Pay, Compensation and Pay, Compensation and BenefitsBenefits

Tehzeeb Sakina AmirTehzeeb Sakina Amir

HRM-session 8HRM-session 8

Spring 2011-MBASpring 2011-MBA

Main contents Main contents

Pay – basic factors & equityPay – basic factors & equity

Establishing Pay ratesEstablishing Pay rates

Pricing managerial & executive jobsPricing managerial & executive jobs

Competency based payCompetency based pay

Pay for performancePay for performance

CompensationCompensation

All forms of pay/rewards going to employees and All forms of pay/rewards going to employees and arising from their employmentarising from their employment Direct financial payments – salary, bonus, incentives Direct financial payments – salary, bonus, incentives

etcetc Indirect financial payments – insurance, healthIndirect financial payments – insurance, health

Legal considerations in compensationLegal considerations in compensation Minimum pay/wageMinimum pay/wage Maximum hours, safety, working conditions etcMaximum hours, safety, working conditions etc

Pay – equity Pay – equity Equity theory of motivationEquity theory of motivation – balance between input – balance between input

and rewardsand rewards External equityExternal equity – different companies – different companies

Internal equityInternal equity – fairness of job pay rate as compare to other – fairness of job pay rate as compare to other

jobs within the same companyjobs within the same company

Individual equityIndividual equity - fairness of an individual pay as compare to - fairness of an individual pay as compare to

his coworkershis coworkers

Procedural equity – fairness in proceduresProcedural equity – fairness in procedures

Salary CompressionSalary Compression – a salary inequity problem – a salary inequity problem

generally caused by inflation, resulting in longer-term generally caused by inflation, resulting in longer-term

employees in a position earning less than workers employees in a position earning less than workers

entering the firm againentering the firm again

Pay – equity Pay – equity

How equity issues are handled:How equity issues are handled: Salary surveys to maintainSalary surveys to maintain external external equity equity

Use job analysis and job evaluation to maintain Use job analysis and job evaluation to maintain internalinternal equity equity

Performance appraisal & incentive pay to maintain Performance appraisal & incentive pay to maintain individualindividual

equityequity

Use communication, grievance handling mechanisms, employee Use communication, grievance handling mechanisms, employee

participation to maintain participation to maintain proceduralprocedural equity equity

Salary compressions can be handled by:Salary compressions can be handled by: Having more aggressive merit pay plansHaving more aggressive merit pay plans

Supervisors has authority to recommend ‘equity’ adjustments Supervisors has authority to recommend ‘equity’ adjustments

Establishing Pay ratesEstablishing Pay rates

Establishing pay rates while ensuring equity – Establishing pay rates while ensuring equity –

five stepsfive steps

1.1. The Salary SurveyThe Salary Survey• Benchmark jobsBenchmark jobs – a job that is used to anchor the – a job that is used to anchor the

employer’s pay scale and around which other jobs are employer’s pay scale and around which other jobs are

arranged in order of relative worth.arranged in order of relative worth.

• Formal & informal salary surveysFormal & informal salary surveys

• ArchivedArchived data on salary data on salary

• Using Using internetinternet to do surveys to do surveys

Establishing Pay ratesEstablishing Pay rates

2.2. Job EvaluationJob Evaluation – to determine worth of – to determine worth of

one job relative to another, jobs are one job relative to another, jobs are

compared through:compared through: Intuitive approachIntuitive approach

Compensable factor – like skills, efforts, Compensable factor – like skills, efforts,

responsibility, working conditionsresponsibility, working conditions

Establishing Pay ratesEstablishing Pay rates

Preparing Job Evaluation Preparing Job Evaluation requires close requires close

cooperation among supervisors, HR, cooperation among supervisors, HR,

employees and union reps. Working closely, employees and union reps. Working closely,

they:they: Identify the need for job evaluation (work stoppages, high Identify the need for job evaluation (work stoppages, high

turnover)turnover)

Getting employees to cooperateGetting employees to cooperate

Make a job evaluation committeeMake a job evaluation committee

Selection of best evaluation methodSelection of best evaluation method

Establishing Pay ratesEstablishing Pay rates

Methods of job evaluation:Methods of job evaluation: Ranking – ranking each job relative to all other jobs, Ranking – ranking each job relative to all other jobs,

usually based on overall difficultyusually based on overall difficulty• Obtain job information through job analysis or job Obtain job information through job analysis or job

descriptiondescription

• Select and group jobs (by departments or in clusters)Select and group jobs (by departments or in clusters)

• Select compensable factors – use one factor while rankingSelect compensable factors – use one factor while ranking

• Rank jobsRank jobs

• Combine ratings of multiple ratersCombine ratings of multiple raters

Establishing Pay ratesEstablishing Pay rates

Methods of job evaluation:Methods of job evaluation: Job classificationJob classification – categorizing jobs into – categorizing jobs into

groupsgroups

• Classes – similar jobsClasses – similar jobs

• Grades – similar in difficulty otherwise jobs are Grades – similar in difficulty otherwise jobs are

different in naturedifferent in nature

• Grade DefinitionGrade Definition – written descriptions f the – written descriptions f the

level of say responsibility & knowledge required level of say responsibility & knowledge required

by jobs in each grade.by jobs in each grade.

Establishing Pay ratesEstablishing Pay rates

Methods of job evaluation:Methods of job evaluation: Point MethodPoint Method – in which number of compensable – in which number of compensable

factors are identified and then the degree to which factors are identified and then the degree to which

each of these factors is present on the job is each of these factors is present on the job is

determined.determined.

Factor ComparisonFactor Comparison - ranking jobs according to - ranking jobs according to

variety of skills & difficulty factors, then adding up variety of skills & difficulty factors, then adding up

these rankings to arrive at an overall numerical these rankings to arrive at an overall numerical

rating for each given job.rating for each given job.

Establishing Pay ratesEstablishing Pay rates

3.3. Group similar jobs into pay gradesGroup similar jobs into pay grades

1.1. PAY GRADEPAY GRADE – is comprised of jobs of approximately equal – is comprised of jobs of approximately equal

difficulty or importance as established by Job Evaluationdifficulty or importance as established by Job Evaluation

4.4. Price Each Pay GradPrice Each Pay Grad

1.1. WAGE CURVESWAGE CURVES – shows the relationship between value of – shows the relationship between value of

the job and the average wage paid for this job.the job and the average wage paid for this job.

5.5. Fine-tune Pay RatesFine-tune Pay Rates

1.1. PAY RANGES – a series of steps or levels within a pay grade, PAY RANGES – a series of steps or levels within a pay grade,

usually based on years of serviceusually based on years of service

Pricing Managerial, Professional & Pricing Managerial, Professional & Executives Executives

Harder to quantify factors – problems solving, Harder to quantify factors – problems solving,

judgments, etcjudgments, etc

It consists of four elements:It consists of four elements: Base pay - fixedBase pay - fixed

Short term incentives – on short term goal achievementsShort term incentives – on short term goal achievements

Long term incentives - stocksLong term incentives - stocks

Executive benefits & perks – insurance, health, retirement Executive benefits & perks – insurance, health, retirement

pension plan with out deductionspension plan with out deductions

Compensating managerial & professional employeesCompensating managerial & professional employees

Competency-based Pay Competency-based Pay

Where the organization pays for the employee’s Where the organization pays for the employee’s

range, depth & types of skills & knowledge, range, depth & types of skills & knowledge,

rather than for the job title he holdsrather than for the job title he holds

It uses one or both:It uses one or both: Pay for knowledgePay for knowledge

Skill-based Pay Skill-based Pay

Employees build job competencies + pay is Employees build job competencies + pay is

more person oriented than job oriented more person oriented than job oriented

Competency-based Pay Competency-based Pay

It contains four main elements:It contains four main elements: A system for defining specific skills & a process for A system for defining specific skills & a process for

tying the person’s pay to his skill leveltying the person’s pay to his skill level

A training system that lets employees seek & acquire A training system that lets employees seek & acquire

skillsskills

A formal competency testing systemA formal competency testing system

A work design that lets employees move among jobs A work design that lets employees move among jobs

to permit work assignment flexibilityto permit work assignment flexibility

Reasons for Competency based Reasons for Competency based paypay

Good part:Good part: Support High Performance Work SystemsSupport High Performance Work Systems

Support strategic aimsSupport strategic aims

Support performance managementSupport performance management

Bad part:Bad part: Implementation problemsImplementation problems

High cost specially when skills are not usedHigh cost specially when skills are not used

Compensation trendsCompensation trends

TraditionalTraditional Focus on seniorityFocus on seniority

Emphasis on job Emphasis on job

dutiesduties

Narrowly defined pay Narrowly defined pay

ranges & jobsranges & jobs

Changing trendsChanging trends Focus on contribution, Focus on contribution,

performance & valueperformance & value

Emphasis on person’s Emphasis on person’s

skillsskills

Focus on organization Focus on organization

overall strategyoverall strategy

Broader jobs & Pay Broader jobs & Pay

rangesranges

Important TrendsImportant Trends

Broad-bandingBroad-banding Comparable WorthComparable Worth Broad Oversight of Executive PayBroad Oversight of Executive Pay Automating Compensation AdministrationAutomating Compensation Administration

Broad-bandingBroad-banding

Consolidating salary grades and ranges Consolidating salary grades and ranges into just a few wide levels or bands each into just a few wide levels or bands each of which contains a relatively wide range of which contains a relatively wide range of jobs and salary levels.of jobs and salary levels.

Pros & ConsPros & Cons Greater flexibility, useful where flat Greater flexibility, useful where flat

hierarchical structures existhierarchical structures exist Unsettling for new employeesUnsettling for new employees

Comparable WorthComparable Worth

The concept by which women who are The concept by which women who are usually paid less than men can claim than usually paid less than men can claim than men in comparable rather than strictly men in comparable rather than strictly equal jobs are paid more.equal jobs are paid more. Women starting salary are traditionally lowWomen starting salary are traditionally low Women receives low raises as compare to Women receives low raises as compare to

menmen Women switch jobs not as frequently as menWomen switch jobs not as frequently as men

TrendsTrends

Broad Oversight of Executive PayBroad Oversight of Executive Pay Board of directors and lawyersBoard of directors and lawyers

Automating Compensation AdministrationAutomating Compensation Administration Quick to updateQuick to update Eliminate costs of manual processingEliminate costs of manual processing Easy to keep a checkEasy to keep a check Automated administered pay actionsAutomated administered pay actions

Pay for PerformancePay for Performance

Motivation & MoneyMotivation & Money

Fredrick Taylor popularized financial Fredrick Taylor popularized financial incentives – financial rewards paid to incentives – financial rewards paid to employees whose performance exceeds employees whose performance exceeds some predetermined standards. Taylor some predetermined standards. Taylor contributed:contributed: Fair day’s workFair day’s work – standards of output based – standards of output based

on scientific analysison scientific analysis Scientific managementScientific management – based on improving – based on improving

work methods through observation & analysiswork methods through observation & analysis Use of Use of incentive payincentive pay