Module-3

Principles of compensation
determination
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Significance
Compensation management is a sensitive and
crucial aspect of human resource management
Compensation adequacy or inadequacy can
affect, either positively or negatively,
the competitiveness of the organization
higher attrition rates,
low commitment,
propensity to financial irregularities or frauds,
corruption, etc.
2
Equity in Compensation
Equity literary means application of general
principles of justice to correct or supplement the
law or fairness.
Compensation equity may be defined as a
practice wherein employees (and organizations)
examine their inputs and outputs and judge
fairness of compensation by comparing inputs and
outputs of a referent other.
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Equity in Compensation
Inputs include
quality of job performance,
length of service,
education, experience,
amount of responsibility and pressure,
productivity on job, effort expended on the job, and
organizational citizenship behaviour.
Outputs include
compensation and benefits,
promotions, status, and
intrinsic rewards.
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Internal equity
Internal equity is the relative worth of each job
when comparing job duties, responsibilities,
accountability, formal training, and experience of
one job to another and arranging all organizational
jobs in a formal grading structure with broadband
compensation ranges.
Internal equity occurs when the comparison other
has a different job, but the same organization.
One way organization achieve internal equity is
through the use of job evaluation programme.
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Internal equity
Internal equity in compensation refers to comparisons
employees make to other employees within the same
organization
An internal equity consideration includes the following
factors:
Difference in skills and competencies of job holders even for
same position
Difference in performance of employees working on same
positions
Productivity level
Able to attract and retain competent employees
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External equity
External equity is the relative worth of comparable
jobs in relevant labour markets factored for
general economic variances and adjusted to
reflect the economic market place.
External equity occurs when the comparison is
done with others who have the same job, but in
different organizations.
Even when others are not in the same
organization or workgroup, or are substantially
dissimilar, equity effects are considerable.
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External equity
Organizations tend to achieve external equity
through the use of labour market (or
benchmarking compensation with competitors)
and compensation surveys.
External equity in compensation refers to
comparisons employees make with similar
employees performing similar jobs at other
organizations.
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Individual equity
Individual equity occurs when the comparison is
done with others who have the same job and in
the same organization.
It is generally accepted that individual equity has
greater impact on employees performance than
the other two.
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Equity Adjustment
An equity adjustment is used to address
compensation inequities arising from external
pressure in high demand fields, internal
compensation compression, or concerns
regarding the retention of certain employees.
These types of compensation increases are not
granted to reward performance.
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Equity Adjustment
Equity considerations are clearly important to
organizations because of their behavioural
consequences.
Because employees have the ability to change
inputs, inequity may lead to changes in effort and
therefore, performance.
Organizations more often use equity based
compensation to attract, motivate, and reward
employees.
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Bargaining ability of employee union
Unionized workers have higher wages than non-
unionized workers.
In India 93 percent of the workforce is in the
unorganized sector and almost the entire
unorganized sector, is virtually non-unionized.
Unionized sectors enjoy minimum wages and
social protection, benefits through collective
bargaining compared to non-unionized workers.
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Bargaining ability of individual
employees
Individual employee performs the work by the
acquired skills, abilities, knowledge experience
and education.
The greater value the skills and experience, the
individual possess the more pay he will demand
for those skills.
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Statutory requirements
Organizations must pay as per the relevant laws
of the land.
For example, in India, the Minimum wages Act,
1948 stipulates that workers in the unskilled, semi
skilled and skilled jobs must be paid a minimum
wage.
This is essential character of any welfare state
committed towards the goals of social justice and
securing the rights of the employees to at least
minimum standard of living.
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Ability to pay
Organizations should pay their employees as per
their financial capacity and capability.
If an organization pays more than its ability, then
the organization may get bankrupt.
On the other hand, if the organization pays much
below its ability to pay, then such organizations
are unlikely to attract and/or retain competent
employees, which will ultimately adversely, affect
the effectiveness of the organization
15
Demand-supply conditions in job
market
During economic buoyancy, organizations hire more
people and increase business activities which push
the compensation level in the labour market as
availability of qualified manpower becomes scarce.
On the other hand, during recession times, due to
general decrease in business activities, organizations
layoff or retrench employees which increase
manpower inflows into the labour market thereby
bringing down compensation levels in general.
However a well developed labour market operates
within a range and thus does not create too many
fluctuations.
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Activity
Current demand for HR, finance and Marketing
Average qualification, experience and salary
range for HR, finance and Marketing personnel
Availability VS. hiring rate
Gap b/w compensation expectation of candidates
and that offered by org.
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What is a Job Worth?
Making a studied decision of the value your
organization places is jobs preformed for it can
greatly affect job retention and company
performance.
How can we measure the value of a job?
Traditional Approach
Broad banding
Pay for Knowledge
Team Pay
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Worth of job
Traditional Approach - Considers internal equity,
external equity and organizational philosophy towards
compensation
Broad banding - Replaces narrow wage scales with
wider ranges of pay. Pay can be flexibly changed to
match performance, skills or duties
Pay for Knowledge - Sets a wage based on a specific
skill or knowledge set
Team Pay - Group compensation based on the team
performance. This encourages employees to strive
towards a common performance goal
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Job evaluation
Job evaluation is a technique of job analysis,
assessment and comparison in order to determine
the demands of the job, such as experience and
responsibility required for carrying out the job
effectively.
Job evaluation is the process of analyzing and
assessing the various jobs systematically to
ascertain their relative worth in an organization.
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Objectives of job evaluation
To gather data and information relating to job
description and job specification
To compare the duties and responsibilities jobs.
To determine the hierarchy of jobs in organization
To determine the ranks of various jobs
To ensure fair and equitable compensation on the
basis of relative worth or value of jobs
To minimize the discrimination in compensation
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Techniques of job evaluation
The Ranking System,
Job Classification or Grading system,
The Factor Comparison System,
The Point System.
Computer aided
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Ranking
This method is one of the simplest to administer.
Jobs are compared to each other based on the
overall worth of the job to the organization.
The 'worth' of a job is usually based on
judgements of skill, effort (physical and mental),
responsibility (supervisory and fiscal), and working
conditions.
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Ranking
Advantages:
Simple.
Very effective when there are relatively few jobs to be
evaluated (less than 30).
Disadvantages:
Difficult to administer as the number of jobs increases.
Rank judgements are subjective.
Since there is no standard used for comparison, new jobs
would have to be compared with the existing jobs to
determine its appropriate rank. In essence, the ranking
process would have to be repeated each time a new job is
added to the organization.
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Job Classification
Jobs are classified into an existing grade/category
structure or hierarchy.
Each level in the grade/category structure has a
description and associated job titles.
To ensure equity in job grading and wage rates, a
common set of job grading standards and
instructions are used.
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Job Classification
Advantages
Simple.
The grade/category structure exists independent of the jobs.
Therefore, new jobs can be classified more easily than the
Ranking Method.
Disadvantages
Classification judgments are subjective.
The standard used for comparison (the grade/category
structure) may have built in biases that would affect certain
groups of employees (females or minorities).
Some jobs may appear to fit within more than one
grade/category.
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Factor Comparison
A set of compensable factors are identified as
determining the worth of jobs. Typically the number of
compensable factors is small (4 or 5).
Examples of compensable factors are:
Skill
Responsibilities
Effort
Working Conditions Next, benchmark jobs are identified.
Benchmark jobs should be selected as having certain
characteristics.
Equitable pay (not overpaid or underpaid)
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Factor Comparison
This process establishes the rate of pay for each
factor for each benchmark job.
Slight adjustments may need o be made to the
matrix to ensure equitable dollar weighting of the
factors.
The other jobs in the organization are then
compared with the benchmark jobs and rates of
pay for each factor are summed to determine the
rates of pay for each of the other jobs.
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Factor Comparison
Advantages
The value of the job is expressed in monetary terms.
Can be applied to a wide range of jobs.
Can be applied to newly created jobs.
Disadvantages
The pay for each factor is based on judgements that
are subjective.
The standard used for determining the pay for each
factor may have build in biases that would affect certain
groups of employees (females or minorities).
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Point Method
A set of compensable factors are identified as
determining the worth of jobs.
Typically the compensable factors include the
major categories of:
Skill,
Responsibilities,
Effort, and
Working Conditions
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Point Method
Skill
Experience
Education
Ability
Responsibilities
Fiscal
Supervisory
Effort
Mental
Physical
Working Conditions
Location
Hazards
Extremes in
Environment
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Point Method
The point method is an extension of the factor
comparison method.
Each factor is then divided into levels or degrees
which are then assigned points.
Each job is rated using the job evaluation instrument.
The points for each factor are summed to form a total
point score for the job.
Jobs are then grouped by total point scores and
assigned to wage/salary grades so that similarly rated
jobs would be placed in the same wage/salary grade.
32
Computer Aided
Job evaluation can be done by using computers.
It features computerized checking of questionnaire
answer and automated output of both job
evaluations and relevant compensation reports.
33
Computer Aided
Advantage
simplification of job analysis,
ability to keep job description up-to-date,
increased objectivity of the evaluations,
less time spent in committee meetings,
improved credibility of the compensation management
system and
greater ease in system maintenance.
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Process of Job evaluation
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Determine the
objectives
Planning Acceptance
Select Jobs
Prepare Job Description
and Job Specification
Appoint Committee
Select Evaluation
method
Review Periodically
Determine objectives
the objectives of job evaluation programme should
be determined prior to undertaking the
programme.
The prime objective of job evaluation is to identify
relative worth of different jobs in the organization
in order to establish fair differentials in
compensation amongst different jobs.
36
Planning
job evaluation programme requires participation of
employees, managers and top management.
Therefore all concerned should be communicated
about the purpose and the obligations of every
employee and managers to ensure its success.
Communication and participation helps in bringing
about trust and stimulates interest in the program.
37
Select the jobs to be evaluated
Due to various and time constraint, shop floor and
office jobs are evaluated.
Executive, professional and technical jobs are
evaluated later in the programme.
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Prepare job description and job
specification
since job evaluation differentiates compensation
amongst jobs based on duties, tasks and
responsibilities associated with each job, therefore
job description and job specification should be
readily available.
39
Appoint a committee to perform job evaluation
job evaluation can be carried out by employees of
the organization or outside with consultants/firms
specializing in job evaluation programme.
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Select job evaluation method
Depending on the nature of the jobs to be
evaluated, an appropriate method is to be chosen.
A particular method may be more suitable for
evaluating clerical jobs and still another method
may be more suitable for evaluating operative
jobs.
Committee has to make a judicious choice of the
methods to be employed for evaluating various
jobs.
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Review periodically
Given dynamic nature of changes embracing
organization, job profiles keep changing with
passage of time.
Therefore, it is crucial to undertake periodic review
once in a year or two.
This helps to update the job evaluations made and
remove employees grievances pertaining to unfair
pricing of their jobs in the previous programme.
42
Salary Survey
A salary survey is a procedure used to evaluate
the worth of jobs in the market place
Salary surveys seek to establish rates of pay for
particular occupation within given industrial
sectors.
Only a competitive compensation package will
result in attraction and retention of a competent
workforce.
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Objectives of Salary survey
Establishing organizations external compensation
policy.
Determine the issues to be addressed in a survey
Designing and conducting surveys
Interpreting and applying survey results
Designing ranges, flat rates, incentives
Adjusting the structure to balance internal,
external, individual equity.
44
Informal survey
Informal surveys are conducted in an informal friendly manner, by
using personal contacts with other comparable organizations or
exchanging mutual information on compensation related issues.
Advantage
the response time is faster and quality of information sought is more
specific and accurate.
The cost involved is practically meagre and the organization can
therefore carry such surveys more frequently.
Disadvantage
the quality and reliability of information depends upon the level of trust
and understanding of mutual exchange.
Sometimes organizations might not be willing to share compensation
related information for key positions or critical skills.
Moreover, if the number of jobs to be compared is too large, then
informal survey will be cumbersome.
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External survey
The compensation surveys are conducted by external
bodies or individuals.
Usually external surveys are conducted by
professional associations for the benefit of their
members and these are generally sector specific such
as engineering, IT, cement, fertilizer, textiles etc.
Management consultants or firms specializing in
external surveys also conduct compensation surveys
for their clients subject to a consideration of a
professional fee.
Firms like McKinsey, Hewitt Associates, Mercer HR
consulting, etc., undertake external surveys.
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Methods of External survey
Job title method
Job description method
Job evaluation method
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Job title method
Under this method, an organization conducting the
external compensation survey collects information
about level, structure and system of compensation
from other organizations based on job title.
The information is sought, collected and categorized
based on positions such as fitter, HR manager,
maintenance manager, etc.
After collecting the information, it is tabulated and
compared with the organizations own compensation
level, structure and systems for managerial decision
making.
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Job title method
This method is easy and simple to implement.
It may lack accuracy and consistency because of
the inherent differences in nature of duties, tasks
and responsibilities for each job in different
organizations.
The working conditions, skill requirements are
different in different types of organization.
Job title method is useful only in jobs that are
standardized in terms of profile.
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Job description method
In this method, an organization conducting the external
compensation survey collects information about level,
structure and system of compensation from other
organizations based on job description.
The information is sought, collected and categorized
based on similar job descriptions.
After collecting the information, it is tabulated and
compared for managerial decision making.
This method is more accurate than the job title method
because the job contents are similar and comparable.
Differentials in compensation between the organizations
are due to job profile which can be then easily tracked.
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Job evaluation method
This method is an improvised version of job description
method.
The descriptions are collected for jobs in other industries.
The jobs selected are evaluated under the same technique
as that being used by the other organizations.
If the points obtained by the similar jobs in other industries
are the same as the ones for the organization, then the
jobs are deemed identical and a comparison for these jobs
can be made.
This method is more accurate but it is time consuming.
51
Process of Salary survey
Select the jobs to be surveyed
Define the relevant markets
Select the organizations to be surveyed
Determine the information to be collected
Determine the data collection technique
Administer the survey
52
Select the jobs to be surveyed
It is costly, time consuming and cumbersome to
obtain information on all jobs, then have them
evaluated.
Therefore, it is prudent practice to collect
information on some representative jobs from
which it would be feasible to draw the
compensation curve.
These representative jobs are called benchmark
jobs or key jobs and therefore are to be selected
with utmost care.
53
Select the jobs to be surveyed
Foll points are noteworthy in this regard:
These jobs should be distributed over the whole range
of jobs
These jobs should have been in the recent past
These jobs should exist in the competitor organizations
or in the markets
These jobs should be manned by a large number of
employees
These jobs should neither have surplus not shortage of
qualified manpower
54
Define the relevant markets
Markets may exist for organizations in which
organizations compete for labour, so also product and
service markets need to be considered.
If organizations move to skill or competency for
structures, separate analysis of organizations
compensation may be required.
Relevant markets are expressed as:
Organizations which compete for the same occupation and
skills required
The geographic distance employees are willing to
commute/relocate
Organizations which compete with the same products
55
Select the organizations to be surveyed
Organizations to be covered for conducting
compensation survey should be comparable in
terms of geographical location, size, ownership,
philosophy and competitive priority.
56
Determine the information to be
collected
Since information collected is the basis of
comparison and the heart of any surveys,
therefore careful planning should be made before
actually collecting data from the field.
Information can be collected through carefully
designed and pre-tested questionnaires.
Trained field staff should be engaged to collect
data.
57
Determine the information to be
collected
Generally the following information is collected through a
compensation survey:
General information: name of the organization, type of industry, total
number of employees and products manufactured or services rendered;
Working conditions: total hours of work, shift schedules, lunch hours,
weekly off days etc.
Leaves and holidays: type and quantum of leaves, no. Of holidays,
manner of leave encashment, basis of leave encashment, maximum
leaves that can be carried forward to subsequent year, etc.
Pay: basic pay, allowances like house rent allowance, city compensatory
allowance, special allowance, transport allowance, shift allowance etc.
Pay for performance: incentives, bonuses, commission etc.
Benefits: uniform, subsidized or free lunch, recreational facilities, thrift
society, housing, childrens education, study leave and allowance etc
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Process of Salary survey
Determine the data collection technique: various
techniques are available for collecting data for
compensation surveys
Telephone
Questionnaire
Internet
Interview
conference
Administer the survey: after deciding on other
modalities of the survey, it is administered to collect
field data for tabulation and interpretation for decision
making of the organizations top management
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THANK YOU
End of Module-3
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