Subject- Compensation Management Unit-4 By K.R.

Ansari

Job based Pay

Job based pay structure is a structure of salary payments that is built on compensable factors
determined by the job. In other words the salary for a job is determined by its responsibilities,
and sometimes its work conditions.
The advantages are:
 It is based on a hierarchical organizational structure, which is the organizational
structure for most organizations.
 It is simpler than a person based system as more work is required to define
knowledge, skills and competencies required for a person based pay structure.
 Most companies’ pay structures are job based pay structures. This means comparison
is possible between companies.
 The hierarchical order of the job structure created the illusion that there are some
career paths and possibilities for promotions.

The disadvantages are:

 It reinforces hierarchy and bureaucracy. It is less compatible with team based
structures and incentives.
 The hierarchical organizational structure that it is based on has fundamental
weakness.
 The job holder may not be competent in the job.
 The job at the top is over paid and the job at the bottom is too paid low. It increases
the overall business operating costs.
 It encourages compromise of honesty in job descriptions and job valuations.
 It does not reward employees directly for their knowledge, abilities and individual
strengths.
 It does not encourage development of a flexible organizational structure in terms of
flatter structure; T-shaped employees and job rotation.
 Some job evaluation systems take short cuts by using a generic set of compensable
factors or develop the pay structure by using job classification.

What Is Skill Based Pay?

Definition
Skill‐based pay (SBP) is a compensation system that rewards employees with additional pay in
exchange for formal certification of the employee’s mastery of skills, knowledge, and/or
competencies. Skill is acquired and observable expertise in performing tasks. Knowledge is
acquired information used in performing tasks. Competencies are more general skills or traits
needed to perform tasks, often in multiple jobs or roles. In SBP systems, employees receive
additional pay only after they demonstrate the skills, knowledge, and/or competencies that the
system rewards.
Skill-based pay refers to a pay system in which pay increases are linked to the number or depth
of skills an employee acquires and applies and it is a means of developing broader and deeper
skills among the workforce. Such increases are in addition to, and not in lieu of, general pay
increases employees may receive. The pay increases are usually tied to three types of skills:
• Horizontal skills, which involve a broadening of skills in terms of the range of tasks
• Vertical skills, which involve acquiring skills of a higher level
• Depth skills, which involve a high level of skills in specialised areas relating to the same job.
Subject- Compensation Management Unit-4 By K.R. Ansari

Skill-based pay differs in the following respects from traditional pay systems which reflect skills
differences in a structure consisting of rates of pay for unskilled, semi-skilled and skilled
workers:
• Skill-based pay is a person-based and not a job-based, system. It rewards a person for what
he/she, rather than the job, is worth. Job worth is reflected in a basic rate of pay for minimum
skills, but pay progression is directly linked to skills acquisition (rather than to general pay
increases applicable to all) .
• It rewards (and therefore emphasizes) a broad range of skills which makes the employee multi-
skilled and therefore flexible.
• It positively encourages skills development.
• A skill-based pay system may not necessarily reflect how well the skill is used, as this falls
within the performance component of pay. But there is nothing to prevent injecting performance
criteria into the system. In such cases the system will be more performance oriented than a
structure which merely recognizes different rates of pay for skills.
• The system needs to be underpinned by opportunities for training which is critical to the
success of the system. The traditional structure is not dependent on such opportunities.

Thus, SBP is a person‐based system, because it is based on the characteristics of the person
rather than the job. In more common job‐based pay systems, pay is based on the job, which
employees are entitled to receive even if they are not proficient in their position.

Competency-based pay
Competencies are the knowledge-skills and the attitude needed by any individual employee to
carry out their job effectively. These can be incorporated into a pay system to reward individuals
who positively contribute to the overall values and objectives of an organisation. This is
competency based pay: rewarding the way people work, not just recognising what they can
deliver. Thus it is a pay structure that rewards employees based on how well they perform in the
workplace, rather than the hierarchy of their position or years of experience.
What are the benefits of competency-based pay structures?
Serves as a motivational tool
In various business verticals, the pay structure is determined by the years the employee has
dedicated to the company or the industry. With a competency-based pay structure, the only thing
standing between your employees and a greater wage is how much they contribute and how well
they perform. With this method they're often more likely to take greater initiative and contribute
to your competitive advantage.
It reinforces a culture of self-improvement
Once your culture has been established, it's more difficult to maneuver it in a different direction
than setting the tempo a certain way in the first place. Don't let that discourage you however, as
it is certainly not impossible to change its course. One way to create a culture of self-
improvement and company-wide productivity is through a competency-based pay model. This
pay structure offers a tangible reward for your employees who are dedicated to growing their
skills and improving themselves. When your employees dedicate their time—even outside of the
40-hour week—to growing your products, services and organization, they will not only
contribute to the success of the company, but also be motivated by the compensation they receive
for their dedication.
Subject- Compensation Management Unit-4 By K.R. Ansari

It may improve staff retention

As described by the staff at CIO: "Employee retention is a critical issue facing today's enterprises
as they compete for talent in a recovering economy. As Josh Bersin, principal at Deloitte and
founder of Bersin by Deloitte, spells out, the costs of employee turnover are increasingly high, as
much as 1.5 to 2 times an employee's salary. There are also other, soft costs, such as lowered
productivity and a decrease in employee morale. These all add up to big trouble for businesses
that aren't investing in their human capital."
While a pay structure alone is often not enough to retain your top talent, it certainly shouldn't be
ignored. Since the competency-based pay model is still rare, your employees may be more
motivated to stay with a company that rewards them for self-improvement and skill
development, rather than seniority at the company or years of experience under their belts.
It encourages corporate transparency
Put simply, transparency is good for business. It creates trust between your employees and those
at a higher-level. It improves employee engagement at its core and contributes to employee
retention. The competency-based pay structure is clear-cut in the essence of transparency, since
your employees know exactly what is expected of them to get a promotion.

Pay for Position

Pay for Position consists in defining how and how much employees should be compensated for
fulfilling their position’s responsibilities, ensuring internal equity and external competitiveness,
and ensuring alignment with corporate values and capacity-to-pay guidelines.

Variable pay
Variable pay is employee compensation that changes as compared to salary which is paid in
equal proportions throughout the year. Variable pay is used generally to recognize and reward
employee contribution toward company productivity, profitability, team work, safety, quality, or
some other metric deemed important.
The employee who is awarded variable compensation has gone above and beyond his or her job
description to contribute to organization success. Variable pay is awarded in a variety of formats
including profit sharing, bonuses, holiday bonus, deferred compensation, cash, and goods and
services such as a company-paid trip or a Thanksgiving turkey.

What are the typical variable pay-outs across different levels?

At junior level, variable pay ranges from 10% to 15% of fixed pay. For sales people, variable pay
plus salesincentives can range from 30% to 40%. Sales incentives aren't defined as variable pay
as they are commissions.
At middle level, it ranges from 15% to 30% and at senior levels, it is typically between 30% to
50%. At very senior levels, Esops and RSUs are also given above target levels as additional
performance incentives.
How do companies use it?
Variable pay has become an increasingly popular mode of compensation in most companies.
This is more so in the increasingly competitive business environment, where companies are
looking to reduce their investment in fixed costs and increase the use of variable costs, since the
latter is paid out only depending on the achievement of certain results.
Subject- Compensation Management Unit-4 By K.R. Ansari

Companies also use variable pay to drive performance culture and even leverage it to attract and
retain talent since talented people prefer joining organisations where they will be differentiated
for their performance.

Rewarding Excellence
Recognition serves as a tool for reinforcing the behaviors that drive an organization to excellence
and gives a vital boost to employees’ engagement that has a “ripple effect” that reaches beyond
the recipient.
As managers, our recognition lets employees know that we care about creating an environment
where individuals feel appreciated for their contributions and their accomplishments. Through
recognition, we also build a culture that attracts and retains the best talent.

Strategic Reward System

Organizations must become more
strategic if they are to survive and
succeed in the current business
environment. Functional and unit
strategies must be aligned with overall
firm strategy to enhance organizational
effectiveness.
As human resources (HR) takes its seat
at the table and affects strategic
direction, organizations are beginning to
recognize that human capital can be
utilized as a competitive advantage. HR
guru Dr. John Sullivan continually
attributes an organization’s success to
the productivity of its employees,
therefore defining the ultimate goal of
human resource management (HRM) as maximizing workforce productivity. In this respect,
strategic compensation systems are vital to ensuring desired employee behaviors and enhanced
firm performance.
Employees should be compensated and rewarded for the time and effort they put into work.
Strategic reward management involves the formulation and implementation of an equitable
reward system that is congruent with the organisation’s strategic objectives. A strategic reward
system is a type of human resource management tool that is used to reward hardworking
employees in an organisation. It operates on two main principles; the best fit perspective and the
best practice advocates claim. The objectives of a strategic reward system are; attract and retain
employees, motivate performance, promote skill development, encourage corporate culture and
determine pay costs. Rewards can be either intrinsic or extrinsic. However, it is important when
designing, implementing and using a reward strategy, that it meets both individual and
organisational needs.
Meaning of Strategic and Total Reward
Strategic reward
Subject- Compensation Management Unit-4 By K.R. Ansari

Strategic reward is based on the design and implementation of long-term reward policies and
practices to closely support and advance business or organisational objectives as well as
employee aspirations.
Total reward
The concept of total reward encompasses all aspects of work that are valued by employees,
including elements such as learning and development opportunities and/or an attractive working
environment, in addition to the wider pay and benefits package.

Links between strategic and total reward

The use of total reward may form part of a strategic approach to reward for many employers. For
example, an organisation might adopt a total reward approach, encompassing the provision of
both cutting edge training programmes together with flexible working options, as well as more
traditional aspects of the pay and benefits package, in order to recruit, retain and motivate the
high quality staff that are best placed to help it secure its business objectives.

Developing a reward strategy

The deployment of strategic reward approaches is often based on the setting out of a formal,
written reward strategy, although it is also possible to adopt a strategic approach to reward
without the use of such a document.

Around one third of employers overall currently have a reward strategy in place, according to the
CIPD’s latest reward management survey, with a slightly greater tendency for public sector
employers to operate (or to plan to adopt) a reward strategy compared with their private sector
counterparts.
Content of reward strategies
'Reward strategies are diverse and so is the structure used by different organisations to define and
present them', as observed by Armstrong. However, he identifies four elements typically
included in strategies:

 a declaration of intent, or statement of proposed reward developments

 a rationale setting out the business case for the reward proposals
 a definition of guiding principles
 an implementation plan.

Pay-for-performance
Pay-for-performance is a system where financial incentives or other benefits are given based on
how well an employee does their job.
Best-practice compensation programs meet employees’ basic financial needs, are fair and
transparent, link directly to performance and reward desired behaviors.
Actions to Emphasize Short Term
The quickest way to make improvements in the journey to paying for performance is by taking
one or more of five actions that quicken your opportunity to determine whether paying for
performance will work in your organization. While there are others that will help these elements
of paying for performance are most often recognized as representing meaningful change. The
five pilots to consider are:
Subject- Compensation Management Unit-4 By K.R. Ansari

 Cascading Goals: Test cascading goals to ensure the metrics used for paying for
performance add value to the goals of the organization. Translate strategic and
operational goals of the organization into measures and objectives employees in some
segment of the organization can influence.
 Variable Pay: Do a trial run for variable pay. Variable pay does not fold into base pay
and must be re-earned from performance period to performance period. Pick cascading
goals and design a variable pay plan in some organizational unit.
 Performance Management: Modify your current performance management solution to
emphasize the dialog between the manager and the employee: Coaching, feed-back,
development, and continuous discussion about how things are going. Train a group of
willing managers to provide feedback on performance, coach, and prepare development
plans to emphasize key areas of performance improvement opportunity.
 Pay for Value-Added: In a single organization or two implement a plan to pay employees
as they obtain and apply the key skills that organization needs over time. Abandon paying
for ´jobs´ and pay for value-identify the skills needed, training in skill acquisition, and
measure employee ability to apply these skills to get needed results.
 Make Managers Accountable: In one or more organizations train managers to be
accountable for managing the pay and reward process for employees in there area. They
should be accountable for the budget they have and manage it throughout the year.
Managers determine who gets what and explain it to the employees directly.

Compensation as a Retention Strategy

The role of Human resources professionals in hiring and retaining the right employees is
becoming more and more important to an organization’s overall strategy. Compensation can
have a direct impact on employee retention. While employers may use employee incentives and
monetary rewards to retain employees, there are ways to complement compensation that have a
much greater impact. Based on the type of compensation, along with the terms and conditions of
an employee compensation package, an employer can boost employee retention.
Employee retention refers to the number or percentage of employees your organization retains.
One of the most effective ways compensation can have a positive impact on employee retention
is to construct an employee development plan that promises employees career track opportunities
with the company. Being on an upward career track should come with corresponding salary and
merit increases. In addition, performance-based bonuses motivate employees in terms of aligning
their individual goals with company goals.
Implementing incentives such as stock options, profit sharing and spot rewards are other ways
compensation affects retention. These forms of compensation demonstrate how critical employee
performance is to the organization’s overall profitability. Spot rewards are usually not as
lucrative; however, they provide immediate recognition, reward and compensation when
company leadership observes an employee performing superior work. Appreciation is key to
employee retention, and if compensation is a part of recognition, then compensation is likely to
increase employee retention.