ion Revised

8/6/2019 ion Revised

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Compensation Management

Employee compensation is of one the major determinants of

employee satisfaction in an organization. The compensation

policy and the reward system of an organization are viewed by

the employees as indicators of the managements attitude andconcern for them.

A good compensation system should be able to attract and

retain employees, give them a fair deal, keep the organization

competitive and motivate employees to perform their best.


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Definition of Job Evaluation

The primary objective of job evaluation is to determine the

relative worth of different jobs in the organization and

provide the basis for the compensation management system.

Job evaluation is extremely important, because it helps to the

understand the perceived fairness of compensation

administration.


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Objective

to determine the position and place of a job in the organizational

hierarchy. to clarify the responsibility and authority associated with each

job.

to manage internal (between different jobs in the organization)

and external (between similar jobs in other organizations of theindustry) consistency in the compensations.

to maintain complete and accurate data relating to job

description and job specification of various jobs.

to ensure employee satisfaction with respect to thecompensation.

to avoid discrimination of any kind in wage administration.

to provide the basis for classification of new or changed jobs.


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Principles of Job Evaluation

The job dimensions have to be properly selected and should berated in accordance with the demands of the job.

The dimensions selected for the purpose of rating should be clearlydefined to ensure clear understanding by the employees.

The evaluation program should be explained and illustrated to theemployees at all levels. The employees as well as the supervisorsshould have confidence in the system of evaluation.

The employees must be actively involved in the evaluationprogram. This helps develop a sense of trust in the whole exercise.

Market factors should be taken into consideration while evaluatingjobs. For example, if there is a scarcity of geo-physicists in the jobmarket, this fact has to be given due importance while evaluating

the job of a geo-physicist.


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Process of Job Evaluation

Preparation of a Job Evaluation Plan - The need for jobevaluation is determined and a detailed plan of how to go about the

whole exercise.

Job Analysis- Job analysis helps in understanding the tasks and

responsibilities associated with a job and the competency setrequired to perform the tasks and fulfill the responsibilities.

Job Description and Job Specification - Job description is a

compilation of the tasks, duties and responsibilities associated witheach job in the organization. Job specification, on the other hand, is

a compilation of the knowledge, skills and attitudes required to

perform each job successfully. These two steps help in evaluating

job.


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Selection of job dimensions -The different factors which will be

the basis for evaluating each job, have to be determined. Oncethese dimensions are selected, monetary values have to be

attached to each of these jobs after proper assessment.

Classification of jobs - The monetary value of each job is a

reflection of its contribution to the organization and its

significance. Jobs are classified in sequential order on the basis

of the monetary values attached to them.

Implementation of the evaluation - The employees should be

educated about the program to make them understand the basisand the procedure of job evaluation. Then, the results of the

evaluation exercise are put to use.

Maintenance - The results of job evaluation have to be updated

and modified from time to time to match the changing

organizational needs and job profiles.


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Techniques of Job Evaluation

Quantitative and non-quantitative techniques are used to compare jobs inan organization for the purpose of classifying them and attaching

monetary values to them.

Non-QuantitativeTechniques:

The two types of non-quantitative techniques are the ranking and the jobgrading methods.

(i) Ranking:

Ranking is one of the simplest and the oldest job evaluation methods. In

this method, the jobs in an organization are assessed based on the

knowledge, skills, effort and other job dimensions associated with eachjob. Ranking involves preparation of brief job descriptions and assigning

ranks to the jobs in accordance with their worth in the organization.

Though it is the simplest, it is not often used because this method does not

have an objective and concrete basis of evaluation.


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.

Relative Ranking - Since it is difficult to rank all the jobs at a time

under the simple ranking method, a method of relative ranking is

adopted. In this method, a key or representative job is identified

and its worth is determined. Subsequently, the relative importance

of each job in comparison with the representative is determined

and then ranked.

Paired Comparison - In this technique, each job is compared with

every other job in the organization. After this comparison in pairs,

the jobs are ranked. This is similar to the paired comparison

method of ranking employees in performance appraisal.

Single Factor Ranking -In this method of evaluation, the single most

important factor/dimension of a job is identified and compared

with the single most important factor/dimension of other jobs.

This simplifies the exercise of job evaluation.


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ii) Job classification or job grading:

Analyzing the organizational structure and its chief characteristics. For

example, determining whether the organization is a functional or a matrix

organization.

Determining the job dimensions/factors, for the purpose of defining grades.

Defining and determining the job grades as Grade I, Grade II and so on,based on the job dimensions and the organizational structure.

Classifying the jobs of the organization under different grades in accordance

with the grade definitions.

Using inputs from employees and trade union representatives regarding thenumber of grades, grade description and job classification.

Freezing the grades and assigning monetary values to the key grades, and

then to all other grades.

CONTD.


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Advantages

Job evaluation using the grading technique is supported by the job

description and the grade definition.

It is a simple technique as is quite easy to understand, once the grade

definition and job classification exercise in complete.

It is inexpensive and provides a systematic understanding of the

organization structure based on grades.

After the grades are established, any changed job or new job can be easily

evaluated.

It is comparatively more comprehensive than the ranking method as it

provides grades and grade description/definition for various classes of jobs.

Disadvantages

It is a cumbersome method as the definitions of grades have to cover

different jobs from different functions. For example, a grade covering the

job of a human resources officer should also cover the job of a finance

officer.


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Quantitative Methods

(i) Point rating method The point method or the point rating

method is one of the most widely used methods of job evaluation.In this method, a quantitative point scale is developed to evaluate

the jobs. However, different scales might be required to evaluate

different jobs. The different steps in the point rating method are:

1. Determine the job factors or compensable factors

2. Determine the sub-factors

3. Define the degree statements or profile statements

4. Assign points to factors, sub-factors and degrees

5. Preparation of a chart

6. Applying the point system


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Job factor Max-point

Job-sub factors Assigned point perdegree

I II III IV

Knowledge 40 Edu-qual Experience

Effort 40 Physical Mental

Responsibility 40

Towards comp Towards colleague

Total 120

Point Rating Method


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Benchmarkjobs

Factor I Factor II Factor III

Knowledge Mental Effort Responsibility

Faculty

Admin Staff

Support staff

Factor Comparison method in B-school


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Advantages

It is an analytical and quantitative method and is reliable.

It is an objective and logical method in which the monetary values are

assigned based on the factor ranking.

It is easy to explain this method to supervisors, employees and unions.

Disadvantages

It is a very cumbersome and complex method.

In case of a mismatch between the factor comparison and factor ranking,

the exercise has to be started from the scratch again.

There is a strong dependence on the benchmark or key jobs. These key jobs

may not always be relevant. If the key jobs in the firm change, the base rate

evolved for earlier key jobs cannot be used as standards for newer types of

jobs.


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Decision Band Method

The Decision Band Method or the DBM has been used

successfully in public and private organizations throughout the

world for over 25 years, but is not a conventional method of job

evaluation. DBM is a unique approach to job evaluation,

originally developed by Professor Emeritus Thomas T. Paterson

in the 1970's, and further developed and refined by Ernst &Young's Compensation Specialists for application in client

organizations.

The basic premise of DBM is that the value of a job depends on

its decision-making requirements. Decision-making is a logicaland equitable basis for comparing jobs, because all jobs require

the incumbents to make decisions of some kind in order to

perform their jobs - whether they are line or staff, supervisory or

non-supervisory, union or non-union.


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Advantages of Job Evaluation

a. Job evaluation is a logical and objective method of ranking and

grading jobs for the purpose of compensation management.

b. It helps to prevent and remove discrepancies in the wage structure of

an organization. This makes wage administration simpler and more

uniform.

c. Job evaluation can explain logically any issue relating to wage

differentials in an organization. This helps in maintaining high worker

satisfaction levels and sound industrial relations.

d. Job evaluation facilitates the entry of new jobs into the organizational

wage structure. The new jobs can be evaluated using appropriate

evaluation techniques and their pay structure can be fixed accordingly.e. Job evaluation helps in comparing the organization's wage structure

with the competitor's wages and market rates.

f. The information collected for job evaluation can be used for decisions

related to selection, transfer and promotion of employees.


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Limitations of job evaluation

1. Changing technologies and systems bring about a changes in jobs and

therefore in job factors. These changes can render the job evaluation

techniques outdated and irrelevant.

2. If not properly formulated or implemented, job evaluation can give rise to

employee grievances. For example, if a job higher in the hierarchy, is rated

lower than a job lower in the hierarchy, the employees concerned might

express their dissatisfaction.

3. Job evaluation introduces rigidity into the pay system and reduces

opportunities for managers to exercise discretion.

4. Job evaluation takes a long time to implement, and may involve some

formalization of rules. This may sometimes lead to a mismatch between thefinancial condition of the organization and the established wage structure.

5. Job evaluation committees sometimes have to compromise to accommodate

the views and demands of different interest groups like the management,

unions and employees.


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Concept of wage and salary administration

Base wages and salaries are defined as the hourly, weekly and

monthly pay that employees receive for their work in anorganization. It is on the basis of these that employees judge the

fairness of the pay system. Base wage and salary are the foundation

of employee pay structure, and total compensation is calculated

after these are fixed. The total compensation of an employee

includes other elements like incentives and benefits.


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Principles Governing Compensation Administration:

The principles that govern the compensation administration, and therefore the

wage and salary administration in an organization, are given below:

Maintaining equity in the distribution of wages and salaries in the

organization;

Maintaining competitiveness in the wage market, in comparison to other

players in the industry;

Matching employee expectations;

Reinforcing positive employee behavior and contribution to the organization;

Eliminating any discrepancies in wage administration in the organization;

Devising a system that is the most efficient for the organization;

Optimization of management and employee interests;

Maintaining good industrial relations and harmony, with respect to

compensation.


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Purpose of Wage and Salary Administration

Attracting talented resources

Retaining and motivating employees

Financial management

Legal requirements


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Concepts of Different Wages

Minimum WagesIt is the amount of remuneration, which is just sufficient to enable

an average worker to fulfill all his obligations. It can be either the

minimum-piece rate or minimum-time rate.

Fair Wage

Worker performing work of equal skill, difficulty or

unpleasantness should receive equal or fair wages. Fair

Wages should also take into consideration the financial

capacity of the employer


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Basic Wage Plans:

a) Time wage plan

b) Piece wage plan

c) Skill-based pay

d) Competency based pay

e) Broadbanding


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Variable compensation programs are designed to pay

employees in accordance with their performance and

not in accordance with their position in theorganizational hierarchy. These programs are

designed to motivate individuals and groups that

contribute effective, as they differentiate between

performers and non-performers.

Variable Compensation


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Executive Compensation

Executive compensation is the compensation paid to the CEO or

the top executives of an organization.

1. Review the existing executive compensation plan

2. Analyze the organizational objectives

3. The plan should provide for retaining a competent and successfulexecutive for a longer period of time.

4. The funding of the executive compensation and other factors

should be taken care of.

5. The final plan should be prepared, with all the various

components, their range, the related targets to be achieved and the

final compensation.

6. The executive compensation plan should be made known to all the

stakeholders.


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Concept of Rewards

Extrinsic rewards are tangible in nature and are normally

under the control of the organization.

Intrinsic rewards are intangible in nature and are internal to

the individual.

Rewards can also be classified into financial and non-

financial. Financial rewards are the rewards that employees

receive in monetary terms.

Non-financial rewards are intangible and are paid in kind.


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Types of Incentive Plans

Short-Term Plans:

1) Halsey Plan: This plan tries to eliminate the limitations of time and piece rate

systems while trying to combine their merits. Under this plan, a certain amount of

work is fixed as a standard output, which is to be completed in a prescribed time.

2) Rowan Plan: Under this plan, the owner is guaranteed a minimum wage on a time

basis. Then, a standard time is fixed for the completion of work and if the worker

completes it before time, he earns more for the time saved.3) Barth System of Wages: In this system, the workers are not guaranteed of a minimum

rate. Wages are calculated as

Wage = Standard time Time taken Hourly rate

4) TaskBonus Systems: This method of incentive payment is generally used for groups.

5) Point-rating system: Under this system, each job is rated in terms of a standard time.

At the end of a specified period, a day or a week, the output of each worker is

assessed.

6) Progressive Bonus: Under this system of incentive payment, the earnings increase at

a progressive rate once the output crosses the minimum or standard output.


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LongLong--Term PlansTerm Plans

1. Annual bonus: The Bonus is normally a one time payment,

made at the end of the financial year. Most annual bonusplans are based on the annual performance of the company.

2. Profit Sharing: Employees earn a share of the companys

profit.a. Distribution plan: annual or quarterly cash bonus plan,

paid according to the pre-determined rule.

b. Deferred plan: profit sharing credits, instead of cashpayment.

c. Combination Plan: Employees are allowed to receive a

portion of profit in terms of cash and the other portion will

go to the credits.


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3. Gain Sharing: The group will receive the reward for its teamwork,

co-ordination and other parameters that leads towards successful

performance.

4. Employee stock plans: Employees are given a part of ownership at

a price lower than the market. There are different stock plans:

a. Employee StockPurchase Plan (ESPP): employees are given the

opportunity to purchase the shares immediately after they earn

them.

b. Restricted StockPlan: Shares are subjected to some restrictions.One of the major restrictions is that the shares may be forfeited if

they are not earned out over a specific period of time.


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c. Employee Stock Option Scheme (ESOS): the company grants anoption to its employees to acquire shares at a future date.

d. Stock Appreciation Right: Employee does not have to put any

money and has the right to relinquish the stock. The employee is

given the appreciation in the values of share from the date theoption was granted till the date it was relinquish.

e. Phantom stock: a special type of stock plan that protects the

employee against any depreciation in the value of the stock.

f. Premium priced option: This stock plan is only applicable when

market value of the stock significantly exceeds the market price.


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Non Monetary Incentives

i) Recognition of an employees contribution

ii) A Challenging assignment

iii) Giving additional responsibility

iv) Rewarding an employee for his performance

through free gifts or free vacations

v) Awards, as a form of incentive, for exceptionalperformance


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Guidelines for effective incentive plans

i. The incentive plan should be linked to employee performance.

This would improve the organizational performance and

contribute to the employee morale too.

ii. The incentive plan should be communicated to the employees

clearly. There should be transparency and the employeesshould view the system as being fair and rewarding

performers.

iii. Employee suggestions and inputs should be valued and

rewarded. The incentive should be proportional to the

contribution of each employee.iv. The incentive plan should be minimally affected by external

factors like the stock market performance and the industry's

performance.


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i. The incentive plan should be flexible enough to

accommodate changes in external factors. Companiesshould upgrade their incentive plans as the environment

changes.

ii. The incentive plan of an organization should provide a

challenge to the employees to gear up their performance

levels.iii. The organizational incentive plan should also benefit the

management with tangible savings in labor costs.

iv. The incentive plan should only add value and not have a

negative influence on the bottom line of the company.

v. The incentive plan should include both monetary and non-

monetary incentives Jar employees.

vi. It should be possible to measure the value of the non-

monetary incentive plans.


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Employee Benefits

Free or subsidized lunches

Medical facilities

Paid holiday/vacation

Retirement benefits like PF and gratuity

Employee insurance Maternity leave

Child-care centers

Educational allowance for employees children

Merit Scholarships for employees children Company accommodation

Company transportation facilities


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Objectives of Employee Benefits

Some of the basic objectives of a benefit program are:1. To provide employees special allowances to match the growing

cost of living, to provide them social security and to improve the

quality of their work life

2. To reward employees for their employment with the organization

and grant them special privileges for holding a particular position.

3. The unions expect some benefits from the management and

satisfying the unions demands helps in maintaining harmonious

industrial relations

4. From the organizational point of view, employee benefits attract

and retain talent and enhance the organizational commitment of the

employees

5. The employers as well as the employees can derive some special

benefits such as tax benefits.


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Some Modern Concepts in Employee Benefit Schemes

i. Golden parachute

The golden parachute is a provision in the employment

contracts of the top management, which ensures the provision

of compensation or lucrative benefits for the loss of a job

during the process of organizational changes.

Under this provision, a lump-sum payment or payment over a

specified period at full or partial rates of normal compensation

is made.

The golden parachute can take different forms:

Continuation of the salary

Bonus and/or certain benefits and perquisites

Retirement benefits

Accelerated vesting of stock incentives


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