PGDM 2012 Compensation Planning

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Compensation Planning


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Job Evaluation for Management

Positions

Hay Profile Method

Job evaluation technique using three factorsknowledge, mental activity/problem solving ,

and accountabilityto evaluate executive and

managerial positions.


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Characteristics of Key Jobs

Key JobsJobs that are important for wage-setting purposes

and are widely known in the labor market.

Characteristics of Key JobsThey are important to employees and the

organization.

They vary in terms of job requirements.They have relatively stable job content.

They are used in salary surveys for wage

determination.


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Compensation

Pay is a statement of an employees worthby an employer.

Pay is a perception of worth by an

employee.


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Motivating Employees through

Compensation

Pay Equity (also Distributive Fairness)

An employees perception that compensation

received is equal to the value of the work

performed.

Explains how people respond to situations in

which they feel they have received less (or more)

than they deserve. Individuals form a ratio of their inputs to outcomes in

their job and then compare the value of that ratio with

the value of the ratio for other individuals in similar

jobs.


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Relationship between Pay Equity and

Motivation

The greater the perceived disparity between my input/output ratio andthe comparison persons input/output ratio, the greater my motivation

to reduce the inequity.


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The Wage Curve

Wage CurveA 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.


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The Wage Curve (contd)

Competence-based Pay, (also skill-based payor knowledge-based pay)

Compensation for the different skills or increased

knowledge employees possess rather than for thejob they hold in a designated job category.

Red Circle Rates

Payment rates above the maximum of the payrange.

Broadbanding

Collapses many traditional salary grades into a

few wide salary bands.


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Expectancy Theory and Pay

Expectancy TheoryA theory of motivation that holds that employees

should exert greater work effort if they have

reason to expect that it will result in a reward thatthey value.

Employees also must believe that good

performance is valued by their employer and will

result in their receiving the expected reward.


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Pay-for-Performance and Expectancy

Theory

Figure 9.3


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Factors Affecting the Wage Mix


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The Wage MixInternal Factors

Compensation StrategySetting organization compensation policy to lead,

lag, or match competitors pay.

Worth of a JobEstablishing the internal wage relationship among

jobs and skill levels.

Relative Worth of an Employee

Rewarding individual employee performance

Ability-to-Pay

Having the resources and profits to pay

employees.


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The Wage MixExternal Factors

Labor Market ConditionsAvailability and quality of potential employees is

affected by economic conditions, government

regulations and policies, and the presence of

unions.

Area Wage Rates

A firms formal wage structure of rates is

influenced by those being paid by other areaemployers for comparable jobs.


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Collective BargainingEscalator clauses in labor agreements that provide

for quarterly upward cost-of-living wage

adjustments for inflation to protect employees

purchasing power.

Unions bargain for real wage increases that raise

the standard of living for their members.

Real wages are increases larger than rises in theconsumer price index; that is, the real earning

power of wages.


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Cost of Living - Consumer Price IndexLocal 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.


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Significant Compensation Issues

Equal Pay for Comparable Worth

The concept that male and female jobs that aredissimilar, but equal in terms of value or worth to

the employer, should be paid the same.

Wage-Rate Compression

Compression of pay differentials between job

classes, particularly the pay differentials betweenhourly workers and their managers.

Low-wage Budgets

Current wage budgets reflect the general trendtoward tight compensation cost controls.


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Principle of wage policy in India

Minimum wageFair wage

Living wage

based on the needs of workers,capacity of the employer to pay and general

economic conditions of the country


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The Compensation Structure

Wage and Salary surveyA survey of the wages paid to employees of other

employers in the surveying organizations

relevant labor market.Helps maintain internal and external pay equity

for employees.

Labor Market

The area from which employers obtain certain

types of workers.


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Strategic Compensation Policy

Concerns The rate of pay within the organization and whether it is to be above,below, or at the prevailing community rate. Quartile positioning

The ability of the pay program to gain employee acceptance while

motivating employees to perform to the best of their abilities. Motivate

The pay level at which employees may be recruited and the pay

differential between new and more senior employees. Equity

The intervals at which pay raises are to be granted and the extent to

which merit and/or seniority will influence the raises. Merit

The pay levels needed to facilitate the achievement of a sound financial

position in relation to the products or services offered. Competitive


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Common Strategic Compensation Goals

To reward employees past performance

To remain competitive in the labor market

To maintain salary equity among employees

To mesh employees future performance with

organizational goals

To control the compensation budget

To attract new employees

To reduce unnecessary turnover


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Total Compensation

Direct Indirect

Bonuses / Variable Pay

Gainsharing /ESOP

Security Plans Pensions

Employee Services Educational assistance Recreational programs

Commissions

Wages / Salaries

Insurance Plans MedicalLifeAccident

Time Not WorkedVacations Breaks Holidays


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Strategic Compensation Planning

Strategic Compensation PlanningLinks the compensation of employees to the

mission, objectives, philosophies, and culture of

the organization.Serves to mesh the monetary payments made to

employees with specific functions of the HR

program in establishing a pay-for-performance

standard.Seeks to motivate employees through

compensation.


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Incentive SchemesIssues

High incentive earning become the basis for wage for the

next negotiations

Who will set the norm

Standard performance?

Be based on scientific work measurement

Direct and Indirect workers

Planning before implementingGroup incentive schemes


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Compensation Philosophy

Job Band 7 and above

The top performers ( 2 EAs +) be positioned at the 75%ile

The next best (2 HAs +) be positioned at 66%ile

The new employees be given a 15 to 20% increase

Job band 8-10 The top performers at 66%ile to Median Range

The next best at Median


Job band 11 and 12

Entry level and professionals like diploma holders etc. Top two categories get near to Median


Others also be given increases in line with 2006 corrections


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Types of Incentive Plans

INDIVIDUAL GROUP ENTERPRISE

Piecework Team compensation Profit sharing

Standard hour plan Scanlon Plan Stock options

Bonuses Rucker Plan Employee stock

Merit pay Improshare ownership plansVariable Pay Earnings-at-risk plans (ESOPs)

Sales incentives

Incentives forprofessional employees

Executive compensation


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Successful Incentive Plans

Employees have a desire for an incentive plan.

Employees are encouraged to participate.

Employees see a clear connection between the

incentive payments they receive and their jobperformance.

Employees are committed to meeting the standards.

Standards are challenging but achievable.

Payout formulas are simple and understandable.

Payouts are a separate, distinct part of compensation.


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Merit Pay

Merit Pay Program (merit raise)Links an increase in base pay to how successfully

an employee achieved some objective

performance standard. Merit Guidelines

Guidelines for awarding merit raises that are tied

to performance objectives.


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Motivation Through Merit Raises

Develop employee confidence and trust inperformance appraisal.

Establish job-related performance criteria.

Separate merit pay from regular pay.

Distinguish merit raises from cost-of-living

raises.

Withhold merit payments when performance

declines.


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Problems with Merit Raises

Inadequate funding for merit increases.

Vagueness in how to define and measure performance.

Employees not believing that merit compensation is tied to

effort and performance

Allowing organizational politics to influence merit pay

decisions.

Failing to differentiate between merit pay and other types of pay

increases.

Mistrust between management and employees.

An overall merit pay plan that does not motivate.


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Group Incentive Plans

Team Incentive PlansCompensation plans where all team members

receive an incentive bonus payment when

production or service standards are met or

exceeded.

Establishing Team Incentive Payments

Set performance measures upon which incentive

payments are based

Determine the size of the incentive bonus.

Create a payout formula and fully explain to

employees how payouts will be distributed.


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Group Incentive Plans

Gainsharing PlansPrograms under which both employees and the

organization share the financial gains according to

a predetermined formula that reflects improved

productivity and profitability.


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Lessons Learned: Designing Effective

Gainsharing Programs

Enlist total managerial support.

Include all groupslabor, management, employees.

Prevent political gamesmanship.

Bonus formulas must be fair, precise and easilycalculated, offer frequent payouts, large enough toencourage employee effort, and create a pay-for-performance environment.

Be certain that employees are predisposed to againsharing reward system.

Launch the plan during a favorable business period.


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Clarifications ?

Documents

PGDM 2012 Compensation Planning