COMPENSATIONCOMPENSATION MANAGEMENTMANAGEMENT

WHY? Money important motivation for employees. To design the lowest – cost pay structure to

attract , motivate and retain competent employees.

Compensation is what employees receive in exchange for their contribution to the organisation.

Poorly compensated jobs leads to absenteeism and other forms of employee withdrawal.

OBJECTIVES

Acquire qualified personnelAcquire qualified personnel Retain present employeesRetain present employees Ensure equityEnsure equity Reward desired behaviorReward desired behavior Control costsControl costs Administrative efficiencyAdministrative efficiency

TOTAL RETURNS

Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.

It has two main components : Direct financial payments( wages ,salaries, incentives

,commissions and bonuses). Indirect payments ( as financial benefits like

employer-paid insurance and vacations ).

Total returns

Total compensation

Cash compensationBenefits

Relational returns

BaseMerit

Short-term incentives

Long-term incentives Income

protection Work/life focus

Allowances

Recognition and status

Employment security

Challenging work

Learning opportunities

ESTABLISHING SRTATEGIC PAY PLANS

LEGAL CONSIDERATIONS IN COMPENSATION:

Davis – Bacon Act (1931) Walsh – Healey Public Contract Act (1936) Title VII of the 1964 Civil Rights Act Fair Labour Standards Act 1938 Equal Pay Act 1963 Employee Retirement Income Security Act 1974

ESTABLISHING PAY RATES:

The process of establishing pay rates while ensuring external and internal equity consists of five steps:

Conduct a salary survey of what other employers are paying for comparable jobs.

Determine the worth of each job in your organization through job evaluation ( to ensure internal equity).

Group similar jobs into pay grades. Price each pay grade using wage curves. Fine – tune pay rates- pay ranges.

Contd…Step 1. The Salary Survey

Aims at determining prevailing wage rates. Provides specific wage rates for specific jobs. Formal written questionnaire surveys –most

comprehensive. Other sources of information- telephone surveys and

newspaper ads. Survey data to price benchmark jobs. Surveys also collect data on benefits like insurance ,

sick leave and vacation, providing basis for decisions regarding employee benefits.

Compensation information in questionnaires generally includes – number of employees, overtime policies, starting salaries and paid vacations.

Contd…Many employers use surveys published by consulting

firms , professional associations , government agencies,Department of labor and self conducted surveys.

Step 2. Job Evaluation

A systematic comparison done in order to determine the worth of one job relative to another.

Results in a wage or salary hierarchy. Identifying compensable factors plays a central role. Compensable factors – skills, effort , responsibility,

and working conditions. These factors depend on the job and job evaluation

method.

Contd…Contd… It is mostly a judgmental process. Demands close cooperation among supervisors , HR

specialists, employees and union representatives. An evaluation committee is chosen. The committee consists of 5 members , most of whom

are employees . Evaluation committee usually identifies 10 or 15 key

benchmark jobs – to be evaluated first and serve as benchmarks against which the relative importance of all other jobs can be compared.

Next selection of compensable factors by HR department.

Actual evaluating the worth of each job by any of the following methods:-

Contd… Ranking Job classification Point method Factor Comparison Job evaluation methods: Ranking- The simplest method of job evaluation that involves

ranking each job relative to all other jobs , usually based on overall difficulty. There are several steps in the job ranking method:1. Obtain job information2. Select jobs3. Select compensable factors4. Rank jobs5. Combine ratings

Contd…Contd…

Job Evaluation Methods: Job Classification ( or Job Grading)

- A method for categorizing jobs into groups.- The groups are called classes if they contain similar

jobs- The groups are called grades if they contain jobs that

are different but are similar in difficulty.- The usual procedure is to choose compensable factors

and then develop class or grade descriptions for each class in terms of amount or level of compensable factor in those jobs.

- Compensable factors – e.g. difficulty and variety of work , supervision exercised , judgment exercised , responsibility , experience , knowledge required etc.

Contd…

- Based on compensable factors , raters write a grade description/ definition.

- E.g.

Grade Nature of assignment

Level of responsibility

GS-7 Performs specialized duties in a defined functional area involving a wide variety of problems ; develops information; identifies interrelationships…

Work is assigned in terms of objectives , priorities and deadlines; the employee works independently in resolving conflicts…

Contd…Job Evaluation Methods: Point Method- The point method is a more quantitative technique.- It involves :1. Identifying several compensable factors each having

several degrees , as well as2. The degree to which each of these factors is present in

the job.- Assign a different number of points to each degree of

each factor.- Once the evaluation committee determines the degree to

which each compensable factor is present in the job , it can calculate a total point value for the job by adding up the corresponding points for each factor.

- It is the most widely used job evaluation method.

Contd…Job Evaluation Method: Factor Comparison- A widely used method of ranking jobs according to a

variety of skill and difficulty factors , and then adding up these rankings to arrive at an overall numerical rating for each given job.

- This method is a refinement of the ranking method.- It involves five steps:

1. Determine the compensable factors

2. Determine key jobs

3. Apportion present wages for key jobs

4. Place key jobs on a factor comparison chart

5. Evaluate other jobs.

Step 3. Group similar jobs into pay grades A pay grade is comprised of jobs of equal difficulty. The committee groups jobs into pay grades after

determining the relative worth of each job.Step 4. Price Each Pay Grade- Wage Curves Wage curve shows the relationship between the value of

the job and the average wage paid for this job. It involves assigning pay rates to the pay grades. The wage curve shows the pay rates currently paid for

jobs in each pay grade , relative to the points assigned to each job by the job evaluation.

Pay rates – vertical axis Pay grades (in terms of points ) – horizontal axis

Contd… If the current rates being paid for any of your jobs/

grades fall well above or below the wage line, raises or a pay freeze for that job may be in order.

Step 5. Fine – Tune Pay Rates It involves developing pay ranges and correcting out of

line rates. Most employers do not pay just one rate for all jobs in a

particular pay grade . Pay ranges may appear as vertical boxes within each

grade, showing minimum, maximum and midpoint pay rates for that grade- called as wage structure.

Pay ranges are series of steps or levels within a pay grade , usually based upon years of service.

Contd…

Advantage for using pay ranges for each pay grades :

-Easier to attract experienced employees into a pay grade if the starting salary for the lowest step may be too low to attract them.

PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES

TYPES OF INCENTIVE PLANS: Individual incentive plans - Income over and above base

salary. Group incentive program Profit sharing plans

Variable pay – same as incentive plans and defined as :- Any plan that ties pay to productivity or profitability.

INCENTIVES FOR OPERATIONS EMPLOYEES :

Piecework plans :-A system of pay based on the number of items processed by each

individual worker in a unit of time , such as items per hour or items per day

- It is the oldest incentive plan. Straight piecework:- An incentive plan in which a person is paid a sum for each item he or

she makes or sells , with a strict proportionality between results and rewards. Standard hour plan:- A plan by which worker is paid a basic hourly rate but is paid an extra

percentage of his or her base rate for production exceeding the standard per hour or per day.

INCENTIVES FOR MANAGERS AND EXECUTIVES:

Short term incentives: The annual bonus:- Plans that are designed to motivate short- term

performance of managers and are tied to company profitability.

- Formulas for determining executive bonus fund:

1. Ten percent of net income after deducting 5% of average capital invested in business.

2. Twelve and one – half percent of the amount by which net income exceeds 6% of stockholder’s equity

3. Twelve percent of net earnings after deducting 6 % of net capital.

Contd… Long- term incentives:

- Stock options – The right to purchase a stated number of shares of a company stock at today’s price at some time in future.

- Mega- option grants –Large upfront grants in lieu of annual grants.

INCENTIVE FOR SALESPEOPLE: Salary Plan- fixed salaries

Commission plans – pay salespeople for only results.

Combination plans –salary and commissions. - It can be in three ways:

- 80% base salary and 20% incentives

- 70 / 30

- 60 / 40

BENEFITS Pay for time not worked Insurance Benefits Retirement Benefits

Pay For Time Not Worked: Also called supplemental pay benefits. Unemployment insurance – Provides benefits if a person is

unable to work through some fault other than his or her own.

Vacations and Holidays Sick Leave – Provides pay to an employee when he or she

is out of work because of illness. Parental Leave – women taking leave during pregnancy. Severance pay – A one – time payment some employers

provide when terminating an employee.

Insurance Benefits: Worker’s compensation – Provides income and medical

benefits to work – related accident victims or their dependants regardless of fault.

Hospitalization , Health and Disability Insurance. Life Insurance

Retirement Benefits:

Social Security – Federal program that provides three types of benefits :

- Retirement income at the age of 62- Death benefits payable to employee’s dependants- Disability benefits payable to disabled employees

Pension Plans - Plans that provide a fixed sum when employees reach a predetermined retirement age or when they can no longer work due to disability.