Managing Compensation

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Managing Compensation
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1. Explain employer concerns in developing a
   strategic compensation program.
2. Indicate the various factors that influence the
   setting of wages.
3. Explain the purpose of a wage survey.
4. Define the wage curve, pay grades, and rate
   ranges as parts of the compensation structure.

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Compensation

• Pay is a statement of an employees worth by an
  employer.
• Pay is a perception of worth by an employee.

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Total Compensation

• Time Not Worked
• Vacations
• Breaks
• Holidays

Wages / Salaries
Commissions

• Insurance Plans
• Medical
• Dental
• Life

Bonuses
Gainsharing

• Security Plans
• Pensions

• Employee Services
• Educational assistance
• Recreational programs

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Common Strategic Compensation Goals

1. To reward employees past performance
2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To link employees future performance with
   organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover

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Strategic Compensation Policy Concerns

1. The rate of pay within the organization and
   whether it is to be above, below, or at the
   prevailing community rate.
2. The ability of the pay program to gain employee
   acceptance while motivating employees to perform
   to the best of their abilities.
3. The pay level at which employees may be recruited
   and the pay differential between new and more
   senior employees.
4. The intervals at which pay raises are to be
   granted and the extent to which merit and/or
   seniority will influence the raises.

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Designing a Pay-for-Performance System

• How will performance be measured?
• How will allocation be done for compensation
  increases.
• Which employees will be eligible?
• How will payouts be made?
• How often will payouts occur?
• How large will the payouts be?
• Will employees perceive the rewards as valued?

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The Bases for Compensation

• Hourly Work
• Work paid on an hourly basis.
• Piecework
• Work paid according to the number of units
  produced.
• Salary Workers
• Employees whose compensation is computed on the
  basis of weekly, biweekly, or monthly pay periods.

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Factors Affecting the Wage Mix
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The Wage MixInternal Factors

• Employers Compensation Strategy
• Setting organization compensation policy to lead,
  lag, or match competitors pay.
• Worth of a Job
• Establishing the internal wage relationship among
  jobs and skill levels.
• Employees Relative Worth
• Rewarding individual employee performance
• Employers Ability-to-Pay
• Having the resources and profits to pay employees.

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The Wage MixExternal Factors

• Labor Market Conditions
• Availability and quality of potential employees
  is affected by economic conditions, government
  regulations and policies, and the presence of
  unions.
• Area Wage Rates
• A firms formal wage structure of rates is
  influenced by those being paid by other area
  employers for comparable jobs.

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The Wage MixExternal Factors

• Cost of Living
• Local housing and environmental conditions can
  cause wide variations in the cost of living for
  employees.
• Inflation can require that compensation rates be
  adjusted upward periodically to help employees
  maintain their purchasing power.

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Job Evaluation Systems

• Job Evaluation
• The systematic process of determining the
  relative worth of jobs in order to establish
  which jobs should be paid more than others within
  an organization.

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Job Evaluation Systems

• Job Ranking System
• Oldest system of job evaluation by which jobs are
  arranged on the basis of their relative worth.
• Disadvantages
• Does not provide a precise measure of each jobs
  worth.
• Final job rankings indicate the relative
  importance of jobs, not extent of differences
  between jobs.
• Method can used to consider only a reasonably
  small number of jobs.

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Job Evaluation Systems

• Job Classification system
• A system of job evaluation in which jobs are
  classified and grouped according to a series of
  predetermined wage grades.
• Successive grades require increasing amounts of
  job responsibility, skill, knowledge, ability, or
  other factors selected to compare jobs.

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Point System

• Point System
• A quantitative job evaluation procedure that
  determines the relative value of a job by the
  total points assigned to it.
• Permits jobs to be evaluated quantitatively on
  the basis of factors or elementscompensable
  factorsthat constitute the job.

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The Compensation Structure

• Wage and Salary survey
• A survey of the wages paid to employees of other
  employers in the surveying organizations
  relevant labor market.
• Helps maintain internal and external pay equity
  for employees.
• Labor Market
• The area from which employers obtain certain
  types of workers.

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Collecting Survey Data

• Conducting Employer-initiated Surveys
• Select key jobs.
• Determine relevant labor market.
• Select organizations.
• Decide on information to collect wages/
  benefits/ pay policies.
• Compile data received.
• Determine wage structure and benefits to pay.

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Characteristics of Key Jobs

• Key Jobs
• Jobs that are important for wage-setting purposes
  and are widely known in the labor market.
• Characteristics of Key Jobs
• They are important to employees and the
  organization.
• They contain a large number of positions.
• They have relatively stable job content.
• They have the same job content across many
  organizations.
• They are acceptable to employees, management, and
  labor as appropriate for pay comparisons.

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The Wage Curve

• Wage Curve
• A curve in a scatter gram representing the
  relationship between relative worth of jobs and
  wage rates.
• Pay Grades
• Groups of jobs within a particular class that are
  paid the same rate.
• Rate Ranges
• A range of rates for each pay grade that may be
  the same for each grade or proportionately
  greater for each successive grade.
• Red Circle Rates
• Payment rates above the maximum of the pay range.

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Freehand Wage Curve
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Wage Structure with Increasing Rate Ranges
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The Wage Curve (contd)

• Competence-based Pay, (also skill-based pay or
  knowledge-based pay)
• Compensation for the different skills or
  increased knowledge employees possess rather than
  for the job they hold in a designated job
  category.
• Greater productivity, increased employee learning
  and commitment to work, improved staffing
  flexibility to meet production or service
  demands, and the reduced effects of absenteeism
  and turnover,
• Broadbanding
• Collapses many traditional salary grades into a
  few wide salary bands.

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Approaches of compensation management

• There are 3P approach of developing a
  compensation policy centered on the fundamentals
  of paying for
• Position,
• Person and
• Performance.

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• The management of any organization considers
  three parameters while deciding the salary as
  well as incentives
• Pay for position
• Broad banding
• Through broad banding the traditional narrowly
  structured pay grades generally determined
  through job evaluation are replaced by fewer and
  wider bands, and a grading structure is created.

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Broad Banding

• It is a compensation technique that reduces many
  different compensation categories to several
  broad compensation bands. A banding procedure
  takes place when jobs are grouped together by
  common characteristics

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Broad Banding

• On recruitment or promotion, employee
  compensation may be set at levels in the
  broadband deemed to be appropriate to an
  employees qualifications, education,
  training and experience. Employees typically
  progress up through the broad band if their
  performance ratings are good, rather than
  progressing up through a grade by steps based on
  time in the grade.

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Pay for Person

• Pay for person takes into account a persons
  capabilities and experience in setting a pay
  level that is both equitable and competitive. It
  also considers the market demand of a persons
  unique skills and experience.
• Pay for person is associated with competency
  based pay. It also incorporates market based
  pay approach.

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• Pay for performance
• An individuals performance is managed through a
  performance contract which comprises the
  clarification of the role, the setting up of
  objectives, and the review of performance. As an
  outcome a measure of performance at the
  corporate, unit and individual level becomes the
  basis for setting the performance pay.

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• DA forms a variable component of pay packet since
  rate of dearness increases more than once every
  year, whereas the basic pay scales are revised
  after long spells of time.

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• Perquisites
• These are normally provided to managerial
  personnel either to facilitate their job
  performance or to retain them in the
• organization.
• Such perquisites include company car, club
  membership, free residential accommodation, paid
  holiday trips, stock
• options, etc.

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• Incentives-
• Incentives are paid in addition to wages and
  salaries and are also called payments by
  results. Incentives depend upon productivity,
  sales, profit, or cost reduction efforts. There
  are (a) Individual incentive schemes, and (b)
  Group incentive programs.
• Individual incentives are applicable to specific
  employee performance. Where a given task demands
  group efforts for completion, incentives are paid
  to the group as a whole. The amount is later
  divided among group members on an equitable basis.

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• Bonus-
• The bonus can be paid in different ways. It can
  be fixed percentage on the basic wage paid
  annually or in proportion to the profitability.
  The Government also prescribes a minimum
  statutory bonus for all employees and workers.
  There is also a bonus plan which compensates the
  Managers and employees based on the sales revenue
  or Profit margin achieved.

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Separation

• Employee Separation is the termination of service
  agreement between the employee and the employer
  when either of them decides to put an end to the
  service.
• Resignation Layoff
• Retirement Retrenchment
• VRS
• Death

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VRS

• Rule 48 A of Pension Rule-1972
• --- Any time after completing 20 years of service
• -- By giving notice of not less than 3 months in
  writing to the appointing authority
• -- 25 days salary(BDA) for the remaining days of
  service until retirement