4. compensation environment structure
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Components of a Total Compensation Program
Career Ladder/Pathway
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InternalFactors
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Compensation policy of Organization
Lag policy
Lower wages than competitors,
compensates employees through
other means
Opportunity for advancement
Incentive plans
Good location
Good working conditions
Employment security
Market policy
Wages equal to competitors
Neutralizes pay as factor
Lead policy
Higher wages than competitors to
ensure organization becomes
employer of choice
Setting organization compensation policy to lead, lag, or match
competitors pay.
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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 paydifferential 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.
5. The pay levels needed to facilitate the achievement of a sound
financial position in relation to the products or services offered.
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Worth of a Job
Establishing the internal wage relationship among jobs and skill levels.
Organizations without a formal compensation program generally base the
worth of jobs on the subjective opinions of people familiar with the jobs. In
such instances, pay rates may be influenced heavily by the labor market or, in
the case of unionized employers, by collective bargaining.
Organizations with formal compensation programs, however, are more likely torely on a system of job evaluation. Even when rates are subject to collective
bargaining, job evaluation can assist the organization in maintaining some
degree of control over its wage structure.
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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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Employees Relative Worth
Rewarding individual employee performance.
In both hourly and salary jobs, employee performance can be recognized and
rewarded through promotion and with various incentive systems.
Superior performance can also rewarded by granting merit raises on the basis
of steps within a rate range establish for a job class. If merit raises are to have
their intended value, however, they must be determined by an effectiveperformance appraisal system that differentiates between employees who
deserve the raises and those who do "not. This system, moreover, must provide
a visible and credible relationship between performance and any raises
received.
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Employers Ability-to-Pay
Having the resources and profits to pay employees
Pay levels are limited by earned profits and other financial
resources available to employers. Thus an organization's
ability to pay is determined in part by the productivity of its
employees. Economic conditions and competition faced by employers
can also significantly affect the rates they are able to pay.
Competition and recessions can force prices down and
reduce the income from which compensation payments are
derived. In such situations, employers have little choice but
to reduce wages and/or lay off employees, or, even worse,
to go out of business.
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External Factors
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Labor Market Conditions
Availability and quality of
potential employees is affected
by economic conditions,
government regulations and
policies, and the presence ofunions.
LArea 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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Cost of living
Local housing andenvironmental conditionscan cause wide variationsin the cost of living for
employees. Inflation can require that
compensation rates beadjusted upwardperiodically to help
employees maintain theirpurchasing power.
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Collective Bargaining
One of the primary functions of a labor union, is to bargain
collectively over conditions of employment, the most important of
which is compensation.
The union's goal in each new agreement is to achieve increases
in real wage increases larger than the increase in the CPI-thereby improving the purchasing power and standard of living of
its members
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Legal Requirements
Payment of Wage Act(1936)
The Minimum Wages
Ordinance (1961) West Pakistan Minimum
Wages Ordinance forUnskilled Workers (1969)
The Factories Act (1934)
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Forms of Equity
1. Individual equity
How fair an individuals pay as compared with what his or her co-workers
are earning for the same or very similar jobs within the company
2. Internal equity
How fair the jobs pay rate is, when compared to other jobs within thesame company
3. External equity
How a jobs pay rate in one company compares to the jobs pay rate in
other companies.
4. Procedural equityThe perceived fairness of the process and procedures to make decisions
regarding the allocation of pay
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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.
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STRATEGIC
POLICIESTECHNIQUES
STRATEGIC
OBJECTIVES
EFFICIENCY
Performance
Quality
Customers
Stockholders
Costs
FAIRNESS
COMPLIANCE
ALIGNMENT
COMPETITIVENESS
CONTRIBUTORS
ADMINISTRATION
Work Descriptions Evaluation/ INTERNAL
Analysis Certification STRUCTURE
Market Surveys Policy PAYDefinitions Lines STRUCTURE
Seniority Performance Merit INCENTIVE
Based Based Guidelines PROGRAMS
Planning Budgeting Communication EVALUATION
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What The Research Tells Us?
Equity Theory
The equity theory model shown in the slide suggests that
employees judge equity on the basis of comparisons
between the work, qualifications, and pay for the jobs of
referent others and those for their own.
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Perceived Equity of a Pay Structure
MY PAY
My qualifications
My work performed
My product value
OTHERS PAY
Their qualifications
Their work performed
Their product value
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Pay structure,refers to the array of pay
rates for different work or skills within a
single organization. The number of levels,
dif ferentialsin pay between the levels, andthe cri ter iaused to determine those
differences create the structure.
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Consequences of an Internally Aligned Structure
Pay structure
Undertake training
Increase experience
Reduce turnover
Facilitate career progression
Facilitate performance
Reduce pay-relatedgrievances
Reduce pay-related work
stoppages
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What Shapes Internal Structures?
EXTERNAL FACTORS:
Economic PressuresGovernment Policies, Laws, Regulations
StakeholdersCultures and Customs
ORGANIZATION FACTORS:Strategy HR PolicyTechnology Employee AcceptanceHuman Capital Cost Implications
INTERNAL STRUCTURE:Levels
Differentials
Criteria
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Internal Consistency:
EngineeringJob Structure
Entry Level
Recognized
Authority
Engineer:Limited use of basic principles. Close supervision.
Senior Engineer:Full use of standard principles and concepts. Under
general supervision.
Systems Engineer: Wide applications of principles and concepts, plusworking knowledge of other related disciplines. Under very general
direction.
Lead Engineer: Applies extensive knowledge as a generalist or specialist.
Exercises wide latitude.
Advisor Engineer: Applies advanced principles, theories, and concepts.Assignments often self-initiated.
Consultant Engineer:Exhibits an exceptional degree of ingenuity,
creativity, and resourcefulness. Acts independently to uncover and resolve
operational problems.
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Which Structure has the Greatest Impact on
Performance? On Fairness?
Structure A
LayeredChief Engineer
Engineering Manager
Consulting Engineer
Senior Lead Engineer
Lead Engineer
Senior Engineer
EngineerEngineer Trainee
Structure B
De-layeredChief Engineer
Consulting Engineer
Associate Engineer
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Structures Vary
An internal pay structure is defined by:
the number oflevels of work
the pay differentials between the levels
the criteria used to determine those levelsand differentials
These are the factors that a manager may
vary to design a structure that supportsthe work flow, is fair, and directs employeebehaviors toward objectives
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Strategic Choices Among
Structure Options
Tailored versus Loosely Coupled
Egalitarian versus Hierarchical
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Strategic Choice:
Hierarchical vs Egalitarian
Hierarchical Egalitarian
Levels
Differentials
Criteria
Supports:
Many Fewer
Large Small
Person or Job Person or Job
Close Fit Loose Fit
Individual Performers Teams
Performance Equal Treatment
Opportunities for Promotion Cooperation
Work Organization
Fairness
Behaviors
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Virtuous and Vicious Circles
Organization
PerformanceINCREASES
Decreased Performance-
Based Pay
Decreased Employee
Performance
Risk/Return
IMBALANCE
Organization
Performance
DECREASES
Increased Performance-Based Pay
Increased Employee
Performance
Risk/Return
BALANCE
Virtuous Circle
Vicious Circle
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QUESTIONS
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