

Indirect Financial Payments

- Pay in the form of financial benefits such as employer
paid insurance and vacations.

Competitive Strategy, Corporate Policies, and

C
Compensation
i
Salary Compression :
A salary inequity problem, generally caused by
inflation, resulting in longer term employees in a
position earning less than workers entering the firm
today.

Geography:
Salary level in Mumbai
Mumbai, Delhi
Delhi, Bengaluru are higher
compared to other cities, e.g., Ahmedabad, Jaipur,
Coimbatore, Bhubaneswar etc.

Establishing Pay Rates

1. Conduct a salary Survey of what other employers are
paying
i ffor comparable
bl jjobs
b (t
(to h
help
l ensure external
t
l
equity)
2. Determine the worth of each job in your organization
through job evaluation (to ensure internal equity)
3. Group similar jobs into pay grades
4 Price each grade by using wage curves
4.
5. Fine-tune pay rates.

Step 1. The Salary Survey

A survey aimed at determining prevailing wage rates. A good

salary survey provides specific wage rates for specific jobs.
jobs
Formal written questionnaire surveys are the most
comprehensive but telephone surveys and newspapers are also
sources of information.

Benchmark Jobs
A job that is used to anchor the employer
employerss pay scale and
around which other jobs are arranged in order of relative
worth.
Commercial, Professional, and Government Salary Surveys
Using the Internet to do Compensation Surveys

Step 2: Job Evaluation

A systematic
y
comparison
p
done in order to determine the
worth of one job relative to other.
Suppose you know (based on your salary survey) how to
price key benchmark jobs, and then use job evaluation to
determine the relative worth of all the other jobs in your
firm relative to these key jobs.

Job Evaluation [Contd.]

The basic p
procedure is to compare
p
the jjobs in relation to
one another for example, in terms of required effort,
responsibility, and skills.

Comparing Jobs ??
Intuitive Approach:
pp
You can take an intuitive approach.
pp
You might decide that one job is more important than
another and not dig any deeper into why.
Compensable Factors: A fundamental, compensable
element of a job, such as skills, effort, responsibility, and
working conditions.

Compensable Factor [Contd.]

Hayy System:
y
Know-how
Problem-Solving
Accountability
Decision making for
f a managers
job, might be
inappropriate for a cleaners job

Job Evaluation Methods: Ranking

The simplest
p
method of jjob evaluation that involves
ranking each job relative to all other jobs, usually based
on overall difficulty.

Steps involved in job ranking method

Obtain job information: Job Analysis (Job Descriptions)
Select group of jobs: Jobs by Departments/ clusters
(Factory workers/ clerical workers)
Select compensable factors- use just one factor
Rank jobs Lowest to highest/ alternation ranking method
Combine ratings- Usually several raters rank the jobs
i d
independently.
d tl Th
Then th
the rating
ti committee
itt ((or th
the employer)
l
)
can simply average the raters rankings.

Job Ranking in a health care unit

Ranking Order

Orderly Annual Pay

Scale

Office Manager

Rs. 43,000

Chief Nurse

Rs. 42,500

Book Keeper

Rs. 34,000

Nurse

Rs. 32,500

Cook

Rs 31,000
Rs.
31 000

Nurses Aide

Rs. 28,500

Peon

Rs. 12,000

What might be drawback of this method?

Job Classification (or Grading) Method

Classes Grouping
p g jjobs based on a set of rules for each
group or class, such as amount of independent
judgment, skill, physical effort, and so forth required.
Classes usually contain similar jobs
jobs.
Grades A job classification system like the class
system, although grades often contain dissimilar jobs,
such as, secretaries, mechanics and firefighters. Grade
descriptions are written based on compensable factors
listed in classification systems.

Job Classification (Grading) Method

A method
h d for
f categorizing
i i jobs
j b into
i
groups.

(a)

(b) Class II - Skilled workers:

Purchasing
g assistant
Cashier
Receipts clerk, etc.

Class I - Executives:
Office manager
Deputy office manager
Office superintendent
Departmental supervisor,
supervisor etc.
etc

(c) Class III - Semiskilled workers:

Steno typists
Machine-operators
Machine operators
Switchboard operators, etc.

(d) Class IV - Semiskilled workers:

Daftaris,
File clerks
Office boys,
y , etc.

Example of a grade definition

Grade

Nature of Assignment

Level of Responsibility

G7
G-7

Performs
P
f
specialized
i li d d
duties
ti iin a d
defined
fi d
functional or program area involving a wide
variety of problems or situations; develops
information,, identifies interrelationships,
p ,
and takes actions consistent with
objectives of the function or program
served.

Workk is
W
i assigned
i
d iin
terms of objectives,
priorities, and deadlines;
the employee
p y works
independently in
resolving most conflicts;
completed work is
evaluated for
conformance to policy,
guidelines, such as
regulations, precedent
cases, and policy
statements require
considerable
interpretation and
adaptation.

Point Method
The jjob evaluation method in which a number of
compensable factors are identified and then the degree
to which each of these factors is present on the job is
determined.
determined

Point Method
It involves identifying
Several compensable factors
Degrees to which each of the factors is
present in the job

Point MethodMethod Steps involved

Determine Clusters of jjob to be evaluated
Collect compensable factors
Define compensable factors

Example of one factor (Complexity in Problem Solving) in a

Point Method System
Level

Point Value

Description of Characteristics
and Measures

Seldom confronts problems not

covered by
y jjob routine or
organizational policy; analysis of
data is negligible. Benchmark :
Telephone Operator/
Receptionist

40

Analyzes non-complicated data.

Benchmark: Statistical/ Billing
Clerk

80

Analysis of standardized data

f use off others. Benchmark:
for
Executive Secretary

120

Analyzes non-routine data.

Benchmark: Team Leader

160

Makes decisions involving

procedures. Benchmark:
Business Manager

200

Uses independent judgment in

making decisions that are not
subject to review. Benchmark:
Executive Director

Point Method
Determine Relative Factor Weights
g

Decision Making

100%

40.8%

Problem Solving

85%

34.7%

Knowledge

60%

24 5%
24.5%

245%

100.0%

Total

Point Method
Assign Point Values to Factors and degrees
Suppose it is decided to use a total 500
points in the point plan.
Because factor decision making has a weight of 40.8%,
it would be assigned 40.8% * 500 = 204 points
204 points would be distributed to each degree
Write Job Evaluation Manual

Evaluation Points assigned to factors and

degrees
FirstDegree

SecondDegree

Third
Degree

Fourth
Degree

Fifth
Degree

Decision
Making

41

82

123

164

204

Problem
Solving

35

70

105

140

174

Knowledge

24

48

72

96

123

Point Method
Conversion of Job Grade Points into Money
y Value
Point range
500 600
500-600
600-700
700-800
700
800
800-900
900-1,000

Daily wage rate (Rs)

300 400
300-400
1
400-500
2
500-600
500
600
3
600-700
4
700-800
5

Job grades
Offi
Officer
Accountant
Manager I Scale
Manager II Scale
Manager III Scale

Factor Comparison
A widelyy used method of ranking
g jjobs according
g to a
variety of skill and difficulty factors, then adding up these
rankings to arrive at an overall numerical rating for each
given job
job.

Factor Comparison - Example

Obtain Job Information Job Description
p
&
Specification
Select key benchmark jobs
15 to 25 key jobs may be selected by the job
evaluation committee
committee.
These jobs will have to be representative benchmark
jobs, acceptable reference points that represent the
full range of jobs to be evaluated.

Factor Comparison - Example

Rank key jobs by factorsfactors
Evaluators are asked to rank the jobs on each
of the five factors

Mental requirements
Physical
y
requirements
q
Skill requirements
Responsibility
Working conditions

Ranking key jobs by factors

Mental
Physical
Requirements Requirements

Skill
Requirement
s

Responsibilit Working
y
Conditions

Worker

Crane
Operator

Punch
Press
Operator

Security
Guard

Distribute wage rates by factors and rank key jobs according to wages assigned to each factor
Hourly wage
rate

Mental
Requirements

Physical
Requirements

Skill
Requiremen
ts

Responsibili
ty

Working
Conditions

Worker

Rs. 9.80

4.00 (1)

0.40 (4)

3.00 (1)

2.00 (1)

0.40 (2)

Crane
Operator

Rs. 5.60

1.40 (3)

2.00 (1)

1.80 (3)

0.20 (4)

0.20 (4)

Punch
Press
Operator

Rs. 6.00

1.60 (2)

1.30 (3)

2.00 (2)

0.80 (2)

0.30 (3)

Security
Guard

Rs. 4.00

1.20 (4)

1.40 (2)

0.40 (4)

0.40 (3)

0.60 (1)

Compare the two sets of rankings to screen

outt unusable
bl kkey jjobs
b
Mental
Requirements

Physical
Requirements

Skill
Requirements

Responsibil
ity

Working
Conditions

Worker

Crane
Operator

Punch
Press
Operator

Security
Guard

Construct & use the jjob Comparison

p
Scale
Mental
Requirement

Physical
Requirement

Skill
Requirement

0.2

Responsibility
Crane Operator

Crane Operator
P
Punch
hP
Press
Operator

Sec. Guard

Welder

0.3
0.4

Welder

Sec. Guard

Working
Conditions

0.5
0.6

Sec. Guard

0.7
Punch Press
Operator

08
0.8
0.9

Secretarial
job

1.0
1.1
1.2

Sec. Guard
Punch Press
Operator

1.3
1.4
1.5
1.6

Crane Operator

Sec. Guard

Inspector

Step 3: Group Similar Jobs into Pay Grades

A pay grade is comprised of jobs of
approximately equal difficulty.

Step 4. Price Each Pay Grade Wage Curves

Averrage pay rrates

Wage Curve Shows the relationship between

the value of the job and the average wage paid
for this job.

Points

Step 5. Fine Tune Pay Rates

Fine tuning involves
Developing pay ranges
Correcting out
out-of
of line rates

Step 5. Fine Tune Pay Rates

[Contd ]
[Contd.]

Most Employers structure

their pay ranges to overlap
a bit, so that an employee in one
grade who has more experience
or seniority may earn more than
an entry level position in the
next pay grade.

Wage Structure

Competency Based Pay

What is Competency
p
y Based Pay?
y
Why Use Competency Based Pay?
Support High Performance Work Systems
Support Strategic Aims
Support Performance Management

Competency Based Pay in Practice

A system
y
for defining
g specific
p
skills,, and a process
p
for tying
y g
the persons pay to his or her skill level;
A training system that lets employees seek and acquire skills
A fformall competency
t
testing
t ti system;
t
andd
A work design that lets employees move among jobs to permit
work assignment flexibility.

Other Compensation Trends

Broadbanding Consolidating salary grades and
ranges into just a few wide levels or bands each of
which contains a relatively wide range of jobs and
salary levels.
Comparable Worth- Comparable worth refers to the
requirement to pay men and women equal wages for
jobs that are comparable (rather than strictly equal)
value to the employer.

Pay for Performance and Financial

Incentives

Money and Motivation

Performance and Payy
Motivation and Incentives

Frederick Herzberg
Edward Deci
Victor Vroom
Behavior Modification / Reinforcement Theory

Incentive
I
i Pay
P Terminology
T
i l
Variable pay Any plan that ties pay to productivity/profitability,
usually as one-time lump sum payments

Piecework Plans
A system of pay based on the number of items
processed by each individual worker in a unit
time, such as items per hour or items per day.
Straight
g Piecework
Standard hour plan

Straight
g Piecework
An incentive plan in which a person is paid a sum for each
item s/he makes or sells, with a strict proportionality
between results and rewards.
Example: Production job
Market pay = Rs. 12 per hour
Average
g hourly
yp
production target
g = 60 p
pieces p
per hour
Piece-rate = Rs. 12/60 = Rs. 0.20 per piece
50 pieces 50 Rs. 0.20 = Rs. 10.00 (below market pay)
60 pieces 60 Rs. 0.20 = Rs. 12.00 (market pay)
70 pieces
i
70 Rs.
R 0
0.20
20 = R
Rs. 14
14.00
00 ((above
b
market
k t pay))
80 pieces 80 Rs. 0.20 = Rs. 16.00 (above market pay)

Standard
S
a da d hour
ou p
plan
a
A plan by which a worker is paid a basic hourly rate
but is paid an extra percentage of his/her rate for
production exceeding the standard per hour or per
day.
day
Example: If a sales representatives standard is 160 leads
per day (and thus Rs.
Rs 64 per day) an he brings in 200
leads, hed get an extra 25% (=40/160) or Rs.( 64+16) =
Rs. 80/- total for the day.

Merit Pay
Any salary increase awarded to an employee
based on his/her individual performance.
Example: Company uses the following 5-point rating scale
to evaluate the employees overall job performance and to
award the corresponding annual merit pay increase:

5 = Excellent = 4.0% pay increase

4 = Very Satisfactory= 3.0% pay increase
3 = Satisfactory= 2.0% pay increase
2 = Unsatisfactory= no pay increase
1 = Very unsatisfactory= no pay increase

 Combining Financial and Non- Financial Incentives

Employee recognition
Gift certificates
Special events
Cash rewards
Merchandise incentives
E-mail/ print communications
Training programs
Work/ life benefits
Variable pay
G
Group
ttravell
Individual travel
Sweepstakes

Incentives for Salespeople

Salaryy Plan
Commission Plan
Combination Plan
Setting Sales Quotas
Strategic Sales Incentives

Team/ Group Incentive Plans

A pplan in which a pproduction standard is set for a specific
p
work group, and its members are paid incentives if the group
exceeds the production standard.

Organization wide Incentive Plans

Profit Sharing Plans

A plan in whereby employees share in the companys profits.

Scanlon/Gainsharing plans aims to encourage improved

employee
l
production
d ti b
by sharing
h i resulting
lti fi
financial
i l gains
i with
ith
employees

Earnings-at-Risk plans put some portion of the employees

earnings at risk

Employees
E
l
Stock
S k Ownership
O
hi Plan
Pl
A corporation contributes shares of its own stock to a trust in which
additional contributions are made annually. The trust distributes the
p y
on retirement or separation
p
from service.
stock to employees

Employees Stock Ownership Plan

Advantages
g
Company gets a tax deduction equal to the fair market
value of the shares that are transferred to the trustee, and
also
l claim
l i an income
i
tax
t deduction
d d ti for
f dividends
di id d paid
id on
ESOP-owned stock.
Firm is able to borrow against employee stock held in trust
Employees arent taxed until they receive a distribution
from the trust, usually at retirement when their tax rate is
lower.
lower

Implementing a Gainsharing plan

1.
2.
3.
4.
55.
6.
7
7.
8.

Establish ggeneral pplan objectives

j
Choose specific Performance measures
Decide on a funding formula
Decide on a method for dividing and distributing the
employees share of the gains
Ch
Choose
th
the form
f
off paymentt
Decide how often to pay bonuses
Develop the involvement system
Implement the plan

Incentives for Managers and Executives

Stock Options
p
The right to purchase a stated number of shares of a
company stock at todays price at some time in the
future.

Designing Effective Incentive Programs

Why Incentive Plans Fail

Performance pay cant replace good management

You get what you pay for
Pay is not a motivator.
Rewards punish
Rewards rupture relationships
Rewards can have unintended consequences
Rewards may undermine responsiveness
Reward undermine intrinsic motivation

How to Implement Effective Incentive Plans

Ask : Are performance levels inadequate due to
motivation?
Link the incentive with your strategy
Make sure the program is motivational
Make
M k the
h plan
l easy for
f employees
l
to understand
d
d
Set effective standards
View the standard as a contract with employees
Get employees support for the plan
Use ggood measurement systems
y
Use a complete set of standards
Make the incentive plan part of a comprehensive,
commitment oriented approach

Employee Benefits
Benefits are indirect monetaryy and non-monetaryy
payments an employee receives for continuing to work
for the company, i.e. health insurance
Pay for time not worked or supplemental pay
benefits includes holidays, vacation days,
bereavement leave
leave, sick leave
leave, military leave
leave, etc
etc.
Unemployment insurance
Severance pay

Employee Benefits [Contd.]

Retirement benefits
Social security
Pension plans

Employee Benefits [Contd.]

Family-friendly
y
y benefits
Workplace flexibility
Flexible benefits plans/ Cafeteria benefits plan
Individualized plans allowed by employers to
accommodate employee preferences for benefits
benefits.