COMPENSATION AND

REWARD MANAGEMENT

What Is Compensation?
All forms of pay or rewards going
to employees arising from their
employment.
Guided by equity, performance,
job evaluation.

Organizational Considerations:

Linking Compensation to Performance

Motivation

Retention

Controlling
costs

Productivity

Organizational
objectives

Determinants of an Organizations
Compensation Strategy

Overall
strategy of the
organization

Overall ability
of organization
to pay

Ability to
attract and
retain
employees

Strength of
union
influence

Compensation Objectives
For the employee
Purchasing power
Felt-fair
Equitable treatment
Recognition of employee performance and contribution

Government
Compliance with employment legislation
Legally sound pay and benefits program
Unions
Compliance with awards and agreements

Wages Versus Salaries

Wages
Is hourly compensation paid to operating
employees; basis for wages is time.
Salary
is income paid to an
individual on the basis
of performance, not on
the basis of time.

Wage and Salary Administration

The ongoing process of managing a wage and salary

structure; managers must be sensitive to these costs and

must be vigilant about managing them properly.

Components of Compensation
Wages and Salary- Employees get an annual increment

on wages and salaries, based on nature of the job, type of

industry, employees seniority, and merit.
Incentives- In addition to wages and salaries employees

get incentives, which are also known as payment by

results. Incentives are of two types: individual incentives
and group incentives.
Fringe Benefits- Provident fund, gratuity, accidental

benefit, health and group insurance, uniform, canteen,

discounts on purchase of companys products etc.

Components of Compensation
Perquisites- Whereas a fringe benefit is well defined and

would include all employees within the organization,

perquisites (or perk) are less well defined and sometimes
given to employees as a special privilege.
Non-monetary benefits- Job sharing, flextime,

recognition (e.g. employee of the month), challenging job

assignments are example of non-monetary benefits.

Strategic Options for Compensation Levels

Which pay level is a firm on

the decline likely to choose?

Pay for Performance: The Challenges

The Do Only What You Get Paid For Syndrome
Negative Effects on the Spirit of Cooperation
Lack of Control
Difficulties in Measuring Performance
The Credibility Gap
Potential Reduction of Intrinsic Drives

Variable Pay
Tying pay to some measure of individual, group, or
organizational performance.
Rewards are variable, costs linked to results

Advantages of Variable Pay Programs

is

directly related to improved performance

rewards those responsible for higher performance
Motivates for better performance
increases employee earnings without dragging the
organization into a higher pay structure
The organization improves profits through reduction in
unit cost of labour or production or both
Additional capital investment for expansion of
production capacity is avoided or minimised

Types of Incentive Plans

INDIVIDUAL

GROUP

ENTERPRISE

Piecework

Team Plan

Profit sharing

Standard hour

Gainsharing

Stock options

Bonuses
Merit pay

Sales incentives

The Difference Between

Gainsharing.docx
Gainsharing
The plan commonly

Profit sharing
The plan typically applies

applies to a single facility,

site, or stand-alone
organization
Gains and resulting
payouts are self-funded
based on savings
generated by improved
performance.
Payouts are made only
when performance has
improved over a historical
standard or target.

organization-wide;
Payouts are funded
through company profits.
Payouts are typically made
when there are profits;
performance doesnt
necessary have to show
an improvement.

Features of Fringe Benefits

An employee enjoys them in addition to the

salary he/she receives.

They are not given for specific jobs performed

but to make jobs more attractive.

They are not linked to productivity so do not

reward performance in any way, criteria used is

other than performance.
They have an indirect impact on workers

efficiency. If impact is direct, it is not a fringe

benefit.

Employee Benefits in India

Integral part of the compensation package.
Determined by labor legislations, location, and tax laws.
Generally, benefits include loans, housing, and transport.
Other activities include celebrations, health programs,

various allowances, family involvement, flexi timings.

Govt. regulation of Compensation &

Benefits in India
Factories Act,1947

Minimum Wages Act, 1948

Payment of Wages Act, 1936
Payment of Bonus Act, 1965

Payment of Gratuity Act, 1972

Employees Provident Fund Act, 1952
Employee State Insurance Act, 1948

Maternity Benefits Act, 1961

Pay Commissions
Shops & Commercial establishment Act of diff states

Equity and Its Impact on Pay Rates

Forms of
Compensation
Equity

External
equity

Internal
equity

Individual
equity

Procedural
equity

Internal & External Wage Curves

Addressing Equity Issues

Area wage and salary surveys

Methods to
Address Equity
Issues

Job analysis and job evaluation

Performance appraisal and
incentive pay

Communications, grievance
mechanisms, and employees
participation

Salary Surveys
Salary surveys compare an organisations

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?

Sources for Salary Surveys

Sources of Salary
Information

SelfConducted
Surveys

Consulting
Firms

Professional
Associations

Government
Agencies

The
Internet

Example of a Pay Survey

Setting Compensation
Pay in Relation to Tenure
Pay increases based on tenure or seniority are
determined not by performance but by the
employees length of time on the job.
Pay in Relation to Skill/Competency
Where the company pays for the employees
range, depth, and types of skills and
knowledge, rather than for the job title he or
she holds

Steps in Establishing Pay Rates

1

Determine the worth of each job in your

organization through job evaluation (to
ensure internal equity).

Conduct a salary survey of what other

employers are paying for comparable jobs (to
help ensure external equity).

Group similar jobs into pay grades.

Price each pay grade by using wage curves.

Fine-tune pay rates.

Job Evaluation
Identifying Compensable Factors

Skills

Effort

Responsibility

Working
conditions

How to Evaluate Jobs

Methods for Evaluating
Jobs

Ranking

Job
classification

Point
method

Factor
comparison

Using a Point System for Job Evaluation

Compensable Factors: A fundamental compensable

element of a job such as:

Job skills
Physical effort

Working conditions
Responsibility and authority

Point Manual
Defines points assigned to the increasing degrees of compensable
factors for which the organization willing to provide payment

Common Job Factors for Comparison

Responsibilities
Skills
Physical Effort
Mental Effort
Working Conditions
Benchmark jobs are compared on the basis of these

factors.

Using the Factor-Comparison Method for

Job Evaluation
1. Define comparison factors to be used
2. Identify benchmark or key jobs in the organization
3. Rank benchmark jobs on each compensation factor

4. Allocate benchmarks job wage to each job factor

based on the relative importance of the job factor

5. Prepare two sets of ratings based on ranking and

assigned wages to determine evaluator consistency

6. Develop a job-comparison chart to rate other jobs in

the organization as compared to the benchmark jobs

Readings for Job Evaluation assignment

Job Evaluation
Compensable Factors
Methods of Job evaluation
Wage Curve(Internal and external), Wage structure, Scales,

Broad banding etc

Assigning Values and corresponding pay
Establishing a market competitive pay plan
(In a market-competitive pay plan a jobs compensation reflects
both the jobs value in the company, as well as what other
employers are paying for similar jobs in the marketplace. The
process involves many steps including selecting compensable
factors, assigning weights, assigning point-values to jobs and
determining the degree to which such factors apply to a given
job.)

Job Evaluation Method 1:

Ranking
Obtain job information
Select raters and jobs
Rank jobs

Rank
1
2
3
4
5
6
7
8
9

Best for small organizations

Job
General manager
Marketing manager
Production manager
Accounting manager
Plant engineer
Accountant
Sales representative
Plant supervisor
Receptionist

Job Evaluation Method 2:

Job Grading / Classification

Decide how many classes the job structure should be

broken into
Write definitions of each class

Compare jobs with definitions and place into the

appropriate class

GRADING FOR CLERICAL WORKERS:

Job classification
CL.

DESCRIPTION

Simple work, no supervisory responsibility,

no public contact

II

Simple work, no supervisory responsibility,

public contact

III

Work of medium complexity, no

supervisory responsibility, public contact

IV

Work of medium complexity, supervisory

responsibility, public contact

Complex work, supervisory responsibility,

public contact

Job Evaluation Method 3:

POINT SYSTEM
A number of factors common to all jobs are selected

Relative weights are assigned to each factor

Each factor is broken down into degrees, defined and a

point value assigned to each

Point scores for jobs can then be calculated

FACTOR

Educat
ion

Experi
ence

Job
complexity

Relation
with
others

Working
Condition

WEIGHT

50%

25%

12%

8%

5%

1st

50

25

12

2nd

100

50

24

16

10

3rd

150

75

36

24

15

4th

200

100

48

32

20

5th

250

125

60

40

25

Experience:

1st

upto 3 mths.

25

2nd

3 mths - 6 mths

50

3rd

6 mths - 1 yr.

75

4th
5th

1 yr. - 3 yrs.
3 yrs & more

100
125

Proprietary Job Evaluation Systems

(commercially available)

Hay Group

Watson Wyatt

Cullen Egan Dell

Weighted Job

Questionnaire

Hay Profile Method

Job evaluation technique using three
factors knowledge, mental activity,
and accountability to evaluate
executive and managerial positions

Price Each Pay Grade

The Wage Curve
Shows the pay rates paid for jobs in each pay grade, relative to

the points or rankings assigned to each job or grade by the job

evaluation.
Shows the relationships between the value of the job as

determined by one of the job evaluation methods and the current

average pay rates for your grades.

Wage Curves

Developing a wage curve involves the following:

Find the average pay for each pay grade
Plot the pay rates for each pay grade
Fit the line called a wage line through the points just
plotted

Wage structure

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.

Wide bands provide for more flexibility in assigning workers to

different job grades.

Lack of permanence in job responsibilities can be unsettling to

new employees.

1145

FIGURE 117
Broadbanded
Structure and
How It Relates to
Traditional Pay
Grades and
Ranges

Policy Issues in Designing Benefit Packages

Which benefits to
offer

Who will be covered

Whether to include
retirees

Coverage during
probation

How to finance
benefits
Cost containment
procedures

Policy
Issues

Degree of employee
choice
Communicating
benefits options

Pay For Time Not Worked

Vacations and
Holidays

Unemployment
Insurance

Sick
Leave

Severance
Pay

Supplemental
Pay Benefits

Parental
Leave

Supplemental
Unemployment
Benefits