Compensation -An Overview

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Compensation:An Overview


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Total Compensation

Direct Indirect

Bonuses

Gain sharing

Commissions

Wages / Salaries

Security Plans Pensions

Employee Services Educational assistance

Recreational programs

Insurance Plans Medical Dental Life

Time Not WorkedVacations Breaks Holidays


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Objectives of Compensation Planning

Some of the important objectives that are sought to be achieved through

effective compensation management are listed below. (Dessler, Fisher, Gomez).

1. Attract talent

2. Retain talent

3. Ensure equity

4. New and desired behavior

5. Control costs

6. Comply with legal rules

7. Ease of operation

The most important objective of any pay system is fairness or equity. The term equity has three

dimensions (Cascio).

1. Internal equity

2. External equity

3. Individual equity


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Compensation Equity Issues

Compensation equity: Is compensation judged to be fair?

3 Compensation equity issues

#1: Individual equity: compare the pay of individuals whodo the same job in the same organization and judge if it is

fair

Example: A retail store has 2 Assistant Store Managers (2 people

doing the same job in the same organization)

If they are paid the same, is that perceived as being fair?

If they are paid differently, is the pay difference perceived as being

fair?

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Compensation Equity Issues 3 Compensation equity issues (more)

#2: Internal equity: compare the pay of different jobs in the

same organization and judge if it is fair

Example: A retail store has an Assistant Store Manager and a

Store Manager (2 different jobs in the same organization)

If they are paid the same, is that perceived as being fair?

If they are paid differently, is the pay difference perceived as being

fair?

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Compensation Equity Issues 3 Compensation equity issues (more)

#3: External equity: compare the pay of the same job in

different organizations and judge if it is fair

Example: Retail store X has a Store Manager and retail store Y has

a store manager (the same job in two different organizations)

Do the two stores pay their store managers the same or not?

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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 pay differential

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. Wage and salary administration plans and programs should be responsive to thechanging local and national conditions.

6. Wage and salary plans should be sufficiently flexible.

7. Job evaluation must be done scientifically.


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Difference between wage and salary1. Wage earners are paid by the hour, Salary earners are paid by the year.

2. Salary earners usually receive paid time when they are not working, Wage

earners often have to give up pay for time off.

3. Salaries are often calculated as packages.

4. Wage earners get paid more for working more than 40 hours per week, Salary

workers are rarely offered overtime pay.

5. Salaries can contain all kinds of benefits and perks


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State Regulation of Wages

The Government has adopted various methods to regulate wages in India

such as prescribing minimum rates of wages, regulating payment of

wages, settlement of wage-related disputes through adjudication

process, setting up of wage boards, etc.


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Internal Influences on Compensation

1. Job needs

2. Ability to pay

3. Cost of living

4. Prevailing wage rates

5. Unions

6. Productivity

7. Demand and supply of labour


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External Influences on Compensation

External influences include:

I. The labor marketII. The economy

III. The government

IV. Unions


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1.The Labor Market and Compensation

In times of full employment, wages may have to be higher

Styles of managing and rewarding are changing in response to diversity

The easiest relationship to imagine between rewards and diversity has to

do with benefits ,tax laws in relation to expats etc.

The increasing level of formal education will also impact reward systems Two other types present compensation challenges: Technological experts &

Temporary or contingent workers.

Compensation specialists must base their compensation plan on a

competitive, global marketplace

Off shoring jobs, projects, and work


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2.Economic Conditions and Compensation

The economic conditions of the industry and competitiveness affect an

organizations ability to pay high wages

A productivity index used to determine a general level of wages:

The Bureau of Labor Statistics Output per Man-hour inManufacturing

The percentage increase in average weekly earnings in the U.S. is

closely related to:

The percentage change in productivity

Plus the percentage change in the consumer price index


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3.Government Influences & Compensation The government directly affects compensation through wage controls and

guidelines

Pay raises may be prohibited at certain times

Laws establish minimum wage rates and work hours

Discrimination is prohibited

Wage freezes are government orders that forbid wage increases

Wage controls limit the size of wage increases

Wage guidelines are voluntary wage controls


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Wage and Hour Regulations

It was passed to counteract the abuses encountered by production workers in themanufacturing sector

FLSA is administered by the Dept. of Labor, which also acts as the enforcement agency

There are four provisions:

1. Minimum wage

2. Overtime

3. Child labor4. The Equal Pay Act of 1963

The Fair Labor Standards Act (FLSA) of 1938 is the basic

pay regulation act


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Overtime Pay

Virtually all hourly (nonexempt) employees must receive overtime

compensation for working:

More than 40 hours per week

More than 8 hours per day

Salaried employees do not receive overtime pay.

Distinguishing between exempt and nonexempt workers is not always

easy

Exempt employees are in managerial, administrative, or

professional positions and are paid on a salaried basis


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The Payment Of Wages Act ,1936

Providing regular payment of wages without unauthorized deductions to persons

employee s in any industrial establishment. The act permits the following

permissible deductions:

1. fines

2. Deductions for absences

3. Deductions for loss of goods entrusted to the workers

4. House given by employer

5. Advances given by employer

6. Provident fund

7. Insurance premium etc.


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Minimum Wages Act ,1948

Wage that must invariably be paid weather the company or big/small, makes profit

or not.

The 15th Labor Conference 1957 quantifies minimum wages as thus:

Minimum food requirements based on calorie intake

Clothing requirement on basis of per capita consumption of 28 yards per annum;72

for all four members.

Rent corresponding to the minimum housing area under Govt. Industrial Housing

Scheme.

Fuel, Lighting and other miscellaneous items of expenditure should constitute 20

% of the minimum wage.


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Equal Pay Act of 1963 (EPA)

EPA is an amendment to the FLSA

Its goal is to guarantee that women holding the same jobs as men will be

treated with respect and fairly compensated regarding all rewards of work

Comparisons cannot be made between individuals holding the same job at

different companies

The gender pay gap in 2001 averaged 26 percent in the US economy

Four elements establish the equality of positions:

Skill

Effort

Responsibility

Working conditions

A difference in wages includes additional forms of compensation, such as:

Vacations and holiday pay, leave of absence, overtime, lodging, food, and

reimbursement for clothing or other expenses


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Union Influences

Unions exert influence on compensation programs

Unionized workers work longer hours and make more than non-unionized

workers

Unions tend to be pacesetters in demands for pay, benefits, and improved

working conditions

There is supportive interaction between unions and the government

The union is more likely to increase the compensation of its members when:

It is financially and competitively strong

It has the finances to support a strike It has the support of other unions

The economy is strong


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Who Makes Compensation Decisions

Compensation decisions are influenced from the top to the bottom of theorganization

In publicly held organizations, stockholders and the board greatly influence pay,especially at the top of the organization

Top management determines + HR

How much of the firms budget is earmarked for pay

The form of pay to be used (time based vs. incentive)

Other pay policies

Both large and small organizations now involve more individuals in determiningpay

At Whirlpool Corporation, top managers and compensation specialists jointlyestablish financial and operating goals


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Motivating Employees through

Compensation Pay Equity (also Distributive Fairness)

An employees perception that compensation received is

equal to the value of the work performed.

A motivation theory that explains how people respond to

situations in which they feel they have received less (or

more) than they deserve.


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Expectancy Theory and Pay

Expectancy Theory

A theory of motivation that holds that employees should

exert greater work effort if they have reason to expect that

it will result in a reward that they value.

Employees also must believe that good performance is

valued by their employer and will result in their receiving

the expected reward.


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Pay and employees productivity ,satisfaction &motivation

Research on the relationship between pay,

employee satisfaction, and productivity continues,but with contradictory results

It can still be concluded, however, that pay is an

important outcome to employees


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Compensation Decisions

Pay for a position is set relative to three groups:

Group A: employees working on similar jobs in other

organizations

Group B: employees working on different jobs within the

organization

Group C: employees working on the same job within the

organization


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The Pay-Level Decision

Managers compare the pay of people working inside the

organization to those outside it

High-pay strategy:

Companies using this strategy are calledpacesetters

Low-pay strategy:

The manager pays at the minimum level needed to hire enough employees

Comparable-pay strategy:

Pay is set at the current market rate in the community or industry.


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1.Pay Surveys

Pay surveys collect data about compensation paid to employees by all

employers in:

A geographic area

An industry An occupational group

Pay surveys are conducted by:

Professional and consulting enterprises

Trade associations

The government

Unions

Competitors


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2.Job Evaluation

Frequently used methods of job evaluation:

Job ranking

Classification

Point system

Factor comparison


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Ranking of Jobs

Ranking is the system used primarily in smaller, simpler

organizations

The evaluator rank-orders whole jobs, from the simplest to the most

challenging through job analysis.(or job specifications) If an organization has many jobs, this system is clumsy to use and the

ratings may be unreliable

One way can be to group jobs and then rank them.(by deptt. Or

clusters)

Select compensable factors.

Ranking is the least frequently used method of job evaluation


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Classification or Grading System Classification or grading groups a set of jobs

Sets are then ranked by difficulty or sophistication

Bases ranking on compensable factors such as judgment, originality,

qualification, difficulty, originality ,experience making grade definitions.

The evaluator first decides how many classifications the job structure has to

be broken into Then, definitions are written for each class

After the classes are defined, job are compared with the definition and placed

into the proper classification

Class I Computer work, no managerial responsibility

Class II Computer work, no managerial responsibility, team involvement

Class III Computer work of medium complexity, no managerial responsibility, team

responsibilities

Class IV Computer work of medium complexity, managerial responsibility, team authority

Class V Complex computer work, managerial responsibility, team leadership


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Point System

The greatest number of job evaluation plans use the point

system

Identify compensable factors

Assign weights to them.

Calculate the net worth of the job.

Requires evaluators to assign points on the basis of:

Skill required

Physical and mental effort needed

Degree of dangerous/unpleasant working conditions Amount of responsibility

When these are summed, the job has been evaluated

Degrees

Factor Weight 1st 2nd 3rd 4th 5th

1. Education 50% 50 100 150 200 250

2. Experience 25 12 12 24 36 48

3. Complexity of job 12 12 24 36 48 60

4. Relationships with others 8 8 24 40

5. Working conditions 5 10 15 20 25


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Factor Comparison Method:

Define a set of compensable factors

Select a set of benchmark (key) jobs

Jobs with well-known, stable job content

Jobs that are common in many organizations

Jobs that represent the full range of jobs being evaluated

Jobs that represent the range of each compensable factor

Example: jobs with various skill levels, effort levels, etc.

Jobs for which market pay data is available

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Factor Comparison Method:

Rank the benchmark jobs on the basis of each compensable

factor

Example: Rank the jobs from least skilled to most skilled

Collect market pay data for the benchmark jobs

For each benchmark job, allocate market pay across the

compensable factors

Example: If market pay for a benchmark job is $15, how much of

that $15 is for skill, how much for effort, how much for

responsibilities, and how much for working conditions?

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Factor Comparison Method (more)

Slot all the non-benchmark jobs into their proper places on

the pay scale for each compensable factor

Determine the pay for each job by adding up the pay from

each compensable factor

Example: Pay = pay from skill + pay from effort + pay from

responsibility + pay from working conditions

Example: Fisher, Schoenfeldt, & Shaw (2006), Table 11.7, p. 498 Job 4: Pay = $3.50 for skill + $2.50 for effort + $3.75 for

responsibilities + $1.25 for working conditions = $11.00

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Pay Classes, Rate Changes, Classifications

The pay-structure process is completed by establishing:

Pay curves

Pay classes

Rate ranges

Job classifications


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The Pay Curve

All jobs within a given labor class receive the same rate of

pay

In this example, pay classes are determined by the point

value that was set through job evaluation

A pay class (pay grade) is a grouping of jobs that are similar

in terms of difficulty and responsibility


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The Pay Curve

Points

Payclasses

100 125 150 175 200 225 250 275 300 325 350

Pay curve

Class 1 Class 2 Class 3 Class 4 Class 5

$

$3500

$3200

$3100

$2900

$2700

$2500

$2300

$2100

$1900

MonthlyPay


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The Pay Curve

The next slide shows how data from a wage and salary

survey are combined with

A compensation trend line is derived by establishing the

general pay pattern

The trend line can then be determined

The pay rate for any job can be ascertained by calculating

the point value of the job and then locating that value on

the trend line

Minimum and maximum limit lines can be set by setting

a percentage above or below the trend line


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The Pay Curve

Points

Pay

classes

$

$6250

$6000

$5750

$5500

$5250

$5000

$4750

$4500

$4250

$4000

$3750

$3500

$3250

$3000

0 500100 150 200 250 300 350 400 450

Class 1 Class 2 Class 3 Class 4 Class 5 Class 6 Class 7 Class 8

Monthly

Pay


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Delaying and Broad banding

Broad banding:

More emphasis on individual performance

Multiple salary grades and ranges are collapsed into a few

wide levels (bands)

Entry-level employees start at the range minimum;

movement upward is based on performance (merit)

Allows managers to reward top performers while saving

money on mediocre employees

When shifting pay decisions to managers, the firm must guardagainst abuse: favoritism can result in unfair use

Documents

Compensation -An Overview