Compensation components

Long-term incentives: Rewards given to employees who achieve long-term performance

objectives; rewards could include stock options, restricted stock and cash long-term
incentive plans.

Annual incentive: Usually a lump-sum payment (cash or stock) made in addition to an

employees normal pay for a fiscal or calendar year, based on achievement of annual
objectives (individual, business unit and/or company). Examples of annual incentives are
bonuses and profit sharing.

Annual bonus: This is generally non-discretionary and not based on predetermined per-
formance criteria or standards (which distinguishes an annual bonus from an incentive).

Cash profit sharing: A plan that provides for employee participation in a companys
profits. The plan normally includes a predetermined and defined formula for allocating
profit shares among participants, and for distributing funds accumulated under the plan.
But some plans are discretionary. Funds may be distributed in cash, deferred as a quali-
fied retirement programme or distributed in a cash/deferred combination.

Recognition awards (cash and non-cash): An amount of cash, a prize, a symbol or an intan-
gible reward given as a form of recognition. Awards can be in the form of money, prizes,
plaques, public commendation, etc., and often are highly publicised within an organisation.

Non-cash incentives: Payments that are not readily convertible to cash for example,
extra time off, meal or merchandise awards, a reserved parking space, membership in a
luncheon club.

Pay structures
Pay structures or salary structures refer to the hierarchy of job grades and pay ranges
established in a company. They may be expressed in terms of job grades, job evaluation
points or policy lines.

Pay structure is a significant factor in any successful compensation strategy, and companies
need to carefully consider several factors while creating a competitive remuneration package
that will help them both optimise their human capital and sustain a competitive advantage.

The recent economic slump has resulted in employers striving to reduce costs while
maintaining a skilled workforce. This is perhaps their biggest challenge, as human capital as
well as its associated costs is one of the major components of any business. Employers
must find the right balance between the need to pay and offer attractive benefits plans
to their employees and develop innovative incentive plans if they are to achieve long-
term goals and sustainable success.

Common pay structure approaches:

1. Using survey data based on market pricing/position matching

2. Job evaluation (JE in the charts below) and market pay lines

3. Traditional grade structure based on job evaluation

4. Broadbanding

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Compensation components

Example of pay structures

1. Spot salaries

X
X
Market/JE points

X X
X X
X
X
X
X

Jobs

2. Multiple banded structures

JE points
x
1,400
x
x
x x
y x
y x
x 1,200
x y x
x
Pay

x x 1,000
y
y x 800
y x
x x
x 600
y
300
1 2 3 4 5 Grades

3. Broad-banded structures

Executive

Management

Professional
Pay

Administrative

Bands

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Compensation components

Salary structure alternatives: Traditional vs. broad-band vs. step

structures
Traditional, broad-band and step pay structures have differing intended effects on a
companys compensation programmes. The table below shows the most common design
benefits for traditional, broad-band and step structures.

Characteristics of traditional, broad-band and step structures

Traditional pay Broad-band

Characteristics structure structure step structure
Flexibility Flexibility with Flexibility with Limited flexibility
controls guidelines
Type of organisation Works well in relatively Works best in dynamic/ Works best when it is
stable organisations. constantly changing difficult to differentiate
organisations; more performance levels, and
common in global internal equity is important
organisations
Career movement Typically upward Can help facilitate Job rate is typically maxi-
movement lateral progression mum of range and attained
and cross-functional within 24-30 months or
movement less
Market alignment Market rates and Market rates used for Market rate is typically
midpoints closely reference the maximum of range,
aligned but in some cases longe-
tivity steps may be added
Manager discretion Limited freedom; Maximum freedom; Limited; typically based on
typically, managers are typically, managers are longetivity/tenure only
provided with salary provided with salary
administration guide- administration guide-
lines lines
Range width Commonly 40-100% Commonly 100-200% Commonly 10-30%
Ease of understanding Easier Harder Easier
among managers

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Features of the types of pay structure approaches

Position matching method Traditional grade and salary structures

Matching is done by conversion to the
Job evaluation is used to group positions
generic position description of similar work value

The method is simple, low-cost and easy
The mid-point value of a grade is
to explain matched to market lines

It does not handle unique positions
This method promotes internal equity

There is no organisation-wide comparison
It is easy to communicate and manage

Useful in smaller, less-complex organi-
It does not address market hot spots
sations

It allows organisation-wide comparison

It addresses market hot spots

Job evaluation and market pay lines Broadbanding

Job evaluation is used to assess work
Broadbanding is done in response to
value changing structures and work practices

Matches are by work value
Positions are grouped on value to busi-

ness criteria

This method handles unique positions

There is greater flexibility to support

It does not address market hot spots managers managing

Useful in larger, more diverse organisa-
Central control is less

tions

The method supports rapidly changing

The method derives a relationship organisations and performance culture
between remuneration and work value
scores
There are two types of broadbanding:

Broad grades: This includes stream-

lined administration and internal
focus

Career bands: This comprises career

development and market focus

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