Compensation Management

Objectives of Compensation

Acquire
Administrative personnel Retain
efficiency employees

Legal Effective Ensure

compliance Compensation equity

Control Reward
costs behaviour
Compensation
• Cash and non-cash rewards employees
receive in exchange for their work
• Effective compensation management
– Employees more likely to be satisfied and motivated
• Compensation perceived to be inappropriate
– Performance, motivation and satisfaction may
decline dramatically
– Employee turnover may occur
– Dissatisfaction with absolute or relative pay
Factors Influencing Pay
EXTERNAL EQUITIES

Market
Organisation
Forces
Policy

Individual
Work Performance
Value

INTERNAL EQUITIES
Factors Influencing Pay

Market Forces
• Labour supply & demand
• Job family differences
• Different industries
Factors Influencing Pay
Organisation Policy
• What do we want to pay

• What can we afford to pay

• Ratio of labour costs to total costs
• Do we provide remuneration by way of
benefits
• Will we have an incentive/bonus scheme
• Collective bargaining agreement
• Emphasis on quality, customer service,
individual or group performance
Factors Influencing Pay

Work Value
• Knowledge and experience

• Task complexity
• Supervisory responsibility
• Interpersonal skills
• Other ability and skill levels
Factors Influencing Pay

Individual Performance/Merit
• Bargaining power
• Actual achievements of the individual
compared to expectations
Compensation Challenges

Prevailing
wage rates

Government Union
constraints Compensation power
Challenges

Wage & salary Productivity

policies
 Remuneration & Rewards

Financial Non-Financial

DIRECT INDIRECT JOB ENVIRONMENT

(cash) (benefits) •Interesting •Good policies
•Wages •Insurance work and practices
•Salaries •Holidays •Challenge •Competent
•Commissions •Medical and •Responsibility supervision
•Bonuses health •Recognition •Congenial
•Child care •Advancement coworkers
•Employee •Safe and
assistance healthy work
•Flexible work environment
schedule •Fair treatment

Components of Employee Remuneration

 Examples of Traditional and
Non-traditional Pay
Traditional Pay
Focus Job-
Job
•Create order
Evaluation based
•Reinforce the hierarchy
•Direct behaviour
Merit Increases Traditional
Pay

Recognition Individual Performance Profit

Awards Incentives Appraisal Sharing

Non-traditional
Pay
Non-traditional Pay Competency
Team/Group
Focus Pay
Incentives Contribution
•Encourage involvement
•Highlight organisational needs -
Gainsharing based
•Reward positive results
Remuneration Choices

Low Base Salaries High Base Salaries

Internal Equity External Equity

Individual Performance Group Performance

Standard, Fixed Package Flexible Package

Lag the Market Lead the Market

No Incentives Many Incentives

Job Skills

Performance Tenure

Hierarchical High Participation

DESIGNING COMPENSATION
SYSTEM

• SUPPORT BEHAVIOR & ATTITUDES

• PARTICIPATIVE APPROACH IN PAY
SYSTEM DESIGN & ADMINISTRATION
• COMMUNICATION & ACCEPTANCE
• MULTIPLE SYSTEMS
• SAME DAY ANNOUNCEMENT FOR
WORKERS /MANAGEMENT
INAPPROPIATE
The Compensation Structure
Job Evaluation

Issues
Issues Wage and
Involved
Involved in
in Salary Surveys
Setting
Setting
Compensation
Compensation Pay Grades
Structures
Structures
Rate Ranges
Compensation Management Step 1
Phase I
Job Analysis Identify and study jobs
• Position descriptions
• Job descriptions
• Job standards
Compensation Management Step 1 &2
Phase I • Determine relative worth or
Job Analysis value of jobs
Phase II
Job Evaluation
• Provides for internal equity
• Job evaluation methods:
• Job ranking
• Job grading
• Point system
Compensation Management Step 1-3
Phase I • Discover what other
Job Analysis employers are paying for
Phase II specific key jobs
Job Evaluation • Provides for external
Phase III equity
Salary Surveys
Compensation Management Step 1-4
Phase I • Establishing the pay level
Job Analysis for each job
Phase II • Combines job evaluation
Job Evaluation ranking, survey wage rates,
and other considerations e.g.
Phase III organization’s pay policy
Salary Surveys
• Wage-trend line developed
Phase IV
Pricing Jobs • Grouping the different pay
levels into a structure that
Match can be managed
• Job classes and rate ranges
Job Analysis: Step 1
Relationship between Job Requirements
and HRM Functions

• JOB-a group of related activities and

duties
• POSITION- The different duties &
responsibilities performed by only one
employee
• JOB FAMILY- a group of individual jobs
with similar characteristics
JOB DESCRIPTION

• TASK- DISTINCT WORK ACTIVITY THAT IS

IDENTIFIABLE FROM BEGINNING TO END
• DUTIES- SEVERAL TASKS RELATED BY
SOME SEQUENCE OF EVENTS
• POSITION- COLLECTION OF TASKS &
DUTIES WHICH ARE PERFORMED BY ONE
PERSON
Relationship between Job
Requirements and HRM Functions
• JOB DESCRIPTION- Statement of the tasks,
duties & responsibilities of a job to be performed
• JOB ANALYSIS-Process of obtaining information
about jobs by determining what the duties,
tasks, or activities of jobs are
• JOB CLASSIFICATION -grouping or categorizing
of jobs
• JOB SPECIFICATION-statement of needed
knowledge, skills & abilities of the person who is
to perform the job
JOB
DOCUMENTATION/DESCRIPTION

• Recording job content information

-job description.
• Ideal job description used for
pricing/compensation reflects not just
information concerning ‘what “ a job
does, but also “how” and “why” of the
duties.
JOB RANKING-RATING

• Ordering jobs from the highest to

lowest based on some definition of
value or contribution in the
organisations goals.
• Two approaches followed-alternate
ranking,paired comparison.
JOB CLASSIFICATION

• Each job measured against a

preexisting set of job classes. Within
this method job evaluation involves
comparing a position with these
generic job level or class.
INTERNAL BENCHMARKING

• Intuitive evaluation by comparing the job

under review with any internal benchmark
job which is believed to be properly graded
and paid and slotting the job under
consideration into the same grade as the
benchmark job
 JOB ANALYSIS & WORK DESIGN As
complementary interventions

JOB ANALYSIS WORK DESIGN

INPUT •Data on work, worker & work •Job Description

environment •Job Specification
•Org environment

PROCESS •Job /Task analysis •Work Design

•Performance Analysis •Human factors
•Quality Imp

OUTPUT •Job Description(work) •Blueprint on perf reqts

•Job Specification(worker) •Blueprint for org eff &
emp satisfaction
JOB ANALYSIS & WORK DESIGN INTERVENTIONS
FROM ENHANCED HPT MODEL

• JOB ANALYSIS • HUMAN FACTORS

 Ergonomics
 Job Description  Safety Engineering
 Job Specifications  Preventive
• Maintenance
WORK DESIGN
• QUALITY
 Job Design IMPROVEMENTS
 Job Enlargement • TQM
• Continuous
 Job Rotation Improvement
 Job Enrichment • Value Analysis/Value
Engineering
 INPUT-OUTPUT RELATIONSHIP OF JOB
ANALYSIS, JOB DESCRIPTION & JOB
SPECIFICATIONS

JOB ANALYSIS
•ORG ENVIRONMENT
•JOB DESCRIPTIONS
•WORK ENVIRONMENT •Standards (work)
•WORK WORKER •Consequences•JOB SPECIFICATION
•Feedback (worker)
JOB ANALYSIS INPUTS-PROCESSES-
OUTPUTS

• Inputs to job analysis

 Purpose
 Location
 Frequency
 Importance
 Qualification
 Tools

• Job analysis process-procedures, difficulty

• Outputs to job analysis-
 Standards
 Consequences
 Feedback
Compensation Management Step
3Establishing a Salary Structure
Step 3. Salary Surveys
• Salary surveys compare an organisation’s 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?
Compensation Management Step 4: Pricing
Jobs- Pay Grade & Pay Progression

• Step 3 Group similar jobs into Pay Grades

or Job Classes
– jobs of equal difficulty

• Step 4 Establish the Wage Curve

Wage Curve shows relationship between value
of job and average wage paid for the job
 Pay Grades

Groups of jobs within a particular class

that are paid the same rate or rate
range
 Wage Curve
Wage Curve

6
monthly
salary 5
(Rs.000)
4
PAY 3

2 Line of Best Fit :

1 using Market-Survey data

JE Points 40 80 120 160 200 240 280 320

Jobs AB CDEF GHIJ KLM 0P QRS
TUV
Grades 1 2 3 4 5 6
7
 Establishing a Salary Structure

• Step 5 Formulate a Rate Structure

• Single Rate Structure vs Rate Range

• Single Rate Structure

GR JOBS SALARY (Rs.)
I AB 5000
II CDEF 7000
III GHIJ 9000
• Rate Range
 
5000 – 250 – 6500 – 300 - EB - 500 – 9000
Non–Overlapping Rate Range

GR JOBS SALARY (Rs.)

I AB 3000–250–4500–500-9000
II CDEF 9000–400–11400–750-17400
III GHIJ 17400–600–21000–900-
28200

Overlapping Rate Range

GR JOBS SALARY (Rs.)
I AB 3000–250–4500–500-9000

II CDEF 6000–400–8400–750-14400

III GHIJ 10000–600–13600–900-20800

 Pay Structure
39.50
37.00 Wage Curve (or line)
34.50
32.00 Maximum Rate
29.50
Rates (Rs.)

27.00
24.50
22.00
22.00
19.50
Minimum Rate
17.00
14.50
12.00
I II III IV V VI
9.50
0 50 100 150 200 250 300
Elements of the Rate
Range
 Red & Green Circle
Jobs
39.50
37.00
34.50
32.00
29.50
Rates (Rs.)

27.00
24.50
22.00
22.00
19.50
17.00
14.50
12.00
I II III IV V VI
9.50
0 50 100 150 200 250 300
 Pay Structure -
Broadbanding
39.50 Wage Curve (or line)
Maximum Rate
37.00
34.50
Previous
32.00
Rates (Rs. 000)

Maximum Rate
29.50
27.00
24.50
22.00
Minimum Rate
22.00
19.50
17.00 Previous
Minimum Rate
14.50
12.00
I II III IV V VI
9.50
0 50 100 150 200 250 300
 STEPS INVOLVED IN THE DETERMINATION
OF WAGE RATES

JOB ANALYSIS MIN WAGE

ADMINISTRATION
OF
JOB DESCRIPTION
WAGE STRUCTURE
& JOB EVALUATIONWAGE SURVEYS WAGE STRUCTURE
JOB SPECIFICATION

PERFORMANCE
APPRAISAL
PERFORMANCE NORMS
& STANDARDS

WAGE PAYMENT
Employee Stock Ownership Plan

• Is a contribution plan that operates like

a qualified stock option bonus plan
• as a kind of employee benefit trust
• Purpose is to encourage employee
stock ownership.
Employer Benefits of ESOP

• Assists in establishing and maintaining

stable, high performance workforce
• Acts as GOLDEN HANDCUFFS to
retain desired employees
• Employer also obtains certain tax
benefits
CHANGING ENVIRONMENTAL
PRESSURES

• GLOBALISATION
• RAPIDLY CHANGING TECHNOLOGY
• DEMOGRAPHIC COMPOSITION
• CHANGING STRUCTURES & SYSTEMS
– Need for Flexibility
– Team Based Structures
– Self managed teams
Pay-for-Performance

• Incentive systems provide a clear

link between pay and performance
or productivity
• Incentive pay
– Directly linked to an employee’s
performance or productivity
Incentive Systems
Benefits Problems
Performance is reinforced Administration can be
regularly complex
Reinforcement is quick and May result in inequities
frequent Employees may not achieve
Effective behaviours are standards due to
likely to continue uncontrollable forces
Union resistance
Wages paid in proportion
Focus efforts on one aspect
with performance
Pay Secrecy
Disadvantage
Advantages s
Most employees prefer to May generate distrust in the
have their pay kept secret pay system
Gives managers greater Employees may perceive
freedom that there is no relationship
Covers up inequities in the between pay and
internal pay structure performance
New Approaches to Pay
• Skill- or knowledge-based pay
– Based on the employee’s skills or knowledge
• Variable pay
– Performance-linked approach
• Broadbanding
– Consolidation of pay grades
• Tailor-made perks
– Employees choose
• International pay
– Need to develop polices to meet global needs
Changing Compensation
Systems
Traditional Modern

Pay = 100% base Variable component

salary added

Entitlement-base Performance-driven
increases gains

Few incentive/bonus Many kinds of plans,

plans, restricted to extended throughout
executives the organization
Pay & Organizational Strategy

Motivating
performance Identifying
Attract & valued rewards
retain

Areas that impact Relating to

performance
Motivating pay systems
development
Setting
Consequences goals