COMPENSATION

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 TABLE OF CONTENTS
 Introduction to compensation
 Types of compensation
 Salary compression
 Equity theory of motivation
 Establishing pay rates
 Competency based pay
 Compensation trends
 Compensation: An Overview
 Compensation - Compensation is the total
amount of the monetary and non-monetary pay and
rewards provided to an employee by an employer in
return for services & work performed as required.
 Direct financial compensation - Pay
received in the form of wages, salaries, incentives,
commissions and bonuses.
 Indirect financial compensation - All financial
rewards not included in direct compensation.
 Nonfinancial compensation - Satisfaction a
person receives from job itself or from work
environment
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Components of a Total Compensation Program
External Environment
Internal Environment
Compensation
Financial Non-Financial
Direct Indirect (Benefits) The Job Job Environment
Wages Legally Required Benefits Skill Variety Sound Policies
Salaries Social Security Competent Employees
Task Identify
Unemployment Compensation Congenial Coworkers
incentives Task Significance
worker’sCompensation Suitable Status Symbols
Commissions Autonomy
Working Conditions
Bonuses Voluntary Benefits Payment
Feedback
for Time Not Worked Health Care Workplace Flexibility
Recognition
Life Insurance Flextime
Retirement Plans Appreciation Compressed Work Week
Employee Stock Option Plans Job Sharing
Supplemental Unemployment Benefits Flexible Compensation
Employee Services Telecommuting
Premium Pay Part-time Work
Unique Benefits Modified Retirement

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EPF

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 3 Ps of Pay /Compensation
 Pay for Position
 Pay for Person
 Pay for Performance

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 3 Ps of Pay
1.Paying for Position
Develop an equitable grading structure
Create a reference salary structure
Leverage compensation costs with market survey information
2. Pay for Person
Determine competency requirements and employee capabilities
Pay individuals based on their competency match with the
position .
Identify and pay market premium for competencies in short
supply in the market
3. Paying for Performance
Design annual bonus and incentives plans that motivate staff
Shift from fixed salary increases to variable pay
Create long-term reward plans - stock options, deferred
compensation and phantom share plans.

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 Equity in Compensation
 External Equity
 Internal Equity

Pay Structure Administrative Focus of Consequences of

Decision Area Tool Employee Pay Equity Perceptions
Comparisons
Pay Level Market pay surveys External equity External employee
movement, labor
costs, employee attitudes
Pay Structure Job Evaluation Internal equity
Internal employee
movement, cooperation,
employee attitudes

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Person A Person B

Outputs Outputs Under-reward

Inputs
< Inputs

Outputs Outputs
Inputs
= Inputs
Equity

Outputs Outputs Over-reward

Inputs > Inputs
 Forms of Equity

Forms of Equity

External Internal Individual Procedural

Equity Equity Equity Equity
 External equity refers to how a jobs’s pay rate in one company compares
to the job’s pay rate in other companies.

 Internal equity refers how fair the job’s pay rate is, when compared to
other jobs within the same company.

 Individual equity refers to the fairness of an individuals pay as

compared with what his or her co-workers are earning for the same or similar
job within the company, based on individual performance.

 Procedural equity refers to the “perceived fairness of the process &

procedures used to make decisions regarding the allocation of pay.
Determinants of Individual Financial
Compensation

 Organization
 Labor market
 Job
 Employee

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 Compensation Policies
 Pay leaders – pay higher wages and
salaries
 Market rate, or going rate – pay what
most employers pay for same job
 Pay followers – pay below market rate
because poor financial condition or
believe they do not require highly capable
employees

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The Labor Market as a Determinant
of Financial Compensation
 Compensation surveys
 Expediency
 Cost of living
 Labor unions
 Society
 Economy
 Legislation
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Determining internal
Equity

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 There are 5 steps in establishing pay rates

1. Salary survey

2. Job evaluation

3. Group similar jobs into pay grades

4. Price each pay grade by using wage curves

5. Fine tune par rates

 1. Salary Survey
 Is what other employers are paying for the comparable job.

 Plays a big role in Pricing Jobs.

 It is done through- Formal written surveys, Informal telephone,

Newspaper.

 There are Commercial, Professional and Government salary

survey.

 Internet is an expanding Compensation survey technique.

 2. Job Evaluation
 Is a systematic comparison done in order to determine the
worth of one job relative to another.

 Jobs with high responsibilities, qualification & duties

should be paid high and vice-versa.

 There are compensable factors such as skills, effort,

responsibility and working conditions.

 There are 4 methods of calculating job evaluation.

 Ranking Method

It involves ranking each job relative to all other jobs, usually based
on overall difficulty.

Ranking Order Annual Pay Scale

1. Office manager $43,000

2. Chief nurse $ 42,500
3. Bookkeeper $ 34,000
4. Nurse $ 32,500
5. Cook $ 31,000
6. Nurse’s aide $ 28,500
7. Orderly $ 25,500
 Classification method

It involves categorizing jobs into groups which are of

roughly the same value for pay purposes.

JOBS PAYS
GRADE 6 Chef $21.50-32.00 / hr
GRADE 5 Manager $12.50-22.00 / hr
GRADE 4 Assistant Manager $8.50-13.00 / hr
GRADE 3 General Cook $7.50-9.00 / hr
GRADE 2 Server $7.00-8.00 / hr
Cashier
GRADE 1 Dishwasher $6.50-7.25 / hr
 Point Method

It involves identifying several compensable factors,

each having several degrees as well as the degree to
which each factors is present in the job
 3. Groups similar jobs into pay
grades
 It is comprised of jobs of approximately
equal difficulty.

 It usually want to first group jobs into pay

grades.
4. Price each pay grade by using wage curves
 Shows the relationship between the value of
the job and the average wage paid for this job.
 Wage curve.
 Factor comparison method
 A widely used method of ranking jobs according
to variety of skills and difficulty factors, then
adding up these ranking to arrive at an overall
numerical rating for each job given.

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 5.Fine–tune pay rates
 It involves 2 thing-Developing pay ranges &
Correcting out of lines rates.

 Pay ranges depends upon years of service.

 Correcting out of lines rates-means correcting

average pay for that job fall well off the wage
line or well outside the rate range for its grade.
 Competency Pay System
Competencies are the knowledge-skills and the
attitude needed by any individual employee
to carry out their job effectively, and
employees are paid on such attributes.

The main such competencies are -

 Decision making skills.

 Technical skills
 GENERAL MILLS
General Mills manufacturing plant pays employees on attained skill
levels, management created four clusters of job in four areas ,these are
– mixing, filling , packaging and materials, each cluster is having three
levels.

 First Level - indicates workers with limited knowledge of day to day

work.

 Second Level- having some technical knowledge.

 Third Level- fully competent employees who can analyze the problem ,
and do not need supervision as well.
 The Job as a Determinant of
Financial Compensation
 Job itself continues to be a factor,
especially in those firms that have
internal pay equity as a primary
consideration
 Organizations pay for value they attach
to certain duties, responsibilities, and
other job-related factors such as
working conditions

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 Job Analysis and Job
Descriptions

 Before organization can determine

relative difficulty or value of jobs,
must first define content
 This is done by analyzing jobs

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 Job Pricing
 Placing a dollar value on worth of a job
 Pay grades - Grouping of similar jobs to
simplify pricing jobs
 Wage curve - Fitting of plotted points to
create a smooth progression between pay
grades
 Pay ranges - Minimum and maximum pay
rate with enough variance between the
two to allow for a significant pay difference
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 Job Pricing (Continued)
 Broadbanding – Collapses many pay
grades into a few wide bands or
improve effectiveness
 Single rate system - Pay ranges are
not appropriate for some
workplace conditions such as some
assembly line
 Adjusting pay rates - Overpaid
and underpaid jobs

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 Scatter Diagram of Evaluated Jobs Illustrating the Wage
Curve, Pay Grades, and Pay Ranges
Average Pay per Hour (Current Rates or Market Rates)

$19.80
5
18.50 4

17.20 3

15.90 urve Pay Ranges for

eC 2
14.60 ag Pay Grades
W
14.00 1
13.30
12.90
12.00
100 200 300 400 500
Evaluated Points
1 2 3 4 5
Pay Grades
Summary
Evaluated Points Pay Grade Minimum Midpoint Maximum
0- 99 1 $12.00 $13.30 $14.60
100-199 2 13.30 14.60 15.90
200-299 3 14.60 15.90 17.20
300-399 4 15.90 17.20 18.50
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400-500 5 17.20 18.50 19.80
 Broadbanding and Its Relationship to Traditional
Pay Grades and Ranges
Average Pay Per Hour

Grade 5

Grade 4

Grade 3
Grade 2 Band B

Grade 1

Band A

Low High

Job Worth
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Employee as a Determinant of
Financial Compensation
 Performance-based Pay
 Skilled-based Pay
 Competency-based Pay
 Seniority
 Experience
 Membership in the organization
 Potential
 Political Influence
 Luck
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 Primary Determinants of Individual Financial
Compensation
The Organization
Compensation Policies
Organizational Politics
Ability to Pay

The Employee Job The Labor Market

Job Performance Merit Compensation Surveys
Pay Variable Pay Expediency
Individual
Competency-Based Cost of Living
Pay Seniority Financial
Labor Unions
Experience Compensation Society
Organization Membership The Economy
Potential Pricing Legislation
Political Influence
Luck
The Job
Job Analysis
Job Descriptions
Job Evaluation
Collective Bargaining
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 Skill-Based Pay
Compensates on basis of job-related skills
and knowledge
 Employees and departments benefit when
employees obtain additional skills
 Appropriate where work tends to be
routine and less varied
 Must provide adequate training
opportunities or system becomes a
demotivator
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 Seniority
 Length of time an employee
has been associated with the
company, division, department,
or job
 Labor unions tend to favor
seniority

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 Experience
Regardless of
nature of job,
very few factors
have a more
significant impact
on performance
than experience

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Membership in the Organization
 Some components of individual financial
compensation are given to employees
regardless of particular job they perform or
their level of productivity
 Intended to maintain a high degree of
stability in the workforce and to recognize
loyalty

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Group-based pay for performance
 Profit sharing – distribution of
predetermined percentage of firm’s
profits to employees
 Gainsharing – incentive payment based
upon improved company performance
 Scanlon plan – reward to employees for
savings in labor costs resulting from
employees’ suggestions

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Executive Compensation

Critical factor in
attracting and
retaining best
managers

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Determining Executive
Compensation

Firms typically prefer

to relate salary growth
for the highest-level
managers to overall
corporate
performance

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Types of Executive Compensation
 Base salary
 Short-term (annual) incentives
or bonuses
 Long-term incentives and
capital appreciation plans
 Stock option plans
 Indexed stock option plans
 Executive benefits (Perks)
 Golden parachutes
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HR’s Role in Executive
Compensation

HR executives who know their

company’s business must play
key role in assuring reasonable
and ethical behavior

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