Compensation and employee behaviour Part I

Compensation and Employee Behaviour: Part I

Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)

Professor

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Bases for Traditional Pay SystemBased on cost of living and labour marketBase wage or salaryEvenly distributed between employeesCorrelated with seniorityBased on individual performance daily,

weekly, monthly

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Bases for Modern Pay SystemVariable payBased on business performanceDifferentiatedBased on individual performanceBased on team and organisational

performanceUsed as a means of communicating values

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Traditional Pay SystemSets pay levels in a narrow band with regular

increase May be 3 to 4 percent pay increase annuallyIncreases meant for promotions, merit, cost of living Less distinction betn. merit & cost of living increase Most merit raises perceived as little more than cost

of living increases due to low levels (3 to 4 percent)Often, it includes a set salary or wage, a set

schedule for merit increases, and a set benefits package

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Modern Pay SystemIt pays greater emphasis on variable payBase wage seen as job worth in open market,

merit pay - reward for results by employee each year

An employee can get a raise either by increasing his job's value or by performing well

Some companies use three-way system to determine annual increases:

- Did the employee accomplish his goals? - Did the company reach its targets? - Did the employee act in accordance with

established competencies for his job? 5

Modern Pay SystemSome companies create broader bands in

salary structures In past, large companies had many salary

levels in each department, making it difficult for employees to move to different jobs

Employees can seek more opportunities now without penalty with 5 large bands, instead of 25 narrow bands

Incentives available, like bonuses, team based incentives/gain sharing, profit sharing, quality awards, stock purchase options, etc.

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Purpose of Compensation

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Motivate & Retain Staff

Attract talent

Contribution based Remuneration

Administratively Efficient

Reward Valued Behavior

Effective Compensation

Ensure Equity

Institutionalized Processes

Legal Compliance

Establishing Pay Plans


Business GoalsBusiness Goals

Business Strategy

Business Strategy

CE

OC

EO

Compensation Philosophy/ activities

serve Business Objectives

Compensation Philosophy/ activities

serve Business Objectives

Business Strategy – This defines the direction in which organization is going in relation to its environment in order to achieve its objectives.

Compensation Philosophy – Consists of a set of beliefs which underpin the reward/compensation strategy of the organization and govern the reward policies that determine how reward processes operate




Business Strategy

Business Strategy

Compensation Plan

Compensation Plan

CompensationStrategy


Non-FinancialRewards


Org.StructureOrg.Structure

CE

OC

EO

HR

Hea

dH

R H

ead

Compensation activities serve Business Objectives

Compensation activities serve Business Objectives

Compensation strategy is periodically reevaluated and

the Compensation plan periodically developed

Compensation strategy is periodically reevaluated and

the Compensation plan periodically developed

Compensation Strategy – defines the intentions of the organization on reward policies, processes and practices required to ensure that it has the skilled, competent and well-motivated workforce it needs to achieve its business goals




Business Strategy

Business Strategy

Compensation Plan

Compensation Plan






CE

OC

EO

HR

Hea

dH

R H

ead

Compensation activities serve

Business Objectives


Business Objectives

Compensation strategy is periodically

reevaluated and the Compensation plan

periodically developed




A strategic perspective on compensation takes the position that how employees are compensated can be a source of sustainable competitive advantage




Business Strategy

Business Strategy

Compensation Plan

Compensation Plan

Market SurveysMarket Surveys



Job EvaluationJob Evaluation

Unit InputsUnit Inputs

Total remuneration

Total remuneration

Performance ManagementPerformance Management




Performance linked Pay

Performance linked Pay

Individual PayIndividual Pay

Contribution/outputs

Contribution/outputs

Internal EquityInternal Equity External EquityExternal Equity

CE

OC

EO

HR

Hea

dH

R H

ead

Em

plo

yee

Em

plo

yee

C &

B/S

MC

& B

/S M

Pay levels /structures

Pay levels /structures


Business Objectives


Business Objectives







Compensation Manager, along with

team is responsible for carrying out

compensation related activities

Compensation Manager, along with

team is responsible for carrying out

compensation related activities


Compensation Plan Design

Job Analysis

Job Description

Market Wage Survey

Job Evaluation

Pay Structure

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Job Analysis• Process to identify & determine particular job duties and requirements • Relative importance of duties• Judgments are made about data collected on job • Used in compensation to identify or determine:

•skill levels •compensable job factors •work environment•responsibilities•required level of education

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Job Description

- Output from job analysis used to develop job description and its specification- Summarize job analysis information in readable format - Provide basis for job-related actions - Identify individual jobs by providing documentation- Identify tasks, duties and responsibilities of a job- Describes what is done, why it is done , where it is done, and how it is done .

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Job Evaluation

The methods and practices of ordering jobs or positions with respect to their value or worth to the organization.

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Market Wage Surveys

- Goal of market wage surveys is to find data from employers with whom organization competes for employees - Data collected & analyzed - Simplest analysis involves comparing going market rate & approximating this rate within organization's own pay structure

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Methods of Wage SurveysGenerally three methods are

employed for wage surveys;• Personal Interviews• Mailed Questionnaires• Telephone Inquiries

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Pay Structure

-Basis for establishing pay plan is pay structure - Hierarchy of jobs with pay ranges and/or rates assigned - Pay structures designed so that greater the worth of a job, higher the pay grade and range

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Objectives of Pay Plans• Internal equity. • External equity (or competitiveness), • Individual equity, • Process equity, • Performance or productivity incentives, • Maximum use of financial resources, • Compliance with laws and regulations,

and • Administrative efficiency

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Aligning Compensation Strategy with HR Strategy

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HR Strategy Compensation Strategy– Attract staff– Retain effective performers – Support change management process– Establish positive corporate reputation – Administer reward management to maximise positive impact – Enhance purchasing power of employees– Make Compensation package simple – Develop human resources

– Total reward approaches that help to make the organisation a great place to work – Competitive pay structure that helps to retain high quality employee – Variable pay schemes that contributes to the motivation of the people – Performance management process that promotes continuous improvement – Performance management processes that identify learning needs and how they can be satisfied – Career family structure that defines knowledge and skills requirement – Total reward approaches that emphasize the importance of enhancing the work environment

Aligning Compensation Strategy with Business Strategy

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Business Strategy Compensation Strategy

– Achieving competitive advantage through innovation – Achieving competitive advantage through quality – Achieving competitive advantage through low costs

– Provide financial incentive/reward and recognition for innovation– Link reward to quality performance

– Review all reward practices to ensure they provide value for money

Seniority & Longevity PaySalary or wages based on seniority or length

of service with an organization The greater the length of service, the greater

the longevity payIt may also be used as a bonus for remaining

on a job beyond a certain periodThese systems reward employees with

periodic additions to base pay according to employees’ length of service in performing their jobs

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Design of Seniority Pay and Longevity Pay Plans

Seniority Pay Longevity PayTo reward job tenure

or employees’ time as members of a company explicitly through permanent increases to base pay

To reward employees who have reached pay grade maximum and who are not likely to move into higher grades

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Advantages of Seniority PayTo Employees To Employers

Perceive they are treated fairly because they earn pay increases according to seniority, which is an objective standard

It facilitates the administration of pay programs

Employers are less likely to offend employees by showing favouritism to others

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Fitting Seniority Pay with Competitive Strategy

Seniority pay does not fit well with the imperatives of competitive strategies because employees can count on receiving same pay raises for average and exemplary performance

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Thank you