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Compensation Administration

Establishing rewards and pay plans


Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment.
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Key Challenge
How to allocate scarce compensation money among employees in ways that rewards and motivates good performance. Mercers (HR consulting firm) survey data reveals that there are growing concerns and challenges related to compensation.

The projections for 2012, in the 16th Annual India Salary Increase Survey
Salary increases in India are projected to be 11.9 per cent in 2012, according to global human resource consulting and outsourcing company Aon Hewitt., were marginally lower compared to the actual increase of 12.6 per cent in 2011.

Pay package increase projections (in %)


2010 Employee levels Top/Senior Management Middle Management Junior Manager/Sup/ Prof 11.1 11.2 11.1 2011 2012

12.0 12.4

12.5 12.7

12.0 12.3

General/Entry Staff Across Industries Overall

11.4 10.6

12.0 12.9

11.8 11.9
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Pay package increase projections (in %) Industry wise


Industry Pharmaceutical 2010 NA 2011 13.2 2012 13.3

Engineering Design/Services

12.6

14.4

13.0

Infrastructure

NA

13.9

12.9

Chemicals

NA 12.6

13.8

12.6

Engineering/Manufacturing

NA

13.7

12.4
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FMCG/FMCD

NA

13.4

12.4

Automotive/Vehicle Manufacturing

NA

14.0

12.4

High Tech/Information Technology

8.9

12.0

11.9

Retail

11.1

12.4

11.8

IT Enabled Services (ITeS) NA

11.9

11.8

Energy (Oil/Gas/Coal/Power) Metals

NA
NA

14.0
NA

11.8
11.3

Telecommunication Services Financial Institutions

NA

12.5

11.0

10.5

12.7

10.0
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Mercers (HR consulting firm) survey data reveals that there are growing concerns and challenges related to compensation. It publishes an annual global compensation planning report for more than 40 countries.

According to the 'Asia Executive Remuneration Snapshot Survey' by consulting firm Mercer, Senior executives in Indian companies should see an increase in base pay by 8.3% in 2012, a marginal drop from last year's 8.4%, according to the survey. However, Indian firms will see more salaries linked to performance since economic conditions are uncertain. Going forward, a lower increase in base pay is expected with salary tilting more towards long-term and short-term incentives.
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Currently, in India around 58% of an executive's salary is fixed and 42% linked to variable pay, compared with companies in other Asian countries, which have 40% attributed to fixed pay and 60% dependent on variable pay.

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Strategic Choices
How to pay employees with respect to competition.

Whether to pay higher, equal or lower than the existing market trend? (Pay level decision) How closely the compensation plan is linked to the organization's overall strategic plan? Merit pay raises, experience based or across-theboard raises. To decide the level of pay secrecy. To determine its stance of internal equity (relative worth). (Pay Structure Decision) Decide how to mix intrinsic (rewards from performing the job) & extrinsic rewards (outside the job). 11

Decide the ratio of fixed & variable pay. Internal vs. External Equity Pay to individual or group contributions Job vs. Individual Pay Egalitarianism vs. Elitism: all have same plan or establish different plans. Open vs. Secret Pay Centralization vs. Decentralization made in central location or delegated to unit managers.
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Importance of designing the compensation intelligently. Fixed/ variable Pay How to implement incentives that motivate staff to achieve outstanding results. Retirement woes Fringe benefits: ESOPs Perks How to use powerful and highly effective tool for managing compensation. How to develop a compensation policy that delivers the greatest value to the employee at the lowest cost to the company How to establish internally equitable and externally competitive grading and salary structures. How to introduce competency/skill and market-based pay 13

Compensation Policy Development


Create philosophy to pay Analyze current practices vs desired objectives Relate internal policies to external market Establish guidelines for equality, competitiveness and motivation

3 Ps of compensation Management
1. Paying for Position Develop an equitable grading structure Create a reference salary structure Leverage compensation costs with market survey information 2. Pay for Person Determine competency requirements and employee capabilities Pay individuals based on their competency match with the position Identify and pay market premium for competencies in short supply in the market 3. Paying for Performance Design annual bonus and incentives plans that motivate staff Shift from fixed salary increases to variable pay Create long-term reward plans - stock options, deferred compensation and phantom 14 share plans.

Equity Fairness
Two types of employee social comparisons of pay are especially relevant in making pay-level and job structure decisions:
Pay Structure Decision Area Pay Level Administrative Tool Market pay surveys

Focus of Employee Pay Comparisons


External equity

Consequences of Equity Perceptions External employee movement, labor costs, employee attitudes Internal employee movement, cooperation, employee attitudes

Pay Structure

Job evaluation

Internal equity

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REWARD CLASSIFICATIONS
Intrinsic - Extrinsic Financial-Nonfinancial Membership (company linked)Performance (individual linked)
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INTRINSIC REWARDS
Personal satisfaction from the job itself Consistent with own value system Decision making Freedom Control

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INTRINSIC REWARDS
Responsibility Interesting work Personal growth Diversity of activities

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EXTRINSIC REWARDS
Beyond the work itself Come from management Financial and/or nonfinancial Financial may be performance- or membershipbased/direct or indirect 19

EXTRINSIC FINANCIAL REWARDS


Wages/Salaries Incentives:Bonuses Profit-sharing Fringe benefits: PF, gratuity, insurance, mediclaim Perks: company car, mobile, furnished house. Paid Vacations, Purchase discounts
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EXTRINSIC NONFINANCIAL REWARDS


Extras at the disposal of the company Do not affect the financial position of the employee Creative Varied

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EXTRINSIC NONFINANCIAL REWARDS


Office furnishings Lunch hours Parking spaces Work assignments, locations Business cards Secretary Titles
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MEMBERSHIP-BASED REWARDS
Most organizational rewards (explicit & implicit) Regardless of performance Examples
Cost-of-living increases Benefits Salary due to labor market conditions
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Classification of Rewards

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COMPENSATION ADMINISTRATION GOALS


Job evaluation based Cost-effective pay structure Attract, motivate, retain Fair Legal

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Legal & Fair


WHAT FACTORS DETERMINE PAY?

Union

Policy

Equity
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Relevant Acts
Minimum Wages Act, 1948 Payment of Wages Act, 1936 Equal Remuneration Act, 1976 Companies Act, 1956 ESIC Act EPF, Gratuity Act

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COMPENSATION ADMINISTRATION LAWS


Equal Remuneration Act 1976
Prevents discrimination Equal pay for equal work Women still earn only 75% of what male counterparts earn

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Equal Remuneration Act 1976


The Equal Remuneration Act 1976 defines "remuneration" in section 2(g) as follows: "the basic wages or salary, and any additional emoluments whatsoever payable, either in cash or in kind to a person employed in respect of employment or work done in such employment, if the terms of the contract of employment, express or implied, were fulfilled." A typical remuneration package in the organized sector (for a time rate payment system) consists of a basic wage, dearness allowance (to compensate for inflation), other allowances, and the house rent allowance. The dearness and the house rent allowances can be different in offices of the same company due to the cost of living in different cities. (Acharya 1995, 7-8.)
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Equity and Its Impact on Pay Rates


Forms of Equity

External Equity

Internal Equity

Individual Equity

Procedural Equity

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Addressing Equity Issues


Salary Surveys

Methods to Address Equity Issues

Job Analysis and Job Evaluation

Performance Appraisal and Incentive Pay

Communications, Grievance Mechanisms, and Employees Participation


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Establishing Pay Rates


Steps in Establishing Pay Rates
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Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). Determine the worth of each job in your organization through job evaluation (to ensure internal equity).

3 4 5

Group similar jobs into pay grades. Price each pay grade by using wave curves.
Fine-tune pay rates.

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Establishing Pay Rates


1. The Salary Survey: determine prevailing wage rates, Price benchmark jobs in the organisation, data about employee benefits. Using internet to get information: Salary.com, wageweb.com.
http://www.opm.gov/Employment_and_Benefits/index.asp

2. Job Evaluation 3. Group similar jobs into pay grades. 4. Price each pay grade through wage curve: shows the relationship between the value of the job & the avg. wage paid for it. 5. Fine tune pay rates: pay levels in each grade.
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JOB EVALUATION
A systematic comparison done in order to determine relative worth of one job relative to another. Job ranking indicates value to organization Higher value jobs should be paid more Skills and performance levels of individuals are additional issues
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JOB EVALUATION CRITERIA

Present in all jobs Present in varying degrees Measurable Compensable factors


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COMPENSABLE FACTORS
Use 3 to 5 May be subdivided
Skills

Effort Step 2. Job Evaluation: Identifying Compensable Factors

Responsibility

Working Conditions
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METHODS OF JOB EVALUATION


Ranking/Ordering
Job classification/Grading Point rating Factor comparison

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Ranking/Ordering Method
No attempt to identify compensable factors Rank order jobs from most important to least No distance identification Simple, good for small companies

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Ranking Order 1. Office manager

Annual Pay Scale $43,000

2. Chief nurse
3. Bookkeeper 4. Nurse 5. Cook 6. Nurses aide 7. Orderly

42,500
34,000 32,500 31,000 28,500 25,500

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CLASSIFICATION METHOD
Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.
Classes contain similar jobs.
Administrative assistants

Grades are jobs similar in difficulty but otherwise different.


Mechanics, welders, electricians, and machinists

Jobs are classed by the amount or level of compensable factors they contain.
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GRADE 6 GRADE 5 GRADE 4

Chef Manager Assistant Manager Office Manager General Cook Server Cashier Dishwasher

JOBS

$21.50-32.00 / hr $12.50-22.00 / hr $8.50-13.00 / hr

PAY

GRADE 3
GRADE 2

$7.50-9.00 / hr
$7.00-8.00 / hr

GRADE 1

$6.50-7.25 / hr

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POINT METHOD
A quantitative technique that involves:
Identifying the degree to which each compensable factor is 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.

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Exhibit 2: Excerpts from a Point Method

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Factor comparison method


A widely used method of ranking jobs according to variety of skills and difficulty factors, then adding up these ranking to arrive at an overall numerical rating for each job given.

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4. Price Each Pay grade using WAGE Curves


Step 4. Price Each Pay GradeWage 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.

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Exhibit 3: A Wage Curve

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THE WAGE STRUCTURE

After drawing wage curve Develop wage structure

See Exhibit 11-5


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Exhibit 4: A Sample Wage Structure

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Broadbanding
Establishing grades makes the task easier. Pay levels/ranges in terms of grade width are established. Minimum & maximum salary one can earn in a grade. Total no. of job evaluation points included in a grade. Broadbanding consolidates salary grades & ranges into a few wide levels or bands. Each of which contains a relatively wide range of jobs & salary levels. e.g. six pay grades can be consolidated into two broad bands. Thus it breeds flexibility.
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A Sample Banding

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Broadbanding
Steps of broadbanding:
1. Decide no. of bands & how many points they will include. 2. Assign each band a salary range: wide & overlap 3. A no. of jobs are included in each band. 4. Several skill levels, increase in skills to get raises 5. Broadbanding is used with strategic initiatives. Example: IBM, Dow Jones implemented it with downsizing restructuring, renewal, cultural change.
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Skill-Based Compensation
Range, depth & types of skills Individual incentives
Merit pay Piecework plans Commissions Time saving bonuses

Group incentives AND.


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Incentives
Individual incentives
Merit pay Piecework plans Commissions Time saving bonuses

Group incentives AND. Plant-wide incentives


Scanlon Plan IMPROSHARE Cost reduction Profit sharing

Gain sharing

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PAYING FOR PERFORMANCE


More than time on the job Piecework Lump sum bonuses

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PAYING FOR PERFORMANCE


Performance>>>> rewards Motivation Popular Not added to base Control of individual or group
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EXECUTIVE PAY
Salaries Supplements
Deferred compensation Hiring bonus Stock options Employee stock ownership plan

AND.
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EXECUTIVE PAY

Perquisites
Cars Country clubs Consulting fees Retirement supplements Expense accounts

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