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Presentation on

Compensation Management
(Developing Compensation Structure) Part III

Compensation Structure
Wage & Salary Surveys 1. Collecting Survey Data 2. Employer Initiated Surveys Wage Survey & Virtual jobs The Wage Curve Pay Grades /Pay Levels/Rate Range Government Regulations

Influences on Pay Determination

Belief about the worth of Job i.e. influence of size, responsibility & skill requirement of duties Individual Characteristics Labour Market Remuneration Policy Compensation Strategy of Companies The Cost Of Living Govt. Intervention

Factor Comparison System

Job Evaluation is done basis on factor by factor basis for the key position Character of the key jobs: They are important to employee & the organization They vary in terms of job requirement They have relatively stable job content They are used in salary surveys for wage determination Key jobs are evaluated against 5 compensable factorsSkill, Mental effort, Physical Effort, Responsibility & Working Conditions

Pricing Jobs
In pricing jobs, the job evaluation worth is matched with the labour market worth Four Steps: Factors Comparison System Establish Pay Levels for each Job Grouping the different pay levels in pay grade Rate Ranges

Pricing Jobs
Pay levels: In order to set a pay level, the points assigned and the survey wage rates are combined through the use of a graph called scatter gram This methods relates point value to wage rates in the labour market. If the management wants to lead or lag behind the market rate by a given percentage, the wage trend can be moved up or down by the same percentage

Pricing Jobs Pay Levels

Key Job B 10 9 8 7 Wages or Salaries 6 5 4 3 2 1 Key Job A

Wage Trend Line

100 200 300 400 500 600 700 800 900 1000
Points Values

Pricing Jobs
Determining Pay Grades A pay grades comprises jobs of approximately equal difficult or importance. It is a process of organizing jobs into groups, also called job classes so that there are limited number of wage rate

Pricing Jobs Pay Grades

A M M O U N T S

0 101 151 201 251 301 351 401 451 501 100 150 200 250 300 350 400 450 500 550 I II III IV V VI VII VIII IX X

Pricing Jobs
Rate Ranges: Rate Ranges generally are divided into a series of steps that permit employees to receive increases up to the maximum rate for the range of the basis of merit or seniority or combination of two. Most salary structures provide for the ranges of adjoining pay grades to overlap. The purpose is to permit an employee with experience to earn as much as or more than a person with less experience in the next higher job classification

Pricing Jobs Rate Range

Wage Curve Maximum Limit 10 9 8 7 6 5 4 3 2 1 Mid Point Range Steps

Wage Rates

Minimum Limit

Range overlap

100 150 200 250 300 350 400 450 500 550 I II III IV V VI VII VIII IX X
Pay Grades

Challenges affecting Remuneration

Job based pay: Employees are paid on the bases of jobs they do Skill based pay: Employees are paid on the basis of number of jobs they are capable of doing, or on the depth of their knowledge

The purpose is to motivate employees to acquire additional skills so that they become more useful to the organization
Brand banding pay: Employees are paid on the basis of wide salary bands keeping in view the job responsibilities, individual skills, Competence and career mobility patterns

Challenges affecting remuneration

Pay Reviews: Pay once determined should not remain constant. It must be reviewed and change often. The often become relevant. Fix date reviews: where all employees salaries are reviewed on one common date Anniversary date reviews: where salaries may be reviewed at twelve month intervals from the date of the employees hiring In organized sector the reviews are taking place once in three years through wage settlements . In Govt. Sector the revision is after every 5 to 7 years Using variable timing ensures flexibility.

Challenges affecting remuneration

Pay secrecy: Equity in remuneration is a significant factor in employee performance. Perceived inequity in wages and salaries will de-motivate and demoralize employees which will lower employee performance. To avoid this problem effort be made to maintain pay secrecy. Comparable worth: one of the popular principles is equal pay for equal work. It remove gender & job evaluation bias International Pay: In increasing globalization of business, international pay assumes greater relevance. The amount of remuneration, its composition and other factors pose serious challenges to the HR Manager

Pay Policies over time: Lag, Match and Lead Pay Structures
Structure Adj For market level At the end of year Lead policy

1 Lead the Market

Months 6

12

Structure Adj For market level At the Middle of year Lead - lag policy

Market Change Line

Increase in Values

Structure Adj For market level At the start of year Lag policy Projected market level at the beginning of the plan year

Lag of the market

Projected market level at the Middle of the plan year

Projected market level at the end of the plan year

Relationship between Pay Equity and Motivation

My input/ Output Ratio

Comparison Person's Ratio

My input Output Ratio

Comparison Persons Ratio

My input output Ratio

Comparison Person's Ratio

In Equity Feeling of being under paid Doing more & receiving less

Equity Feeling of being paid fairly Doing the same & receiving the same

In Equity Feeling of being over paid Doing less & receiving more

The Greater the perceived disparity between input/output ratio and the comparison inputs/output ratio, the greater the motivation to reduce the inequity

Concepts of Wages
Minimum Wage:

Minimum Wage is the one which provides not merely for barely sustenance of life, but also for the preservation for the efficiency of the worker
For this purpose, the minimum wage must also provide for measure of education , medical requirements and amentias. The minimum wage may be tied by an agreement between the management and the workers but is usually determined through legislation

For fixing MW, besides the needs of workers, other factors like ability of the concern to pay, nature of the jobs will have to be considered

Concepts of Wages
Fair Wage: Fair wage is what is equal to the rate prevailing in the same trade and in the neighborhood for similar work Fair wage is what is equal to the predominant rate for similar work throughout the country & for traders in general Fair wage can be fixed only by comparison with an accepted standard wage

Concepts of Wages
Living Wage:

Living wage is a step higher than fair wage. Living wage may be described as one which should enable the wage earner to provide for himself /herself not only the bare essentials of life like food, clothing and shelter, but a measure of frugal comfort including education for children; protection against ill health; requirement of essential social needs; and/or measure of insurance against the more important misfortunes including old age. Living wage must be be fixed considering the general economic condition of the country. It varies from country to country ,

Factors affecting Wage Mix

Internal Factors External Factors Compensation Policy of the organization Condition of labour Market

Worth of job
Employee relative worth

WAGE MIX

Area Wage Rate Cost of living

Employer's ability to pay

Legal requirements

Wage Components
Basic Pay Across the Board pay increase Cost of Living increase Merit Pay Lump sum Bonus Individual Incentive Plans Success Sharing Plans Gain Sharing Plans Profit Sharing Plans Risk Sharing Plans

Incentive Payments
Besides wages and salaries, employees are paid incentives depending upon their performance. Incentive payment are quite substantial and are paid as regularly as wage & salaries Incentive are monetary benefits paid to workmen in recognition of heir outstanding performance They are also defined as variable rewards granted according to variations in the achievement of specific results, it is also called payment by results Incentives generally vary from individual to individual and from period to period for the same individual

Types of Incentives Schemes

Scheme where the workers earning vary in the same proportion as output Scheme where the earning vary less proportionately than output Schemes where earnings vary proportionately more than output Scheme where earning differ at different level of output Group incentive Scheme

Group Incentive Plans

Group incentives are as common as individual plans in industrial establishment Piece work system. The total earning of a group are first determined in accordance with the incentive method which is followed and the earnings are then distributed among the members of the group on some equitable basis If the group consists of members with equal skills, the earnings are divided equally among them. When the members are of unequal skill, the earning of the group may be divided among the members in proportion to their individual time rates or according to specified percentage

Group Incentive Plans

Team Compensation Plan: Compensation plan where all team members receive an incentive bonus payment when production or services standards are met or exceeded

Gain Sharing Incentive Plan

A program under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability

Types of Incentive Plans

Enterprise

Group
Team Compensation Scanlon plan to gain cost reduction Rucker plan to Gain production value Created Impro share to gain Overall productivity Earning at risk plans

Individual Piece Work Standard hour plan Bonus Merit Pay Spot Award Sales Incentives Maturity Curves

Profit Sharing Stock option Employee Stock ownership Plan (ESOPs)

Group Incentive Plans

Benefits: 1. Better cooperation/Team work among workers 2. Less supervision 3. Reduced incidence of absenteeism 4. Reduced clerical work an shorter training time 5. Distributing success among those responsible for producing success Disadvantage: 1. An efficient worker may be penalized for the inefficiency of the other members in the group 2. The incentive may not be strong enough to serve its purpose 3. Rivalry among the members of the group defeats the very purpose of team work and co-operation

Employees Benefits
EB includes any benefits that the employees receives in addition to direct remuneration ..fringe embrace a broad range of benefits and services that employees receive as part of their total compensation package pay or direct compensation is based on critical job factors and performance. Benefits and services, however are indirect compensation because they are usually extended a condition of employment and are not directly related to performance

Employees Benefits
EB is preferred by employee in comparison to direct wage

Advantage: 1. Attract & motivate Employees 2. Satisfy Employee Objectives 3. Meet employee health & Security Requirements 4. Reduce Turnover 5. Maintain a favorable competitive position 6. Mitigate fatigue

Employees Benefits
1. 2. 3. 4. 5. Benefits is a fringe, five criteria's need to be met It should be computable in terms of money The amount of benefit is not generally predetermined No contract, indicating when the sum is payable should exist It should be basis genuine interest in the protection and promotion of well being Should be cost effective, broad based and satisfying real need

Types of Employee Benefits

Social Security Insurance Workmen Compensation Insurance Leave without Pay Health Care Benefits Vacation with Pay (Paid Holidays) Severance Pay Employee Assistance Programs Work life Benefits: Balancing Work and home needs Counseling Services Long Service Awards

Executive Remuneration
Executive remuneration has assumed considerable importance in recent years. Salaries and perks paid to highest decision makers in organization are sky rocking and this sudden spurt in managerial remuneration is the result of economic de-regulation and the consequent entry of MNCs into country The aspects to look at: What and how much are the executives paid Why are they paid hefty remunerations What issues are involved in payment of high remuneration

1. 2. 3.

Reason for Hefty Salaries

Large financial incentive are a way to reward superior performance Business Competition is pressure filled and demanding Good executive talent is in great demand Effective executives creates shareholder value It is also a fact of business life, reflecting market compensation trends

Executive Remuneration Features:

Managerial remuneration cannot be compared to the wage & salary scheme meant for other employees in Organisation Executives are denied the privilege of having unionized strength Secrecy is maintained in respect of executive remuneration. The remuneration depends upon such factors as competence, length of service and loyalty to the founders Executive pay is not supposed to be based on individual performance measure but rather on unit or organization performance Executive remuneration is subject to statutory ceiling/taxes

The top Twenty Competences

Achievement orientation Concerns for quality Initiative Interpersonal understanding Customer Service orientation Influence & impact Organization awareness Net working Directive ness Team work and cooperation Developing others

The top Twenty Competences

Team leadership Technical expertise Information Seeking Analytical Thinking Conceptual Thinking/Visionary Self Control Self Confidence Business orientation Flexibility Managing of ambiguity & confusions Executor

Components of Remuneration
The Executive remuneration has comprise of four elements: Salary - determined basis job evaluation Bonus- is a short term (annual) payment basis performance Long term incentives - Stock options Perquisites major source of income for executive over & above the salary & paid regularly

Characteristics of Salary Systems

1. 2. 3. A hierarchy of pay levels A hierarchy of jobs A set of rules and procedure that define A relation of between 1 & 2 What qualities are necessary for movement from one level to another Who makes choices or by what process they are made, when there is competition for promotions

Executive Perks
Company Car Travel by Company Plane Physical Examination Mobile Phones Laptops Insurance Policies Financial Consulting Estate Planning Income Tax Preparation Country Club Membership Luncheon Club Membership

Executive Perks
Chauffeur/Gardner Service Children Education Spouse Travel Legal Counseling Personal Interest Free Loans Home Repairs Entertainment Reimbursements Soft Furnishings Hard Furnishing Residential Telephone Reimbursements News Papers/Magazines/Books Reimbursements

Enterprise Incentive Plans

Profit Sharing Plans Stock Options Employee Stock ownership plans

Significant Compensation Issues

The issue of equal pay for comparable worth The issue of wage rate compression to meet internal pay equity concern The issue of Low Salary Budgets

Thank you very Much

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For clarification, if any