Designing compensation system Part I

Designing Compensation System: Part IDr. G C Mohanta, BE(Mech), MSc(Engg), MBA,

PhD(Mgt)

Professor

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Components of Compensation System

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Types of Equity

Internal Equity - Fairness of the pay structure, relationship among jobs within a single organization

External Equity - Comparisons of similar jobs in different organizations

Individual Equity - Comparisons among individuals in the same job within the same organization

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Equity Theory

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Building Internal Consistent Compensation System through

Job Evaluation

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Job Evaluation - Concept

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Job Evaluation Methods

Job RankingJob Grading or ClassificationFactor ComparisonPoint Method

Compensable FactorsApplication to JobsHay Plan

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Internal Equity in PracticeJob analysis

Collecting data about jobs

Job evaluationValuing jobs

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Job Evaluation Process

Job evaluation

process

Job description

Job analysis

Job evaluation

Job specification

Wage survey

Employee classification

Creating Internal Equity through Job Analysis and

Job Valuation

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Job Analysis The systematic, formal study of the duties and responsibilities that comprise job content 

The process seeks to obtain important and relevant information about the nature and level of the work performed

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Job AnalysisProcess to identify and determine particular job

duties and requirements & relative importance of duties

Judgments made on data collected from job analysisCan be used in compensation to identify/determine:

• Skill levels • Compensable job factors • Work environment (e.g., hazards; attention; physical

effort) • Responsibilities (e.g., fiscal; supervisory) • Required level of education (indirectly related to

salary level)

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Tasks Responsibilities Duties

Job Analysis

Job Descriptions

Job Specifications

Knowledge Skills Abilities

Human Resource Planning

Recruitment

Selection

Training and Development

Performance Appraisal

Compensation and Benefits

Safety and Health

Employee and Labor Relations

Legal Considerations

Job Analysis for Teams

Job Analysis Result• Job Description

– Job based– Tasks– Work performed

• Job Specification– Employee based– Knowledge, skills & abilities– Experience

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Job DescriptionOutput from job analysis used to develop job

description and job specification A critical component of both compensation

and selection systemsIt defines the responsibilities, requirements,

functions, duties, location, environment, conditions and other aspects of jobs

It may be developed for jobs individually or for entire job families

It describes and focuses on job itself and not on any specific individual who might do the job

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Job Specification

It defines worker characteristics (i.e., knowledge, skills and abilities) required to perform the job competently

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Types Of Job Analysis Information Considerable information is needed, such

as:Worker-oriented activitiesMachines, tools, equipment, and work aids

usedJob-related tangibles and intangiblesWork performanceJob contentPersonal requirements for the job

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Types of Data Collected Through Job Analysis

Work Activities – work activities and processes; activity records; procedures used; personal responsibility

Worker-oriented activities – human behaviours, such as, physical actions and communications on the job; elemental motions for methods analysis; personal job demands, such as, energy expenditure

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Types of Data Collected Through Job Analysis

Machines, tools, equipment, and work aids used

Job-related tangibles & intangibles – knowledge dealt with or applied; materials processed; products made or services performed

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Types of Data Collected Through Job Analysis

Work performance – error analysis; work standards; work measurements, such as, time taken for a task

Job context – work schedule; financial and nonfinancial incentives; physical working conditions; organizational and social contexts

Personal requirements for the job – personal attributes, such as, personality and interests; education and training required; work experience

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Job Evaluation - ObjectivesJob evaluation - used to determine relative

value of each job in relation to all jobs within the organization

Immediate objective - to obtain internal and external consistency in wages and salaries

Ultimate objective - employee and employer satisfaction with wages and salaries paid

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Job Evaluation

Methods and practices for ordering jobs or positions with respect to their value or worth to the organization

A system for comparing jobs for purpose of determining appropriate compensation levels for individual jobs or job elements

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Building Market Competitive

Compensation System

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Establishing External Equity – Compensation Surveys

Wage and Salary Surveys (Compensation Surveys)Identifying Key JobsSelecting Organizations to SurveyCollecting Data

Self-Surveys Online Surveys Government Surveys Interpreting the Data Avoiding Antitrust

Pay Level PolicyMatching the CompetitionAdapting a Lead PolicyFollowing a Lag Approach 24

Wage Surveys (Compensation Surveys)

Goal of wage surveys is to find data from employers with whom the organization competes for employees

Collected data should be analyzed Analysis involves comparing going market

rate and approximating this rate within organization's own pay structure

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Methods of Wage Surveys

Generally three methods are employed for wage surveys:• Personal Interviews• Mailed Questionnaires• Telephone Inquiries

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Establishing Individual EquityDesigning Pay Ranges

Establishing Pay Ranges Wage Ranges

BroadbandingAbove- and Below-Range Employees

Setting Individual PaySeniorityMerit PaySkill Based Pay

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