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Compensation: Establishing strategic pay plans ―The enemy of the best is good‖ By, Farah Naqvi
Compensation: Establishing strategic pay plans
―The enemy of the best is good‖
By,
Farah Naqvi

Corporate Policies, Competitive Strategy,

and Compensation

  • Aligned reward strategy

    • The employer’s basic task is to create a bundle of rewardsa total reward packagespecifically aimed at eliciting the employee behaviors the firm needs to support and achieve its competitive strategy.

    • The HR or compensation manager will write the policies in conjunction with top management, in a

manner such that the policies are consistent with

the firm’s strategic aims.

Developing an Aligned Reward Strategy Questions to Ask: 1. What are our company’s key success factors?
Developing an Aligned Reward Strategy
Questions to Ask:
1. What are our company’s key success factors?
What must our company do to be successful in fulfilling its mission or achieving
its desired competitive position?
2.
What are the employee behaviors or actions necessary to successfully
implement this competitive strategy?
3.
What compensation programs should we use to reinforce those behaviors?
What should be the purpose of each program in reinforcing each desired
behavior?
4.
What measurable requirements should each compensation program meet to be
deemed successful in fulfilling its purpose?
5.
How well do our current compensation programs match these requirements?
Source: Jack Dolmat-Connell, ―Developing a Reward Strategy that Delivers Shareholder
and Employee Value,‖ Compensation and Benefits Review, March–April 1999, p. 51.
Table 11–1
11–3

Forms of Equity

  • External equity

    • How a job’s pay rate in one company compares to the job’s pay rate in other companies.

  • Internal equity

    • How fair the job’s pay rate is, when compared to other jobs

within the same company

  • Individual equity

    • How fair an individual’s pay as compared with what his or her

co-workers are earning for the same or very similar jobs within the company.

  • Procedural equity

    • The perceived fairness of the process and procedures to make decisions regarding the allocation of pay.

Methods to Address Equity Issues

  • Salary surveys

    • To monitor and maintain external equity.

  • Job analysis and job evaluation

    • To maintain internal equity,

  • Performance appraisal and incentive pay

    • To maintain individual equity.

  • Communications, grievance mechanisms, and employees’ participation

    • To help ensure that employees view the pay

process as transparent and fair.

Establishing Pay Rates

  • Step 1:Salary Survey

  • Step 2. Job evaluation

    • A systematic comparison done in order to determine the worth of one job relative to another.

Compensable factor: A fundamental, compensable element of a job, such as skills, effort, responsibility, and working conditions.

  • Step 3:Group similar jobs into pay grades

  • Step 4:Price each pay Grade-Wage curves

  • Step 5:Fine tune pay rates

Sources for Salary Surveys

  • Consulting firms

  • Professional associations

  • Government agencies

    • U.S. Department of Labor’s Bureau of Labor Statistics (BLS) conducts three annual surveys:

      • Area wage surveys

      • Industry wage surveys

      • Professional, administrative, technical, and clerical (PATC) surveys.

What is a job??? Job, task and position  A task exists whenever human effort must
What is a job???
Job, task and position
A task exists whenever human effort must be exerted for a
specific purpose. When sufficient tasks accumulate to
justify the employment of a worker a position has been
created.
A job has been defined as a group of positions which are
identical to their major or significant tasks.(The war
manpower commission 1944)
What is job evaluation????? Def: The systematic determination of the relative worth of jobs in a
What is job evaluation?????
Def: The systematic determination of the relative worth of jobs in a particular
organization to be used as a means for rationalizing pay structures, through
the removal of anomalies.
Understanding:
Job evaluation is a technique that entails
the evaluation
of
jobs on
a
set
of
factors that are usually a combination of :
Know how required for the job
Accountability and contribution of the job to the organization
Often
confused
with…Job
analysis,
performance
appraisal
and
employee
evaluation
Job evaluation –why???  “In this company marketing is a pampered department.”  “We in accounts
Job evaluation –why???
“In this company marketing is a pampered department.”
“We in accounts are responsible for everything and the finance
people only play in money markets and earn fat salaries.”
“We in marketing have to face so many problems ,yet this company
values only manufacturing”
This is an engineering company yet those MBA’S………..

Need for job evaluation

To

provide

structure

a

basis

for

more

objective

and rational wage

  • To correct wage inequalities resulting from personal acquaintance, bargaining pressures, chance customs etc.

  • To provide the means for ranking of new and changing jobs

  • To provide information for promotion purposes regarding lines of promotion within job series

  • To provide basic determination

information for job negotiation and wage

  • For employee satisfaction and fostering organizational values

Methods of job evaluation (i) Point plan:  Has a predetermined manual rating scale.  Scale
Methods of job evaluation
(i)
Point plan:
Has a predetermined manual rating scale.
Scale lists factors or traits common to jobs
Factors are subdivided into degrees and points assigned to
each degree
Total points determine its relative position in the job structure.
After all jobs are evaluated the entire jobs are broken into job
families. (eg all jobs in point value from 100-130-grp1,150-
200-group 2)
Positives: Objectivity, simplicity, short time and comparability
Neg: Assumes that job are composed of certain fixed
factors.No special credit given to a imp
factor that may be
unique to a job. Assignment of weights is arbitrary
Overview of the Point System Degree of Factor Job Factor Weight 1 2 3 4 5
Overview of the Point System
Degree of Factor
Job
Factor
Weight
1
2
3
4
5
1. Education
50%
100
200
300
400
500
2.
Respon-
30%
75
150
225
300
sibility
3.
Physical
12%
24
48
72
96
120
effort
4.
Working
8%
25
51
80
conditions

(ii) Ranking or grading system

  • Making an array in terms of ranks of jobs from most to least imp. Jobs are rated as a whole. Comparison is made of one whole job against the other.

  • System should be preceded by accurate job analysis and job description

  • Suits smaller organizations which ranks jobs on the basis of overall impression of the raters

  • Ranking is in terms of jobs (difficulty level, responsibilities ,work

load, supervision required, conditions of work and knowledge /experience required).

Pos: Simplicity and takes less time

Neg: Does not indicate the degree of diff among jobs. Ratings suffer sometimes owing to inadequate knowledge of raters. May reflect current salary structure.

(iii) Factor comparison system  Conceived by Edward N. Hay and Samuel Burk.  The method
(iii) Factor comparison system
Conceived by Edward N. Hay and Samuel Burk.
The method begins by defining fundamental or basic job
factors. Generally these are: mental/physical requirement,
skill req, physical conditions, responsibility.
It then provides for a rating of each job on these factors
Weighing of the factors
Composite job rating based on weighted factors.
Pos: Essentially a ranking system but gives space to any
unique or rare factors
Neg: Complex, difficult to install an maintain and hard to
explain to non professionals.
Position
Mental
P.Skill
Resp
Physical
Working
Condition
s
Book-keeping operator
Telephone operator
Mail clerk
1
1
1
1
3
2
2
2
2
4
3
4
4
3
2

(iv)Job Classification

  • Raters categorize jobs into groups or classes of

jobs that are of roughly the same value for pay

purposes in grades.

  • Classes contain similar jobs.

  • Grades are jobs that are similar in difficulty but otherwise different.

  • Jobs are classed by the amount or level of compensable factors they contain.

Comp factdevelop grade descriptions for each gradeplace jobspay for each group or class is roughly the same

Example of A Grade Level Definition This is a summary chart of the key grade level
Example of A Grade Level Definition
This is a summary chart of the key grade level criteria for the GS-7
level of clerical and assistance work.
Figure 11–3
11–17

Case for job evaluation ..

  • It makes the criteria against which jobs are valued explicit and provides a basis for judgement process

  • For providing an equitable and defensible pay structure

  • Can be aligned with the organization value system and competency framework ,reinforcing them as an approach to people management besides assisting in crucial HR decisions

Case against

  • It can be bureaucratic ,inflexible, time consuming and inappropriate in today’s organizations.

  • Priori judjement on the part of evaluators

  • Schemes can decay over time Grade drift (People learn how to manipulate them to achieve a higher grade without a sufficient increase in responsibility)

Threats to validity of job evaluation

  • Training of raters

  • Selection of factors and assigning of weights

  • Subjectivity on the part of the raters

  • Misuse of statistical procedures

To conclude….

  • Clearly defined and identifiable jobs must exist. These jobs will be accurately described in an agreed job description.

  • Job evaluators will need to gain a thorough understanding of the job

  • Job evaluation is concerned with jobs, not people. It is not the person that is being evaluated.

  • Job evaluation is based on judgement and is not scientific. However if applied correctly it can enable objective judgements to be made.

  • It is possible to make a judgement about a job's contribution relative to other jobs in an organization.

  • The real test of the evaluation results is their acceptability to all participants.

  • Job evaluation can aid organizational problem solving as it highlights duplication of tasks and gaps between jobs and functions.

Establishing Pay Rates (cont’d)

  • 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(factory jobs, clerical jobs and other clusters).

Establishing Pay Rates (cont’d)

  • 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.

    • 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.

 Step4:Price each Pay grade Plotting a Wage Curve 11–23
Step4:Price each Pay grade
Plotting a Wage Curve
11–23

Establishing Pay Rates (cont’d)

  • Step 5. Fine-tune pay rates

    • Developing pay ranges

      • Flexibility in meeting external job market rates

      • Easier for employees to move into higher pay grades

      • Allows for rewarding performance differences and seniority

  • Correcting out-of-line rates

    • Raising underpaid jobs to the minimum of the rate range for their pay grade.

    • Freezing rates or cutting pay rates for overpaid (―red circle‖)

  • jobs to maximum in the pay range for their pay grade.

     Step 5:Fine tune pay rates Wage Curves Note: This shows overlapping wage classes and maximum–minimum
    Step 5:Fine tune pay rates
    Wage Curves
    Note: This shows overlapping wage classes
    and maximum–minimum wage ranges.
    11–25

    Pricing Managerial and Professional

    Jobs

    • Compensating managers

      • Base pay: fixed salary, guaranteed bonuses.

      • Short-term incentives: cash bonuses

      • Long-term incentives: stock options

      • Executive benefits and perks: retirement plans, life insurance, and health insurance

    Pricing Managerial and Professional

    Jobs

    • What Really Determines Executive Pay?

      • CEO pay is set by the board of directors taking into account factors such as the business strategy, corporate trends, and where they want to be in a short and long term.

      • Firms pay CEOs based on the complexity of the

    jobs they filled.

    • Boards are reducing the relative importance of base

    salary while boosting the emphasis on

    performance-based pay.

    Compensating Professional

    Employees

    • Employers can use job evaluation for professional

    jobs.

    • Compensable factors focus on problem solving, creativity, job scope, and technical knowledge and expertise.

    • Firms use the point method and factor comparison methods, although job classification seems most popular.

    • Professional jobs are market-priced to establish

    the values for benchmark jobs.

    What Is Competency-based Pay?

    • Competency-based pay

      • Where the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds.

    • Competencies

      • Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.

    Why Use Competency-Based Pay?

    • Traditional pay plans may actually backfire if a

    high-performance work system is the goal.

    • Paying for skills, knowledge, and competencies is more strategic.

    • Measurable skills, knowledge, and competencies are the heart of any company’s performance management process.

    Competency-Based Pay in Practice

    • Main components of skill/competency/ knowledgebased pay programs:

      • A system that defines specific skills, and a process for tying the person’s pay to his or her skill

      • A training system that lets employees seek and acquire skills

      • A formal competency testing system

      • A work design that lets employees move among jobs to permit work assignment flexibility.

    Comparable Worth

    • Comparable worth

      • Refers to the requirement to pay men and women

    equal wages for jobs that are of comparable (rather than strictly equal) value to the employer.

    References:

    • Michael Armstrong. A handbook of Human resource management,10 th edition,2006

    • Noe Hollenbeck Gerhart Wright. Fundamentals of Human Resource Management. Tata Mc Graw Hill,2007

    • Vivek Bhatia, How to evaluate job content, Business Today. Vol 5,Jan 7-21;1996

    • Meera Seth, Manpower Muddle. Case Study. Business Today, Sept 6.1994

    • C.S Damle. Spin off benefits of managerial job evaluation.Indian management Oct

    1993.vol32.No6

    • Nazimuddin Ahmed .The making of job evaluation plan. Vikalpa. Vol 7No.2 April- June,1982

    • Philip G.Bensen,Jeffrey S.Hornsby. The politics of pay, the use of influence tactics on J.E Committees. Group and Organization studies. Vol 13.No2,June1988

    • Jeffrey Hornsby, Brien N.Smith. Group and Organization Management. The impact of decision making methodology on J.E Outcomes. Group and Organization Management.Vol19.No1,March 1994

    • Dov Elizur. Job evaluation, A systematic approach. Gower Publishing company.Ltd.1981

    • Wendell French. Human Resource Management. All India Publishers and Distributors