COMPENSATION

Establishing Strategic Pay Plans.

 What is Compensation?
 Types of Compensation?
 The basic factors in determining pay rates.
 How to establish pay rates.
 How to price managerial and professional jobs.
 Competency based pay and other current trends
in compensation.
Presented by,
Muhd Irshad
Vinod
Feroz Khan
Sachin
Sophia
 COMPENSATION

Compensation may be defined as money

received in the performance of work, plus the
many kinds of benefits and services that
organisations provide their employees.
 TYPES OF COMPENSATION

Direct Compensation (Money)

Indirect Compensation (Benefits)

 Factors determining pay rates

 Demand and supply:- If the labour is in short supply, the workers will
offer the services only if they are paid well. On the other hand, if the supply is
more then workers available might get ready work at cheaper rates.

 Bargaining Power: Where labour unions are strong enough to force the
hand of employers, the wages will be determined at a higher level in comparison to
other units where unions are weak.

 Cost of living:- Wages of workers also depends upon the cost of living of
the worker so as to ensure him a decent living wage.
 Comparative Wages:- Wages paid by the other firms for the
same work also influence the wage levels.

 Ability to Pay:- Those firms which are earning huge profits

may afford to pay high wages and can provide more facilities to its
workers in comparison to the firms earning comparatively low profits.

 Productivity of labour:- Higher productivity will

automatically fetch more profit to the firm, where in turn workers will
be paid high wages in comparison to other firms with low productivity.

 Job Requirements:- If a job require higher skill, greater

responsibility and risk, the worker placed on that job will naturally get
higher wages in comparison to other jobs which do not require the
same degree of skill, responsibility or risk.
 Govt. Policy:- Since the bargaining power of the workers is
not enough to ensure fair wages in all industries, the Govt. has to
interfere in regulating wage rate to guarantee minimum wage rates in
order to cover the essentials of a decent living.
 Corporate Policies, Competitive Strategy

 Aligned reward strategy

› The employer’s basic task is to create a bundle of
rewards—a total reward package—specifically 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.
 Compensation Policy Issues
 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
› It also plays a policy role. Employers handle cost-of-
living differentials in several ways.
› Like, giving transferred person a nonrecurring
payment, usually in lump sum.
 Equity and Its Impact on Pay Rates
 The equity theory of motivation
› States that if a person perceives an inequity, the
person will be motivated to reduce or eliminate the
tension and perceived inequity.
 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. The salary survey
› Aimed at determining prevailing wage rates.
 A good salary survey provides specific wage rates for
specific jobs.

 Benchmark job: A job that is used to anchor the

employer’s pay scale and around which other jobs are
arranged in order of relative worth.
 Establishing Pay Rates (cont’d)
 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.
 Job Evaluation Methods:
Ranking
 Ranking each job relative to all other jobs,
usually based on some overall factor.
 Steps in job ranking:
› Obtain job information.
› Select and group jobs.
› Select compensable factors.
› Rank jobs.
› Combine ratings.
 Job Evaluation Methods:
Job Classification
 Raters categorize jobs into groups or classes of
jobs that are of roughly the same value for pay
purposes.
› 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.
 Job Evaluation Methods: Point
Method
 A quantitative technique that involves:
› Identifying the degree to which each compensable
factors are present in the job.
› Awarding points for each degree of each factor.
› Calculating a total point value for the job by adding
up the corresponding points for each factor.
 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.
 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.
 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.
 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.
PRICING MANAGERIAL &
PROFESSIONAL JOBS.
 COMPENSATING EXECUTIVES.

 Usually consist of 4 main elements.

1. Base pay..
2. Short term incentives..
3. Long term incentives..
4. Executive benefits..
 WHAT DETERMINES
EXECUTIVE PAY..?
 CEO pay is set by the board ..

 FACTORS EFFECTING:::
1. Company size..
2. Company performance..
3. Business strategy..
4. Corporate trends..
5. Complexity firms..
 CONTROLE….
 Share-holders…

 Ex: GlaxoSmithKline Pharmaceuticals firm

 Sh. Voted to reject board’s recommendation.
 $35 million if CEO lost his job
 Pension plans of both him & his wife..
 PERFORMANCE BASED PAY..
 Example:::
 DANA CORP.–
 (Auto parts maker of heavy trucks..)
 CEO– Mr. Joseph Magliochetti..
 Sales dropped by 6%, & profit 44%.
 CEO got $850,000..
 Board eliminate his bonus & stock grant,
 $1.8million..
 COMPENSATING
PROFESSIONALS EMPLOYEES..
 Engineers & Scientists…
 Factors effecting:::
1. Problem solving skills..
2. Creativity..
3. Job scope..
4. Technical knowledge & expertise..
 Competency Based Pay
 Traditionally the jobs pay rates are based on the
relative worth of the job.

 Over the past few years, there has been a surge of

interest in pay for performance.
 Why Pay for Performance
 The logic is crystal clear. You pay people
contingent on their performance motivating
exemplary employee behavior.
 Individuals benefit from enhanced rewards

 organizations benefit from the cumulative boost

in performance.
 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

 Competencies
› Demonstrable characteristics of a person, including
knowledge, skills, and behaviors, that enable
performance.
 Change
 Title & Tenure to Performance &Competency

 Job-Oriented to Person Oriented

 Compensable factors of Effort and

Responsibility to Knowledge ,skill and Abilities
(KSAs)
 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/
knowledge–based 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.
 Competency-Based Pay: Pros and
Cons
 Pros
› Higher quality
› High productivity
› Higher Growth
› High Motivations
› Higher job Satisfaction
› Higher Accountability
› Healthy Competition
 Cons of Performance based Pay

 Cons
› Implementation problems
› Cost implications of paying for unused knowledge,
skills and behaviors
› Complexity of program –systems and evaluations and
assessment
› Uncertainty that the program improves productivity
Pay-for-Performance Goal Setting
Best practices:

› Adopt SMART goals (specific, measurable, achievable,

relevant, time-bound)
› Support the process, from the CEO, through the entire
organization
› Make goal-setting as transparent a process as possible
› Do not consider the goal in an employee’s plan until the
employee physically accepts the goal in the system
› Allow for top down (cascading goals) and bottom up
(pushed) goals
› Encourage balanced scorecard philosophy and alignment
of individuals goals to corporate initiatives
Pay-for-Performance Best Practices

› Base merit decisions on job performance (factoring in

other factors such as compa ratio, position in range,
performance relative to peers, etc. (to assist with forced
distributions)
› Base short-term incentive decisions (MBO bonuses) on
objectives or goal achievement
› Make long-term incentive decisions as a retention tool for
top performers
› Have a consistent method of determining compensation
decisions that is equitable for employees (and not too
complicated).
 Motivation and Incentive
 Different people react to different incentives in
different way

 Hence Incentive plans have to be carefully

drawn.
 Fredrick Herzberg’s Motivation
Theory
 Higher –Level needs & Lower Level needs also
called Motivators and Hygienes.

 Hygienes like monetary hikes are easy to achive

and may not motivate for long enough.
 Hence should work on Motivators like job
challenge and satisfaction needs.
Non-cash incentives

40
trip
35
30 shopping
25
20 home
improvement
15 ticket to places
10
5 Electronics

0
 Types of incentives
 Individual based

 Group based

 Sales based

 Company wide
 Another category
 Financial –bonus /perks /commissions

 Non Financial- rewards /recoginitions/title

changes/social recoginitions/appreciations
 Benefits & Services
 Holidays & vacations
 Medical benefits
 Family counselling
 Loans
 Car /House Lease
 Insurance
 Pension Plans
 Education for Child benefits
 Educational subsidies and leaves
 Leaves
 Flexiwork