58916570 compensation strategies and practices session 8

8/3/2019 58916570 Compensation Strategies and Practices Session 8

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Compensation Strategies

and Practices


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Objectives of an Effective CompensationSystem:

- Legal compliance with all appropriate laws andregulations- Cost effectiveness for the organization

- Internal, external, and individual equity foremployees- Performance enhancement for the organization

Compensation Systems


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Nature of Compensation

Types of Rewards

Intrinsic

Intangible, psychological andsocial effects of compensation

ExtrinsicTangible, monetary andnonmonetary effects ofcompensation


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Components of A Compensation Program


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Direct Compensation

Compensation Type

Base Pay The basic monetary compensation that anemployee receives, usually as a wage orsalary.

Wages Payments calculated on the amount of time

worked.

Salary Consistent payments made each periodregardless of the number of hours worked inthe period.

Variable Pay Compensation linked to individual, team, ororganizational performance.

Benefit An indirect reward given to an employee orgroup of employees as a part oforganizational membership.


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Typical Division of HR Responsibilities:Compensation


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Continuum of Compensation Philosophies


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Compensation Approaches


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Decisions About CompensationLevels

Compensation Strategies

Above-Market Paying for higher qualified, more productiveworkers.

Middle-Market Attempting to balance of employer costs and

need to attract and retain employees.

Below-Market Paying all that the firm can affordTaking advantage of the abundant supply ofpotential employees in a loose labor market.


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Individual vs. Team Rewards

Distribute variable rewards at the team level

Make system simple and understandable.

Using Team-Based Reward Systems

Use skill-based pay for the base.

Use variable pay based on business entity performance

Maintain a high degree of employee involvement


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Perceptions of Pay Fairness

Equity The perceived fairness between what a persondoes (inputs) and what the person receives(outcomes).

Procedural Justice The perceived fairness of the process andprocedures use to make decisions about

employees

Distributive Justice The perceived fairness in the distribution ofoutcomes.

Pay Openness The degree of openness or secrecy that anorganization allows regarding its pay system.

External Equity The perception that the organization providesemployees with compensation that comparableto the compensation of employees with similarjobs in other organizations.


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CompensationAdministrationProcess


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Job Evaluation

Job EvaluationThe systematic determination of the relativeworth of jobs within an organization.

Benchmark JobA job found in many organizations and

performed by several individuals who havesimilar duties that are relatively stable and

require similar KSAs.


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Job Evaluation Techniques

1. Two general typesa. Market-based evaluations

b. Job-content evaluations

2. Market-based evaluations

a. Use market data to determine differences in job worthb. Allow companies to assign pay rates that are neither too low nor too

high relative to the market

c. Compensation professionals use compensation surveys todetermine the prevailing pay rates in the relevant job markets

3. Job-content evaluationsa. Emphasize the companys internal value system to establish a

hierarchy of internal job worth based on each jobs role in thecompany strategy

b. Compensation professionals review preliminary structures forconsistency with market pay rates on a representative sample of

jobs (benchmark jobs)

c. Must balance external market considerations with internal


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Job Evaluation

FactorComparison

Ranking Classification

PointMethod

JobEvaluationMethods


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Ranking Method

Simplest method

Raters examine description ofeach job

Jobs arranged in order accordingto value

Must first conduct job analysis

and write job description


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Classification Method

Define number of classes or grades todescribe group of jobs

Description of each class of job is written

Compare job description with class

description

Class descriptions reflect differences of jobgroups at various difficulty levels

Each job is put into a grade according to the

class description it best matches

Class description that most closely agreeswith job description determines jobclassification


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The point method

A quantitative method that assigns numerical values tocompensable factors which are summed up to indicate theoverall value of the job

The relative worth of the job is established by the magnitudeof its overall numeric value


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Factor Comparison Method

A quantitative and complicated method Combination of ranking and pin point method

Determine benchmark job in an organization

Select compensable factors

Rank all benchmark job factors by factors

Assign monitory value to each factor by comparingjobs to market rates for benchmark

Evaluate all other jobs in the organization bycomparing with the benchmark jobs


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Pay Surveys

A pay survey is a collection of data on compensation rates forworkers performing similar jobs in other organizations.

An employer may use surveys conducted by other organizations, orit may decide to conduct its own survey.

USING PREPARED PAY SURVEYS

When using surveys from other sources, it is important to use themproperly.

Some questions to be addressed before using a survey are:

Participants:Is the survey a realistic sample of those employers withwhom the organization competes for employees?

Broad-based:Is the survey balanced so that organizations of varying

sizes, industries, and locales are included? Timeliness:How current is the data (determined by the date when

the survey was conducted)?

Methodology:How established is the survey, and how qualified arethose who conducted it?

Job matches:Does it contain job summaries so that appropriatematches to organization job descriptions can be made?


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Developing Pay SurveysSelect Employers with Comparable Jobs

Determine Jobs to be Surveyed

Decide What Information Is Needed

Conduct Survey


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Pay Structures

Market Line

The line on a graph showing therelationship between the job value, asdetermined by job evaluation points,

and pay survey rates.

Common Pay Structures

Hourly and salaried

Office, plant, technical, professional,managerialClerical, information technology,professional, supervisory, management,

and executive


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Establishing Pay

Structures


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Pay Structures (contd)

Pay GradesA grouping of individual jobs having approximately thesame job worth.

BroadbandingThe practice of using fewer pay grades havingbroader pay ranges that in traditional systems.

Benefits

- Encourages horizontal movement of employees- Is consistent with trend towards flatterorganizations- Creates a more flexible organization

- Encourages competency development-


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Traditional Pay Structure vs. Broadbanding


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Pay Scattergram


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Example ofPayGradesand PayRanges


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Pay Rate Issues

Rates Out of Range Red-Circled Employees

An incumbent (current jobholder) who is paidabove the range set for the job.

Green-Circled Employees

An incumbent who is paid below the range setfor the job.

Pay Compression

A situation in which pay differences amongindividuals with different levels of experience andperformance in the organization becomes small.


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Issues Involving PayIncreasesSeniority

Time spent in an organization or on a particularjob.

Used to determine eligibility for organizational

rewards and benefits.

Maturity Curve

A curve that depicts the relationship betweenexperience and pay rates.

Assumption is that as experience increases,proficiency and performance increase.


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Issues Involving PayIncreasesCost-of-Living Adjustments (COLA)

A percentage increase in wages that allowsemployees to maintain the same real wages in aperiod of economic inflation.

Adjustments are tied to changes in an economicmeasure (e.g., the Consumer Price Index).

Lump-Sum Increases (LSI)

A one-time payment of all or part of a yearly payincrease.

Lump-sum payments do not increase basewages


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Thank You !!!

58916570 compensation strategies and practices session 8

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