compesation mgmt.

7/31/2019 compesation mgmt.

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Compensation Administration

Employee compensation refers to all

forms of pay or rewards going toemployees and arising from their

employment.


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Key Challenge

How to allocate scarce compensationmoney among employees in ways thatrewards and motivates good

performance. Mercers (HR consulting firm) survey

data reveals that there are growing

concerns and challenges related tocompensation.


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The projections for 2012, in

the 16th Annual India Salary

Increase Survey

Salary increases in India are projected to

be 11.9 per cent in 2012, according toglobal human resource consulting andoutsourcing company Aon Hewitt., weremarginally lower compared to the actual

increase of 12.6 per cent in 2011.


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Pay package increase projections (in %)

Employee levels 2010 2011 2012

Top/Senior

Management

11.1 11.2 11.1

Middle Management 12.0 12.5 12.0

Junior Manager/Sup/

Prof

12.4 12.7 12.3

General/Entry Staff 11.4 12.0 11.8

Across Industries

Overall

10.6 12.9 11.9


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Industry 2010 2011 2012

Pharmaceutical NA 13.2 13.3

Engineering Design/Services 12.6 14.4 13.0

Infrastructure NA 13.9 12.9

Chemicals NA 12.6 13.8 12.6

Engineering/Manufacturing NA 13.7 12.4


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FMCG/FMCD NA 13.4 12.4

Automotive/Vehicle

Manufacturing

NA 14.0 12.4

High Tech/InformationTechnology

8.9 12.0 11.9


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Retail 11.1 12.4 11.8

IT Enabled Services (ITeS) NA 11.9 11.8

Energy

(Oil/Gas/Coal/Power)

NA 14.0 11.8

Metals NA NA 11.3

TelecommunicationServices

NA 12.5 11.0

Financial Institutions 10.5 12.7 10.0


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Mercers (HR consulting firm) surveydata reveals that there are growing

concerns and challenges related tocompensation. It publishes anannual global compensation planning

report for more than 40 countries.


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According to the 'Asia ExecutiveRemuneration Snapshot Survey' by

consulting firm Mercer, Senior executives inIndian companies should see an increase inbase pay by 8.3% in 2012, a marginal dropfrom last year's 8.4%, according to the

survey.However, Indian firms will see more salaries

linked to performance since economicconditions are uncertain. Going forward, alower increase in base pay is expected withsalary tilting more towards long-term andshort-term incentives.
http://economictimes.indiatimes.com/topic/Mercerhttp://economictimes.indiatimes.com/topic/base-payhttp://economictimes.indiatimes.com/topic/base-payhttp://economictimes.indiatimes.com/topic/base-payhttp://economictimes.indiatimes.com/topic/base-payhttp://economictimes.indiatimes.com/topic/Mercer


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Currently, in India around 58% of anexecutive's salary is fixed and 42% linked

to variable pay, compared with companiesin other Asian countries, which have 40%attributed to fixed pay and 60%

dependent on variable pay.


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Strategic Choices

How to pay employees with respect to competition.

Whether to pay higher, equal or lower than theexisting market trend? (Pay level decision)

How closely the compensation plan is linked to the

organization's overall strategic plan?

Merit pay raises, experience based or across-the-board raises.

To decide the level of pay secrecy.

To determine its stance of internal equity (relativeworth). (Pay Structure Decision)

Decide how to mix intrinsic (rewards fromperforming the job) & extrinsic rewards (outside the

job).


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Decide the ratio of fixed & variable pay.

Internal vs. External Equity Pay to individual or group contributions

Job vs. Individual Pay

Egalitarianism vs. Elitism: all have sameplan or establish different plans.

Open vs. Secret Pay

Centralization vs. Decentralizationmade in central location or delegated tounit managers.


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Importance of designing the compensation intelligently.

Fixed/ variable Pay How to implement incentives that motivate staff to

achieve outstanding results. Retirement woes

Fringe benefits: ESOPs Perks How to use powerful and highly effective tool for

managing compensation. How to develop a compensation policy that delivers

the greatest value to the employee at the lowest costto the company How to establish internally equitable and externally

competitive grading and salary structures. How to introduce competency/skill and market-based

pay


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Compensation Policy Development Create philosophy to pay Analyze current practices vs desired objectives Relate internal policies to external market

Establish guidelines for equality, competitiveness and motivation

3 Ps of compensation Management

1. Paying for Position Develop an equitable grading structure Create a reference salary structure Leverage compensation costs with market survey information

2. Pay for Person Determine competency requirements and employee capabilities

Pay individuals based on their competency match with the position Identify and pay market premium for competencies in short supply in the market

3. Paying for Performance Design annual bonus and incentives plans that motivate staff Shift from fixed salary increases to variable pay

Create long-term reward plans - stock options, deferred compensation and phantomshare plans.


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Two types of employee social comparisons of pay are

especially relevant in making pay-level and job structuredecisions:

Pay Structure

Decision Area

Pay Level

Pay Structure

Administrative

Tool

Market pay surveys

Job evaluation

Focus of

Employee PayComparisons

External equity

Internal equity

Consequences of

Equity Perceptions

External employeemovement, laborcosts, employee attitudes

Internal employeemovement, cooperation,

employee attitudes


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REWARD

CLASSIFICATIONS

Intrinsic - Extrinsic

Financial-Nonfinancial

Membership(company linked)-Performance

(individual linked)


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INTRINSIC REWARDS

Personal satisfactionfrom the job itself

Consistent with ownvalue system

Decision making

Freedom

Control


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INTRINSIC REWARDS

Responsibility

Interesting work

Personal growthDiversity of activities


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EXTRINSIC REWARDS

Beyond the workitself

Come from

managementFinancial and/or non-

financial

Financial may beperformance- ormembership-based/direct or

indirect


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EXTRINSIC FINANCIAL

REWARDS

Wages/Salaries

Incentives:Bonuses

Profit-sharing

Fringe benefits: PF,gratuity, insurance,mediclaim

Perks: company car,mobile, furnishedhouse. Paid

Vacations, Purchasediscounts


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EXTRINSIC

NONFINANCIAL REWARDS

Extras at the disposalof the company

Do not affect thefinancial position ofthe employee

Creative

Varied


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EXTRINSIC

NONFINANCIAL REWARDS

Office furnishings

Lunch hours

Parking spacesWork assignments,

locations

Business cards

Secretary

Titles


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MEMBERSHIP-BASED

REWARDS

Most organizationalrewards

(explicit & implicit)

Regardless ofperformance

Examples

Cost-of-living increases

Benefits

Salary due to labormarket conditions


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Classification of Rewards


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COMPENSATION

ADMINISTRATION GOALS

Job evaluation based

Cost-effective pay

structureAttract, motivate,

retain

Fair

Legal


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Legal &Fair Union

Policy Equity

WHAT FACTORSDETERMINE PAY?


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Relevant Acts

Minimum Wages Act, 1948

Payment of Wages Act, 1936

Equal Remuneration Act,

1976

Companies Act, 1956

ESIC ActEPF, Gratuity Act

CO S O


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COMPENSATION

ADMINISTRATION LAWS

Equal RemunerationAct 1976

Prevents

discrimination

Equal pay for equalwork

Women still earn only

75% of what malecounterparts earn


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Equal Remuneration Act 1976

The Equal Remuneration Act 1976 defines "remuneration"

in section 2(g)as follows: "the basic wages or salary, and any additional

emoluments whatsoever payable, either in cash or inkind to a person employed in respect of employment orwork done in such employment, if the terms of the

contract of employment, express or implied, werefulfilled."

A typical remuneration package in the organized sector(for a time rate payment system) consists of a basicwage, dearness allowance (to compensate for inflation),other allowances, and the house rent allowance. Thedearness and the house rent allowances can be differentin offices of the same company due to the cost of livingin different cities. (Acharya 1995, 7-8.)

E it d It I t


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Equity and Its Impact on

Pay Rates

External

Equity

Procedural

Equity

Internal

Equity

Individual

Equity

Forms of Equity


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Addressing Equity Issues

Salary Surveys

Job Analysis andJob Evaluation

Performance Appraisaland Incentive Pay

Communications, GrievanceMechanisms, and Employees

Participation

Methods toAddress Equity

Issues


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Establishing Pay Rates

3

5

Steps in Establishing Pay Rates

Determine the worth of each job in your organizationthrough job evaluation (to ensure internal equity).

Conduct a salary survey of what other employers arepaying for comparable jobs (to help ensure external equity).

Group similar jobs into pay grades.

Price each pay grade by using wave curves.

Fine-tune pay rates.

1

2

4


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Establishing Pay Rates

1. The Salary Survey: determine prevailing wagerates, Price benchmark jobs in theorganisation, data about employee benefits.Using internet to get information: Salary.com,wageweb.com.

http://www.opm.gov/Employment_and_Benefits/index.asp

2. Job Evaluation

3. Group similar jobs into pay grades.

4. Price each pay grade through wage curve:

shows the relationship between the value ofthe job & the avg. wage paid for it.

5. Fine tune pay rates: pay levels in each grade.


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JOB EVALUATION

A systematic comparisondone in order todetermine relative worthof one job relative to

another.Job ranking indicates

value to organization

Higher value jobs shouldbe paid more

Skills and performancelevels of individuals areadditional issues

JOB EVALUATION


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JOB EVALUATION

CRITERIA

Present in all jobs

Present in varyingdegrees

Measurable

Compensable factors


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COMPENSABLE FACTORS

Skills

Effort

Responsibility

Working Conditions

Step 2. Job Evaluation:Identifying

Compensable Factors

Use 3 to 5

May be subdivided

METHODS OF JOB


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METHODS OF JOB

EVALUATION

Ranking/Ordering

Job classification/Grading

Point rating

Factor comparison


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Ranking/Ordering Method

No attempt to identifycompensable factors

Rank order jobs from

most important toleast

No distanceidentification

Simple, good for smallcompanies


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1. Office manager $43,000

2. Chief nurse 42,500

3. Bookkeeper 34,000

4. Nurse 32,5005. Cook 31,000

6. Nurses aide 28,500

7. Orderly 25,500

Ranking Order Annual Pay Scale


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CLASSIFICATION METHOD

Raters categorize jobs into groups orclasses of jobs that are of roughly thesame value for pay purposes.Classes contain similar jobs.Administrative assistants

Grades are jobs similar in difficulty butotherwise different.

Mechanics, welders, electricians, and machinistsJobs are classed by the amount or level of

compensable factors they contain.


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JOBS PAY

GRADE 6 Chef $21.50-32.00 / hr

GRADE 5 Manager $12.50-22.00 / hr

GRADE 4 Assistant Manager $8.50-13.00 / hr

Office ManagerGRADE 3 General Cook $7.50-9.00 / hr

GRADE 2 Server $7.00-8.00 / hr

CashierGRADE 1 Dishwasher $6.50-7.25 / hr


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POINT METHOD

A quantitative technique that involves:

Identifying the degree to which eachcompensable factor is present in the job.

Awarding points for each degree of eachfactor.

Calculating a total point value for the job by

adding up the corresponding points for eachfactor.

Exhibit 2: Excerpts from a Point Method


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p


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Factor comparison method

A widely used method of ranking jobsaccording to variety of skills and difficultyfactors, then adding up these ranking to arriveat an overall numerical rating for each jobgiven.


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4. Price Each Pay grade using

WAGE Curves

Step 4. Price Each Pay GradeWage Curve

Shows the pay rates paid for jobs in each pay

grade, relative to the points or rankings assigned

to each job or grade by the job evaluation.Shows the relationships between the value of the

job as determined by one of the job evaluation

methods and the current average pay rates for

your grades.


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Exhibit 3: A Wage Curve


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THE WAGE STRUCTURE

After drawing wagecurve

Develop wagestructure

See Exhibit 11-5


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Exhibit 4: A Sample Wage Structure

Broadbanding


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Broadbanding

Establishing grades makes the task easier.

Pay levels/ranges in terms of grade width areestablished.

Minimum & maximum salary one can earn in a

grade. Total no. of job evaluation points included

in a grade. Broadbanding consolidates salary grades & ranges

into a few wide levels or bands. Each of which

contains a relatively wide range of jobs & salarylevels. e.g. six pay grades can be consolidated into

two broad bands. Thus it breeds flexibility.


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Broadbanding

Steps of broadbanding:

1. Decide no. of bands & how many points theywill include.

2. Assign each band a salary range: wide & overlap

3. A no. of jobs are included in each band.4. Several skill levels, increase in skills to get raises

5. Broadbanding is used with strategic initiatives.

Example: IBM, Dow Jones implemented it withdownsizing restructuring, renewal, culturalchange.


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Skill-Based Compensation

Range, depth & typesof skills

Individual incentives

Merit pay

Piecework plans

Commissions

Time saving bonusesGroup incentives

AND.


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Incentives

Individual incentivesMerit payPiecework plansCommissions

Time saving bonuses Group incentives AND. Plant-wide incentivesScanlon PlanIMPROSHARECost reductionProfit sharing

Gain sharing

PAYING FOR


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PAYING FOR

PERFORMANCE

More than time onthe job

Piecework

Lump sum bonuses

PAYING FOR


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PAYING FOR

PERFORMANCE

Performance>>>>rewards

Motivation

Popular

Not added to base

Control of individualor group

EXECUTIVE PAY


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EXECUTIVE PAY

Salaries

Supplements

Deferredcompensation

Hiring bonus

Stock options

Employee stockownership plan

AND.


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EXECUTIVE PAY

Perquisites

Cars

Country clubs

Consulting fees

Retirement

supplementsExpense accounts

compesation mgmt.

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