Chapter 3

Compensation Management

Definition - JE
A systematic process of analyzing & evaluating jobs to determine their worth in the organization Indicator of managements attitude Enable to attract, retain & motivate employees

Compensation
Traditional approach importance to work in an org Contemporary approach worth of an individual in an org

Objectives - JE
Determine organizational hierarchy Identify responsibility & authority Updated data on JD &JS

Objectives contd
Internal & external consistency Ensure employee satisfaction

Principles - JE
Proper selection of job dimensions rating Define the dimensions Define the evaluation program to e/es

Principles contd
Active participation of e/es Consider market factors demand for jobs

Process JE
1. Preparation of job evaluation plan need + method adopted 2. Job Analysis collection of information related to jobs 3. Job Description tasks & responsibilities associated to the job

Process contd
4. Job Specification knowledge + skill + attitude required 5. Selecting job dimensions & assigning monetary values

6. Classification of jobs based on monetary values

Process contd
7. Implementation & Evaluation 8. Maintenance

Techniques of job evaluation

Quantitative

Non Quantitative Ranking

Factor comparison method Point Rating

Job classification

Quantitative Methods
1. Point Rating Method Jobs are evaluated using scales Similar jobs are evaluated using common scale Steps Prepare JD + JS on a sample job identify common job factors Job factors are broken down to concrete sub factors

Point Rating Method contd

Assign degree statements (specific requirement of each sub factor) five degrees, in the form of phrases Assign points to factors, sub factors & degrees
Degree 1= 20 points = experience less than 6 months 2= 40 points = experience 6 months to 1 year

Point Rating Method contd

Preparation of chart Jobs are ranked on the basis of points

Point Rating Method contd

Advantages Accurate Long lasting Job description is considered higher validity Disadvantages Time consuming Costly, more clerical wk

Factor Comparison Method

Based on the principles of Point Rating & Ranking Method

Steps
Select common factors across all jobs

Identify bench mark jobs

Bench mark jobs are compared & ranked on their relative importance factor comparison

Factor Comparison Method contd value & in total = Each factor is assigned a monetary
pay of bench mark job factor evaluation

All jobs are then compared as against bench mark jobs Advantages Analytical & Reliable Easy to communicate to supervisors

Factor Comparison Method contd

Logical approach monetary values assigned on factor importance Disadvantages Procedure is complex

High dependence on the bench mark jobs

Decision Band Method

Developed by Prof.Emeritus Thomas T.Paterson 1970 Refined by Ernst & Youngs compensation specialists

Monetary value = decision making requirements of the job Decisions are divided in to 6 data bands (levels of decisions) simple to complex

Non Quantitative Techniques

1. Ranking Method
Jobs are assessed on the basis of, Knowledge, Skill, Effort, Job Dimension

Ranking Method contd

Steps Job description

Assign ranks on the basis of worth to the organization

Ranking Method contd

Advantages Simple Appropriate to small organization

Quick & inexpensive

Disadvantages Job specification not considered

Does not differentiate the jobs

Job Classification/Grading
Jobs are graded on the basis of their significance & worth to the organization Steps Defining the organization structure Identify dimensions managerial, supervisory, data entry

Job Classification/Grading
Determine the job grades grade1, grade II job dimension & org structure Using i/p from e/e, TU no. of grades, grade description, job classification Freezing the grades assign monetary values to key grades then to all grades

Job Classification/Grading contd

Advantages Technique incorporated JD & Grade definition Better understanding of the organizational structure Comprehensive in nature Disadvantages Time consuming

Advantages of Job Evaluation

Helps to remove discrepancies in the wage structure Gives logical explanation wage related issues Facilitates the entry of new jobs to the organizational wage structure

Helps to compare the wage structure

Limitations of job Evaluation

Dynamic environment bring about change in job factors outdated evaluation techniques Poor formulation leads to grievances Rigid pay systems no discretion to mgrs Imbalance b/w designed pay structure & financial strength of the org. Cannot stick to the demands as union demands have to be met

Wage & Salary Administration

Compensating e/es in a fair manner
Maintaining principle of equity Matching e/es expectations

Compensation
What an e/e receives in return for his or her contribution to the organization

Components of compensation
Wage & salary Incentives Fringe benefits perquisite Non monetary benefits

Principles Governing Compensation Administration

Principle of equity Matching competitiveness in wage market Matching e/e expectations Eliminating discrepancies Devise system to suit the org Maintaining good IR

Purpose of Wage & Salary Admn.

Attract Talent
Retain & Motivate Talent Financial Mgt Legal Requirement

Concepts of Different Wages 1. Minimum Wages

Minimum wages act 1948

Enable an average worker to fulfill all his obligation

Minimum piece rate/ minimum time rate

Fixed by law
Revised every 5 years

Current min wage rate is Rs 133 / day - Karnataka

http://www.paycheck.in/main/officialminimumwages http://www.paycheck.in/main/legal-outlook/salary http://www.paycheck.in/root_files/MW%20Karnataka.pdf

Minimum Wages contd

Minimum wages are fixed on 6 components, Standard working class family considered earnings of women, children, adolescents - disregarded Minimum food intake / member net calories Rent Per capita clothing (73 yards for a family of 4)

Minimum Wages contd

20% allotted to miscellaneous fuel, lighting etc 25% allotted to other requirements childrens education, medical requirements, minimum recreation

Concepts of Different Wages contd 2. Fair Wage

Also consider the financial capacity of the e/r Higher then minimum wage & less then living wage fair wage committees recommendation Related to productivity of the e/e Prevailing wage rates considered

3. Living Wage

Concepts of Different Wages contd

Highest in value

Not only for basic necessities but other comforts

Basic Wage Plans

1. Time Wage Plan Basis time period of employment Implemented where o/p cannot be standardized Fixed amount irrespective of o/p Extra benefit only through extra time

Basic Wage Plans contd

2. Piece Wage Plan Basis o/p of the e/e o/p is measurable Implemented where o/p can be standardized Direct incentives compromise on quality e.g. call centers Payment by results

Basic Wage Plans contd

3. Skill Based Pay/ Knowledge Based Pay
Basis job related skill Recruitment below market rates

hotter the skills, the better the pay

Promoted & rewarded on acquisition of skills e.g. software industry better skills = better pay

Basic Wage Plans contd.

4. Competency Based Pay Basis knowledge, skills, behavior of e/e

Competency of the best performing e/e is identified

Comparative analysis

Basic Wage Plans contd

5. Broad banding Salary bands are defined Overlapping is possible HR Manager flexible on fixing the salary with in a band Non-promotional income opportunities for employees

Variable Compensation
Basis performance not on organizational hierarchy Differentiates b/w performers & non performers American Management Association Study 83 comp grievances(83%), absenteeism(84%), losttime(64%) comes down Components production incentives, profit sharing, bonus

Variable Compensation contd

Motivational tool at individual level & group level Worker level piece rate/time rate (OT) Manager level monetary & non monetary incentives, challenging assignments, increased responsibility, reward for innovative contributions Group level entire gp rewarded motivate towards a common goal

Components of Executive Compensation Packages

Executive Compensation
Reasonableness of Executive Compensation
Would another company hire this person as an executive? How does the executives compensation compare with that for executives in similar companies in the industry Is the executives pay consistent with pay for other employees within the company? What would an investor pay for the level of performance of the executive?

Executive Compensation
Compensation paid to top mgt. Steps to design an EC package Review of existing package identify the flaws Analyze organizational objectives link the pay - ST bonus linked increase in profit - LT stock options growth rate LT objective retention (restrictive stock option)

 Analyze the financial status of the company Detailed EC plan designed Maintain transparency

Executive Compensation contd

Common Executive Compensation Issues

Other Issues in Compensation Administration

1. Pay secrecy or openness 2. Pay security guaranteed annual wage, cost of living adjustments 3. Pay compression Narrow difference b/w own pay & colleagues pay

Wage Differentials
Differences in wage paid for same or similar job work schedule, hazards, cost of living Individual level competence, experience, knowledge, gender Organizational level size, stage of business cycle, image Industry level business trend (high pay in IT, service) changing Regional level India & US (Indians are preferred)

Rewards
e/e earns as a result of his employment with the organization Stimulates e/es to perform financial rewards (basic and performance pay) and employee benefits, which together comprise total remuneration Extrinsic tangible (promotion, bonus) Intrinsic intangible (informal recognition, challenging tasks) Financial bonus, incentives Non financial cafeteria benefit

Incentives
Variable rewards granted to employees according to variations in their performance Rewards to an e/e over & above his base wage or salary, in recognition of his performance & contribution Also called payment by results Vary from individual to individual

Types of Incentives - Short term Incentives

Short term Incentives (Blue collar workers) 1. Halsey Plan Standard time + o/p is fixed Guaranteed minimum wage on time basis Incentives paid if work completed before time

Incentives = plan% * time saved * hourly rate

Types of Incentives contd.

e.g. St. time = 8 hrs Plan % = 50% Pay = 30 + 5 Actual time = 6 hrs Hourly rate = Rs. 5/hr

2. Rowan Plan Guaranteed minimum wage on time basis Incentives = (Time saved * time taken *hourly rate)/ std. time Pay = 30 + 7.50

Types of Incentives contd.

3. Barth System
No guaranteed min. wage Wage = (std. time * time taken) * hourly rate Pay = (8 * 6) * 5 = 6.9 * 5 = 34.50

4. Task Bonus System Std. pay & task is predetermined Used for groups Emphasis on team work & coordination Incentives issued only if individual tasks are performed

Types of Incentives contd.

5. Point Rating System Job is rated in terms of std. time At the end of a specified period o/p is assessed paid accordingly e.g. std time value 10 units /hr no. of working hrs/ day 8/ Rs. 5 end of the day e/e produces 100 units (equivalent to 10 hrs of production) pay = Rs. 50

Types of Incentives contd.

6. Progressive Bonus Based on efficiency of the e/e Incentives start = o/p cross % of std o/p If performance does not reach specific % then daily hourly wages are paid

Long Term Incentives

1. Annual Bonus one time cash bonus paid at the end of the year Basis profit + individual performance Payment of Bonus Act 1965 8.33% of wage/salary earned or Rs. 100 which ever is higher 2. Profit Sharing 1st implemented by Walt Disney Corporation e/e earns a share of comp profit - % of the total profit Distribution Plan annual or quarterly cash bonus is paid according to pre determined formula

Long Term Incentives contd

Deferred Plan credit system, paid on retirement/ e/e leaves the organization Combination Plan combination of 1+2 plans - e/e receive a portion of profit cash bonus, rest will be put in deferred plan 3. Gain Sharing External factors are not considered Rewarding groups for their successful performance (team wk, coordination) Independent of profit earned

Long Term Incentives contd

4. E/e stock plans issued at lower price than the market price Enhances accountability & loyalty Best form of reward Types:
1. 2. 3. 4. 5. 6. E/e stock purchase plan (ESPP) Restricted stock plan E/e Stock Option Scheme (ESOS) Stock Appreciation Rights (SAR) Phantom Shares Phantom Stock Premium priced options/ performance vesting options

Non Monetary Incentives

Recognize e/es contribution Delegate challenging assignments

Additional responsibility + Authority Free gifts & free tours

Why incentive plans fail?

1. Performance pay cant replace good mgt. ambiguous instructions, no clear goals, hostile wk force/mgt 2. You get what you pay for Rewards a gp how many pieces produced rushed production, low qly Incentive for reducing accidents reduce no of reported accidents 3. Pay is not a motivator Adequate reward then other effective motivators Herzberg

Why incentive plans fail? contd

4. Rewards rupture relationships Encourage individuals or individual gps to pursue rewards for themselves 5. Rewards can have unintended consequences Suppose income depends on performance rating & productivity e/e focus on nos, manipulate, engage in unethical or illegal behavior

Guidelines for Effective Incentive Plans

IP should be linked to the e/e performance increase morale IP should be transparent should be communicated e/e suggestion should be considered Least importance to external factors

Guidelines for Effective Incentive Plans contd.

Should be flexible Should add value no negative influence on bottomline Should include both monetary & non monetary incentives

Individual vs. Team Rewards

Using Team-Based Reward Systems
Use skill-based pay for the base.

Make system simple and understandable.

Use variable pay based on business entity performance

Distribute variable rewards at the team level

Maintain a high degree of employee involvement

Compensation Administration Process

Employee Benefits & Services

Meaning
Which include any benefits that the e/e receives in addition to direct remuneration Indirect financial or non financial payments e/e receive for continuing with their employment with the company Also known fringes, service Programmes, hidden pay roll

Why Benefits & Services?

Mitigate fatigue

Discourage labour unrest

Satisfy e/e objectives Aid recruitment

Reduce turn over

Minimize overtime cost

Do Benefits motivate e/es?

No satisfactory answer

Satisfaction at wk place plays imp role

Fringe benefits fail in their motivational effect not with performance, but with org membership

Fringe benefits result in unhealthy competition

Fringe benefits
Described as welfare expenses, wage supplements, perquisites other than wages

Principles of Fringes
Provided to the e/e protect & promote their well being Must satisfy a real need

Cost-effective
Sound planning e/e should educate to use these benefits

Types of Fringe Benefits

1. Legally required Social security Disability insurance 2. Contingent & Deferred Pension plans Gp life/health insurance Guaranteed annual wage Maternity, child care, sick leave Dental benefits Severance pay one time payment when terminating an e/e

Types of Fringe Benefits contd..

3. Payment for the time not worked Vacations Holidays Voting pay allowances 4. Other benefits TA Comp car & subsidies Uniform allowances Meal allowances

Types of Non monetary Rewards

Modern E/e Benefit Schemes

1. Golden Parachute For top mgt executives Provision of compensation for the loss of a job acquisition by another firm (not severance)

Bonus & other benefits, perquisites

Retirement benefits

Modern E/e Benefit Schemes contd.

2. Cafeteria Benefit Plan Flexible benefit plans e/e can select the most suitable plan Customized benefit plans after assessing e/e needs