Part 4: COMPENSATION AND TOTAL REWARDS

Chapter 10
DEVELOPING COMPENSATION PLANS
Learning Objectives
When you finish studying this chapter, you should be able to:

✔ List the basic factors determining pay rates.

✔ Define and give an example of how to conduct a job
evaluation and set pay rates.
✔ Explain the difference between competency-based and
traditional pay plans.
Learning Contents
01 The Basic Factors in Determining Pay Rates

02 Job Evaluation Methods

03 Contemporary Topics in Compensation

1- The Nature of Total Rewards & Compensation

Concepts

TOTAL REWARDS
monetary and non-monetary rewards provided by companies to
attract, motivate, and retain employees

▷ encompassing compensation and benefits, personal and professional growth

opportunities and a motivating work environment
▷ tangible direct/indirect rewards, intangible rewards
▷ also telecommuting programs, health and well-being programs, training &
development
1- The Nature of Total Rewards & Compensation
1- The Nature of Total Rewards & Compensation

Laws governing Rewards & Compensation

o How long is the probationary period?

o How much percentage is the probationary salary of the offered salary?

o How much percentage is the overtime salary of the actual salary?

o How much is the latest Vietnam minimum wage?

2- Pay Structure

Market-based approaches - Salary survey

market-competitive pay plan

A pay system in which the
employer’s actual pay rates are
competitive with those in the
relevant labor market
determining prevailing wage rates
>>> to see what others are paying for similar jobs
2- Pay Structure

Market-based approaches - Salary survey

Lag-the-Market Strategy
• Lag the market by paying slightly less than the prevailing
levels in the marketplace

Lead-the-Market Strategy
• Lead the competition by paying higher wages than
competing employers

Match-the-Market Strategy
• Match the competition by paying the market or going rate for
labor
2- Pay Structure

Job evaluation method

What is job evaluation?

a systematic comparison done to determine the worth of one
job relative to another
▷ to determine a job’s relative worth
▷ result in a wage or salary structure

the basic principle

jobs that require greater qualifications, more responsibilities, and more
complex duties should receive more pay than jobs with lesser requirements
2- Pay Structure

Job evaluation method

Compensation philosophy Job analysis Job evaluation

Internal focus External focus

intuitive approach alternative approach Salary survey

Compensable factors
2- Pay Structure

Job evaluation method

an intuitive approach
decide that one job is more important than another, and not dig any deeper

alternative approach
compare the jobs by focusing on certain basic factors the jobs have in common

compensable factors
A fundamental, compensable element of a
job, such as skills, effort, responsibility, and
working conditions.
 2- Pay Structure

Job evaluation method

Ranking
ranking each job relative to all other jobs, usually based on overall difficulty

Compare
1 6 & assign
2 3 4 5 a new
Obtain job Select and Select Rank jobs Combine pay scale
information group jobs compensable independently ratings
▪ Job analysis factors ▪ alternation ▪ average
▪ Job difficulty ranking the raters’
method rankings
2- Pay Structure

Job evaluation method

2- Pay Structure

Job evaluation method

Job classification (job grading)

Raters categorize jobs into groups which are of roughly the same value for pay
purposes.
▪ classes: if they contain similar jobs
▪ grades: if they contain jobs that are similar in difficulty but otherwise different
(1) difficulty and variety of work
(2) supervision received and exercised
1 2 (3) judgment exercised
(4) originality required
(5) nature and purpose of interpersonal
write class or write a set of work relationships
grade descriptions compensable factor (6) responsibility
(7) experience
(8) knowledge
2- Pay Structure

Job evaluation method

Job classification (job grading)

2- Pay Structure

Job evaluation method

Point Method
in which a number of
compensable factors are
identified and then the degree to
which each of these factors is
present on the job is determined
2- Pay Structure

Rate Ranges and the

Wage Structure
minimum and maximum
pay rate with enough
variance between to allow
for significant pay
difference
3- Contemporary Topics in Compensation

Competency - , knowledge - or skill - based pay

pay the employee for the skills and

knowledge he or she is capable of
using rather than for the
responsibilities or title of the job
currently held
3- Contemporary Topics in Compensation

Broadbanding

collapse salary grades into just a few

wide levels or bands, each of which
contains a relatively wide range of
jobs and pay levels
3- Contemporary Topics in Compensation

Performance-Based Pay: Incentive (variable) pay_rewards

employees for partially or completely attaining a predetermined
work objective.

Individual Incentive Plans

▷ Piecework plans – reward workers for every item produced over a
designated production standard
▷ Merit pay: is a pay increase added to employees’ base pay based on their
level of performance (permanent merit increases)
▷ Merit bonuses: is a one-time annual financial award, based on
productivity that is not added to base pay
 3- Contemporary Topics in Compensation
Performance-Based Pay
Team and Organization Incentive Plans

team/ group incentive plans

a plan in which a production standard is set
for a specific work group, and its members
are paid incentives if the group exceeds the ▷ gainsharing plan
production standard. ▷ profit-sharing plan
▷ earning-at-risk pay plan
organization-wide incentive plans ▷ stock option plan
plans in which all or most employees can ▷ employee stock ownership
participate, and that generally tie the reward plan (ESOP)
to some measure of company-wide
performance.
 Case Application: Carter Cleaning Company
Textbook, pp. 352

Questions:
1. Is the company at the point where it should be setting up a formal salary
structure based on a complete job evaluation? Why?

2. Similarly, is Carter’s male–female differential wise? If not, why not?

3. Specifically, what would you suggest Jennifer do now with respect to her

CASE STUDY company’s pay plan?

ANALYSIS
IN SUMMARY

Total Rewards & Compensation

• monetary and non-monetary rewards provided by companies to attract, motivate, & retain employees
• employee compensation includes both direct financial payments and indirect financial statements.
The process of establishing pay rates while ensuring external, internal, and procedural equity
• conducting a salary survey, determining the worth of each job, doing a job evaluation, grouping jobs,
pricing each pay grade with wage curves, fine-tuning pay rates.
Job evaluation
• a systematic comparison to determine the worth of one job relative to another based on compensable factors
• methods: ranking, job classification, the point method
Incentives
• tangible rewards that encourage or motivate actions for individuals to achieve a higher productivity
• individual incentives, team and organizationwide incentives.
Benefits
• indirect financial and nonfinancial payments employees receive for continuing their
employment with the company
• pay for time not worked and Insurance benefits; retirement and other benefits;
personal services and family-friendly benefits
CRITICAL THINKING

Self-Assessment Questions

◆ Compare and contrast the following methods of job evaluation: ranking,

classification, and point method.
◆ Which are benefits to be designed for part-time and contingent workers?
 Carter Cleaning Company: The New Pay Plan
Read The case study ‘Carter Cleaning company’ in your Textbook, pg. 352).

Questions:
1. Is the company at the point where it should be setting up a formal salary
structure based on a complete job evaluation? Why?
2. Is Jack Carter’s policy of paying 10% more than the prevailing rates a
sound one, and how could that be determined?
3. Similarly, is Carter’s male-female differential wise? If not, why not?
4. Specifically, what would you suggest Jennifer do now with respect to her
CASE STUDY company’s pay plan?
ANALYSIS
To Our Next Week

Compensation and Total rewards

Read
Chapter 11 – Employee Benefits