compensation environment.ppt

8/13/2019 Compensation Environment.ppt

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Components of a Total CompensationProgram

External Environment/InternalEnvironment


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Internal Factors


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Compensation policy ofOrganization

Lag policy

- Lower wages than competitors,

compensates employees throughother 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 CompensationPolicy 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.

5. The pay levels needed to facilitate the achievement of a soundfinancial 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 to rely 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 scattergram 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 ajob class. If merit raises are to have their intended value,

however, they must be determined by an effective

performance 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.

A firms formal wage structureof rates is influenced by those

being paid by other area

employers for comparable jobs.

LArea Wage Rates


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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.

Cost of living


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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 increase by improving the purchasing power andstandard 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 Ordinancefor Unskilled Workers (1969)

The Factories Act (1934)


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Forms of Equity

1. Individual equityHow 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 equityHow fair the jobs pay rate is, when compared to other jobs within the same company

3. External equityHow 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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Individual Equity

Fairness about pay differentials among individuals in same job

Established by using

- Seniority-basedpay systems: Reward longevity

- Merit-basedpay systems: Reward employee performance

- Incentive plans: Employees receive part of compensation based onperformance

- Skills-basedpay systems: Compensation based on employees

possessing skills that firm values

- Team-basedpay plans: Encourage cooperation and flexibility


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Internal Equity

Fairness of pay

differentials between

different jobs in

organization Established by job

ranking, job classification,

point systems or factor

comparisons (job

evaluation)


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External Equity

Fairness of organizational

compensation levels relative

to external compensation

Assessed by collectingwage and salary survey

information to guide in

setting organizations pay

strategy to lead, meet, or lag

labor market wages

Comparable salary for work

performed by workers of

similar jobs in other firms.


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Methods to Address EquityIssues

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.

Vi t d Vi i Ci l


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Virtuous and Vicious Circles

Organization

Performance

INCREASES

Decreased Performance-

Based Pay

Decreased Employee

Performance

Risk/Return

IMBALANCE

Organization

PerformanceDECREASES

Increased Performance-Based Pay

Increased Employee

Performance

Risk/Return

BALANCE

Virtuous Circle

Vicious Circle

compensation environment.ppt

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