2005 Prentice Hall Inc. All rights reserved.

111
Establishing Strategic Pay Plans
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Introduction
Employee compensation
All forms of pay or rewards going to employees and
arising from their employment.
Direct financial payments
Pay in the form of wages, salaries, incentives,
commissions, and bonuses.
Indirect financial payments
Pay in the form of financial benefits such as employer
paid insurance, paid sick leaves, and paid vacations,
fringe benefits like PF, Gratuity, canteen facilities etc.
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Ways to make direct financial payments
Time Based
Hourly wage
Salaries
Performance Based
Piecework (calculated rate per piece)
Sales commission
Combination
Sales
Factors determining the design of any pay plan
legal factor,
union factor,
company policy and
equity
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1. Legal factor
Non managerial workers:
1. The Minimum wages Act, 1948
2. The Payment of wages Act, 1936
3. Equal remuneration Act, 1976
4. The Payment of Bonus Act, 1963
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Contd
Top management remuneration:
The Companies Act, 1956:
An upper ceiling of 15000/month(1991)
Sec. 198: shouldnt exceed 11% of net
profits
Sec. 309(1): Remuneration Committee
Union Influences on compensation decision
Formal collective bargaining
Negotiations at Industry level : Common pay
agreement
Negotiation at company level
In U.S.:
The National Labor Relations Act,1935
Fair Labor standards Act
40hours, 1.5 overtime pay rate, $7.25/hr, $6-
$12/hr in hazardous occupations
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Corporate Policy
Aligned reward strategy
a total reward package
Compensation strategy has an impact on companys
productivity
E.g. Oracle, Microsoft
Various issues like Seniority based pay or performance
based pay
Salary Compression: 5
th
and 6
th
pay scales, outcome of
inflation
Geography: e.g. Motif in Ahmedabad
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Methods to Address Equity Issues
Salary surveys (Salary.com)
To monitor and maintain external equity.
Job analysis and job evaluation
To maintain internal equity.
Performance appraisal and incentive pay
To maintain individual equity.
Grievance mechanisms, and employees
surveys
To help ensure that employees view the pay
process as transparent and fair.
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Process of Establishing Pay Rates
1. Conduct a salary survey (external equity)
2. Determine the worth of each job in your
organization (internal equity job evaluation)
3. Group similar jobs into pay grades
4. Price each pay grade by using wave curves
5. Fine-tune pay rates
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Establishing Pay Rates
Step 1. The salary survey
Prevailing wage rates.
Formal written questionnaire surveys
telephone surveys
newspaper ads are also sources of information.
Price Benchmark jobs with the help of surveys
Place 20% or more positions directly in the market
place
Collect data on Insurance, sick leave, vacation
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Sources for Salary Surveys
Consulting firms (Hay Associates, Hewitt Associates)
Government agencies (US Dept. of Labors Bureau of
Labor statistics)
Internet
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Some Pay Data Web Sites
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Establishing Pay Rates (contd)
Step 2. Job evaluation
A systematic comparison done in order to
determine the worth of one job relative to another
Compensable factor
Skills, effort, responsibility, and working conditions
(Equal Pay Act)
Knowledge, Problem Solving, Accountability (Hay
Consulting firm, Wal-Mart)
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Establishing Pay Rates (contd)
Step 3. Group Similar Jobs into Pay Grades
A pay grade is comprised of jobs of approximately
equal difficulty or importance as established by job
evaluation.
Point method: the pay grade consists of jobs falling within
a range of points.
Ranking method: the grade consists of all jobs that fall
within two or three ranks.
Classification method: automatically categorizes jobs into
classes or grades.
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Establishing Pay Rates (contd)
Step 4. Price Each Pay Grade
Wage Curve
Shows the pay rates currently paid for jobs in
each pay grade, relative to the points or rankings
assigned to each job or grade by the job
evaluation.
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Plotting a Wage Curve
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Establishing Pay Rates (contd)
Step 5. Fine-tune pay rates
Developing pay ranges
Flexibility for performance differences
Seniority
Correcting out-of-line rates
Raising underpaid jobs to the minimum of the rate range
for their pay grade.
(i)Cut pay rates for overpaid (red circle) jobs to maximum
in the pay range for their pay grade
(ii)freeze the rate till general salary increases bring the
other jobs into line
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Wage
Structure
Note: This shows overlapping wage classes
and maximumminimum wage ranges.
CTC
The total expenditure company would incur to
employ the employee
Includes monetary and non monetary benefits
such as monthly pay, Accommodation,
canteen facilities, telephone, medical
reimbursements etc.
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Components of salary
Basic salary
Allowances :
DA
HRA
Conveyance allowance
Reimbursements:
Meal Coupons
Mobile and Telephone bills
Medical reimbursements
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Contd
Retirement benefits:
PF
Gratuity
Other Benefits and Perks
LTA
Medical allowance (health facilities)
Insurance
Miscellaneous benefits (servants, furnishings,
company car etc.)
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