PAY ADMINISTRATION Presented by: Jo Ann B. Maquilan-Sanchez

PAY ADMINISTRATIONPAY ADMINISTRATION

Presented by:Presented by:

Jo Ann B. Maquilan-SanchezJo Ann B. Maquilan-Sanchez

CONTROL SALARY LEVEL: CONTROL SALARY LEVEL: BOTTOM UPBOTTOM UP

Bottom-up BudgetingBottom-up Budgeting – – requires managers to requires managers to forecast the pay increases forecast the pay increases they will recommend during they will recommend during the upcoming plan year.the upcoming plan year.

Process involved in Process involved in BOTTOM BOTTOM UP Budgeting:UP Budgeting:

1. Instruct managers in 1. Instruct managers in compensation policies and compensation policies and techniquestechniques. – train managers in . – train managers in the concepts of a sound pay-for-the concepts of a sound pay-for-performance policy and in standard performance policy and in standard company compensation techniques company compensation techniques such as the use of pay increase such as the use of pay increase guidelines and budgeting guidelines and budgeting techniques. Also communicate the techniques. Also communicate the salary ranges and market data.salary ranges and market data.


2. Study pay increase 2. Study pay increase guidelines.guidelines. – Review with the – Review with the managers the purpose of managers the purpose of increase guidelines and how to increase guidelines and how to use them.use them.


3. Distribute forecasting 3. Distribute forecasting instructions and instructions and worksheets.worksheets. – Furnish – Furnish managers with the forms and managers with the forms and instructions necessary to instructions necessary to preplan increases.preplan increases.

Forecasting worksheetsForecasting worksheets

ensure that managers are at least aware of this ensure that managers are at least aware of this information and that pay increases for any one information and that pay increases for any one period are part of a continuing message to period are part of a continuing message to individual employees, not some ad hoc response to individual employees, not some ad hoc response to short-term changes.short-term changes.

The The result of the forecasting cycleresult of the forecasting cycle is a budget for is a budget for the upcoming plan year for each organization’s unit the upcoming plan year for each organization’s unit as well as estimated pay treatment for each as well as estimated pay treatment for each employee. The budget does not lock in the manager employee. The budget does not lock in the manager to the exact pay change recommended for each to the exact pay change recommended for each employee. Rather it represents a plan, and employee. Rather it represents a plan, and deviations due to unforeseen changes such as deviations due to unforeseen changes such as performance improvements, unanticipated performance improvements, unanticipated promotions, and the like are common. promotions, and the like are common.

Forecasting WorksheetsForecasting Worksheets

This approach to This approach to pay pay budgetingbudgeting requires managers requires managers to plan the pay treatment for to plan the pay treatment for each of their employees. It each of their employees. It places the responsibility for pay places the responsibility for pay management on the managers. management on the managers. The compensation manager The compensation manager takes on the role of advisor to takes on the role of advisor to operating management’s use of operating management’s use of the system.the system.


4. Provide consultation to 4. Provide consultation to managersmanagers – offer advice and – offer advice and salary information services to salary information services to managers upon request.managers upon request.


5. Collect forecasts and verify 5. Collect forecasts and verify data submitteddata submitted – audit the – audit the increases forecasted to ensure increases forecasted to ensure that they do not exceed the that they do not exceed the pay guidelines and are pay guidelines and are consistent with appropriate consistent with appropriate ranges.ranges.


6. Compile statistical data for 6. Compile statistical data for reportsreports – prepare statistical – prepare statistical data in order to feed back the data in order to feed back the outcomes of pay forecasts and outcomes of pay forecasts and budgets.budgets.


7.7. Analyze forecastsAnalyze forecasts – examine – examine each manager’s forecast and each manager’s forecast and recommend changes based on recommend changes based on noted inequities among noted inequities among different managers.different managers.


8. Review and revise forecasts 8. Review and revise forecasts and budgets with and budgets with managementmanagement – consult with – consult with managers regarding the managers regarding the analysis and recommended analysis and recommended changes. changes.


9. Submit final budget for 9. Submit final budget for approvalapproval – obtain top – obtain top management approval of management approval of forecasts.forecasts.


7.7. Analyze forecastsAnalyze forecasts – examine – examine each manager’s forecast and each manager’s forecast and recommend changes based on recommend changes based on noted inequities among noted inequities among different managers.different managers.


10. Conduct feedback with 10. Conduct feedback with managementmanagement – present – present statistical summaries of the statistical summaries of the forecasting data by department forecasting data by department and establish unit goals.and establish unit goals.


11. Monitor budgeted versus 11. Monitor budgeted versus actual increasesactual increases – control the – control the forecasted increases versus forecasted increases versus the actual increases by the actual increases by tracking and reporting periodic tracking and reporting periodic status to management.status to management.

VARIABLE PAY AS A COST VARIABLE PAY AS A COST CONTROLCONTROL

Variable pay depends on performanceVariable pay depends on performance and is not “rolled into” employee’s base and is not “rolled into” employee’s base pay. The essence of variable pay is that it pay. The essence of variable pay is that it must be must be reearned each periodreearned each period, in contrast , in contrast to conventional merit pay increases or to conventional merit pay increases or across-the-board increases that are added across-the-board increases that are added to base pay each year and that increase to base pay each year and that increase the base on which the following year’s the base on which the following year’s increase is calculated. increase is calculated.

Increases added to the base pay have Increases added to the base pay have compounding effects on costscompounding effects on costs, and , and these costs are significant. these costs are significant.


Conventional increases impact not only the Conventional increases impact not only the average pay level but also the average pay level but also the costs of all costs of all benefitsbenefits contingent on base pay (e.g. contingent on base pay (e.g. pensions). pensions).

The greater the ratio of variable pay to The greater the ratio of variable pay to base pay, the more variable (flexible) the base pay, the more variable (flexible) the organization’s labor costs.organization’s labor costs.

The greater the ratio of contingent to core The greater the ratio of contingent to core workers and variable to base pay, the workers and variable to base pay, the greater the variable component of labor greater the variable component of labor costs, and the greater the options available costs, and the greater the options available to managers to control these costs.to managers to control these costs.


Although variability in pay and employment may be Although variability in pay and employment may be an advantage for managing labor costs, it may be an advantage for managing labor costs, it may be less appealing from the standpoint of managing less appealing from the standpoint of managing equitable treatment of employees. The inherent equitable treatment of employees. The inherent financial insecurity built into variable plans may financial insecurity built into variable plans may adversely affect employee’s financial well-being and adversely affect employee’s financial well-being and subsequently affect their behaviors at work and subsequently affect their behaviors at work and attitudes toward their employers.attitudes toward their employers.

Managing labor costManaging labor cost is only one is only one objective for objective for managing compensationmanaging compensation. Other objectives in the . Other objectives in the pay model include pay model include sustaining competitive sustaining competitive advantage (productivity, total quality, customer advantage (productivity, total quality, customer service, and costs) and equitable treatment of service, and costs) and equitable treatment of employees.employees.

INHERENT CONTROLSINHERENT CONTROLS

Two basic processes that Two basic processes that served to control pay served to control pay decision making:decision making:

1.1. Those inherent in the design of Those inherent in the design of techniques techniques

2.2. The formal budgeting processThe formal budgeting process

Several Pay Techniques that Several Pay Techniques that served to control pay:served to control pay:

1.1. Job analysis and evaluationJob analysis and evaluation

2.2. Skill/competency-based plansSkill/competency-based plans

3.3. Policy linesPolicy lines

4.4. Range Minimums and Range Minimums and MaximumsMaximums


1. Range minimums and maximums1. Range minimums and maximums These ranges set the maximum and minimum dollars to be These ranges set the maximum and minimum dollars to be

paid for specific work.paid for specific work. Range Maximum Range Maximum ……

Represents the highest value the organization places on the Represents the highest value the organization places on the output of the work.output of the work.

Example :Example : All that the work produced in a particular job is All that the work produced in a particular job is worth to organization even if skills and knowledge possessed worth to organization even if skills and knowledge possessed by the employees maybe more valuable for some in another by the employees maybe more valuable for some in another job (job-based structures)job (job-based structures)

Reasons whyReasons why pressures to pay above the pressures to pay above the range maximum range maximum (red circle rates) occur:(red circle rates) occur:

when employees with high seniority reach the maximum when employees with high seniority reach the maximum when promotion opportunities are scarcewhen promotion opportunities are scarce

Range Minimum Range Minimum …… Represents the minimum value placed on the work (usually Represents the minimum value placed on the work (usually

used for trainees)used for trainees) Reasons whyReasons why range minimum occur:range minimum occur: If outstanding employees receive a number of rapid If outstanding employees receive a number of rapid

promotions and rate adjustment have not kept up.promotions and rate adjustment have not kept up.

Several Pay Techniques that Several Pay Techniques that served to control pay:served to control pay:6. Compa-ratio6. Compa-ratio Range midpoints – a compa-ratio is often Range midpoints – a compa-ratio is often

calculated. calculated. This may be done forThis may be done for individual employees, for individual employees, for each range, for organization units, or for functions.each range, for organization units, or for functions.

Compa-ratio = Compa-ratio = Average rates actually paidAverage rates actually paid Range midpointRange midpoint Interpretation for compa-ratio result:Interpretation for compa-ratio result: Less than 1.00Less than 1.00 – on average- employees in that range are – on average- employees in that range are

paid below the midpoint.paid below the midpoint. managers are paying less than the intended policy (managers are paying less than the intended policy (ReasonsReasons why this why this

occur: majority of employees may be new or recent hires; they may be occur: majority of employees may be new or recent hires; they may be poor performers; promotion may be so rapid that few employees stay in poor performers; promotion may be so rapid that few employees stay in the job long enough to get into the high end of the range)the job long enough to get into the high end of the range)

Greater than 1.00Greater than 1.00 – on average – the rates exceed the – on average – the rates exceed the intended policy intended policy

((Reasons: Reasons: majority of workers with high seniority, high majority of workers with high seniority, high performance, low turnover, few new hires, or low promotion performance, low turnover, few new hires, or low promotion rates)rates)


2. performance evaluation2. performance evaluation3. gain-sharing3. gain-sharing4. salary increase guidelines4. salary increase guidelines

These techniques also regulate These techniques also regulate manager’s pay decisions by manager’s pay decisions by guiding what managers do. guiding what managers do. Controls are imbedded in the Controls are imbedded in the design of these techniques to design of these techniques to ensure that decisions are directed ensure that decisions are directed toward the pay system’s objectives.toward the pay system’s objectives.

Other examples of controls Other examples of controls designed into the pay designed into the pay

techniques:techniques:1.1. Mutual sign-offs on job descriptions Mutual sign-offs on job descriptions

required of supervisors and subordinatesrequired of supervisors and subordinates2.2. Slotting new jobs into the pay structure Slotting new jobs into the pay structure

via job evaluation which help ensure that via job evaluation which help ensure that jobs are compared on the same factors.jobs are compared on the same factors.

3.3. Organization-wide performance Organization-wide performance management system intended to ensure management system intended to ensure that all employees are evaluated on that all employees are evaluated on similar factors.similar factors.

4.4. Analyzing costsAnalyzing costs Costing out wage proposals is commonly Costing out wage proposals is commonly

done prior to recommending pay increases.done prior to recommending pay increases. Also used in preparation for collective Also used in preparation for collective

bargainingbargaining

Other examples of controls Other examples of controls designed into the pay designed into the pay

techniques:techniques:5. Using Computers5. Using Computers

can analyze almost every aspect of compensation can analyze almost every aspect of compensation informationinformation

can provide analysis and data that will improve the can provide analysis and data that will improve the administration of the pay system (easily compare administration of the pay system (easily compare past estimates to what actually occurred, e.g. the past estimates to what actually occurred, e.g. the percentage of employees that actually did receive a percentage of employees that actually did receive a merit increase and the amount)- Spreadsheet merit increase and the amount)- Spreadsheet programs can simulate alternate wage proposals programs can simulate alternate wage proposals and compare their potential effects.and compare their potential effects.

Have wider applications to compensation Have wider applications to compensation administration besides costing. (e.g. computerized administration besides costing. (e.g. computerized job analysis and job evaluation)job analysis and job evaluation)

Can also evaluate salary survey data and simulate Can also evaluate salary survey data and simulate the cost impact of incentive and gain-sharing the cost impact of incentive and gain-sharing options.options.

COMMUNICATION or COMMUNICATION or Marketing?Marketing?

Employees’ perceptions about Employees’ perceptions about the pay system are shaped the pay system are shaped through the treatment they through the treatment they receive from managers about receive from managers about the formal communication the formal communication programs about their pay and programs about their pay and performance, and participation performance, and participation in the design of the system.in the design of the system.

COMMUNICATION or COMMUNICATION or Marketing?Marketing?

Salaries of the top executives in publicly Salaries of the top executives in publicly held corporations are published in held corporations are published in prospectuses and often in annual financial prospectuses and often in annual financial reports.reports.

Most employees are not told what their Most employees are not told what their coworkers are being paid.coworkers are being paid.

The literature on compensation The literature on compensation management usually exhorts employers to management usually exhorts employers to communicate pay information; however, communicate pay information; however, there is no standard approach on what to there is no standard approach on what to communicate to individuals about their own communicate to individuals about their own pay or that of their colleagues.pay or that of their colleagues.

Marketing ApproachMarketing Approach

(like selling products to costumers, the (like selling products to costumers, the pay system is a product, and employees pay system is a product, and employees and managers are the customers).and managers are the customers).

Include consumer attitude surveys about Include consumer attitude surveys about the product, snappy advertising about the product, snappy advertising about the pay policies, and elaborate the pay policies, and elaborate videotapes expounding policies and videotapes expounding policies and strengths.strengths.

Aims to directly manage expectations Aims to directly manage expectations and attitudes about pay.and attitudes about pay.

Contrast between Marketing Contrast between Marketing Approach and Communication Approach and Communication

ApproachApproach

Marketing Marketing ApproachApproach

Communication Communication ApproachApproach

Focuses on the Focuses on the quality and quality and advantages of advantages of overall policies and overall policies and is silent on specifics is silent on specifics suchas range, suchas range, maximums, maximums, increase guides, increase guides, and the like. and the like.

tends to provide tends to provide

technical detailstechnical details

Reasons for communicating Reasons for communicating pay information:pay information:1.1. Pay delivers a strong messagePay delivers a strong message – considerable – considerable

resources have been devoted to designing a resources have been devoted to designing a system that is intended to motivate effective system that is intended to motivate effective performance and encourage productivity. Pay performance and encourage productivity. Pay system influence work behaviors and attitudes, system influence work behaviors and attitudes, managers and employees.managers and employees.

2.2. Employees seem to misperceive the pay Employees seem to misperceive the pay systemsystem. (they tend to overestimate the pay of . (they tend to overestimate the pay of those with lower level jobs and to underestimate those with lower level jobs and to underestimate the pay of those in higher level jobs. They tend to the pay of those in higher level jobs. They tend to think that the pay structure is more compressed think that the pay structure is more compressed than it actually is. “if differentials are than it actually is. “if differentials are underestimated, their motivational value is underestimated, their motivational value is diminished.”diminished.”

CommunicationCommunication

There is some evidence to suggest that the There is some evidence to suggest that the goodwill engendered by the act of being goodwill engendered by the act of being open about pay may also affect employees’ open about pay may also affect employees’ attitudes toward pay.attitudes toward pay.

Employees in companies with open pay Employees in companies with open pay communication policies are as inaccurate communication policies are as inaccurate in estimating pay differentials as those in in estimating pay differentials as those in companies in which pay secrecy prevails. companies in which pay secrecy prevails. However, they tend to express higher However, they tend to express higher satisfaction with their pay and their pay satisfaction with their pay and their pay system.system.

Intended and Unintended Intended and Unintended Consequences in Pay Consequences in Pay

Communication:Communication:1.1. If the pay system is not based on work-related or If the pay system is not based on work-related or

business-related logic, then the wisest course is business-related logic, then the wisest course is probably to avoid formal communication until the probably to avoid formal communication until the system is put in order. But avoiding this is not system is put in order. But avoiding this is not synonymous with avoiding communication.synonymous with avoiding communication.

2.2. Achieving a fair and equitable pay system Achieving a fair and equitable pay system requires active involvement and feedback from requires active involvement and feedback from managers and employees. An open policy helps managers and employees. An open policy helps ensure that employees understand how their pay ensure that employees understand how their pay is determined.is determined.

3.3. Providing accurate pay information may cause Providing accurate pay information may cause some initial short-term concerns among some initial short-term concerns among employees. Employees probably have employees. Employees probably have rationalized a set of relationships between their rationalized a set of relationships between their pay and the perceived pay and efforts of others. pay and the perceived pay and efforts of others. Receiving accurate data may require those Receiving accurate data may require those perceptions to be adjusted.perceptions to be adjusted.

IMPORTANT ISSUES RELATED IMPORTANT ISSUES RELATED TO STRUCTURING THE TO STRUCTURING THE

COMPENSATION FUNCTIONCOMPENSATION FUNCTION

1. Centralization and Decentralization 1. Centralization and Decentralization DecentralizationDecentralization – refers to a management strategy of giving separate – refers to a management strategy of giving separate

organization units the responsibility to design and administer their own organization units the responsibility to design and administer their own systems.systems.

Examples: Examples: TRW and GE, have small corporate compensation staffs (3 or TRW and GE, have small corporate compensation staffs (3 or 4 professionals). Their primary responsibility is to manage the systems 4 professionals). Their primary responsibility is to manage the systems by which executives and the corporate staff are paid. These by which executives and the corporate staff are paid. These professionals operate in a purely advisory capacity to other organization professionals operate in a purely advisory capacity to other organization subunits. The subunits in turn, may employ compensation specialists. subunits. The subunits in turn, may employ compensation specialists. Or they may choose to employ only personnel generalists rather than Or they may choose to employ only personnel generalists rather than compensation specialists, and may turn to outside compensation compensation specialists, and may turn to outside compensation consultants to purchase the expertise required on specific consultants to purchase the expertise required on specific compensation issues.compensation issues.

CentralizationCentralization- locates the design and administration responsibility in a single - locates the design and administration responsibility in a single corporate unit.corporate unit.

ExamplesExamples: AT &T and Pacific Gas Electric, has large corporate staffs : AT &T and Pacific Gas Electric, has large corporate staffs whose responsibility is to formulate pay policies and design the whose responsibility is to formulate pay policies and design the systems. Administration of these policies and systems falls to those systems. Administration of these policies and systems falls to those working in various units, who often are personnel generalists. Such an working in various units, who often are personnel generalists. Such an arrangement runs the risk of formulating policies and practices that are arrangement runs the risk of formulating policies and practices that are well tuned to overall corporate needs but less well tuned to each unit;s well tuned to overall corporate needs but less well tuned to each unit;s particular needs and circumstances.particular needs and circumstances.

IMPORTANT ISSUES RELATED IMPORTANT ISSUES RELATED TO STRUCTURING THE TO STRUCTURING THE

COMPENSATION FUNCTIONCOMPENSATION FUNCTION2. Flexibility within Corporate-wide Principles2. Flexibility within Corporate-wide Principles

This will answerThis will answer all the issues in decentralization by developing all the issues in decentralization by developing corporatewide principles or guidelines that all must meet.corporatewide principles or guidelines that all must meet.

3. Reengineering and Outsourcing3. Reengineering and Outsourcing Reengineering the compensation function involves changing the Reengineering the compensation function involves changing the

process of paying people. It means reshaping the compensation process of paying people. It means reshaping the compensation function to make it more client or customer focused.function to make it more client or customer focused.

The basic question asked during reengineering is, “Does each The basic question asked during reengineering is, “Does each specific activity (technique) directly contribute to our objectives (to specific activity (technique) directly contribute to our objectives (to our competitive advantage)?”our competitive advantage)?”

The next question is “Should we be doing the specific activity in-The next question is “Should we be doing the specific activity in-house, or can others do it more effectively, that is, should we house, or can others do it more effectively, that is, should we outsource it?”outsource it?”

Outsourcing is a viable alternative in the compensation (and Outsourcing is a viable alternative in the compensation (and benefits) field as organizations struggle to cease doing activities benefits) field as organizations struggle to cease doing activities that do not directly contribute to objectives. Employee benefits are that do not directly contribute to objectives. Employee benefits are a major candidate for outsourcing.a major candidate for outsourcing.

Cost saving is the apparent major short-term advantage of Cost saving is the apparent major short-term advantage of outsourcing.outsourcing.

Disadvantages of outsourcing includes: less responsiveness to Disadvantages of outsourcing includes: less responsiveness to unique and specific employee-manager problems, less control unique and specific employee-manager problems, less control over decisions that are often critical to all employees (their pay), over decisions that are often critical to all employees (their pay), and information leaks to rivals and competitors.and information leaks to rivals and competitors.

SUMMARYSUMMARY1.1. Administration includes control: control of the way Administration includes control: control of the way

managers decide individual employee’s pay as well as managers decide individual employee’s pay as well as control of overall costs of labor.control of overall costs of labor.

2.2. Some controls are designed into fabric of the system Some controls are designed into fabric of the system (inherent controls, range maximums and minimums, and (inherent controls, range maximums and minimums, and etc.)etc.)

3.3. The salary budgeting and forecasting processes impose The salary budgeting and forecasting processes impose additional controls.additional controls.

4.4. The formal budgeting processes focuses on controlling The formal budgeting processes focuses on controlling labor costs and generating the financial plan for the labor costs and generating the financial plan for the system.system.

5.5. The budget sets the limits within which the rest of the The budget sets the limits within which the rest of the system operates.system operates.

6.6. Pay systems are tools, and like any tools, they need to be Pay systems are tools, and like any tools, they need to be evaluated in terms of usefulness in achieving an evaluated in terms of usefulness in achieving an organization’s objectives.organization’s objectives.

THANK YOU FOR THANK YOU FOR LISTENING!LISTENING!

__________________________________________Have a Blessed Day!Have a Blessed Day!

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PAY ADMINISTRATION Presented by: Jo Ann B. Maquilan-Sanchez