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Chapter 9

Compensation

Compensation includes more then wages and salaries.

Together they form compensation package.

Wage is something from which deduction can be made andpaid to blue collared employees.

Salary is something from which deduction cannot be madeand paid to white collared employees.

It includes benefits and incentives and certain securities

provided by law.

Adequate Compensation motivates the employees.

Compensation

Direct compensation Indirect compensation(Wages, Salaries, Incentives) (Fringe benefits)and gain sharing (bonuses)

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OBJECTIVES OF COMPEBSATION MANAGEMENT

To help the organization achieve strategic goals whileensuring internal and external equity.

Internal Equity: ensures that more responsible positions inthe organization are paid more.

External Equity: assures that jobs are fairly compensated incomparison with jobs in the market.

Other Objectives

Acquire qualified personnel; compensation must be highenough to attract applicants.

Retain current employees Ensure equity

Reward performance

Control costs effective compensation management aims thatworkers and neither under nor over paid.

A rational compensation system helps the organizationobtain and retain workers at responsible cost becausecompensation is a cost to the organization.

Comply with legal regulations.

Easily understood, compensation system should be keptsimple enough to be easily understood by the administration

personnel and employee.

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Major Phases of Compensation Management

Phase 1 Job AnalysisIdentities jobs and study the jobs

Position description Job descriptions Job standards(which jobs)

Phase 2 Job EvaluationInternal equity

Job ranking Job grading Factor comparison Point system

Phase 3 Wage and Salary surveys

External equity

Labor Dept State unemployment Employer Self conductedsurveys offices associations surveys

Phase 4 Pricing jobs

Matching internal and external worth

Job evaluation worth Match Labor market worth

(Rate range of each job)

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1) Job Analysis:

Means analyze different jobs in the organization and collect

information about job through surveys, observation,

questionnaire, interviews and discussion with supervisor

and expert opinion.

2)Job Evaluation:

Determine worth relative of jobs

Jobs are evaluated on the basis of how much skills

responsibilities effort and working conditions are

involved in a job.

Job evaluation when conducted by single person he is

called compensation specialist BUT ..

When carried out by a group of persons it is known as

job evaluation committee

The committee reviews job analysis information to

learn about duties, responsibilities and WCs.

With this knowledge jobs are out into a hierarchy

according to their relative worth ( job evaluate method )

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Different methods used for J E such as:

Job Ranking

b) Job Grading

c) Factor Comparison

d)Point system

a)Job Ranking:

Simplest Method

Job analysis information reviewed by specialist and then rank

each job subjectively according to its relative importance in

comparison with other jobs in the firm.

The rater may consider the responsibility, skill, effort and

working conditions involved in each job.

Jobs are then paid according to its worth.

This method however does not capture the relative differencesbetween jobs as a result, pay levels may be in accurate

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b)Job Grading:

Sophisticated then the ranking method.

Each job in the firm is assigned to a grade by makingdescription with each jobs description.

Job Grading Standard Description

I Work is simple and highly repetitive, doneunder close supervision, requiring little training and

responsibility or initiative. Example: Janitor

(gatekeeper), File clerk.

II Work is simple and repetitive, done under close supervision, requiringlittle training, Employee is expected to assume

responsibility or show initiative only rarely. Clerk-

typist I, Office Clerk.

III Work is simple with little variation, done under close supervision,

requiring little training.

Employee is expected to assume responsibility

or show initiative to perform satisfactorily.

Clerk typist II , Administration office , Clerk

computer lab assistant.

IV Work is moderately complex, with some variation, done under generalsupervision. High level of skill is required. Employee

is responsible for student affairs; regularly exhibits

initiative.

Professor, Lecturer.

V Work is complex varied, done under general supervision. Advanced

level skill is required. Employee is responsible for

major decisions of the institute; shows high degree

of initiative.Coordinator, Director.

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b) Factor Comparison:

J E committee compares critical or compensable jobfactors such job factors as responsibility skills,mental effort, physical effort and WCs.

Each factor is compared one at a time with the samefactor of the other key jobs and them the separateevaluation are combined to determine the relativeimportance of each job.

This method involves five steps

Step I:Determine critical factors:

Analysts must first decide which are the commonand important factors in a broad range of jobs

Some organizations use different factors forManagerial, professional, sales & other types of jobs

Step II :Determine Key Jobs :

Key jobs are the jobs that are commonly found inthrough out the organization & in the jobs market.

Common jobs are selected because it is easier todiscover market rates for them.

These jobs are regarded as benchmarks & shouldencompass a wide variety of critical factors

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Step III :Apportion Current Wages for Key Jobs

Then the key jobs current wage rate is divided among the

critical factors

Wage rate allocated to each factor depends on how

important is that factor to the jobs ..E.g

Janitor receives $ 6.70 per/hour; amount distributed in thefollowing manner among different factors

.80 cents for skills

.50 cents for Mental efforts

$ 1.90 for WCs

First the amount assigned to each factor should

reflect its importance compared with the other factors

in the job e.g$ 4 is assigned for skill & $ 2 for

physical effort for a machinist this shows that skill is

twice as important as physical effort

2nd , this amount allocated to that factor should reflect

the relative importance of that factor among the

different jobs e.g If the responsibility of a Secretary

is three times that of a janitor, the money allocated to

a secretary is for responsibility should be three times

that allocated to a janitor 0.8 x 3 = $ 2.40

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Step IV:Place Key Jobs on a factor Comparisons Chart:

Information of step III transferred to a factor

comparison chart. Key jobs are placed in the columns

according to the amount of wages assigned to each

critical factor In the responsibility column the title secretary is

placed next to $ 2.40 rate to show how important

secretarys responsibility is worth to the organization

The same assignment process takes place for every

other key jobs

Step V:Evaluate Other Jobs:

Titles of key jobs serve as benchmarks for other non-

key jobs in the organization, which are being

evaluated by fitting on the scale in each column

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e) POINT SYSTEM :

Point system is used move than any other method

This system evaluates the compensable factors of

each job but instead of using wages as the factor

comparison does, it uses points

The point system is more precise as the

compensable critical factors are further divided

into sub factors and then evaluated

System involves six steps :

Step I :Determine Critical Factors

Same as in the factor comparison method only the

critical factors are further divided into detailed sub

factors

Step II :Determine the levels of Factors

Factors like responsibility may vary from job to job,

the point system creates several levels associated

with each factor, such as minimum I, low II,

moderate III, high IV etc

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Step III:Allocate points to sub factors

When the factors are placed in the left hand columnand the levels placed at the top, the result is point

system matrix. Starting with level IV, the job

evaluation committee subjectively assigns the

maximum possible points to each sub factor

Step IV :Allocate points to levels

Once the maximum total points for each job factors

are assigned under level IV, analysis allocate points

across each row to reflect the importance of different

levels

For simplicity equal points difference are assigned

between levels, but point difference between levels

can also be variable

Step V :Develop the point manual:

Analysts then develop a point manual that contains a

written explanation of each job element.

It also defines what is expected of the four levels of

each sub factor. This information is needed to assign

jobs to appropriate level

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Step VI:Apply the point systemWhen the point matrix and manual are ready, the relative

value of each jobs can be determined

The specialists subjectively compare job descriptions with

the standard point manual description for each sub factor.

The match between the job description and the manual

statement reveals the level and points for each sub factor

of every job.

The points for each sub factor are added to find the total

number of points for the job. After the total points are

known the jobs are ranked accordingly

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Phase 3: Wage & Salary Survey

For external equity experts have to rely on wage & salarysurveys

These surveys discover what other employees in the same

labor market are paying for specific key jobs

Wage & salary surveys are benchmarks against which

analysts compare compensation levels

Sources of Compensation Data:

One source of collecting data about the wages and

salaries is the Labor Dept, which periodically conducts

surveys regarding current wage & salary rate.

State unemployment offices also compile this

information for employers.

A third source of compensation data may be an

employer association that surveys member firms Fourth source of data collection is the professional

associations, which may be the only source of compensation

data for highly specialized jobs.

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The major problem with these published data of surveys iscomparability. Analysts cannot always be sure that their jobs

match the jobs in the surveys. Matching job titles may be

misleading .jobs with similar titles may differ in description

from organization to organization

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Phase 4: Pricing Jobs In pricing jobs the job evaluation worth is matched with

the labor market worth

This involves two activities establishing the appropriate

pay level for each job & grouping different pay levels into

a structure that can be easily managed

Pay levels

To set the right pay level, the internal ranking

and the wage surveys are combined through the

use of scatter gram.

The vertical axis represents the pay rates

If the point system is used the horizontal axis is

used for points

Plotting the total points & wage level for each

key job creates the scatter gram. Thus each dot

represents the intersection of the point value &

the market determined wage rate for a particular

key job.

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For example; key job A is worth 500 points &

is paid $6 an hour. The jobs that represents key

jobs can be used to draw a wage-trend line as

close to as many points as possible, employing

statistical technique called least square method

of regression

This method relates point values (internal

worth) to wage rates in the labor market

(external worth).

If the employer wants to lead or lag behind the

market rate by a given percentage, the wage

trend line can be moved up or down by the

same percentage

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The compensation Structure:

Compensating hundreds of jobs in an Org is a very complexproblem for the analyst. Making a separate wage rates for

these jobs is almost meaningless as between several jobs the

difference of pay might be even a few cents

Therefore compensation analysis finds it more convenient to

lump jobs into job classes. For example; in the point system

method classes may be based on point ranges: such as 0 to

100, 101 to 150, 151 to 200 and so forth. This grouping

causes the ascending wage line to be replaced by a series of

ascending dashes. Thus all the jobs in the same class receive

the same wage rate. A job valued at 105 points. For example

will receive the same pay as the job with 145 points. Too

many job grades defeat the purpose of grouping and too few

grades result in jobs of widely varying importance receive

the same pay.

The problem with flat rate for each job is that giving a

worker a merit increase- which is a raise in pay for

performance requiring moving the employee into a higher

job class. To solve this problem most firms use rate changes

for each class.

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For example wage trend indicates that $8 is the average

hourly rate for a particular job class. Every employee in thatclass will get $8 if it is a flat rate. With a rate range of $1 for

each class, a new or marginal performer can be paid $7.50 at

the bottom of the range. Then an average performer is placed

at the mid-point or $8. when performance appraisal indicates

above average, the employer may be given 25 cents increase.

If his performance continues to be above average than

another increase of 25 cents can be given. Once the

employee reaches the top of the range no more increase will

be forth coming. Either a promotion or across the board pay

raise must be given to earn more than $8.50. An across the

board increase will raise the average wage-trend line

upward.

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Challenges Affecting Compensation

Strategic Objectives

Compensation management is not limited to internal

& external equity

There are other challenges like pay for knowledge

and pay for skill, approaches used by GE, Polaroid.

The more skills or knowledge the higher the pay

Prevailing Wage Rates

Market forces may cause some jobs to be paid more

than their relative worth

When there is a shortage of certain talent in the labor

market then such jobs are paid much higher wage then

prevailing market rates

Firms that need these talents were forced to pay a

premium.

Diagrammatically these rates appear on the wage

chart as RED CIRCLE RATE

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Union power

In unionized companies employers are forced to bend

down to union demands.

Wage rates are usually bargained between the CBA or

union and the management. If the employer ignores

the demands of union the workers may go on strike.

In unionized companies another problem which the

management face is that , they limit managements

flexibility in administering merit increases, because

unions are in favor of wage increases on the basis of

seniority

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Government Constraints

Government sets the minimum wage rates, overtime

pay, and equal pay etc.

If an employer violates the laws relating to wages he

will be guilty of breaking the law and will be

penalized for that

Over time usually paid at double or 1 ^1/2 of the

normal wage rate

Executives, professional, administrative and other

highly paid workers are exempt from overtime

provisions

They are also knows as exempt employees

Overtime is usually paid to blue collared jobs

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Comparable Worth and Equal Pay

Equal pay for equal work is the idea of

comparable pay for comparable work

it requires employers to pay equal wages for jobs

of comparable value

For example: male & female nurse would have to

be paid the same if their seniority and merit

matched but a female nurse and male electrician

could be paid different rates.

Under comparable worth, irrespective of the fact

whether male or female if the number of points

under a job evaluation point system is same then

they have to be paid the same

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Compensation Strategies & Adjustments

Most org have compensation strategies & policies that

cause wages & salaries to be adjusted

A common strategy is to give non-unionized workers

they same raises that are given to unionized

employees; in order to prevent further unionization

Some company pay a premium above prevailing wage

rates to attract and retain best employees

Also some employers have a Cost of Living Allowance

(COLA) in their compensation. COLA give employees

automatic raises when the labor dept increases the

Cost of living Index

Premiums or bonuses for international assignments

are another adjustment

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International Compensation Challenges

The globalization of business affects Compensation

Management

Firms that compete globally may find that using

local area salary surveys in the home country

Jobs may have to be restructured to use less

expensive labor, be automated, or be moved to

lower-cost countries or the org to survive

In multinational companies when an employee is

transferred to a foreign branch then his

compensation is adjusted according to the

compensation of the foreign country to which he is

transferred

Incentives, Fringe Benefits & Bonuses

Beside the basic wages and salaries employees are also paid

certain benefits, bonuses and incentives as part of their

compensation package

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CHAPTER 10

Incentives and Gainsharing

Managers and HR depts can use incentives and gain

sharing as tools to motivate employees to attain org goals

& objectives because these are compensation approaches

that reward specific outcomes Incentive system link compensation and performance by

rewarding performance instead of seniority or hours

worked

Although incentives may be given to a group, they often

reward individual behavior

Many farm workers are paid for each pound or bag of fruit

they pick, for example. Gainsharing matches an

improvement (gain) in performance with a distribution (

sharing) of he benefits with employees

Usually , gainsharing applies to a group of employees

rather than an individual

Incentives & gainsharing are the fastest-growing trends in

compensation management

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Although performance-based compensation has a long

history, it is often considered a non-traditionalcompensation approach, since most people receive wages

& salaries

Employers interest in performance-based compensation is

motivated by increased competition

Creating a sense of common fate or destiny makes people

feel they have shared destiny and need to cooperate to

prosper. The result can be a greater commitment to

improve performance, productivity and quality through

teamwork. Even though individual compensation may

rise, overall labor costs may actually drop as the same

number of workers(inputs) produces more goods and

services(outputs)

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Incentive Systems

These systems exist for almost every type of job from manual labor toprofessional, managerial and executive work. The more common incentives arethe following

Piecework

Incentive system that compensates the worker for each unit of output.

Daily or weekly pay is determined by multiplying the output in units timesthe rate per unit

Piecework does not always mean higher productivity, however it may bedifficult to measure a persons contribution(for example, a receptionist ) or an employee may not be able to controlthe output ( assembly line worker)

Production Bonuses

Production bonuses are incentives paid to workers for exceeding outputgoals

Often employees receive a base pay rate. Then , through extra effort thatresults in output above the standard, they get a supplemental bonus, whichis usually figured at a given rate for each unit of production over thestandard.

One variation rewards the employee for saving time. For example, (if thestandard time for replacing an automobile transmission is for hours andthe mechanic does it in three , the mechanic may be paid for four hours)

A third method combines production bonuses with piecework bycompensating workers on an hourly basis, plus an incentive payment foreach unit produced. For example

(the employee may be paid $9 an hour plus 25 cents per unit, a stepped bonusmight pay 35 cents for each unit over thirty per day )

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Commissions

In sales jobs, the seller may be paid a percentage of the

selling price or flat amount for each unit sold

When no base compensation is paid, total earnings

come from commissions

Real estate agents & automobile sellers are often on

this form of straight commission

Maturity Curves

What happens when technical or scientific employees

reach the top of their rate range?

One answer is broad banding which widens the rate

range to accommodate senior or top performers.

Another approach is maturity curves, which are

adjustments to the top of the rate range for selected

jobs.

Employees are rated on productivity & experience.

Outstanding contributors are assigned to the top

curve, good but less outstanding performers are placed

on the curve next to the top

Through this technique, high-performing professionalscontinue to be rewarded for their efforts above the top

of their jobs rate ranges without being required to

seek a management position or switch jobs to increase

their earnings

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Merit Raises

Pay increases given after an evaluation of performance

The employees immediate supervisor usually decides

these raises

Although merit raises reward above-average

performance, they are seldom tied to any specific

standard

This lack of clear standards causes some companies to

rely on a MBO approach that sets standards against

which merit raises can be given

MBO is particularly common among administrative &

managerial employees because their productivity is not

objectively measurable

when raises are distorted by biases, meritorious

performance goes unrewarded

Example : if a Co. values quality but gives merit raises

to managers soon realize that quality is not valued as

highly as quantity is.

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Pay-for-knowledge/Pay-for-Skills Compensation

Pay for knowledge or pay for skill compensation systems

reward employees with higher pay as an incentive for he

increased knowledge or skills they acquire

Most Org have traditionally designed their compensation

systems around specific jobs

The salary structure of these systems has typically been

based on job analysis & evaluations; this process

determines a jobs worth & salary range

A new alternative to this job-based approach has been

developed; this new system pays employees for the skills

& knowledge they possess, rather than for the job they

do or a particular job category

whether the compensation system is called knowledge-

based pay, skill based pay, or pay for knowledge, pay

levels are based not on what an employee does but on the

range of jobs the employee can do.

Employees are rewarded for each new job or skill

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These learning-based pay systems evaluate the

employees worth to the employer; increased skills andjob mastery give management greater staffing flexibility.

The increased employee knowledge also may reduce the

total number of workers needed & may lead to higher

quality results

The higher pay & greater diversity of work may mean

higher levels of satisfaction & therefore lower

absenteeism & turnover.

At the same time, the HR department creates continuous

learning Org where continued growth is valued by

employees & the company.

In short, employees are paid more because they are

worth more

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Non-Monetary Incentives

Incentives usually mean money, but performance incentivesalso come in other forms.For example: many companies have recognition programs inwhich employees receive plaques, novelty items(from keychains to baseball caps), certificates, time off, vacations &other non-cash incentives for job performance, suggestions andeven community service

Beyond specific rewards connected to specific behaviors,changes in the job or the work setting may serve as anincentive to improve ones performance

People may be motivated to apply for employment or workdiligently to retain the current job because of fringe benefits.For example : Health insurance for those with sickly family

members & tuition waivers for university employees withcollege-age children may be a powerful incentive

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Executive Incentive

Incentives especially executive incentives-need to achieve abalance between short-term results and long-termperformance

Although incentives that relate to long-term improvementswere found in 45 percent of 112 firms researched in onestudy, most companies still tie executive bonuses to annualprofits, which are considered short-term.

In some companies, this short-term orientation may lead toreductions in product quality and cuts in research &development, & other long-term investments

At the same time, incentives must be matched to the needs ofexecutives.

Young & middle-ages executives are likely to desire cashbonuses to meet the needs of a growing or maturing family.

Older executives often seek to defer incentive compensationto build retirement savings.

In Europe where tax rates on income tend to be higher thanthey are in the US, executives frequently receive nontaxablebenefits as rewards for good performance

A chauffeured limousine paid for by the company is acommon reward for a senior executive

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In Japan, expensive club membership is a common perks ofthe executive life

Sometimes executives are granted stock options the right topurchase the companys stock at a predetermined price

This price may be set at, below, or above market value

This intent is to give executive an incentive to improve thecompanys performance, with some companies actuallyrequiring executives to buy stock in the firm

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International Incent iives

To attract, retain and motivate international executives &the key employees, many global companies are setting upforeign allowances that are incentives for internationalemployees.

Some companies find it beneficial to pay foreign housing& transportation costs & taxes directly rather than giveallowances & incentives to work overseas

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A Point System Matrix

Compensable or LevelsCritical factors Minimum Low Moderate High

1. Responsibilitya. Safety of others 25 50 75 100 b. Equipment & Material 20 40 60 80c. Assisting trainees 5 20 35 50d. Product/Service quality 20 40 60 80

2. Skilla. Experience 45 90 135 180 b. Education/Training 25 50 75 1003. Efforta. Physical 25 50 75 100 b. Mental 35 70 105 150

4. Working Conditionsa. Unpleasant conditions 20 40 60 80 b. Hazardous 20 40 60 80______________________________________________

Total points 10000