P. 1 HRMG 5000 Fall 2007 Michel de Tymowski Work TyM.

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Compensation ManagementCompensation ManagementMain PrinciplesMain Principles

Michel de Tymowski

WorkTyM

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Compensation management principles Compensation management principles

Compensation basic principles

Job Evaluation

Pay for Performance

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COMPENSATION BASIC COMPENSATION BASIC PRINCIPLESPRINCIPLES

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SocietySociety

Most employers believe that how people are paid • affects people’s behaviors at work• which affect an organization’s chances of

success.

Compensation systems can help an organization achieve and sustain competitive advantage.

Sometimes differences in compensation among countries are listed as a cause of loss of jobs from more developed, higher-wage economies to less developed ones.

Therefore, understanding productivity differences among international locations is crucial.

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Society Society (cont’d)(cont’d)

Some consumers may view increases in compensation as the cause of price increases. They may not believe that higher labor costs are to their benefit.

Economic realities are relevant to compensation management.

– an organization’s capacity to pay– its industrial sector– as well as geographic location

are all key factors that must be considered.

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An organization’s economic reality is not static

– Today’s decisions about compensation will have an impact on the organization’s financial health for many years and, generally, this impact is difficult to reverse.

Employees have varied needs and view them differently

– The challenge for the organization therefore is to adopt compensation policies and programs that maximize employee motivation.

Compensation is also status, both within the organization and in society.

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Supervisors consider it important to be paid more than their subordinates, and on a different basis.

The same applies to the various perquisites an organization provides to certain employees.

– Often, what counts with such benefits is not their monetary value but rather the prestige and status they confer.

Organization and individuals pursue different objectives by means of compensation.

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For the organization– the exchange is designed to recruit and retain the necessary labor, and to elicit employees behavior that will enable it to fulfill its mission.

For individuals– the objective may come down to satisfying needs. These may differ considerably from one individual to another and may also change with time.

Compensation is a contribution for the organization, a reward for the individual.

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The Elements of CompensationThe Elements of Compensation

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The Elements of CompensationThe Elements of Compensation

Organizations regularly adjust pay. This is done by taking into account many factors, such as :

– changes in the economy

– the amount of the changes made by other organizations in the community or similar labor market

– the organization’s ability to pay

– as well as any increase in an employee’s performance or year of service

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Cash Compensation – BaseCash Compensation – Base

Base wage is the cash compensation that an employer pays for the work performed.

Base wage tends to reflect the value of the work or skills and generally ignores differences attributable to individual employees.

The base wage represents the “no risk” part of the total wage. The individual performance will represent the “risky” part by impacting the level of total wage.

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Cash Compensation – Merit Pay/COL Cash Compensation – Merit Pay/COL adjustmentsadjustments

Merit pay increases are given as increments to the base pay in recognition of past work behavior.

– Some assessment of past performance is made, with or without a formal performance evaluation program, and the size of the increase is varied with performance.

– Thus, outstanding performers could receive an 5 to 7 percent merit increase 8 months after their last increase,

– whereas an average performer may receive, say, a 2 to 3 percent increase after 12 or 15 months.

In contrast to merit pay, cost-of-living adjustments give the same percent increase across the board to everyone, regardless of performance.

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Cash Compensation – IncentivesCash Compensation – Incentives

Incentives tie pay increases directly to performance

However, incentives differ from merit adjustments.

– First, incentives do not increase the base wage, and so must be re-earned each pay period.

– Second, the potential size of the incentive payment will generally be known beforehand.

Whereas merit pay programs evaluate – past performance of an individual – and then decide on the size of the increase

the performance objective for incentive payments is called out very specifically ahead of time.

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Cash Compensation – IncentivesCash Compensation – Incentives

Incentives can be tied to :

– the performance of an individual employee– a team of employees– a total business unit– or some combination of individual, team, and unit

The performance objective may be :

– expense reduction– volume increases– customer satisfaction– revenue growth– return on investments– or increases in total shareholder value

the possibilities are endless.

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Compensation Management ModelCompensation Management Model

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PoliciesPolicies

Four Policies

Every employer must address the policy decisions :

– (1) internal alignment– (2) external competitiveness– (3) employee contributions, and– (4) management of the pay system.

These policies are the foundation on which pay systems are built. They also serve as guidelines for managing pay in ways that accomplish the system’s objectives.

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Policies - Internal AlignmentPolicies - Internal Alignment

Internal Alignment

Internal alignment refers to comparisons

among jobs or skill levels inside a single organization

Jobs and people’s skills are compared in terms of

their relative contributions to the organization’s business objectives

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Policies - Policies - External External CompetitivenessCompetitiveness

External Competitiveness

External competitiveness refers to compensation relationships external to the organization:

– comparison with competitors.

Increasingly, organizations claim their pay systems are market-driven, that is, based almost exclusively on what competitors pay

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Policies - Policies - External External CompetitivenessCompetitiveness

Employee Contributions

– How much emphasis should there be on paying for performance?

– Should one programmer be paid differently from another if one has better performance and/or greater seniority?

– Or should there be a flat rate for programmers?

– Should the company share any profits with employees?

– With all employees?

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Policies - ManagementPolicies - Management

Management

Ensuring that the right people get the right pay for achieving objectives in the right way. The system will not achieve its objectives unless it is properly managed.

• Are we able to attract skilled workers?

• Can we keep them? Do our employees believe our pay system is fair?

• Do they understand what is expected of them?

• Do they understand how their pay is determined?

• How do the better-performing firms, with better financial returns and a larger share of the market, pay their employees?

• Are the systems used by these firms different from those used by less successful firms?

• How do our labor costs compare to those of our competitors?

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Techniques - Internal ConsistencyTechniques - Internal Consistency

Internal Consistency

An organization trying to ensure internal consistency in compensation must :

• first analyze and describe its jobs, then either :

– evaluate the jobs

– do a competency & skill job assessment

– a maturity curve approach (applicable for certain group of professionals)

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Techniques - CompetitivenessTechniques - Competitiveness

Competitiveness

An organization interested in making its pay competitive must first define its labor market Domestic and international for senior management).

Having selected the market or markets, the next step is to collect information about the various elements of compensation.

– Base salary?– Total Cash?– Working time?– Time off?– Benefits?– Other perks and allowances?

Once the survey or surveys have been done, the organization must determine the level of compensation in relation to the market.

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Techniques - Employee ContributionTechniques - Employee Contribution

Employee Contribution

An organization that wishes to recognize the contribution of its employees may use techniques and practices that vary according to what contribution it wishes to emphasize

– individual performance– group performance– years of services– training

The organization must develop an employee performance appraisal system and determine criteria for measuring individual performance

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Market SectorMarket Sector

Salary aggressiveness

Salary levels

Financial/Trading +++++Pharma/Bio medical ++++Oil/Chemicals ++++Fast Consumer Goods ++++High Tech/Telecom +++Industrial Goods ++Services ++

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How to motivate employeesHow to motivate employees

To remunerate managers in a competitive way based on their responsibilities as well as their individual performance

• Establish a coherent salary structure (external equity)

• Create an internal equity within a competitive market environment

• Establish a link between individual performance and the job requirement

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Reward SystemReward System


Job AnalysisJob Analysis

Job EvaluationJob Evaluation

Managing BasePay

Managing BasePay

Job DescriptionJob Description BenefitsBenefits

Working conditionsWorking conditions

Variable PayVariable Pay

RecognitionAwards

RecognitionAwards

Long-termIncentivesLong-termIncentives

RecruitmentRecruitment

Training & Dev’mtTraining & Dev’mt

Perf. evaluationPerf. evaluation

HR PlanningHR Planning

Selection & HiringSelection & Hiring

Career planningCareer planning

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JOB ANALYSISJOB ANALYSIS

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INTERNAL STRUCTUREINTERNAL STRUCTURE

Job BasedJob Based

Job analysisJob descriptionsJob analysis

Job descriptions

Job EvaluationClasses/Comp

factors

Job EvaluationClasses/Comp

factors

Factor degrees& weighting

Factor degrees& weighting

Job-BasedstructureJob-Basedstructure

Person BasedPerson Based

SkillsSkills CompetenciesCompetencies

PURPOSE

Collect, summarizeWork information

Determine whatto value

Assess value

Translate intostructure

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Writing Job DescriptionsWriting Job Descriptions

It is a written record of the duties and responsibilities of a specific job compiled through job analysis

It consists of statements which identify and describe the scope and contents of a job

It provides an outline of the essential functions and major duties of a job

It does not describe all details of a job

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Writing Job DescriptionsWriting Job Descriptions

Typical Problems with Job Descriptions

• Often poorly written, providing little guidance.• Often not updated as job duties and specifications change

• May violate the law by including specifications unrelated to the job

• Job duties written in vague rather than specific terms

• Could limit the scope of the job-holder • Could restrict ability to cope with change • Creates significant administrative workload • Not always linked to other HR activities or processes but generally supervisors have a good feel for the job !

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JOB EVALUATIONJOB EVALUATION

“Job evaluation is the process of arranging jobs within an organization into a hierarchy based on their relative requirements, so that employees are paid in proposition to the requirements of their job.”

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Job EvaluationJob Evaluation

The Importance of Value Systems

Job evaluation

– means an assessment of the work, not the incumbent

– involves establishing a hierarchy of job based on requirements

– to pay the incumbents of a position in proportion to the requirement of their job, and not to determine pay levels or specific pay differentials

– to create internal pay equity based on the various job requirements

– technical characteristics are less important than the use made of them

– Success is measured by the results it achieves, not the method used

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What Approach?What Approach?

INTERNAL STRUCTUREINTERNAL STRUCTURE

Job BasedJob Based

Job RankingJob Ranking

Person BasedPerson Based

SkillsSkills CompetenciesCompetencies

ClassificationClassification

Market PricingMarket Pricing

Point MethodPoint Method

General rankingPaired ranking

Job to JobComparison

Job-to-predetermined- standard comparison

Job-to-factor Evaluation

Based on external competitive salary data

Qualitative driven

Quantitative driven

Job SlottingJob Slotting Reporting basis

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Job Evaluation AlternativesJob Evaluation Alternatives

JOB RANKING CLASSIFICATIONMARKET PRICING

AND SLOTTINGPOINT FACTOR

COMPETENCY-BASED

• Jobs ranked using • Grades/bands defined • Market rates established • Point assigned to jobs • Jobs grouped accordinggeneral criteria of worth through description of for benchmark jobs; non- based on factors, levels to behaviors, skills and to Company (e.g., roles and major benchmark jobs slotted in and factor weights knowledge required forimportance or accountabilities; jobs salary structure based on success complexity) assigned to grades/ defined process

bands

• Simple • Easy to explain • Closely tied to market • Can compare jobs across • Captures organizationalvalues functions if criteria are values

• Easy to communicate • Easy to modify broadly pertinent • Credible • Strong basis for other HR

• Easy to maintain • Adaptable to job families • Is perceived to be programs • Easy to communicate objective and consistent

• Potential for bias • Unusual jobs may need • Interpretation needed to • Considerable effort • Much effort to developto be “forced” into slot jobs required to develop and implement

• May over-emphasize a definition factors single factor • Requires training

• May be viewed as • Difficult in fast-changing • Much effort to administer infrastructure • May be viewed discretionary unless market and implement

negatively if seen as definitions are clear and • Most appropriate indefining “value” to specific • Requires good market • Single program may not organizations where Company data be effective in all people’s capabilities

• May not be effective divisions/job families define their job (e.g., unless institution focuses consulting) on “roles” versus “jobs”

Description

Strengths

Limitations

Less Complexity Greater Complexity ALTERNATIVES

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Market Pricing

• Uses the labor market to determine the value of jobs

• Readily comprehensive

• Easily applicable

• Simple

Issues

• Overlooks the question of internal pay equity

• Hierarchy is based solely on market price

• Ignores the fact that pay is only one component of compensation

• Does not consider the specific characteristics of organizations

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Market Pricing (continued)

• Structure developed on competitive market practices

• Based on market surveys• The competitive market data drives the salary

structure

Eu

ro

Compagny XYZ

20 ’000

30 ’000

40 ’000

50 ’000

5 6 7 8 9 10 11 12 13 14 15

Grades

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Job Slotting

• structured around the organization chart

• Job positioned following the organization charts

• Usually defined by departments/type of activities

Eu

ro

Marketing

20 ’000

30 ’000

40 ’000

Eu

ro

Finance

20 ’000

30 ’000

40 ’000

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Point Method

• Classical position evaluation (Hay type)– Position profile/responsibilities & challenge

• Computer aided job evaluation– Multiple choice questionnaire approach based on weighted factors

• Mix evaluation– Similar to the classical evaluation plus individual skills & competencies

• Competency evaluation– Individual profile (competencies, aptitudes, and know-how)

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Classical Evaluation (Hay type)Classical Evaluation (Hay type)

• Based on the profile, responsibilities & challenge of the position

• Job descriptions essential for the exercise

• Structured around factors such as:Know-How– Education, experience, management responsibilities, supervision/motivation of subordinates/employees

Problem Solving– Challenge and thinking environmentAccountabilities– Freedom of action and accountabilities on revenues/budgets

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Classical Evaluation (Hay type)Classical Evaluation (Hay type)

• Assigns point values based on compensable factors.

• Each job receives a total point value, and relative worth can be compared.

• Is also known as Hay plans, from the consulting company at the origin of this method

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Computer aided evaluation (NetComp)Computer aided evaluation (NetComp)

• Based on the profile/responsibilities & challenge of the position evaluated through a defined position questionnaire (multiple choice)

• Structured around factors such as:

– Know-How (education, experience, international dimension)

– Communication (internal & external to the organization)

– Dimension (revenue/budget, number of employees)– Effectiveness (reporting, contribution et impact of error)

– Leadership (level of decision and management)– Challenge (level of autonomy, creativity and working environment)

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Jpb EvaluationJpb Evaluation

Managing BasePay

Managing BasePay

Job DescriptionJob Description BenefitsBenefits

Working conditionsWorking conditions

Variable PayVariable Pay

RecognitionAwards

RecognitionAwards

Long termIncentivesLong termIncentives

RecruitmentRecruitment

Training & Dev’mtTraining & Dev’mt

Perf. evaluationPerf. evaluation

HR PlanningHR Planning

Selection & HiringSelection & Hiring

Career planningCareer planning

Developing aSalary Structure

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Some DefinitionsSome Definitions

External competitiveness• The pay relationships among organizations - the

organization’s pay relative to its competitors

Salary Structure• Refers to the range of pay rates for different jobs within

a single organization

Pay Level• The average of the array of rates paid by the employer

Pay Forms• The various types of payments, or pay mix, that make up total compensation

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Pay MixPay Mix

Different Mixes

BaseOptions

Bonus

Benefits

BaseOptionsBonusBenefits

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Pay-Mix Policy AlternativesPay-Mix Policy Alternatives

Base

Options

Bonus

Benefits

Performance Driven

Base

Options

Bonus

Benefits

Market Match

Base

Options

Bonus

Benefits

Work/Life Balance

Base

Options

Bonus

Benefits

Security

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Pay Mix and StructurePay Mix and Structure

100%

75%

50%

25%

0%

Entry Mid-Level ExecutiveLevel Manager

Base Salary

Cash Incentive

Stock Incentive

Internal Job Structure

Pay Mix varies within the Structure

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Factors Influencing Pay levelsFactors Influencing Pay levels

Business SectorBusiness Sector

LegislationLegislation

Labor Supply & DemandLabor Supply & Demand

LocationLocation

SizeSize

Market productivityMarket productivity

Market Pay LevelsMarket

Pay Levels

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Factors Influencing Organization Factors Influencing Organization Comp PolicyComp Policy

Business StrategyBusiness Strategy

Union InfluenceUnion Influence

Prestige & TraditionPrestige & Tradition

Other HR mgmt policies & practices

Other HR mgmt policies & practices

Capacity to PayCapacity to Pay

Compensation factorsCompensation factors

The Organization Compensation Policy:-Lead-Lag-Follow Competition

The Organization Compensation Policy:-Lead-Lag-Follow Competition

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The Pay ModelThe Pay Model

Three important contributions to keep in mind

• There is no “going rate” and so managers make conscious pay level and mix decisions influences by several factors

• There are both product market and labor market competitors that impact the pay level and mix decisions

• Alternative pay level and mix decisions have different consequences

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Salary StructureSalary Structure

Over engineered structure• Rigid• Heavy administrative burden• Sometimes inefficient

Simple structure• Easily adaptable• Flexible• Suitable for small organization• Can easily be manipulated

Find the right mix

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Structure ApproachStructure Approach

Corporate structure for Worldwide Mgmt• Employee rotations within countries/regions• Many senior positions compete at international level

• Facilitate transfer/expatriate policy design• Facilitate management incentive design• Ease-up perquisites and benefits implementation

More local structure for professional, sales and mainstream employees• Better data at local level• Better local understanding of the job content

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What Criteria to be used to What Criteria to be used to Evaluate the ManagementEvaluate the Management

To remunerate managers in a competitive way based on their responsibilities as well as their individual performance

• Establish a coherent salary structure (external equity)

• Create an internal equity within a competitive market environment

• Establish a link between individual performance and the job requirement

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Development of a Salary StructureDevelopment of a Salary Structure

Analysis of evaluated jobs against competitive market values.

Development of a salary structure

Position Points market value regressionAccountant 125 23,000 22,700 Mktg assistant 158 25,000 26,900 Financial Analyst 210 28,000 29,100 Project Mgr 250 35,000 34,900 Product Mgr 300 41300 40,500 IT Director 335 46,960 45,900 HR Director 380 53,900 54,600 Finance& Admin Dir. 420 59,200 60,700

Grade min midpoint max5 120 18,000 22 500 27 000 6 160 20,700 25,900 31 050 7 200 23 805 29,800 35 710 8 240 27,376 34,200 41 060 9 280 31 482 39 400 47 220 10 320 36,200 45 300 56 570 11 360 41,635 52,000 65 050 12 400 47 880 59 900 74 810

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PercentilesPercentiles

Sample MEDIAN14

D1 D9975321

25 ile 2.5Median 5Mean 5.975 ile 890 ile 11

Terminologies :ABS Annual Base SalaryATR Annual Total RemunerationD1 lower decile (= 10th ile)Q1 first or lower decile (25th ile)Md medianAvg Average/meanQ3 Third or upper quartile (75th ile)D9 upper decile (90th ile)

Q1 Q3

50%

80%

100%

10% 10%

25%25%

1/3 2/3

33% 33% 33%

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Salary CurveSalary Curve

Salary Structure

-

20 000

30 000

40 000

50 000

60 000

0 200 400 600 800

Points/Grade

$ Smooth

Actual

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Development of a Salary StructureDevelopment of a Salary Structure

Salary Structure

Eu

ro

Compagny XYZ

20 ’000

30 ’000

40 ’000

50 ’000

5 6 7 8 9 10 11 12 13 14 15

Grades

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Min, Max, Range: Spread & Overlap Min, Max, Range: Spread & Overlap

Set pay ranges

• Determine minimum and maximum compensation for each grade.

• Determine the spread for each grade

• Set the overlap between pay ranges.

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Min, Max, Range: Example Min, Max, Range: Example E

uro

Compagny XYZ

20 ’000

30 ’000

40 ’000

50 ’000

5 6 7 8 9 10 11 12 13 14 15

Grades

Min

Max

Midpoint

Range Spread

RangeOverlap

Midpoint Spread

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Pay for PerformancePay for Performance

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Employees PerformanceEmployees Performance

Three general factors driving employees performance :

• Skills & ability to perform task

• Knowledge of facts, rules, principles and procedures

• Motivation to perform

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Does Compensation Motivate Does Compensation Motivate Behavior?Behavior?

Person Characteristics Preferred reward Characteristics

Materialistic Relatively more concerned about pay level

Low self-esteem Want large decentralized organization with little

pay for performance

Risk takers Want more pay-based on performance

Risk averse Want less performance-based pay

Individualists Want pay plans based on individual performance,

not group performance

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What is expected from a Reward What is expected from a Reward SystemSystem

Rewards must :

• Help organizations attract and retain employees

• Must make high performance an attractive option for employees

• Must encourage employees to built new skills and gradually foster commitment to the organization

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Merit PayMerit Pay

Merit Increase Matrix Overall Salary increase budget 2006

Country : France

Average market increase: 3.0%

Cost-of-living : 1.5% .

Merit increase : 1.5%

Pop.

Distrib. 2006/07 P10 Q1 Q3 P90

P

8% >>>> E A 5.0% - 5.8% 4.2% - 5.0% 3.8% - 5.0% 3.0% - 3.8%

R

F

37% >>>> O B 4.2% - 5.0% 3.8% - 5.0% 3.4% - 3.8% 2.6% - 3.0%R

M

44% >>>> C 3.4% - 3.8% 3.0% - 3.1% 2.8% - 3.0% 0.7% - 0.9%

L

V

11% >>>> L D 0.4% - 0.5% 0.2% - 0.3% 0.0% - 0.0% 0.0% - 0.0%

Pay positioning

P. 1 HRMG 5000 Fall 2007 Michel de Tymowski Work TyM.

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Transcript of P. 1 HRMG 5000 Fall 2007 Michel de Tymowski Work TyM.