Pay and Compensation

Compensation & Reward Compensation & Reward ManagementManagement

Pay ModelPay Model1.1. ConceptsConcepts Compensation techniques Compensation objectives

2.2. Internal equityInternal equity Job Analysis Job Description Job Evaluation

3.3. External equityExternal equity Market definitions Surveys Policy lines Pay structures

4.4. Employee equityEmployee equity Seniority Increases Performance Evaluation Increase Guidelines

5.5. AdministrationAdministration Planning Budgeting Monitoring Evaluation

Forms of CompensationForms of Compensation

COMPENSATIONCOMPENSATION

IndirectIndirect DirectDirect

Protection Programs

Employee Services

& Perquisites

Pay for time not

worked

Base PayMerit Pay (Reward)

Incentives – Short & Long

Term

Cost of living Adjustments

Strategic Issues related to PayStrategic Issues related to Pay

1. Pay decisions to be guided by strategic strategic stages stages of an organization

2. Pay design to reconcile employee employee differencedifference

Equity : Conceptual FoundationEquity : Conceptual Foundation

• Internal equityInternal equity

– Comparisons inside an organization – among jobs

– Weighs jobs in terms of relative value of their contributions to the organization’s objectives

– 2 aspects2 aspects:

• Relative similarities & differences in the work content of jobs• Relative value / contribution of the work to the organization’s

objectives

– How much do you wish to pay accountants in comparison with purchase clerk within the same organization?


• External equityExternal equity

– Comparisons outside an organization

– Several options regarding external equity:

• Some employers may set their pay levels higher than their competition hoping to attract best applicants

• Another employer may offer lower base pay but greater opportunity to work overtime, greater job security or better benefits than other employers

– How much do you wish to pay accountants in comparison with what other employers would pay them?


• Employee equityEmployee equity

– Comparisons among individuals doing the same job for the same organization

– Should all such employees receive the same pay? Or should one programmer be paid differently from another if one has better performance & / or greater seniority?

– How much do you wish to pay accountant A in comparison with accountant B based on their performance and length of their service, etc., within the same organization?

Job Evaluation : Perspective & DesignJob Evaluation : Perspective & Design

• Results of Job Analysis & Job Description serve as inputinput for evaluating jobs & establishing job structure

• Job Evaluation involves the systematic evaluation of the Job Description based on many factors:

– Content of the work– Relative value of the work to the organization– Culture of the work place– External market forces

Job Evaluation : MethodsJob Evaluation : Methods

• 4 fundamental JE methods4 fundamental JE methods:

1.1. RankingRanking – whole job is compared against other whole jobs on some general notion of value / job content

2.2. ClassificationClassification – concepts of value / work content are divided into categories / classes & jobs are slotted into these categories

3.3. Factor comparisonFactor comparison – content & value are broken down into factors & jobs are evaluated by the degree of each factor the job possesses.

4.4. Point planPoint plan – content and value are broken down into factors and jobs and evaluated by the degree of each factor the job possesses

Job Evaluation : Job Evaluation : Ranking MethodRanking Method• Rankings of jobs according to relative valuerelative value

• Involves ordering of Job Descriptionsordering of Job Descriptions from highest to lowest in value

• 2 ways of ranking usually considered

1.1. Alternation rankingAlternation ranking2.2. Paired comparisonPaired comparison

• DisadvantagesDisadvantages:

– Criteria / factors on which jobs are ranked are usually so crudely defined that evaluations become subjective

– Evaluator(s) using this method must be knowledgeable about every single job under study

– Number alone can make this task formidable (50 jobs will require 1225 paired comparison!!)

Job Evaluation : Job Evaluation : Alternation RankingAlternation Ranking

• Ordering the job descriptions alternatively at each at each extremeextreme (all jobs are considered)

• Eg.Eg. of alternation ranking

JobsJobs RankRank

No.No. TitleTitle Most ValuedMost Valued

11 Welder √ Tool maker

22 Machine operator Welder

33 Packer √

44 Grinder √

55 Unit assembler

66 Janitor

77 Tool maker √

88 Spray painter √ Spray painter

99 Engine operator Grinder

1010 Inspector Packer

Least Valued

Job Evaluation : Job Evaluation : Paired ComparisonPaired Comparison• Comparing all

possible pairs of jobs

• No. of pairs to compare =

[n (n-1)] / 2

• Eg.Eg. If you have 5 jobs then there are 10 paired comparisons

• Jobs with highest total no. of “Most Most ValuableValuable” ranking becomes the highest-ranked job.

Job NumbersJob Numbers

11 22 33 44 55 66 77 88 99

11 AA AA BB AA BB BB AA AA

22 BB

33 BB AA

44 AA

55 BB

66 AA BB

77 AA

88 BB

99 BB

A = Better B = Worse

Job Evaluation : Job Evaluation : Classification MethodClassification Method

• Slotting Job Descriptions into a series of classes / series of classes / gradesgrades that cover the range of jobs

– ClassesClasses: a series of carefully labeled slots / pigeon holes– Labels are the class descriptions that serve as the standard

against which the Job Descriptions are compared

• Steps:Steps:

1. Determine jobs / units to be included in study2. Conduct Job Analysis / prepare Job Descriptions3. Select evaluators4. Define classes5. Identify & slot benchmarksbenchmarks6. Prepare classification manual7. Apply system to non-benchmark jobsnon-benchmark jobs

Job Evaluation : Job Evaluation : Factor Comparison MethodFactor Comparison Method

• Jobs are evaluated based upon 2 criteria2 criteria:

a.a. A set of compensable factorsA set of compensable factorsb.b. Wages for a select set of jobsWages for a select set of jobs

• More sophisticatedsophisticated than the previous 2 methods, however, its complexity often limits its usefulness

• Basic Steps:Basic Steps:

1. Conduct Job Analysis2. Select benchmark jobsbenchmark jobs3. Rank benchmark jobsbenchmark jobs on each factor4. Allocate benchmark wages across factors5. Compare factor & wage allocation ranks6. Conduct the job comparison scale7. Applying the scale

What is a Benchmark Job?What is a Benchmark Job?

• Benchmark jobs (also called key jobskey jobs) serve as a reference pointsreference points & must possess certain characteristicscharacteristics:

a. Content are well knownwell known & agreed uponagreed upon by the parties involvedb. Contents changechange very little over timec. Current pay rates are generally acceptableacceptable & differentials

among jobs relatively stablestabled. Taken together, they contain the entire rangeentire range of each

compensable factore.e. AcceptedAccepted in the external labour market for setting wages

• 15 – 2515 – 25, however number depends on range & diversity of work to be evaluated

Job Evaluation : Job Evaluation : Point MethodPoint Method

• 3 common chs:3 common chs:

1.1. Compensable factorsCompensable factors2. Factor degrees numerically scales3. Weights reflecting relative importance of each factor

• Steps Steps in designing the point plan:

a. Conduct Job Analysisb. Choose compensable factorsc. Establish factor scalesd. Derive factor weightse. Prepare evaluation manualf. Apply to benchmark jobs

Job Evaluation : Job Evaluation : Point MethodPoint Method• Example – Characteristics of Point Job Evaluation method, Factors,

Scaled Degrees, Weights -

WeightsWeights Compensable Factors Compensable Factors DegreesDegrees

(3)(3) (1)(1) (2)(2)

40%40% Skills RequiredSkills Required 11 22 33 44 55

30%30% Effort RequiredEffort Required 11 22 33 44 55

20%20% ResponsibilityResponsibility 11 22 33 44 55

10%10% Working ConditionsWorking Conditions 11 22 33 44 55

Here in this example, a Job ‘X’’s 240240 total points may result from:

• 2 degrees of skills required = 22 X X 4040 = 80• 3 degrees of effort required = 33 X X 3030 = 90• 3 degrees of responsibility required = 33 X X 2020 = 60• 1 degree of working conditions = 11 X X 1010 = 10• • TOTAL = 240240

Designing Pay level & Designing Pay level & StructureStructure

Major DecisionsMajor Decisions

• Major StepsMajor Steps:

1. Determine the pay level policy

2. Design, conduct, & analyze surveys

3. Update the data

4. Construct the policy lines

5. Design ranges, flat rates, & / or incentives

Determine Pay Level PoliciesDetermine Pay Level Policies

• 3 classes of pay level policies:

1. To leadlead2. To meetmeet3. To follow competitionfollow competition

• Relative importance of pay level factors (ranked by importance)

a. Rates paid by other employersother employers in the industry or areab.b. UnionUnion strengthc.c. Cost of livingCost of living changesd.d. Surplus / shortageSurplus / shortage of qualified workerse. Employee unrestunrestf. Employer’s overall financial positionfinancial positiong. Firm’s profitsprofits

Determine Pay Level PoliciesDetermine Pay Level PoliciesPOLICY EFFECTS : What difference does the pay policy make?

1.1. PAY WITH COMPETITIONPAY WITH COMPETITION

– Labour Costs = its Competitors (Market Rate)Labour Costs = its Competitors (Market Rate)

2. LEAD POLICYLEAD POLICY

– Labour Costs > Market RateLabour Costs > Market Rate– Rationale is to maximize ability to attract & retain quality employeesmaximize ability to attract & retain quality employees & to

minimize employee dissatisfaction with pay– Some employers are able to pass higher pay rates on to consumers in form of pass higher pay rates on to consumers in form of

higher product priceshigher product prices– Sometimes an entire industry can pass high pay rates on to consumers if pay is

relatively low proportion to total operating

3. LAG policyLAG policy

– Labour Costs < Market RateLabour Costs < Market Rate– Lower pay levels probably contribute to turnoverturnover

Design & Conduct SurveysDesign & Conduct Surveys

• Systematic process of collecting informationcollecting information & making judgments about the compensation about the compensation paid by other employerspaid by other employers

• Surveys have 3 basic purposes3 basic purposes:

1. To establishestablish the pay level & structure or to updateupdate them in response to changing external pay rates

2. To analyzeanalyze personnel problems that may be pay related

3. To participate as “good citizensgood citizens” in response to requests from other employers / public agencies

Design & conduct surveysDesign & conduct surveys

WHAT INFORMATION TO COLLECT?WHAT INFORMATION TO COLLECT?

1. NATURE OF ORGANIZATIONNATURE OF ORGANIZATION

– To assess similarities & differences among organizations in the survey – include financial information, size, & organization structure

2. NATURE OF TOTAL PAY SYSTEMNATURE OF TOTAL PAY SYSTEM

– All the basic forms of pay included to assess similarities & differences in the pay packages offered

– Sometimes benchmark benefit package to including only the most expensive & variable benefits

3. INCUMBENT DATAINCUMBENT DATA

– Actual rates paid to incumbent which include total earnings, hours worked, date, & amount of last increase, bonus, incentive, & so on

Design & conduct surveysDesign & conduct surveys

TYPES OF ANALYSISTYPES OF ANALYSIS?

• 2 components of the pay system models are emerging

– An internally equitable job structure based upon job analysis & job evaluation has been developed – Internal EquityInternal Equity (horizontal axishorizontal axis)

– Key jobs from that structure were selected & the rates paid for those jobs by competitors in the external market have been surveyed – purpose is to establish external equityexternal equity (vertical axisvertical axis)

Constructing Pay Policy

Lines

Construct Pay Policy LineConstruct Pay Policy Line

• ‘Quick’ analyses help check usefulness of survey datausefulness of survey data

– Note down the illustration

• Construct market pay linesmarket pay lines


• Updating survey dataUpdating survey data

• Set the employer’s pay policy lineemployer’s pay policy line


Design Pay RangesDesign Pay Ranges• Design pay ranges for jobs inside the organization

• Why bother with ranges?

– Wide variation of rates paid for similar jobs & skills reflects two external pressures:

1. Existence of quality variations (skills, abilities, experience) among individuals in the external market

2. Recognition of differences in the productivity-related value to employers of these quality variations

– Ranges reflect the following org.al pressures:

1. Intention to recognize individual quality & performance variations with pay2. Intention to meet employees’ expectations that pay increases will occur

over time

Design Pay RangesDesign Pay Ranges

• Construction of rangesConstruction of ranges

– Develop classesDevelop classes or grades

• Note down the illustration

– Set midpoints, maximums, and minimumsmidpoints, maximums, and minimums

• Note down the illustration

– Degree of overlapoverlap

Recruiting & HR

Pay and Compensation