Figure steps to Base Pay

The actual development of a compensation program begins with the following:

1- First Step: 1- Job Analysis

It is the systematic, formal study of the duties and responsibilities that comprise job content. The process seeks to obtain important and relevant information about the nature and level of

the work performed. And it is the process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and

observation.

Every organization has a purpose, a reason for its existence. The purpose may be complex, or carried about as a general idea rather than set down and defined, but nonetheless it is there.

To achieve its purpose the organization adopts a strategy, a plan of campaign. Its strategy shapes the structure of the organization, both as it is now and as it will evolve and, in turn, the

structure of the organization marks out the jobs which will have to be done.

Figure Job Analysis

Job

Analysis

Job

DescriptionJob

EvaluationPay Rate

Base Pay/

Compensation

Package

Structure

Step 1 Step 2 Step 3 Step 4

Job Analysis

Job Tasks

Job Duties

Job responsibilities

Therefore, Job Analysis is the process of understanding a job and presenting this information

in a format which will enable others to understand the job. Job Analysis normally comprises the following stages:

• Gathering of information about the content of jobs and the relationships between jobs. This information may be obtained by interviewing a manager or jobholder, from a group of

managers or job holders, from existing Job Descriptions, from statistical or financial data, organization charts, and so forth.

• Analyzing and organizing that information. The skill of job analysis is about really

understanding the job in order to break it down into its key components.

• Presentation of the information in a concise and systematic manner. This can be in the form

of a conventional Job Description or as a “Job Family Model” in situations where there are related work levels within a type of job. There are also other ways of presenting job information

such as annotated organization charts, generic job matrices, and so forth.

A- Whatever the final format, there are four key principles for effective Job

Analysis:

1 • Analysis NOT Lists

In drafting a Job Description or Job Family Model it is important to analyze the job. This means separating the job into its important constituent parts, examining them, and reassembling them

in a way which facilitates understanding. Without analysis, the Job Description is likely to

become a wearying check-list of small and unrelated tasks.

2 • Jobs NOT People

Analysis is not concerned with performance, style, character, career history or anything else about the jobholder. It is concerned with the job, and the present jobholder is only involved

because he/she usually knows most about it. With Job Family Models the emphasis is on the

growth in contribution with the development of capability or competency but this is done as far as possible in a generic way, not necessarily focused on the capability of jobholders who are

currently in the role.

3 • Facts NOT Judgments

It is not the role of the facilitator to make judgments about the job, rather the task is to

communicate factual information as clearly as possible. The distinction is analogous to that between the news itself and the editorial comment in a paper. It is for the eventual users of the

Job Description to form whatever kind of judgments are necessary for their purpose, on the evidence presented.

4 • The Job As It Is Now

The aim is to capture the job as it is at a particular point in time. The Job Description should

not be clouded by references to historic roles or future aspirations, although information on

such aspects may well be gathered during the course of discussions about the job.

Where specific planned growth or development has been agreed and the job holder is working

towards this should be included, for example for a marketing job which is working to develop a market of a targeted size from what may be small beginnings now. Only developments which

are likely to be realized in 2-3 years at most should be considered.

B- Job Analysis Process:

Organizational analysis Selection of jobs to be analyzed Data collection

Validating Information Issuing Job Description, Job specification and Job Families Sign

and approve final Document

Figure Levels of Analysis

C- There are two types of Job Analysis Techniques: (Plus combining both)

1. Qualitative Analysis: Approaches to collecting job data that result in narrative

descriptions of job activities.

Interviewing the Job Holder

Questionnaires

Observation

Participant Diary

2. Quantitative Analysis: Approaches to collecting job data that result in a numeric “score”

used for comparison purposes.

Position Analysis Questionnaire (PAQ) is a questionnaire used to collect quantifiable data

concerning the duties and responsibilities of various jobs

Functional job analysis: 1) rates a job on data; people; things; the extent to which specific

instructions are necessary to perform the task; the extent to which reasoning and judgment are required to perform the task; and mathematical ability required to perform the task;

and 2) identifies performance standards and training requirements.

3. Combining both methods together or using more than a method

Organizational Analysis

Selection of jobs to be analyzed

Data collection

Job descriptionJob

specification

D- Job Analysis: Outputs

• Job analysis outputs a clear statement of what is required from each and every role in the organization

• And also it outputs template that can be used for:

– Job Evaluation

– Recruitment

– Training and development needs analysis

– Performance management/appraisal

– Career development and succession planning

Figure Job Analysis Input and Outputs

E- Job Analysis Steps:

Step 1: Decide how you‟ll use the information.

Step 2: Review relevant background information. Step 3: Select representative positions.

Step 4: Actually analyze the job. Step 5: Verify the job analysis information.

Step 6: Develop a job description and job specification.

Tasks Responsibilities Duties

Job

Analysis

Job

Descriptions

Job

Specifications

Knowledge Skills Abilities

Human Resource

Planning

Recruitment

Selection

Training and

Development

Performance Appraisal

Compensation and

Benefits

Safety and Health

Employee and Labor

Relations

Legal Considerations

Job Analysis for Teams

2- Second Step: Job Description Job descriptions and job specifications are one of the major outcomes of the job analysis

process

A- Job Description

It could be argued that the different users of Job Descriptions require different information

about the job. However, it is very inefficient to prepare a number of different documents about the same job, and in practice it is desirable to prepare a multi-purpose document which meets

the needs of all potential users.

The job description is based on objective information obtained through job analysis.

Job description acts as an important resource for:

Describing the job to potential candidates

Guiding new hired employees in what they are specifically expected to do

Providing a point of comparison in appraising whether the actual duties align with the stated duties.

Whichever format is used therefore, there is a need to agree the most appropriate content of

the Job Description which will depend on the proposed uses of the document. This content may typically include:

Job Details: Basic information about Job Title, Reports to, etc.

Purpose: A one-sentence summary of why the job exists.

Dimensions: The significant quantities on which the job has an impact.

Key Result Areas / Principal Accountabilities: The outputs of the job.

Knowledge, Skills and Experience: The qualifications, skills and experience needs to do the job.

Competencies: The inputs of the job - knowledge, skills, behaviors, attitudes, etc.

Performance Measures And / Or Standards: Statements of performance measures

Organization Chart: Graphical representation of where the job fits in.

Contextual Information: Supporting information about the context in which the job operates.

B- Job Specifications

It is a statement of the eligibility criteria, Job specifications specify the minimum acceptable qualifications required by the individual to perform the task efficiently. Based on the information

obtained from the job analysis procedures, job specification identifies the qualifications, appropriate skills, knowledge, and abilities and experienced required to perform the job. It

describes the qualifications, skills required for the position.

Job specification is an important tool in the selection process as it keeps the attention of the

selector on the necessary qualifications required for that job.

C- Job Family

In general terms, a job family describes levels of contribution in an area of work where the

nature of work is broadly similar but the level of work or contribution differs significantly according to the experience and capabilities of job holders.

The aim in developing a Job Family Model is to use as far as possible similar criteria for

describing the work levels and through these to set out clearly the features that differentiate one level from another.

General Characteristics of a Job Family

A typical job family would have between three and five levels.

Each job family therefore describes a career path and clarifies the criteria for advancing from one level of the family to the next.

In most organizations, job families are likely to describe work in a number of the main

functional groups e.g. Engineering, Information Technology, Accounts. Some job families may be more generic and cover similar jobs across a number of functions, or the whole

organization e.g. Secretaries.

It is also possible that each function may be subdivided into several sub families. For

example in the IT function may include several sub-families such as System Development,

Desk Top Support / Network Engineering and Operations.

When Should Job Families Be Used

There are clear functional hierarchies (i.e. Career Ladders)

There are common generic roles across the organization

There is a desire to reward growth and development in competence and contribution.

There is a desire to improve employee flexibility;

There is a desire to empower line managers to manage their people more effectively;

There is a desire to empower individuals to take more control over their personal

development

In summary, Job Families are a foundation for effectiveness in the management of people in certain types of role, however the design of Job Families is not an end in itself. Job family models enable a business to more effectively integrate the key activities associated with manpower planning and development.

D- Purposes of Job Descriptions & Job Family Model

Many people see Job Descriptions or Job Family Models primarily as documents for the Human

Resources function. There are two key purposes for these documents:

1. Communicate Organizational Expectations

A key purpose of a Job Description or Job Family Model is to identify for a jobholder the

contribution required by the organization. It is a fundamental tool for a line manager who can use it to ensure that his/her subordinates understand what they have to achieve and the

criteria on which their performance will be assessed.

2. Provide Information for Human Resource Processes

Beyond this communication purpose, Job Descriptions and Job Family Models meet a number of

other needs. They provide information to support:

Recruitment: Where there needs to be a clear understanding of the nature of a job so that

the relevance of the skills and experience of internal and external applicants may be assesse

Training: Where programmers need to be established to properly equip development

individuals to meet the demands of particular jobs.

Job Evaluation: Where comprehensive job information must be available as the basis for judgments concerning the relative size and importance of jobs.

Performance Management: Where performance against job accountabilities is measured.

Organization Review: Where there is a need to look at the way in which work is organized

and distributed within an organization.

E- Job Design

Job analysis helps very much in, or in other words a preliminary step for Job Design

Job Design is the process of determining the specific tasks to be performed, the methods used

in performing these tasks, and how the job relates to other work in the organization. Job

Design from HRD's point of view sometimes merely involve realignment of functions

and responsibilities. In today's corporate structures, this usually means Job

Enlargement and/ or Enrichment.

Job Enlargement means increasing the scope of a job through extending the range of its

duties and responsibilities to provide greater variety to the worker.

Job Enrichment in organizational development, human resources management, and

organizational behavior, is the process of improving work processes and environments so they are more satisfying for employees.

Job enrichment, as a managerial activity includes these two steps technique:

1. Turn employees' effort into performance: 2. Link employees‟ performance directly to reward:

Job rotation: Moving a trainee from department to department to broaden his or her experience and identify strong and weak points to prepare the person for an enhanced role with the

company. Systematically moving workers from one job to another to enhance work team performance

F- Writing Job Descriptions Steps:

Step 1.Decide on a Plan

Step 2.Develop an Organization Chart

Step 3.Use a Job Analysis/Description Questionnaire

Step 4.Obtain Lists of Job Duties

Step 5.Compile the Job‟s Human Requirements

Step 6.Finalize the Job Description

3- Third Step: Job Evaluation

Job evaluation provides a systematic basis for determining the relative worth of jobs within an organization.

While job analysis describes the job, job evaluation develops a plan for comparing jobs in terms

of those things the organization considers important determinants of job worth. A systematic comparison done in order to determine the worth of one job relative to another to create a job

structure for the organization.

In job evaluation it is important to determine what the organization is "paying for" – what aspects of jobs place one job higher in the job hierarchy than another job. These yardsticks are

called compensable factors. In the previous step -job analysis- we suggested that the job information needed for job

evaluation consists of work activities and worker requirements. But what aspect or aspects of work activities and/or which worker requirements are to be used? The choice of yardstick will

strongly influence where a job is placed in the hierarchy.

We also noted in the first step- Job Analysis- that some methods of job analysis require

analysts to describe jobs in terms of pre-selected factors. This practice seems to assign to job analysts not only the analysis but the evaluation of jobs. A legitimate question is whether this

combination of information gathering and evaluation may introduce bias to job evaluation.

A- Compensable Factors

To be useful in comparing jobs, compensable factors should possess certain characteristics.

First, they must be present in all jobs. Second, the factor must vary in degree. A factor

found in equal amounts in all jobs would be worthless as a basis of comparison. Third, if two or more factors are chosen, they should not overlap in meaning. If they do overlap,

double weight may be given to one factor. Fourth, employer, employee, and union viewpoints should be reflected in the factors chosen; consideration of all viewpoints is

critical for acceptance. Fifth, compensable factors must be demonstrably derived from the work performed.

The factors must be observable in the jobs. For this reason responsibility is a hard factor to use. Compensable factors can be thought of as the job-related contributions of employees.

Documentation of the work-relatedness of factors comes from job descriptions. Such documentation provides evidence against allegations of illegal pay discrimination. It also

provides answers to employees, managers, and union leaders who raise questions about

differences among jobs.

Finally, compensable factors need to fit the organization. Organizations design jobs to meet their goals and to fit their technology, culture, and values.

B- Job Evaluation Methods

i. Job Ranking

- Raters examine job description and arrange jobs according to value to company

ii. Job Classification

- Classes or grades are defined to describe a group of jobs.

iii. Factor Comparison

- Jobs are compared against other jobs on the basis of how much of some desired factor they possess.

iv. Point Method

- Numerical values are assigned to specific job components; sum of values provides quantitative assessment of job‟s worth (Hay Guide Chart)

v. Computer-Assisted Job Evaluation

- Computers can be used to help directly with the job evaluation process (www.jobchart.com)

Figure Job evaluation Methods

Comparison Method Analysis Method

Entire Job Job Factors

Job Against Scale

Job Against Job

Classification Point Method

RankingFactor

Comparison

C- Point-Factor Method

The point-factor method, or point plan, involves rating each job on several compensable

factors and adding the scores on each factor to obtain a point total for a job. A carefully worded rating scale is constructed for each compensable factor. This rating scale includes a

definition of the factor, several divisions called degrees (also carefully defined), and a point score for each degree. The rating scales may be thought of as a set of rulers used to

measure jobs.

Designing a point plan is complex, but once designed the plan is relatively simple to

understand and use. Numerous ready-made plans developed by consultants and associations exist. Existing plans are often modified to fit the organization.

1 The point method is widely used.

2 In this each factor requires some degree of compensable factor. 3 A different number of points assigned to each factor.

4 Add each job‟s points

Step1: Determine clusters of jobs to be evaluated: -

because jobs vary widely by departments. So the 1st step is to cluster jobs.

Step 2: Collect job information: -

As in all other job evaluation methods, this step comes first. All jobs may be analyzed at this point, or merely a sample of benchmark jobs to be used to design the plan. A job description is

written for each job analyzed.

(1) analyze the job. (2) Write job descriptions.

(3) Develop job specification.

Step 3: Select compensable factors: - When job information is available, compensable factors are selected. Although the yardsticks on

which jobs are to be compared are important in all job evaluation methods, they are especially important in the point-factor method. Because a number of factors are used, they must be the

ones for which the organization is paying.

Step 4: Define compensable factors: -

Factors must be defined in sufficient detail to permit raters to use them as yardsticks to evaluate jobs. Such definitions are extremely important because the raters will be referring to

them often during their evaluations. When the factors chosen are specific to the organization,

the task of defining them is less difficult. Also, it is often argued that definitions may be more precise when the plan is developed for one job family or function. There seems to be a growing

tendency to define factors in more detail. See figure 14-7 for an example.

Step 5: determine and Define factor degrees: - As we have noted, the rating scale for each factor consists of divisions called degrees.

Determining these degrees would be like determining the inch marks on a ruler. It is necessary first to decide the number of divisions, then to ensure that they are equally spaced or represent known distances, and finally to see that they are carefully defined. The number of degrees depends on the actual range of the factors in the jobs. If, for example, working conditions are seen to be identical for most jobs, and if jobs that differ from the norm have very similar working conditions, then it is sufficient to have no degrees. If, on the other hand, seven or even more

degrees are discernible, that number of degrees is specified. A major problem in determining degrees is to make each degree equidistant from the two adjacent degrees. This problem is solved in part by selecting the number of degrees actually found to exist and in part by careful definition of degrees. Decision rules such as the following are useful:

1- Limit degrees to the number necessary to distinguish between the jobs.

2- Use terminology that is easy to understand.

3- Use standard job titles as part of degree definitions.

4- Make sure that the applicability of the degree to the job is apparent.

Step 6: Determine relative values/points of factors and degrees:-

Only rarely are compensable factors assigned equal weights. It is usually determined that some

factors are more important than others and should bear more weight.

Factor weights may be assigned by committee judgment or statistically. In the committee

approach, the procedure is to have committee members (1) carefully study factor and degree definitions, (2) individually rank the factors in order of importance, (3) agree on a ranking, (4)

individually distribute 100 percent among the factors, and (5) once more reach agreement. The result is a set of factor weights representing committee judgment. The weights thereby reflect

the judgments of organization members and may contribute to acceptance of the plan.

The committee may then complete the scale by assigning points to factors and degrees. Next a

decision is usually made on the total points possible in the plan – say 1000. Applying the weights just assigned to this total yields the maximum value for each factor. For example, a

factor carrying 30 percent of the weight has a maximum value of 300 points. Thus the highest

degree of this factor carries 300 points. Assigning points to the other degrees may be done by either arithmetic or geometric progression. In the former, increases are in equal numbers of

points from the lowest to the highest degree. In the latter, increases are in equal percentage of points. Arithmetic progression is found in most point plans, especially those designed for one

job family rather than the entire organization. But just as different factors usually have different numbers of degrees, some factors may employ geometric progression.

Because it is usually assumed that all jobs include some of a factor, the lowest degree is usually assigned some points. A simple way of assigning points to degrees is as follows:

1- Set the highest degree of a factor by multiplying the weight of the factor by the total possible

points. 2- Set the minimum degree of the factor using the arithmetic or percentage increase figure.

3- Subtract these two figures. 4- Divide the result by the number of steps (numbers of degrees minus one).

Add this figure successively to the lowest degree.

The result of this procedure is an arithmetic progression. Using logarithms and following the

same calculations produces a geometric progression.

In the statistical approach to weighting factors, benchmark jobs are evaluated and the points

assigned are correlated with an agreed-upon set of wage rates. Regressing this structure of pay rates on the factor degrees assigned each job yields weights that will produce scores closely

matching the agreed-upon wage rates. Factor weights were developed statistically in the Steel Plan, which we mentioned in our discussion of factor comparison. The same approach is used

to develop weights for factors derived from quantitative job analysis. The statistical approach is often called the policy-capturing approach.

Whether developed by committee decision or by the statistical method, the rating scales are often tested by evaluating a group of benchmark jobs. If the results are not satisfactory,

several adjustments are possible. Benchmark jobs may be added or deleted. Degrees assigned

to jobs may be adjusted. The criterion – the pay structure – may be changed; or the weights assigned to factors may be changed. In any of these ways, the job evaluation plan is

customized to the jobs and the organization.

Step 7: Write job evaluation method:-

Develop a manual for the job evaluation. A job evaluation manual conveniently consolidates the factor and degree definitions and the point values (the yardsticks to be used by raters in

evaluating jobs). It should also include a review procedure for cases where employees or managers question evaluations of certain jobs. Usually the compensation specialist conducts

such reevaluations, but sometimes the assistance of the compensation committee is called for.

Step 8:. When the manual is complete, job rating can begin:-

Raters use the scales to evaluate jobs. Key jobs have usually been rated previously in the

development of the plan. The others are rated at this point. In smaller organizations, job rating

may be done by a compensation specialist. In larger firms, committee ratings developed from independent ratings of individual members are usual. As jobs are rated, the rating on each

factor is recorded on a substantiating data sheet. This becomes a permanent record of the points assigned to each factor and the reasons for assigning a particular degree of the factor to

the job. Substantiating data come from the job description.

In a job evaluation, every job in an organization is examined and ultimately priced according to the following features:

Relative importance of the job

Knowledge skills and abilities needed to perform the job

Difficulty of the job

Because jobs may vary widely in an organization, it is particularly important to identify

Benchmark jobs. Benchmark jobs are used with all of the job evaluation methods because they provide „anchors‟ against which unique jobs can be evaluated.

Rank the jobs within each department, and then rank jobs within and among departments.

Verify ranking by comparing it to industry.

Point Values for Job Factors (point Method)

Factors

1st Degree

2nd Degree

3rd Degree

4th

Degree

5th

Degree

Skill

1. Job

Knowledge 14 28 42 56 70

2. Experience 22 44 66 88 110

3. Initiative and

ingenuity 14 28 42 56 70

Effort

4. Physical demand

10 20 30 40 50

5. Mental or visual demand

5 10 15 20 25

Responsibility

6. Equipment

or press 5 10 15 20 25

7. Material or

product 5 10 15 20 25

8. Safety of

others 5 10 15 20 25

9. Work of

others 5 10 15 20 25

Job Conditions

10. Working

conditions 10 20 30 40 50

11. Hazards 5 10 15 20 25

Total 500

D- Pay or Salary Survey: To benchmark jobs in order to put the correct pay rate per

job

Pay survey is the collection of data for compensation rates for workers performing similar jobs in other organization.

Salary Survey becomes immensely important. It has following twin objectives.

- To identity the elements of dimension of managerial compensation in the region, neighboring

industries and economy as a whole.

- To present the complete pay-packages-covering not just salary and perquisites, but also non-monetary

benefits, ranging from housing facilities and furnishing allowances to overseas travel facilities and equity participation schemes-earned by mangers, rather than only the monetary components, which are often misleadingly low.

To ensure that pay levels are competitive, it is necessary to track market rates for the jobs

within the organization, especially those that are particularly vulnerable to market pressures because of scarcity factors. This is sometimes called benchmarking. Job evaluation schemes can

be used to determine internal relativities, but, in themselves, they cannot price jobs. To a large extent, pay levels are subject to market forces which have to be taken into account in fixing the

rates for particular jobs. Some specialized jobs may not be subject to the same external

pressures as others, but it is still necessary to know what effect market rates are likely to have on the pay structure as a whole before deciding on internal pay differentials which properly

reflect levels of skill and responsibility. It has also to be accepted that market pressures and negotiations affect differentials within the firm.

1- The Concept Of The Market Rate

The concept of the market rate, even in the local labor market, is an imprecise one. There is no

such thing as the market rate, unless this is represented by a universally applied national pay scale, and such cases are now rare. There is always a range of rates paid by different

employers, even for identical jobs, because of different pay policies on how they want their

rates to compare with the market rates. This is particularly so in managerial jobs and other occupations where duties can vary considerably, even if the job title is the same, and where

actual pay is likely to be strongly influenced by the quality and value to the business of individuals. It is therefore possible to use pay surveys only to provide a broad indication of

market rates.

Judgement has to be used in interpreting the results of special enquiries or the data from

published surveys. And there is often plenty of scope for selecting evidence which supports whatever case is being advanced.

2 - The Information Required

When making market comparisons, the aim should be to:

obtain accurate and representative data covering base pay, bonuses and benefits; compare like with like in terms of the type and size of the job and the type of organization

– this is the process of „job matching;’

obtain up-to-date information; interpret data in the light of the organization‟s circumstances and needs;

present data in a way that indicates the action required.

3 - Job Matching

The aim in conducting a pay survey is to compare like with like – the process of job matching.

The various methods of job matching in ascending order of accuracy are:

job title – often very misleading;

brief (two or three lines) description of job and level of responsibility – this provides better guidance for matching jobs but still leaves much scope for inaccuracy;

capsule job descriptions which define the job and its duties in two or three hundred words, some indication being given of the size of the job in such terms as

resources controlled – these can provide a better basis for job matching but may

still not produce the ideal degree of accuracy; full job descriptions which provide more details about the job but demand a considerable

amount of effort in making the comparisons; job evaluation can be used in support of a job description to obtain reasonably accurate

information on comparative job sizes, but it is very time consuming unless it is done through the outsourced surveys run on this basis by firms such as Hay and Wyatt.

4 - Presentation Of Data

Data can be presented in two ways:

A. Measures of central tendency:

– arithmetic mean (average); – median – the middle item in a distribution of individual items, this is the most commonly used

measure because it avoids the distortions to which arithmetic averages are prone.

B. Measures of dispersion: – upper quartile – the value above which 25 per cent of the individual values fall;

– lower quartile – the value below which 25 per cent of the individual values fall;

– inter-quartile range – the difference between the upper and lower quartiles.

5 - Sources Of Information

The following are the sources of information available on market rates:

published surveys; special surveys;

club surveys; advertisements.

6- Benchmarking jobs: Compensation benchmarking is the process of using internal job descriptions to

match to established salary survey jobs in order to identify the external market rate for each benchmark

position. This is done after correct job matching is done in order to compare/benchmark similar jobs

Using survey data

The use of market survey data as a guide on pay levels is a process based on judgment and

compromise. Different sources may produce different indications of market rate levels. As a

result you may have to produce what might be described as a ‘derived‟ market rate based on

an assessment of the relative reliability of the data.

Establishing market rates for core positions within an organization is important for a variety of reasons. First and foremost, it guides decision making for pay decisions including hiring,

promotions, internal equity salary adjustments, and general compensation budget planning. Because labor costs are the largest cost to any organization, a solid understanding of the

external value of each position allows an organization to develop an approach for setting overall

compensation philosophy, or the level at which the organization will set salary levels. The ability to balance the needs to attracting and retaining talent with fiscal responsibility of the

organization is a key priority for Executives. Compensation benchmarking provides the information leaders need to define the costs associated with salaries and other compensation

components such as profit sharing or bonuses.

4- Forth Step: Grade and Pay Structure

Figure Grade and Pay structure

Job Evaluation Results Pay Survey Data

Develop Market Line

Identify Different

Pay Structures

Establish Pay Grades

Compute Pay

Ranges

Revise Pay Grades and

Ranges as Needed

Compare Current Pay to

Pay Ranges

Once the job evaluation results and pays survey data is available, a market line is developed. Market line is a relation between job value, as determined by job evaluation plans, and pay

survey rates.

1- Grade Structure Defined

A grade structure consists of a sequence or hierarchy of grades, bands or levels into which

groups of jobs that are broadly comparable in size are placed. There may be a single structure that contains grades or bands and which is defined by their number and width (width is the

scope the grade or band provides for pay progression). Alternatively the structure may be divided into a number of job or career families consisting of groups of jobs where the essential

nature and purpose of the work are similar but the work is carried out at different levels.

2 - Pay Structure Defined

A pay structure defines the different levels of pay for jobs or groups of jobs by reference to their relative internal value as determined by job evaluation, to external relativities as

established by market rate surveys and, sometimes, to negotiated rates for jobs. It provides

scope for pay progression in accordance with performance, competence, contribution or service.

There may be a single pay structure covering the whole organization or there may be one

structure for staff and another for manual workers, but this is becoming less common. There has in recent years been a trend towards „harmonizing‟ terms and conditions between different

groups of staff as part of a move towards single status.

This has been particularly evident in many public sector organizations in the UK, supported by national agreements on „single status‟. Executive directors are sometimes treated separately

where reward policy for them is decided by a remuneration committee of non-executive

directors.

A grade structure becomes a pay structure when pay ranges, brackets or scales are attached to

each grade, band or level. In some broad-banded structures, as described below, reference

points and pay zones may be placed within the bands and these define the range of pay for jobs allocated to each band.

3 - Guiding Principles For Grade And Pay Structures

Grade and pay structures should:

be appropriate to the culture, characteristics and needs of the organization and its

employees; facilitate the management of relativities and the achievement of equity, fairness,

consistency and transparency in managing gradings and pay; be capable of adapting to pressures arising from market rate changes and skill

shortages; facilitate operational flexibility and continuous development;

provide scope as required for rewarding performance, contribution and increases

in skill and competence; clarify reward, lateral development and career opportunities;

be constructed logically and clearly so that the basis upon which they operate can readily be communicated to employees;

enable the organization to exercise control over the implementation of pay

policies and budgets.

4 - Types Of Grade And Pay Structure

The types of pay structures as described below are

i. narrow-graded,

ii. broad-graded, iii. broad-banded,

iv. job family,

v. career family vi. and pay spine.

i) Narrow-graded structure

A narrow-graded structure consists of a sequence of job grades into which jobs of broadly equivalent value are placed

ii) Broad-graded structures

Broad-graded structures, have six to nine grades rather than the 10 or more grades contained in narrow-graded structures. They may include

The grades and pay ranges are defined and managed in the same way as narrow-graded

structures except that the increased width of the grades means that organizations sometimes introduce mechanisms to control progression in the grade so that staff do not inevitably reach

its upper pay limit. The mechanisms available consist of:

iii) Broad-banded structures

By definition, broadbanding is creating a salary structure that consolidates the relatively large

number of ranges found in a traditional structure into fewer ranges. Because there are fewer ranges, a broadband salary structure has characteristics that distinguish it from a traditional

structure. Broadband structures are characterized by fewer salary ranges that have wider range

spreads, larger midpoint differentials and a lesser degree of overlap. Broadband structures tend to place greater emphasis on career development opportunities than employees otherwise

would seek in the company‟s recruiting markets.

Broad-banded structures compress multi-graded structures into four or five „bands‟,

The process of developing broad-banded structures is called „broad-banding‟. In its original version, a broad-banded structure contained no more than five bands, each with, typically, a

span of 70 to 100 per cent. Bands were unstructured and pay was managed much more flexibly

than in a conventional graded structure (no limits may be defined for progression, which

depended on competence and the assumption of wider role responsibilities) and much more attention was paid to market rates that governed what were in effect the spot rates for jobs

within bands. Analytical job evaluation was often felt to be unnecessary because of the ease with which jobs could be allocated to one of a small number of bands. The difference between

broad bands and broad grades is that the latter still generally adopt a fairly conventional approach to pay management by the use of analytical job evaluation, mid-point management,

compa-ratio analysis and pay matrix techniques.

However, structure often crept in. It started with reference points aligned to market rates

around which similar roles could be clustered. These were then extended into zones for individual jobs or groups of jobs, which placed limits on pay progression, Job evaluation was

increasingly used to define the boundaries of the band and to size jobs as a basis for deciding where reference points should be placed in conjunction with market pricing. The original

concept of broad-banding was therefore eroded as more structure was introduced and job evaluation became more prominent to define the structure and meet equal pay requirements.

Zones within broad-bands began to look rather like conventional grades.

iv) Job family structures

Job families consist of jobs in a function or occupation such as marketing, operations, finance,

IT, HR, administration or support services, which are related through the activities carried out

and the basic knowledge and skills required, but in which the levels of responsibility, knowledge, skill or competence levels required differ. In a job family structure different job

families are identified and the successive levels in each family are defined by reference to the key activities carried out and the knowledge and skills or competences required to perform

them effectively.

v) Career family structures

Career family structures resemble job family structures in that there are a number of different

„families‟. The difference is that in career family, jobs in the corresponding levels across each of

the career families are within the same size range and, if an analytical job evaluation scheme is used, this is defined by the same range of scores. Similarly, the pay ranges in corresponding

levels across the career families are the same. In effect, a career structure is a single graded structure in which each grade has been divided into families.

vi) Pay spines

Pay spines are found in the public sector or in agencies and charities that have adopted a public sector approach to reward management. They consist of a series of incremental „pay points‟

extending from the lowest to the highest paid jobs covered by the structure. Typically, pay

spine increments are between 2.5 and 3 per cent. They may be standardized from the top to the bottom of the spine, or the increments may vary at different levels, sometimes widening

towards the top. Job grades are aligned to the pay spine and the pay ranges for the grades are defined by the relevant scale of pay points. The width of grades can vary and job families may

have different pay spines. Progression through a grade is based on service, although an increasing number of organizations provide scope for accelerating increments or providing

additional increments above the top of the scale for the grade to reward merit.

5- Designing Grade And Pay Structures

i) Design options

There is a choice of structure, as explained earlier, and whichever structure is selected, there

will be a number of design options. The first decision to make is where to place grade boundaries which, as described below, is usually informed by a job evaluation exercise.

Decisions on grade boundaries will be influenced by considerations affecting the number and

width of grades. Further options exist on the pay structure concerning the differentials between grades, the degree to which there should be overlap between grades, if any, and the method of

pay progression within grades. In broad-banded structures there is also choice on the infrastructure (the use of reference points or zones), and in career or job family structures

there are options concerning the number of families, the composition of families and the basis upon which levels should be defined.

ii) Deciding on grade boundaries

An analytical job evaluation exercise will produce a rank order of jobs according to their job

evaluation scores. A decision then has to be made on where the boundaries that will define

grades should be placed in the rank order. So far as possible, boundaries should divide groups or clusters of jobs which are significantly different in size so that all the jobs placed in a grade

are clearly smaller than the jobs in the next higher grade and larger than the jobs placed in the next lower grade.

Fixing grade boundaries is one of the most critical aspects of grade structure design following

an analytical job evaluation exercise. It requires judgement – the process is not scientific and it is rare to find a situation when there is one right and obvious answer. In theory, grade

boundaries could be determined by deciding on the number of grades in advance and then

dividing the rank order into equal parts. But this would mean drawing grade boundary lines arbitrarily and the result could be the separation of groups of jobs that should properly be

placed in the same grade.

The best approach is to analyse the rank order to identify any significant gaps in the points scores between adjacent jobs. These natural breaks in points scores will then constitute the

boundaries between clusters of jobs that can be allocated to adjacent grades. A distinct gap

between the highest rated job in one grade and the lowest rated job in the grade above will help to justify the allocation of jobs between grades.

It will therefore reduce boundary problems leading to dissatisfaction with gradings when the

distinction is less well defined. Provisionally, it may be decided in advance when designing a conventional graded structure that a certain number of grades is required, but the gap analysis

will confirm the number of grades that is appropriate, taking into account the natural divisions between jobs in the rank order. However, the existence of a number of natural breaks cannot

be guaranteed, which means that judgement has to be exercised as to where boundaries

should be drawn when the scores between adjacent jobs are close.

In cases where there are no obvious natural breaks, the guidelines that should be considered

when deciding on boundaries are as follows:

Jobs with common features as indicated by the job evaluation factors are grouped

together so that a distinction can be made between the characteristics of the jobs in different grades – it should be possible to demonstrate that the jobs grouped into one

grade resemble each other more than they resemble jobs placed in adjacent grades.

The grade hierarchy should take account of the organizational hierarchy, ie jobs in which the job holder reports to a higher level job holder should be placed in a lower

grade, although this principle should not be followed slavishly when an organization is

over-hierarchical with, perhaps, a series of one-over-one reporting relationships.

The boundaries should not be placed between jobs mainly carried out by men and jobs mainly carried out by women.

The boundaries should ideally not be placed immediately above jobs in which large numbers of people are employed.

The grade width in terms of job evaluation points should represent a significant step in

demand as indicated by the job evaluation scheme.

iii) Number of grades, levels or bands

The considerations to be taken into account when deciding on the number of grades levels or

bands are:

The range and types of roles to be covered by the structure. The range of pay and job evaluation points scores to be accommodated.

The number of levels in the organizational hierarchy (this will be an important factor in a broad-banded structure).

Decisions on where grade boundaries should be placed following a job evaluation

exercise, which has produced a ranked order of jobs – this might identify the existence of clearly defined clusters of jobs at the various levels in the hierarchy between which

there are significant differences in job size. The fact that within a given range of pay and responsibility, the greater the number of

grades the smaller their width and vice versa – this is associated with views on what is

regarded as the desirable width of a range, taking into account the scope for progression, the size of increments in a pay spine and equal pay issues.

The problem of „grade drift‟ (unjustified upgradings in response to pressure, lack of promotion opportunities or because job evaluation has been applied laxly), which can

be increased if there are too many narrow grades.

iv) Width of grades

The factors affecting decisions on the width of grades or bands are:

Views on the scope that should be allowed for performance, contribution or career

progression within grade. Equal pay considerations – wide grades, especially extended incremental scales, are a

major cause of pay gaps between men and women simply because women, who are

more likely to have career breaks than men, may not have the same opportunity as

men to progress to the upper regions of the range; male jobs may therefore cluster towards the top of the range while women‟s may cluster towards the bottom.

The number of grades – the greater the number the smaller the width. Decisions on the value of increments in a pay spine – if it is believed, as in local

government and as a result of an equal pay that the number of increments should be restricted, for equal pay or other reasons, but that the number of grades should also be

limited, then it is necessary to increase the value of the increments.

In a broad-banded structure, the range of market rates and job evaluation scores covering the jobs allocated to the band.

v) Differentials between pay ranges

Differentials between pay ranges should provide scope to recognize increases in job size

between successive grades. If differentials are too close – less than 10 per cent – many jobs become borderline cases, which can result in a proliferation of appeals and arguments about

grading. Large differentials below senior management level of more than 25 per cent can create

problems for marginal or borderline cases because of the amount at stake. Experience has shown that in most organizations with conventional grade structures, a differential of between

16 and 20 per cent is appropriate except, perhaps, at the highest levels.

vi) Pay range overlap

There is a choice on whether or not pay ranges should overlap and if so, by how much. The

amount of overlap, if any, is a function of range width and differentials.

Large overlaps of more than 10 per cent can create equal pay problems where, as is quite common, men are clustered at the top of their grades and women are more likely to be found

at the lower end.

vii) Pay progression

There is a choice of methods of pay progression between the fixed service related increments

common in the public sector, and the other forms of contingent pay, namely performance, competence or contribution-related, as described later

viii) The grade and pay structure design process

An analytical job evaluation scheme is usually the basis for designing a graded structure and it

can be used in the initial stages of designing a broad-banded or career/job family structure. In the case of graded structures, decisions on the number and width of grades are generally

based on an analysis of the rank order of scores produced by job evaluation.

This approach is used less often in the design of broad-banded or career/job family structures,

where the most common method is to make a provisional advance decision on the number of bands or career family levels, and then position roles in bands (often by reference to market

rates) or allocate roles into levels by an „analytical matching‟ process. Job evaluation may only be used at a later stage to validate the positioning of roles in bands or the allocation of jobs to

family levels, check on relativities and, sometimes, define the bands or levels in job evaluation score terms. The initial decision on the number of bands or levels and their definition may,

however, be changed in the light of the outcome of the allocation, matching and evaluation

processes. More rarely, the grade and pay structure design is conducted by means of a non-analytical job classification exercise which defines a number of single grades. Jobs are then

slotted into the grades by reference to the grade definitions. The basic sequence of steps for designing a grade and pay structure

6- Fifth Step : Pay Structure (As per DHL methodology)

Pay structure creation is the final step, in which the internal structure (Step 2) is merged with the external market pay rates (Step 4) in a simple regression to develop a market pay line. Depending on whether the organization wants to lead, lag or meet the market, the market pay line can be adjusted up or down. To complete the pay structure, pay grades and pay ranges are developed. Organizations develop and implement salary structures to provide a framework for administering their employee compensation programs. Effective administration of a compensation program requires a balance between the pay levels for employees inside the company—internal equity1—and the pay levels those employees could command in the company’s recruiting markets—external equity2.

A- HOW TO DEVELOP A SALARY STRUCTURE

Most companies determine their employee pay levels by evaluating market pay levels for the majority of their jobs. Compensation professionals call these ―benchmark jobs.‖3 In contrast to benchmark jobs, non-benchmark jobs are not evaluated for the purpose of determining market pay levels, usually because market data is unavailable.

The market pay levels for all benchmark jobs can be arranged from highest to lowest to assess the relative value of each job. The company’s non-benchmark jobs are then slotted in between comparable benchmark jobs to create a job-worth hierarchy that incorporates both the external value and the company’s internal value for all jobs in relationship to each other. The job-worth hierarchy forms the basis for grouping jobs of similar value and establishing the classifications that compose the company’s salary structure.

Things to remember and know:

1Internal equity is a fairness criterion that implies an employer’s pay practices correspond to each job’s relative value in the organization.

2External equity is a measure of an employer’s compensation levels compared to other employers within its recruiting market. As a fairness criterion, external equity implies that the employer compensates at levels that correspond to prevailing external market rates, as determined by the job’s market range. External equity must be balanced with internal equity.

3Job evaluation is a formal process used to create a job-worth hierarchy within an organization. The two basic approaches are the market data approach and the job content approach. Most job evaluation processes use a combination of these two basic approaches.

4Competitive pay policy establishes the strategic and philosophical principles that guide design, implementation and administration of an employer’s compensation programs to attract and retain talented employees. Compensation strategy

supports an organization’s business objectives and specifies what programs will be used and how they will be administered. Compensation philosophy ensures that compensation programs support business needs and organizational culture.

B- BUSINESS CONSIDERATIONS FOR PAY STRUCTURE DESIGN

Business considerations for pay structure design include strategic issues, competitive practices, the organizational culture and the affordability of pay. The key strategic issues to consider are the objectives of the company and the extent to which salary will be used to attract and retain employees capable of achieving business success.

Also consider the salary practices of competitors by studying compensation surveys with data showing how they structure their salary administration programs. Organizations with a dynamic culture tend to place less emphasis on base pay in favor of variable pay, which has greater impact on employee behavior for achieving business objectives. By contrast, organizations with static cultures place emphasis on base pay because they can reasonably predict business performance and employee behaviors. Finally, consider the organization’s financial resources with regard to its ability to pay employees in the form of salaries, which are fixed costs.

C- TECHNICAL CONSIDERATIONS FOR PAY STRUCTURE DESIGN

Technical considerations for pay structure design include the number of range levels, width of the ranges from minimum to maximum values (i.e., range spreads), the distance between adjacent range midpoint values (i.e., midpoint differentials) and the degree of overlap between adjacent ranges.

The number of ranges in a salary structure is a characteristic that describes the number of hierarchical levels needed to distinguish the value of jobs in the organization. The number of ranges required to compose a complete structure is determined by the following considerations:

The number of skill and/or responsibility distinctions evident in the organization’s job-worth hierarchy

The number of supervisor-subordinate relationships in the company’s organizational structure

The degree of emphasis on career development and progression

The resources available to administer the pay program

Generally, the more range levels, the more administration required

The ―range spread‖ is a characteristic of salary structures that describes the distance between the minimum and the maximum salary range values. Most structures are fan-shaped with smaller range spreads for lower ranges and wider range spreads for the higher-level positions. Essentially, spread reflects the range of salary opportunity for the jobs that are assigned to the range, from minimum to maximum salary values.

A salary range with a spread of 100 percent would be twice as wide. In general, wider ranges apply to jobs that have larger salary values (e.g., executive jobs), whereas narrower ranges apply to jobs with smaller salary values (e.g., clerical jobs).

Midpoint differential is a characteristic of salary structure design that describes the percentage difference between the midpoint values of adjacent salary ranges. In general, if the company’s job evaluation approach doesn’t discriminate finely between levels, the result will be fewer salary range levels. Another factor to consider in concluding midpoint differentials is the company’s policy with regard to the cost of promoting employees into jobs at higher salary range

levels. For example, a policy that limits promotional salary increases to eight percent, but with a midpoint differential of 15 percent, could result in salaries for promoted employees falling below the new grade minimum salary value.

The degree to which ranges overlap each other’s salary values is a function of midpoint differentials and range spreads. Analyze range overlap after decisions have been made about midpoint differentials and range spreads to

ensure there is a reasonable progression between the range levels that compose the salary structure; then adjust if necessary.

D- Pay Structure Includes:

I. Pay Schedules

Sets of Pay Grades, multiple markets grouped (geography, industry, etc).

II. Pay Grades

A label for a group of jobs with similar relative internal worth.

Is associated with a pay range

There are no fixed rules for every organization.

Decide how many grades you will have. Number of pay grades varies in response to:

The size of the organization.

The vertical distance between the highest and lowest level job.

How finely the organization defines jobs and differentiates between them (i.e. levels).

The pay increase and promotion policy of the organization.

Determine the definition of each grade.

III. Pay Ranges

the upper and lower bounds of compensation.

To develop a pay range after developing the pay grades:

Calculations & Helpful formulas: (see below figure/table to understand)

Midpoint Differential.

Distance between midpoints

=(MidB-MidA)/MidA

Range Spread.

Distance between bottom and top of range

=(Max-Min)/Min

Typical range spreads are 30% to 60%

Min relative to Mid.

=Mid/(1+(Range Spread/2))

Max relative to Min.

=Min*(1+Range Spread)

Range Range

Width Min Mid Max

A 40% $8.50 $10.25 $12.00

B 41% $9.75 $11.75 $13.75

C 42% $11.25 $13.50 $16.00

D 43% $12.75 $15.50 $18.25

E 44% $14.75 $18.00 $21.25

F 45% $16.75 $20.50 $24.50

G 46% $19.25 $23.75 $28.25

H 47% $22.00 $27.25 $32.50

I 48% $25.25 $31.25 $37.50

J 49% $29.00 $36.00 $43.25

K 50% $33.25 $41.50 $49.75

L 52% $37.75 $47.75 $57.50

M 54% $43.25 $54.75 $66.50

N 56% $49.25 $63.00 $76.75

O 58% $56.25 $72.50 $88.75

P 60% $64.25 $83.50 $102.75

Q 62% $73.25 $96.00 $118.50

IV. How do you use the pay range?

Employee Placement in Range:

- Min = New Hire.

- Midpoint = Proficient & meeting performance expectations.

- Above midpoint = Takes into account tenure, performance, education – whatever org values most.

V. Guidelines or Policies:

Develop guidelines or policies about:

- Where new employees enter ranges.

- How current employees move within ranges.

- What happens when an employee is promoted?

- How much discretion do managers have?

- Get specific, where it makes sense.

VI. Assign Grades to Positions; Adjust for Internal Equity

- Align positions to structure by matching market value with closest range midpoint.

- Adjust for internal equity.

- Positions with similar level of responsibility and value to the organization.

- Where market is between two grades, use internal equity to tip.

VII. Metrics for managing Employee Pay with Ranges

Compa-ratio and Range Penetration are indicators of how employees are performing relative to the ranges.

Calculations:

- Range Penetration =(Employee Pay-Min)/(Max-Min)

- Compa-Ratio = Employee Pay / Midpoint

In Practice:

- Use them to get specific in your policies or guidelines.

- Range Penetration:

0% is Min, 50% is Mid, 100% is Max.

Compa-Ratio:

- 1 is Midpoint.

- Compa-ratio range varies by comp strategy and more, starting guideline is

E- Components of Total Remuneration system:

The literal meaning of remuneration is to counter-balance. In the case of human resource

management, remuneration is referred to as money and other benefits received by an employee for providing services to his employer. Money and benefits received may be in

different forms-base compensation in money and various benefits, which may be associated

with employee's service to the employer like provident fund, gratuity, and insurance scheme, and any other payment which the employee receives or benefits he enjoys in lieu of such

payment.

"Compensation includes direct cash payments, indirect payments in the form of employee benefits and incentives to motivate employees to strive for higher levels of productivity”

Based on above description of compensation, we may identify its various

components as follows:

i) Wage and Salary:

Wage and salary are the most important component of compensation and these are essential

irrespective of the type of organization. Wage is referred to as remuneration to workers particularly, hourly-rated payment. Salary refers to as remuneration paid to white-collar

employees including managerial personnel. Wages and salary are paid on the basis of fixed period of time and normally not associated with productivity of an employee at a particular

time.

The main difference between salary and wage is that wages are mostly paid by the hour

whereas salaries are mostly paid constantly, consistently and the same amount either at the end of the week, month or end of the year. Other differences include; those who earn salaries

are paid for time off whereas those earning wages are not paid for time off, those earning salaries rarely get paid for overtime whereas those earning wages get paid for overtime and

lastly, those earning salaries enjoy perks and benefits whereas those earning wages do not enjoy any perks or benefits

There are various concepts of wages which govern the wage structure these concepts are:

Minimum wage, living wage, and fair wage.

a) Minimum Wage:

A minimum wage is one which has to be paid by an employer to his workers irrespective of his

ability to pay. "Minimum wage is the wage which must provide not only for the bare sustenance of life, but for the preservation of the efficiency of the workers. For this purpose, minimum

wage must provide some measure of education, medical requirements and amenities" .

b) Living Wage:

"A living wage is one which should enable the earner to provide for himself and his family not

only the bare essentials of food, clothing and shelter but a measure of frugal comfort including education for his children, protection against ill-health, requirements of essential social needs

and a measure of insurance against the more important misfortunes including old age" . Living wage is more than the concept of minimum wage. Such a wage is determined keeping in

view the national income and paying capacity of industrial sector.

c) Fair Wage:

The concept of fair wage is linked with the capacity of the industry to pay.

"Fair wage is the wage which is above the minimum wage but below the living wage. The lower limit of the fair wage is obviously the minimum wage: the upper limit is to be set by the

capacity of the industry to pay" . Thus, fair wage depends on different variables affecting wage determination. Such factors are

labor productivity prevailing wage rates, the level of national income and its distribution and the

capacity of industry to pay. At present, the concept of fair wages is followed by the most business organizations.

d) Methods of Wage Payment:

In devising system of wage determination, the critical question that emerges is whether the

wage will be linked to time spent on the workplace or output achieved during a specified

period. This results into two types of wages time wage and piece wage. These two basic systems have their own relative merits and demerits.

Sometimes, in order to avoid hardship to employees, a combination of these two methods is

followed to ensure the payment of minimum wages. This method is known as balance method.

Let us see how these methods work.

d.1) Time Wage Method:

In time wage method, the wage is determined on the basis of time worked which may be hourly, daily, weekly, monthly or any other time base. A worker is paid wage for the time

worked irrespective of his output during that time. Perhaps, this is the oldest and most

prevalent system of wage payment.

d.2) Piece Wage Method:

In piece wage method workers are paid wages according to the quantity of output during a

specified period. This may be calculated on the basis of number of units produced or the

completion of a job where output is not measurable in terms of individual units. Piece wage

method too has its own merits and demerits.

d.3) Balance Method:

Balance method also known as debt method, is essentially a combination of time wage and

piece wage methods. Under this method, a worker is guaranteed a fixed wage based on time

rate with a provision of piece wage method. Thus, if a worker produces more quantity in a period, usually on weekly or monthly basis, and earns more than his time wage, he/she is given

credit for additional output which is compensated in another period in which production quantity falls below the time wage.

This method provides a sense of security to a worker so far as his wage earning is concerned.

At the same time, he is also motivated to produce more because of inclusion of piece wage system. This method has its relevance in a workplace where the work flow is irregular like

docks.

ii) Incentives: Incentives are the additional payment to employees besides the payment of wages and

salaries. Often these are linked with productivity, either in terms of higher production or cost

saving or both. These incentives may be given on individual basis or group basis.

Incentives may be defined as any reward of benefit given to the employee over and above his wage or salary with a view to motivating him to excel in his work. Incentives include both

monetary as well as non-monetary rewards. A scheme of incentive is a plan to motivate individual or group performance.

a) Incentives for work:

Incentives can take any form. According to Z. Clark Dickinson the important incentives for work

can be listed as follows: Desire for livelihood and fear of want.

Desire for approval of master and fear of punishment. Desire for praise and fear of being dismissed.

Impulse to activity or joy in work and dislike of inactivity.

The moral command and fear of conscience.

b) Classification of Incentives:

All forms of incentives can be broadly classified into two kinds namely, Financial Incentives, and

Non-financial Incentives.

b.1) Financial Incentives

Financial incentives or pecuniary incentives are the most original of all the incentives. It is given

in the form of money. The financial incentives still form the most important influencing and

motivating factor up to a certain limit. Because it is only by virtue of the monetary compensation that the workers can satisfy their fundamental needs such as food, clothing,

shelter etc. The financial incentives may be either direct or indirect. Direct incentives include wages, bonus and other incentives directly given to the workers in the form of cash.

Indirect financial incentives include subsistence allowance expenses, medical expenses etc.

b.2) Non-financial incentives:

Non-financial or non-pecuniary incentives include all other influences planned or unplanned, which stimulate exertion. Mere monetary incentive cannot help the management in solving all

the problems of industrial unrest. Further additional cash wage may also tempt the workers to misuse the money in vices like

gambling, drinking etc. Under such circumstances, the non-financial incentives have a

significant role to play. Such incentives create a healthy atmosphere and change the mental outlook of the workers. They make the working class more stabilized and economically sound.

Thus, in short, the workers by virtue of the non-financial incentives are enabled to enjoy a richer and fuller life. Experiences of foreign countries particularly countries like Britain, America

and Japan have shown that there is a high degree of positive correlation between non-financial

benefit schemes and labor productivity.

iii) Benefits: ( can be cash and/or none cash)

It includes various types of non-wage compensation provided to employees in addition to their normal wages or salaries

Examples of these benefits include: housing (employer-provided or employer-paid), group insurance (health, dental, life etc.), disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), social security, profit sharing, funding of education, and other specialized benefits.

The purpose of employee benefits is to increase the economic security of staff members, and in doing so, improve worker retention across the organization.[2] As such, it is one component of reward management.

iv) Fringe Benefits (are none cash only)

Fringe benefits are a variety of non-cash payments are used to attract and retain talented

employees. Fringe benefits include such benefits which are provided to the employees either

having long-term impact like provident fund, gratuity, pension; or occurrence of certain events like medical benefits, accident relief, health and life insurance; or facilitation in performance of

job like uniforms, Canteens, recreation, etc.

The fringe benefits are categorized as follows: Payment for Time Not worked: Benefits under this category include: sick leave with pay,

vacation pay, paid rest and relief time, paid lunch periods, grievance time, bargaining time, travel time etc.

Extra Pay for time Worked: This category covers the benefits such as: premium pay, incentive

bonus, shift premium, old age insurance, profit sharing, unemployment compensation, Christmas bonus, bonus, food cost subsidy, housing subsidy, recreation.

a) Organizations provide a variety of fringe benefits. The fringe benefits are

classified under four heads as given here under:

a.1) Employment Security:

Benefits under this head include unemployment, insurance, technological adjustment pay, leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for grievances,

holidays, cost of living bonus, call-back pay, lay-off, retiring rooms, jobs to the sons/daughters

of the employees and the like.

a.2) Health Protection: Benefits under this head include accident insurance, disability insurance, health insurance,

hospitalization, life insurance, medical care, sick benefits, sick leave, etc.

a.3) Old Age and Retirement:

Benefits under this category include: deferred income plans, pension, gratuity, provident fund, old age assistance, old age counseling, and medical benefits for retired employees, traveling

concession to retired employees, jobs to sons/daughters of the deceased employee and the like.

a.4) Personnel Identification, Participation and Stimulation: This category covers the following benefits: anniversary awards, attendance bonus, canteen,

cooperative credit societies, educational facilities, beauty parlor services, housing, income tax aid, counseling, quality bonus, recreational programs, stress counseling, safety measures etc.

b) Objectives of Fringe Benefits:

The view point of employers is that fringe benefits form an important part of employee incentives to obtain their loyalty and retaining them. The important objectives of fringe benefits

are: To create and improve sound industrial relations

To boost up employee morale.

To motivate the employees by identifying and satisfying their unsatisfied needs. To provide qualitative work environment and work life.

To provide security to the employees against social risks like old age benefits and maternity benefits.

To protect the health of the employees and to provide safety to the employees against accidents

To promote employee's welfare by providing welfare measures like recreation facilities.

To create a sense of belongingness among employees and to retain them. Hence, fringe benefits are called golden hand-cuffs.

To meet requirements of various legislations relating to fringe benefits.

v) Cafeteria Benefits (Flexible benefits)

A cafeteria plan is a type of employee benefit its name comes from the earliest such plans that

allowed employees to choose between different types of benefits, similar to the ability of a customer to choose among available items in a cafeteria. Qualified cafeteria plans are excluded

from gross income. To qualify, a cafeteria plan must allow employees to choose from a

selection of two or more benefits consisting of cash or qualified benefit plans A cafeteria plan is an employee benefits plan that allows your employees to choose among a

variety of options to create a benefits plan that best meets their needs and those of their family.

Cafeteria plan options may include health and accident insurance, cash benefits, tax advantages and/or retirement plan contributions.

Also known as "cafeteria employee benefit plan" or "flexible benefit plan".

vi) Need for Extending Benefits to Employees:

Rising prices and cost of living has brought about incessant demand for provision of extra

benefit to the employees. Employers too have found that fringe benefits present attractive areas of negotiation when

large wage and salary increases are not feasible. As organizations have developed ore elaborate fringe benefits programs for their employees,

greater pressure has been placed upon competing organizations to match these benefits in order

to attract and keep employees.

Recognition that fringe benefits are non-taxable rewards has been major stimulus to their expansion.

Rapid industrialization, increasingly heavy urbanization and the growth of a capitalistic economy have made it difficult for most employees to protect themselves against the

adverse impact of these developments. Since it was workers who are responsible for production, it was held that employers should accept responsibility for meeting some of the

needs of their employees. As a result, some benefits-and-services programs were adopted

by employers The growing volume of labor legislation, particularly social security legislation, made it

imperative for employers to share equally with their employees the cost of old age, survivor and disability benefits.

The growth and strength of trade unions has substantially influenced the growth of company

benefits and services. Labor scarcity and competition for qualified personnel has led to the initiation, evolution and

implementation of a number of compensation plans. The management has increasingly realized its responsibility towards its employees and has

come to the conclusion that the benefits of increase in productivity resulting from increasing

industrialization should go, at least partly, to the employees who are responsible for it, so that they may be protected against the insecurity arising from unemployment, sickness,

injury and old age. Company benefits-and-services programs are among some of the mechanisms which managers use to supply this security.

vii) Compensation Package

Compensation is the process of directly and indirectly rewarding employees on a current or

deferred basis, for their performance of assigned tasks.

Lot of time it is misunderstood to be salary. Hence salary can be defined as a direct compensation paid on a regular time interval without a consideration of any specific units of

output; sometimes used to distinguish employees (salaried) who are not covered by a collective

bargaining agreement.

Pay is not the central issue for attracting and retaining employees. Pay is still important, but so are the other issues. People rarely leave a job for money alone. Instead they leave for

career advancement, technical or career challenge, communication reasons or job security.

However, Compensation can play a strategic role in addressing critical business challenges, such as attracting and retaining top talent, and during incentives to achieve your business

strategy.

In an organization while designing the compensation package the most important thing that an HR Manager needs to keep in mind is Managing Pay. This involves two issues.

Controlling Costs, and

Leveraging Pay (getting the most “bang for the buck”)

Hence, establishing an agile compensation and benefits system that track costs, help ensure

pay equity, is understood by employees, and keeps in touch with employee desires and what‟s

popular in the market should do this.

In other words we can say that “Organizations needs to be fluid to move as market

moves. That necessitates a more flexible approach to compensation”

In a nutshell:

Compensation is a critical area of human resource (HR) management, and one that can greatly affect employee behavior. To be effective, compensation must be perceived by employees as fair, competitive in the market, accurately based, motivating and easy to understand. HR professionals might create the pay structure for their organization, or they might work with an external compensation consultant. There are several steps to designing a pay structure: job analysis; job evaluation; pay survey analysis; pay policy development; and pay structure formation. Each step is briefly explained below. Step 1: Job Analysis Job analysis is the process of studying jobs in an organization. The outcome of this process is a job description that includes the job title, a summary of the job tasks, a list of the essential tasks and responsibilities, and a description of the work context. Also included are the knowledge, skills and abilities needed to perform the job. Step 2: Job Evaluation Job evaluation is the process of judging the relative worth of jobs in an organization. The outcome of job evaluation is the development of an internal structure or hierarchical ranking of jobs. Job-based evaluation is used more often than person-based evaluation, and so the former will be the focus in this case. There are three methods of job-based evaluation: the point method (which is the most commonly used); ranking; and classification. Job evaluation helps to ensure that pay is internally aligned and perceived to be fair by employees. Step 3: Pay Policy Identification Pay policy identification is the process of determining whether the organization wants to lead, lag or meet the market in compensation. The pay policy or strategy will likely influence employee attraction and retention. Pay policies can vary across job families (i.e., groups of similar jobs) and job levels if the top management feels that different strategies can be effective in different areas of the organization.

Step 4: Pay Survey Analysis Pay survey analysis is the process of analyzing compensation data gathered from other employers in a survey of the relevant labor market. Gathering external pay data (e.g., base pay, bonuses, stock options and benefits) is essential to keep the organization’s compensation externally competitive within its industry. Employee attraction and retention can be improved by maintaining externally aligned pay structures. Step 5: Pay Structure Creation Pay structure creation is the final step, in which the internal structure (Step 2) is merged with the external market pay rates (Step 4) in a simple regression to develop a market pay line. Depending on whether the organization wants to lead, lag or meet the market, the market pay line can be adjusted up or down. To complete the pay structure, pay grades and pay ranges are developed.