CHAPTER 11REWARDING HUMAN RESOURCES

1. STRATEGIC REMUNERATION

Strategic remuneration Involves remuneration policies and practices being aligned with the organisation’s strategic business objectives. This can help to reinforce the organisation’s culture and key values and to facilitate the achievement of its strategic business objectives. An important tool for motivating higher levels of job performance and enhancing organisational effectiveness.

Pay-for-performance A pay system that rewards employees on the basis of their performance. This emphasis on individual performance, recognition and reward, undermines collective employment relations, discourages union membership, marginalises unions and increases management control.

1.1 Remuneration philosophyRemuneration policies and practices should emanate from the organisation’s strategic business objectives

because these determine the performance and behaviours to be motivated, the kind of people to be attracted and retained, and the structure of the organisation. Remuneration cannot be looked at in isolation if a high-performance environment is to be created. If an organisation’s stated objective is to attract, retain and motivate the ‘best’ people in its industry, then it is pointless to compensate employees at below-market rates. A formal remuneration policy should:

- Reflect the organisation’s strategic business objectives and culture- Articulate the objectives that the organisation wants to achieve via its remuneration programs- Be communicated to all employees- Provide the foundation for designing and implementing remuneration programs.

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Strategic remunerationObjective and policy setting phases

Stage 1 Develop strategic business objectives. Stage 2 Develop HRM objectives. Stage 3 Develop employee remuneration objectives.

Remuneration administration phases Stage 4 Job analysis: Identify, describe and place jobs to create the desired organisational structure,

considering: job analysis ,job description, job specification Stage 5 Job evaluation: Establish the internal equity and importance of jobs to the organisation, via: job

ranking, job grading Stage 6 Pay survey: Establish external equity, considering: own surveys, professional association surveys Stage 7 Job pricing: Match the job’s internal and external worth, considering: job evaluation worth (worth

within the company), labour market worth (what other employers are paying). Stage 8 Implementation: Administer, communicate, monitor and review the remuneration program.

1.2 Remuneration program objectives

For the organisation Attract and keep the desired quality and mix of employees. Ensure equitable treatment. Motivate employees to improve their performance continually Ensure remuneration is maintained at the desired competitive level. Control remuneration costs. Ensure optimum value for each remuneration dollar spent. Comply with legal requirements.For the employee Ensure equitable treatment. Accurately measure and appropriately reward performance and contribution to the achievement Provide appropriate remuneration changes based on performance, Provide regular remuneration and performance reviews.

2. JOB EVALUATION

Job evaluation is a systematic method of determining the worth to the organisation of a job in relation to the worth of other jobs. It is concerned with creating a job hierarchy ‘how big’ or ‘how small’ a job is. The aim is to ensure that jobs of different sizes or relative worth attract the appropriate pay differentials. (FC, AFC,ACC)

2.1 Job Evaluation SystemsAll are based on the assumption that jobs can be differentiated by evaluating the information in a job description. The most common job-based systems include job ranking and job grading or classification, which are qualitative, and the point system and factor comparison methods, which are quantitative. Job ranking

A job evaluation method that sizes jobs by placing them in rank order. The quickest, the simplest and the most user-friendly job evaluation method. The job ranking method is too subject to bias and too clumsy to be used in any but the smallest of organisations. This is a considerable drawback of the job ranking method.

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Job grading or classificationA job evaluation method that sizes jobs using a series of written classifications. This uses a number of job-related factors, such as education, experience and responsibilities, to determine classes or grades of job. Then create generic or ‘benchmark’ job descriptions for each grade or class. The problem is that satisfactory descriptions have to be written and then this can become extremely complex in large organisations and is often unworkable. Does not provide a precise classification. It is often used in the public sector in industrial awards, and for engineering and scientific jobs.

The point systemThe point system involves quantifying a set of job factors — such as education, experience, responsibility and working conditions — by allocating points to each factor. Typically, each factor is divided into a number of levels, each with a specific definition.This system appears to be precise, but quite subjective decisions are involved in choosing the relative weights for each factor, the gradations within each factor and the number of factors. There are questions that each HR manager must be able to resolve, and more importantly justify, when explaining the system to employees. All of this can be time-consuming, expensive and difficult.

The factor comparison systemA refinement of the ranking and point systems. Like the point system, it uses job factors such as education, experience, responsibility and working conditions, and allocates points to quantify these factors. The basic principle is that all jobs should be compared and evaluated independently against each of the job factors.

Computerised job evaluationComputerised job evaluation systems is based on structured questionnaires. Responses are rated using measures such as the amount of time spent on a particular task, the importance of the task and accountability. In practice a job evaluation committee is still required to audit and validate the results. Advantages claimed for computerized job evaluation include greater consistency.

2.2 Which System Should Be Used?There are advantages and disadvantages associated with each type and between internally developed and commercially available systems. Should consider the factors listed below before selecting a system.

Objectives. What are business objectives in introducing job evaluation? Will the selected plan satisfy these objectives?

The size of the organisation. The smaller the organisation, the easier it is to use a simple system. Larger organisations may find more sophisticated point systems or factor comparison plans appropriate.

Organisational resources. Are the expertise available to develop an internal plan? How much can the organisation afford to spend on introducing a plan? Will the expected benefits exceed the cost?

Plan users. Which organisations use which type of plans? What do similar organisations in the industry use?

Corporate culture. The job evaluation plan selected must reflect the organisation’s culture. Introducing a highly structured plan designed for bureaucratic organisations is pointless if the organisation is small, fast-moving and entrepreneurial.

Employee attitudes. No matter how good a job evaluation system is, it will fail if it is not understood and accepted by employees as being fair and equitable. Particularly with the more complex systems, it is essential that employees be given a thorough explanation of how the system works.

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3. JOB DESCRIPTIONThe job description is a product of job analysis, so the method of job analysis chosen should be consistent with the organisation’s strategic business objectives and culture. In designing the format of and writing the job description, the HR manager must always keep in mind its purpose. The job description is a blueprint that profiles the design of the job, making its potential usefulness to management almost limitless. Nevertheless, criticism of job descriptions can stem from several potential causes for conflict. The effectiveness of job descriptions can be undermined by:

Misuse by managers or employers Incompatibility with the organisation’s strategic objectives and culture Difficulty in comprehension Inflexibility in design and content Rapid obsolescence

4. PAY SURVEYS

A method for relating an organisation’s pay rates to those for similar jobs in other organisations. There are two main types of pay survey.

1. Matching similar jobs according to their content 2. Matching jobs according to their job size using a common job evaluation method

Ex: Hay Group Guide Chart Profile Method A method of job evaluation using three prime factors — know-how, problem solving and accountability.Pay survey can be used by the HR manager to calculate the organisation’s competitive position and to plan any corrective action required. To begin this process, the HR manager must identify the appropriate labour market and those organisations that it competes with for labour.

Organisations in the same or related industries? Organisations in the same geographic area? ‘best-practice’ companies? Domestic companies? Multinationals? Organisations of a similar size in terms of sales, number of employees and assets?

The pay survey is to be worthwhile: Does the survey provide participants with clear, concise job descriptions? Are the data screened for consistency and accuracy? Who are the participants? Are they best-practice companies, or unsophisticated, unknown entities? Who has access to the published information? Who is conducting? Are they professional? Are they specialists in remuneration survey methods? How is the survey information to be presented? How old is the information? When was the survey conducted? What does the survey cost?

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4.1 Job Evaluation And The Pay SurveyJob evaluation determines the relative worth of each job to the organisation — that is, job evaluation is concerned with internal equity. The pay survey makes it possible to assign appropriate pay ranges to each job — that is, the pay survey helps to ensure that external equity is achieved and maintained.

4.2 Pay StructureIndividual pay rates are normally determined by job size and employee performance. Job size is established by job evaluation, and performance is measured by performance appraisal. Once job sizes have been established, each job level is given a pay range showing the minimum and maximum pay to be paid. The pay structure presents all pay ranges over the whole range of job sizes and is an essential tool in remuneration administration.

4.3 The Pay Line Or CurveThe pay line or curve graphically depicts the remuneration being paid for jobs, related to job size. The purpose of the pay line is to show the relationship between the size of a job and the average remuneration paid for it. The pay line permits companies to ‘price’ jobs by providing the basis for establishing pay ranges.

5. PAY RANGESPay range sets the minimum and maximum scheduled amounts paid for a job at a particular job size.

5.1 The Standard RangeThe most generally accepted pay range for professional and managerial positions is plus or minus 20 per cent from the midpoint. A range of this magnitude gives ample room for discrimination on the basis of experience and performance.

5.2 Broad BandingBroad banding involves the clustering of numerous individual pay grades into a few broad pay grades. Organisations using hierarchical pay grades with small midpoint to midpoint progression;

Narrow spreads in the pay ranges Job flexibility and multiskilling are restricted Customer service is hindered Career growth opportunities are limited

The collapsing of multiple pay grades into fewer pay grades creates much broader pay ranges. Although broad banding pay ranges vary, the range maximum is typically 100 per cent of the range minimum. Consequently, the range midpoint loses its value as a control point.

5.3 Market PostureDetermine where an organisation seeks to be in the pay market — above market, market average or below market.

Pay above market average. Pay better-than-average remuneration believing that paying higher rates of pay enables them to attract, retain and motivate superior employees.

Pay market average. The aim is to compensate employees at a level equal to the prevailing market rate in the geographic area or industry in which they operate.

Pay below market average. Pay the minimum level needed to hire employees to stay in business. The long-term implications for attracting, retaining and motivating a qualified workforce are obvious. It may be the only option available in the short run, especially if the business is in financial difficulty.

5.4 Selecting a Policy Pay LinePay survey data are historical information. The remuneration specialist uses these data to determine the organisation’s current competitive position and to develop the organisation’s new policy pay line. The policy

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pay line is a graphical representation of the organisation’s predicted pay midpoints for the 12-month period ahead. Its purpose is to ensure that the organisation’s stated market position is achieved and maintained.

6. EQUITABLE REMUNERATION

6.1 Pay SecrecyEquity in remuneration is a major concern of employees. Where inequities are perceived to exist, the impact on morale and motivation can be devastating. Management can try to avoid this problem by maintaining pay secrecy. (Occurs where pay is kept confidential between the employer and the employee). pay secrecy remains the norm in most private-sector organisations, with some organisations requiring employees to sign confidential agreements.

6.2 Pay compressionPay compression occurs when employees feel that the difference between their pay and that of other employees in jobs above or below them is too small. Pay compression can occur when pay rates for new hires increase at a faster rate than those of employees already on the payroll, or when pay increases are given for low-level jobs without commensurate adjustments for high-level positions.

6.2 Gender Pay GapThere are a number of ways that gender discrimination in pay rates can occur. As discussed earlier, gender stereotyping in the preparation of the job description and in the job evaluation process can lead to pay inequities. In Australia, for example, the average gender pay gap is 18 %. US female managers receive only 81 cents for every dollar earned by their male counterparts. UK, women earn on average 28 per cent less than men.

6.3 Senior Executive PayA star status given to executive pay disclosure have seen a dramatic upsurge in executive remuneration. Shareholders, trade unions and politicians as a result are expressing concern about the levels of senior executive remuneration. In U.S, the average CEO earns 183 times the average wage. In Australia, the ratio is 135:1, in Hong Kong it is 160:1 and in Germany it is 148:1.

A golden parachute is an agreement between an employee and a company that gives the employee the protection of particular benefits, such as stock options. In contrast, a golden handshake is a compensation package that is offered to an executive who may have retired. ‘Golden handshakes’ can also be given to executives who do not continue to work for a company for other reasons.

6.4 Setting Pay Rates

SeniorityBased on seniority are determined not by performance, but by the employee’s length of time on the job. Organisational membership, not individual achievement, is the prime criterion for the allocation of pay increases. Seniority-based pay is most effective in keeping employees within the organisation.

Avoid the problems of biased managers Provide a quick, easy and painless way of making pay increase decisions Recognize the correlation between experience and performance Reward the loyal employee

Pay for performance (merit pay)The objective is to develop a productive, efficient, effective organization that enhances employee motivation and performance. Rewards based on individual performance, establish greater individual accountability and promote employee development. Many organisations are not aggressive in relating

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pay to performance. Employees, as a result, often feel underpaid because they cannot see a strong link between their performance and the size of their merit increase.However, competitive pressures and the demand for higher employee productivity mean that organisations are being forced to better ensure that merit increases reflect performance.

Skill-based payPay for competencies or knowledge, compensates employees on the basis of the job-related knowledge, skills and abilities they possess. The purpose of this system is to motivate employees to gain additional knowledge, skills and abilities that will increase their personal satisfaction and value to the organisation.

Likely to be adopted by organisations that encourage employee involvement, use total quality management and face strong market challenges from foreign competition. Skill-based pay also depends on the employees wanting to increase their knowledge and skills.Supporters of a skill-based pay system claim that it:

Fits the strategic business focus on core competencies Gives management greater flexibility in rostering, allocating work Gives employees additional job security, job mobility and The chance to increase earnings without being moved permanently Allows for multiskilling Results in a better trained workforce by facilitating the learning of desirable organisational

skills Motivates employees through the growth and development

7. INCENTIVE REMUNERATION

Globalization, increased competition and cost and performance pressures have promoted the growing use of flexible remuneration programs linked to individual, group or company performance. For example, a basic idea underlying share option plans is that because employees see themselves as owners of the business, they are motivated to work harder.

At-risk remuneration. Contingent upon the successful achievement of specific performance targets.Bonuses Discretionary rewards paid for achieving performance targets. May require some form of performance criteria to be applied before paying bonuses or granting options, the evidence indicates that performance standards are subjectiveOptions Give employees the option to buy shares at a favorable price at some future date (usually, but not always, if certain performance targets are met). carry no cost and no actual downside risk.

If properly designed they can play an important role in motivating employees and recognizing performance. Incentive pay plans can effectively focus employee attention on those objectives that the organisation wishes to reinforce through its pay practices.

8. EMPLOYEE BENEFITS

The right combination of benefits can assist an organisation in reaching its strategic business objectives and provide HR managers with a powerful tool to promote the attraction, retention and motivation of employees. Unfortunately, many conventional benefit programs bear little relationship to the strategic business objectives of the organisation. As a consequence, an opportunity for the HR manager to forge a strategic business partnership with management is lost. In fact, most employee benefits are determined by membership of the organisation and have nothing to do

with the individual’s contribution towards the organisation’s strategic business objectives.

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Consequently, although expensive to organisations, the provision of a benefit is not always a motivating employee reward or one with an economic pay-off for the organisation.

Benefits are also discriminatory. The receipt of benefits is often determined by age, marital status, gender, seniority and not by merit or the value of the individual’s contribution to the organisation.

Poor design can mean that benefit programs may neither improve employee motivation nor be cost-effective.

workforces become more diverse, mismatches between employee preferences and the range of benefits provided may lead to intergenerational conflict

8.1 Flexible Benefit PlansMost organisations have a varied employee population. To address this, some organisations offer a system of flexible or cafeteria benefits. Such programs allow employees to select the particular benefits that match their individual needs.

8.2 Types of employee benefitsOrganisations provide many non-monetary benefits to their employees. These enhance the attractiveness of the organisation as a place to work and are generally administered by the HR department. Effective communication of employee benefits is necessary if employees are to understand their entitlements and the costs involved.

Mandatory benefits Voluntary benefitsAnnual leave CarSick leave ChildcareWorkers compensation Club membershipsPublic holidays coachingSuperannuation Free Parking

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