4. compensation environment structure

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Components of a Total Compensation Program

Career Ladder/Pathway


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InternalFactors


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Compensation policy of Organization

Lag policy

Lower wages than competitors,

compensates employees through

other means

Opportunity for advancement

Incentive plans

Good location

Good working conditions

Employment security

Market policy

Wages equal to competitors

Neutralizes pay as factor

Lead policy

Higher wages than competitors to

ensure organization becomes

employer of choice

Setting organization compensation policy to lead, lag, or match

competitors pay.


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Strategic Compensation Policy Concerns

1. The rate of pay within the organization and whether it is to be

above, below, or at the prevailing community rate.

2. The ability of the pay program to gain employee acceptance while

motivating employees to perform to the best of their abilities.

3. The pay level at which employees may be recruited and the paydifferential between new and more senior employees.

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

which merit and/or seniority will influence the raises.

5. The pay levels needed to facilitate the achievement of a sound

financial position in relation to the products or services offered.


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Worth of a Job

Establishing the internal wage relationship among jobs and skill levels.

Organizations without a formal compensation program generally base the

worth of jobs on the subjective opinions of people familiar with the jobs. In

such instances, pay rates may be influenced heavily by the labor market or, in

the case of unionized employers, by collective bargaining.

Organizations with formal compensation programs, however, are more likely torely on a system of job evaluation. Even when rates are subject to collective

bargaining, job evaluation can assist the organization in maintaining some

degree of control over its wage structure.


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The Wage Curve

Wage Curve

A curve in a scatter gram 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.

Red Circle Rates Payment rates above the maximum of the pay range.


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Employees Relative Worth

Rewarding individual employee performance.

In both hourly and salary jobs, employee performance can be recognized and

rewarded through promotion and with various incentive systems.

Superior performance can also rewarded by granting merit raises on the basis

of steps within a rate range establish for a job class. If merit raises are to have

their intended value, however, they must be determined by an effectiveperformance appraisal system that differentiates between employees who

deserve the raises and those who do "not. This system, moreover, must provide

a visible and credible relationship between performance and any raises

received.


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Employers Ability-to-Pay

Having the resources and profits to pay employees

Pay levels are limited by earned profits and other financial

resources available to employers. Thus an organization's

ability to pay is determined in part by the productivity of its

employees. Economic conditions and competition faced by employers

can also significantly affect the rates they are able to pay.

Competition and recessions can force prices down and

reduce the income from which compensation payments are

derived. In such situations, employers have little choice but

to reduce wages and/or lay off employees, or, even worse,

to go out of business.


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External Factors


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Labor Market Conditions

Availability and quality of

potential employees is affected

by economic conditions,

government regulations and

policies, and the presence ofunions.

LArea Wage Rates

A firms formal wage structure of

rates is influenced by those

being paid by other area

employers for comparable jobs


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Cost of living

Local housing andenvironmental conditionscan cause wide variationsin the cost of living for

employees. Inflation can require that

compensation rates beadjusted upwardperiodically to help

employees maintain theirpurchasing power.


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Collective Bargaining

One of the primary functions of a labor union, is to bargain

collectively over conditions of employment, the most important of

which is compensation.

The union's goal in each new agreement is to achieve increases

in real wage increases larger than the increase in the CPI-thereby improving the purchasing power and standard of living of

its members


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Legal Requirements

Payment of Wage Act(1936)

The Minimum Wages

Ordinance (1961) West Pakistan Minimum

Wages Ordinance forUnskilled Workers (1969)

The Factories Act (1934)


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Forms of Equity

1. Individual equity

How fair an individuals pay as compared with what his or her co-workers

are earning for the same or very similar jobs within the company

2. Internal equity

How fair the jobs pay rate is, when compared to other jobs within thesame company

3. External equity

How a jobs pay rate in one company compares to the jobs pay rate in

other companies.

4. Procedural equityThe perceived fairness of the process and procedures to make decisions

regarding the allocation of pay


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Methods to Address Equity Issues

Salary surveys

To monitor and maintain external equity.

Job analysis and job evaluation

To maintain internal equity, Performance appraisal and incentive pay

To maintain individual equity.

Communications, grievance mechanisms, and employees

participation To help ensure that employees view the pay process as

transparent and fair.


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STRATEGIC

POLICIESTECHNIQUES

STRATEGIC

OBJECTIVES

EFFICIENCY

Performance

Quality

Customers

Stockholders

Costs

FAIRNESS

COMPLIANCE

ALIGNMENT

COMPETITIVENESS

CONTRIBUTORS

ADMINISTRATION

Work Descriptions Evaluation/ INTERNAL

Analysis Certification STRUCTURE

Market Surveys Policy PAYDefinitions Lines STRUCTURE

Seniority Performance Merit INCENTIVE

Based Based Guidelines PROGRAMS

Planning Budgeting Communication EVALUATION


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What The Research Tells Us?

Equity Theory

The equity theory model shown in the slide suggests that

employees judge equity on the basis of comparisons

between the work, qualifications, and pay for the jobs of

referent others and those for their own.


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Perceived Equity of a Pay Structure

MY PAY

My qualifications

My work performed

My product value

OTHERS PAY

Their qualifications

Their work performed

Their product value


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Pay structure,refers to the array of pay

rates for different work or skills within a

single organization. The number of levels,

dif ferentialsin pay between the levels, andthe cri ter iaused to determine those

differences create the structure.


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Consequences of an Internally Aligned Structure

Pay structure

Undertake training

Increase experience

Reduce turnover

Facilitate career progression

Facilitate performance

Reduce pay-relatedgrievances

Reduce pay-related work

stoppages


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What Shapes Internal Structures?

EXTERNAL FACTORS:

Economic PressuresGovernment Policies, Laws, Regulations

StakeholdersCultures and Customs

ORGANIZATION FACTORS:Strategy HR PolicyTechnology Employee AcceptanceHuman Capital Cost Implications

INTERNAL STRUCTURE:Levels

Differentials

Criteria


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Internal Consistency:

EngineeringJob Structure

Entry Level

Recognized

Authority

Engineer:Limited use of basic principles. Close supervision.

Senior Engineer:Full use of standard principles and concepts. Under

general supervision.

Systems Engineer: Wide applications of principles and concepts, plusworking knowledge of other related disciplines. Under very general

direction.

Lead Engineer: Applies extensive knowledge as a generalist or specialist.

Exercises wide latitude.

Advisor Engineer: Applies advanced principles, theories, and concepts.Assignments often self-initiated.

Consultant Engineer:Exhibits an exceptional degree of ingenuity,

creativity, and resourcefulness. Acts independently to uncover and resolve

operational problems.


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Which Structure has the Greatest Impact on

Performance? On Fairness?

Structure A

LayeredChief Engineer

Engineering Manager

Consulting Engineer

Senior Lead Engineer

Lead Engineer

Senior Engineer

EngineerEngineer Trainee

Structure B

De-layeredChief Engineer

Consulting Engineer

Associate Engineer


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Structures Vary

An internal pay structure is defined by:

the number oflevels of work

the pay differentials between the levels

the criteria used to determine those levelsand differentials

These are the factors that a manager may

vary to design a structure that supportsthe work flow, is fair, and directs employeebehaviors toward objectives


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Strategic Choices Among

Structure Options

Tailored versus Loosely Coupled

Egalitarian versus Hierarchical


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Strategic Choice:

Hierarchical vs Egalitarian

Hierarchical Egalitarian

Levels

Differentials

Criteria

Supports:

Many Fewer

Large Small

Person or Job Person or Job

Close Fit Loose Fit

Individual Performers Teams

Performance Equal Treatment

Opportunities for Promotion Cooperation

Work Organization

Fairness

Behaviors


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Virtuous and Vicious Circles

Organization

PerformanceINCREASES

Decreased Performance-

Based Pay

Decreased Employee

Performance

Risk/Return

IMBALANCE

Organization

Performance

DECREASES

Increased Performance-Based Pay

Increased Employee

Performance

Risk/Return

BALANCE

Virtuous Circle

Vicious Circle


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QUESTIONS

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4. compensation environment structure

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