Establishing Strategic Pay plans

By: Kashish Srivastava Khushbu Bhojwani Lovepreet Arora Malvika Goenka

Basic Factors In Determining Pay Rates

Employee compensation
All forms of pay or rewards going to employees and arising from their employment.
Employee Compensation

Direct Financial Payments

Indirect Financial Payments

Direct financial payments Pay in the form of wages, salaries, incentives, commissions, and bonuses. Indirect financial payments Pay in the form of financial benefits such as insurance

Direct financial payments based on two factors

Pay for time:

Blue collar and clerical workers get hourly or daily wages, And others, like managers paid by month or week. Time pay is still the foundation of most employers pay plans.

Pay for performance:

It ties compensation to the amount of production the worker turns out. For example: Piecework

The Compensation Scenario in India

Employee compensation system around the world operate within the framework of legislation. Fair compensation for work is an integral component of Decent Work as defined by International Labor Organization (ILO). For govt. employees, salaries are fixed acc. to the recommendations of the pay commission.

Important legislation affecting salaries of top management

Companies Act of 1956

Employee Stock Option Scheme (ESOS) & Employee Stock Purchase Scheme (ESPS) Minimum Wage in India

Union Influences on Compensation Decisions

Unions and labor relations laws also influence the pay plan design. Formal collective bargaining agreement b/w trade unions and employers form the foundation of pay plans, however such agreements are generally restricted to the public sector or formal private sector employment , leaving out the large group of informal sector employees.

Competitive strategies, corporate policies, and compensation

The compensation plan should advance the firms strategic aims Creating a bundle of rewards a total reward package including wages, incentives and benefits.

Four new incentive and other pay policies

Pay to market: The company switched from its pervious single salary structure to new different salary structure and merit budget for different job families.
Fewer broadband jobs: IBMs old system slotted IBMs jobs into 24 narrow wage grades.

Lets Manager Manage: Manger rank employees on a variety of factors (such as critical skills and results). o Manager decide which factors are used and weights they are given.

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Incentivize employees: Every non executive employees cash compensation consisted of base salary. There was no concept of pay for performance. A top-rated employee receives two-and-onehalf times the award of an employee within the lowest ranking.

Equity and Its Impact on Pay Rates

The equity theory of motivation

States that if a person perceives an inequity, the person will be motivated to reduce or eliminate the tension and perceived inequity.
Forms of Equity

External Equity

Internal Equity

Individual Equity

Procedural Equity

Establishing Pay Rates

It is a 5 step process:Step 1: The Salary Survey Step 2: Job Evaluation

Step 3: Group Similar Jobs Into Pay Grades Step 4: Price Each Pay Grade-Wage Curves Step 5: Fine Tune Pay Rates

1:The Salary Survey

What others are paying? There are 3 important uses of surveys:

Payment of Benchmark Jobs Payment of Comparable Jobs To find information on employee benefits like insurance , sick leave etc.

Types of surveys Commercial , Professional ,and Government Salary Surveys

Data published by consulting firms , professional associations or government agencies.

Using Internet to do compensation surveys

Information published on different websites like salary.Com , Wageweb.

II:Job Evaluation

What is a jobs relative worth? It is a formal and systematic comparison of jobs to determine the worth of one job in relation to others.

Job Evaluation Methods

Ranking:
Jobs are ranked on some overall factors like job difficulty. Steps:

Obtain Job information Select and group jobs Select compensable factors Rank jobs Combine ratings

RANKIN ORDER

SMALL HEALTH FACILITY

43000 42500 34000 32500 31000 28500

ANNUAL PAY SCALE

OFFICE MANAGER CHIEF NURSE BOOKKEEPER NURSE COOK NURSES AIDE

ORDERLY

25500

Job Classification

Raters categorize jobs into groups; all the jobs in each group are of roughly the same value for pay purposes. Categorization can be done through a) job descriptions b) rules based on compensable factors

Point Method
It is a quantitative technique. It involves identifying

1)several compensable factors

2) The degree to which each of these factors are present in the job.

Assign the points to each factor and total it.

Factor Comparison
It is an improvement over the ranking method Here jobs are ranked several timesonce for each of several compensable factors. Combine ranks into an overall rating for the job.

III: Group Similar Jobs Into Pay Grades

Companys group similar kind of jobs into pay grades for simplification. Grouping can be done on the basis of ranking or number of points. A pay grade comprises of jobs of approximately equal difficulty or importance as stated by job evaluation.

IV : Price Each Pay Grade-Wage curves

Pay rates are assigned to pay grades for this purpose a wage curve can be used. The wage curve shows the pay rates currently paid for jobs in each pay grade. Heres how a wage curve appears:

Average pay rates

9 8 7

avg. pay rates

6 5

4
3 2 1

Average pay rates

0
0 100 200 300 400 500 600 700

Points

V:Fine Tune Pay Rates

It involves:

Developing Pay Ranges:

Employees dont pay same pay rate to all d employees of a similar grade instead they develop a vertical pay rate for every horizontal pay grade. These are called pay ranges which shows the minimum mid-point and maximum payment made in one pay grade

Correcting out of-line rates:

o o

When the current job pay is either too high or too low relative to other jobs on that firm. If an employee belong to the underpaid category , his salary can be upgraded to at least the minimum level If the employee is overpaid then Either his salary should be freeze to the maximum level Or a new pay grade should be developed in which they can legitimately be given the over-rated salary.

Pricing
The acceptability of job evaluation hinges in large part on whether the results are consistent with the ranking of the same job in external labor market

Compensating checklist

A good compensating program is comprehensive and flexible and ensures optimum performance at all levels. . The following checklist may be used to evaluate a companys program. The more questions answered yes, the more thorough has been the planning for compensation administration.

Pricing Managerial and Professional Jobs

Compensating managers
Base pay: fixed salary, guaranteed bonuses. Short-term incentives: cash or stock bonuses Long-term incentives: stock options Executive benefits and perks: retirement plans, life insurance, and health insurance without a deductible or coinsurance

Pricing Managerial and Professional Jobs

What Really Determines Executive Pay?

CEO pay is set by the board of directors taking into account factors such as the business strategy, corporate trends, and where they want to be in a short and long term.
Firms pay CEOs based on the complexity of the jobs they filled. Boards are reducing the relative importance of base salary while boosting the emphasis on performance-based pay.

Compensating Professional Employees

Employers can use job evaluation for professional jobs. Compensable factors focus on problem solving, creativity, job scope, and technical knowledge and expertise. Firms use the point method and factor comparison methods, although job classification seems most popular. Professional jobs are market-priced to establish the values for benchmark jobs

Competency Based Pay

COMPETENCY BASED PAY

Competencies-A competency is an underlying characteristic ( knowledge, skill , behaviour) of a person/organization which enables to deliver performance in a given job, role or a situation.

Competency Based Pay It means that the company pays for the employees range, depth, and types of skills and knowledge, rather than the job title he or she holds. Also known as Knowledge or Skill based pay.

Why use Competency- Base Pay?

I.

Firstly ,it enables companies to encourage employees to develop the competencies the companies require to achieve their strategic aim. Secondly ,it provides a focus for the employers performance management process.

II.

Five main elements

A system for defining required skills. 2) A process for tying persons pay to his or her skill level. 3) A training system that let employees acquire the skills. 4) A formal skills testing system 5) A work design that let employees move among jobs to permit work assignment flexibility.
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Thank You!!