WEEK-1

1.1.1Overview of the Pay Model:

Compensation Strategy:

The People Manager Value Proposition begins with the organizational objectives, needs and
values. If we're an organization that might rely on operational efficiency and low costs. It is
cost leadership strategy It’s a method to reduce costs and produce the least expensive goods in
a market or industry in an effort to gain market share. If any organization such as maybe a
technology driven company that relies more on developing new products and then bringing
those to market , is innovation driven organization . Innovation drives business and
productivity. Those organizations that consistently challenge themselves and their employees
become market leaders. However, many companies are risk adverse, relying on compensation
models and incentive programs that support the status quo instead of encouraging employees
to achieve ambitious goals. On an overview it is completely related to what we need our people
to accomplish, which in-turn define the HR Strategy of organization. First and fore most
concern is whom to attract and whom to retain, then maintaining their performance and
motivate them to perform better through rewards like

 The total cash to mean both the base cash or salary

 Short term incentives as things such as commissions or bonuses.
 Long term Incentive is completely related and linked to Long term performance. For
example, Stock options.
 Pay-mix or Total compensation is mix of all the above. It includes how we distribute
resources between each component of mix.
Further-more, there is Employee Value proposition which is the main motivating and attracting
factor. They include not just compensation, but they also include all of the non-cash rewards,
all of the things that makes a job rewarding.

Strategic Messaging Model :

So this model maps isabout compensation and the mix of that compensation and then messagi
ng around that compensationto you can get the person that you want to attract, retain, and mot
ivate.The first element of our strategic messaging model, includes just the simply the size of t
he compensation package.
So for example it includes whether allocating a lot of resources to compensation.Perhaps pay
ing the 25th percentile of the market for total compensation.Perhaps you're paying the median
or perhaps paying the 75th percentile, trying to pay more than 75% competitors.So dependi
ng on who you want to attract, retain and motivate, you might shift the allocation of those co
mpensation expenditures . If organizations want to attract people who are confident
organizations focuses on short-term Incentives, whereas to align individual’s activities to the
Organizational goals, organizations focuses on Long-term Incentives and sometimes culture
too. How we communicate the reason behind their pay mix is quite important than all the above.
Methods of attracting, obtaining and motivating the employees depends on this.

1.1.2 From A Pay Strategy To Pay Mix

A pay strategy lays out your organization's point of view on how you will determine pay and
benefits for employees. It aligns all of your compensation resources to your business goals,
helps you decide where you want to compete, how competitive you need to be and what you
choose to reward. Pay mix is the ratio of base salary to target incentives that make up On-
Target Earnings (OTE). For example, a 60/40 pay mix means that 60% of OTE is fixed base
salary, and 40% of OTE is Target Incentive (TI), or variable pay.

Examples of Pay Strategy:

 Walmart's business strategy relies on cutting costs and operational efficiency. And for
them, this also translates into keeping compensation costs low. And so their
complementary practices rely on operational efficiency in all aspects of the business
including their selection. They need to be able to select, identify workers cheaply to
 train them at relatively low cost. And also to standardize work practices so that
changes in their work force are minimally disruptive.
 Costco, an American retailer is well known for its pay strategy and pay-mix which
increased productivity, with this they delivered superior service to customers and
employees. Once if they feel a candidate is suitable for a job then they train the
employee to make him perfect for that job. They invest a lot into training of
employees so that operational efficiency can be achieved. Here the motivating factor
is Pay-Mix. This is how they linked Strategy of organization to the Pay-Mix of the
employees.

SAS Institute tends to unlike other software companies, they rely very little on short term
incentives and long term incentives, and rather they focus on their benefits package and base
pay. They see these very generous benefits as allowing their employees to focus directly on
their work. They're pioneers in offering such benefits as onsite daycare and a reduced work
week. . Many examples related to Microsoft, Netflix etc were also mentioned.

1.2.1 Producing A Job Description

When producing a job description, it is about is performing a job analysis. We should think
job analysis, and make a job description.

 The first reason to write a job description is to benchmark pay. We need to figure out
what it is that we're trying to do or accomplish with this job so that we can go off into
the labor market and find an accurate benchmark.
 The second reason why we want to write a job description is for compliance
purposes. It is this the kind of job where we need to pay them a wage and give them
overtime or is this the kind of job where we can just give them a salary.
 A third reason has to do with staffing, training, and development.

For example, Job description of Compensation and Benefits Manager:

Description:
 Should Plan, direct and coordinate Employee’s pay.
 Produce Job descriptions to decide Benchmark of Pay.
  Setting organization’s pay structure, determining the wage rate and develop modifies
compensation plans or select and manage the benefit vendors.
Requirements and skills:
 Bachelor’s degree in Human Resources Management or related field.
 Knowledge in principles of compensation, laws, legal codes and statutes related to
compensation.
 Should able to use software’s related to Human Resources and many more.

1.2.2 Benchmarking Pay

Salary benchmarking is a vital tool when hiring employees. Salary benchmarking, also called
compensation benchmarking, is the process by which internal job descriptions are matched to
external jobs with similar responsibilities to identify the market rate for each position.
Before hiring employees, we first need to build a foundation. And if that foundation is rotten,
then ,already set yourself up for failure. If done incorrectly using bad market salary data, we
could have a hard time attracting the best candidates, or risk looking foolish by advertising a
position with a salary range completely out of whack with the rest of the market. If we hire
someone and a salary benchmarking mistake is later discovered, any adjustment (especially
downward) could create employee dissatisfaction, poor employee engagement, and lead to
higher turnover costs if that employee has to be replaced. This makes salary benchmarking a
vital part of the hiring process.

Calculation of Benchmark Pay Example:

 In 2012, it was given that the median salary of compensation and benefits manager is
$95,250 per year and according survey among HR managers it is $90000. That means
that half of compensation benefits managers were making more than that number, half
of them were making less than that number. Use that median pay and using some other
source we determine 2nd view of pay. So based on these salaries estimate the weight
that are to be added when we take different sources. Weighted mean in this case is
$94000, then it should be multiplied by the respective weight. Then add the weights
separately. Then median times the pay divided by sum of the weights is our final
Benchmarked pay.
1.2.3 Surveys And Labor Market

A compensation survey is a survey designed to show how comparable employers pay for
comparable jobs.? With ideal survey it would have comparable benchmarks. That means that
they would have the same industry and the same geography and the same jobs. That's
because, even if we're trying to for example pay a compensation of benefits manager, a
certain to try benchmark their pay, their pay might be different in finance versus construction,
versus small stores, or they might be different in big cities versus small cities.

Labor market analysis is the process of: Identifying the appropriate labor market for various
types of positions. Surveying the market to determine the salaries that are being paid for like
positions. Identifying market trends such as: ancillary pay, and merit and pay practices.

In general, labor market analysis is the process of:

 Identifying the appropriate labor market for various types of positions.

 Surveying the market to determine the salaries that are being paid for like positions.
 Identifying market trends such as: ancillary pay, and merit and pay practices.
 Establishing, adjusting, and/or recommending salary changes and/or structures for
staff positions.
 Consulting with management on their workforce needs.
 Labour market will map wage on the y axis and the quantity of labour, how many
people are on those jobs, on the x axis. Through this we can know how many people
are having jobs and how many are not. This also helps employers to map their strategy
with the pay level they are willing to give.

1.3.1 Salary Structure Terminology

The salary structure is a hierarchical set of jobs and their associated pay ranges.
Benchmarking an Engineer we're going to be looking up into the labor market. And get data
from a salary survey, and then we'll have our benchmark pay rate for that Engineer. But then,
not all Engineers in our organization are going to be making the exact same pay rate. What
we might have is our Benchmark grade or our midpoint, be determined by our salary survey
and then we're going to add and subtract the 20% to determine our range .So the first thing
that we'll see is our different job titles. So for example, at the lower end of our structure, we'll
have our Junior Engineers, followed by our perhaps just our Engineers. And then, our Senior
Engineers and then there could be lead engineers or principal engineers or so on.

We also have our salary midpoints so we want this to be roughly the midpoints for where
most people would be earning for these different grades, and those would be tied to our
external benchmarks. And then, lastly, we have our ranges. We have both the minimum
salary that you might make as a junior engineer, and also the most that you might make as a
junior engineer. And to get a higher pay, you would have to be promoted into the next grade
1.3.2 Salary Structure and Internal Benchmarks

Salary of engineer, Junior engineer and lead Engineer is completely different. Then by
comparing through benchmarking we determine gaps and then draw graph which helps in
visualizing gaps.

Steps to create a structure from the jobs that are able to be benchmarked.

 Pick jobs that are needed to be benchmarked.

 Then benchmark pay at control rates in the market.
 Fit the pay policy line through regression or some other method.
 Set pay for non-benchmarked jobs using policy pay line.
 Determine pay ranges of organization based on firm policies.

1.3.3 Criteria for Raises and Promotions

We have to remember that the pay structure isn't everything. The pay structure determines base
cash. Base cash is only one of four elements of the payment, along with short term incentive,
long term incentive and our benefits and perks. And even then, our pay mix is only one part of
the full employee value proposition. Also included in the book, employee value proposition,
isn't just their pay, their total comp, but it's also all of the noncash awards and all of the other
things that makes people come and excited to work for the organization every morning.

Raise tied to loyalty or tenure :

So, for example, what we have here is when you come into the organization, you might earn a
wage of $10 per hour. And then, as you stay with your organization, then eventually he'll get
raises up to a rate of $15.50 per hour, if you stay as a junior engineer.This communicates that
we value tenure, that we value loyalty, and we value being in the organization for a long time.
And it's those people who are in the organization for a long time who are going to get to the
top of their wage schedules.

Raise tied to performance:

This is an example of a method of communicating to employees that we also value both your
tenure, because that you climb in the organization, but we also value your score on these
different ratings. And so, here's an example of a raise schedule.The people who get the
largest raises are those who are relatively low within the ranges, so they have a lot to climb
and they also have the highest performance ratings. And so, those employees who have
outstanding performance ratings but are also relatively low within that range are going to get
raises of 5 or 6%. In contrast, there's going to be some people who don't get any raises in this
context.

Ranking order of jobs:

 Grading of jobs is done by type of job and risks associated with decisions related to that
role.
 Determine the skills such as certifications, licensures or the job requirements.
 Last one is through competency-based ranking, which is determined by behavioural
competencies. All of these communicates what organizations value most.

1.3.4 Broadbanding

Broadbanding is the process of consolidating many grades into fewer bands with wider ranges.
And so, this process is a process that can take away some of the structure and the frequency of
promotions. But also gives us kind of a maximum amount of flexibility to because those ranges
are very wide.

Advantages:

 More pay flexibility

 More lateral job flexibility
 Specialized career ladders

Disadvantages:

 Rarer promotions
 Loss of structure
 WEEK 2

2.1.1 Tying pay to performance Evaluations

The options for tying pay to performance evaluations are going to be a lot of options because
performance evaluations can be tied to any element of the pay mix. So again, the pay mix
includes our cash, base cash, our short term incentives, our long term incentives and out
benefits and perquisites. Tying our performance evaluations to short term incentives, we're
usually talking about tying them to bonuses, we're tying them to long term incentives, we're
tying them to option grants. And if we're tying them prerequisites, we're tying them to things
like maybe reserved parking or perhaps a nicer larger office. Or if we're tying performance
evaluations to noncash awards, we might be talking about employee reward program or perhaps
better job assignments.

Tying raises to the performance is most preferred compared to tying it to Base Pay. Then some
of the organizations are tying non-cash rewards with Performance, few are initiating Employee
reward programs or better job assignments. Basically, there are a lot of options to improve
performance of employee like

 For example, organizations tie performance evaluations to base cash through raises i.e
as they perform better, they get more raises and also those raises are reflected with
moving up within the pay grades of organization.
 Other method is to tie performance with fixed bonuses. Employees get motivated to
work rather than slacking off.

2.1.2 Should Pay Depend On Performance Evaluations ?

In the case of boss who’s not satisfied with the leadership of an employee where all qualities
like work is good the performance evaluation then the question of developmental purposes
come in the picture . That's because performance evaluations really have two main purposes.

One is kind of the big bucket of developmental purposes. That is, we want the boss to be
engaged with employees, to have a learning conversation with them, regarding how they can
do better in the future, how they can better align their efforts and their objectives to the goals
of the organization. And so it really serves a very important developmental purpose, certainly
for the employees and for the organization as a whole. The second purpose of these
performance evaluations is that we're potentially also tying them to raises and bonuses, to
option grants, and so on, so all these different pay elements.

Challenges :

when performance evaluation becomes about judgment, becomes about or tied to things like
raises or promotions or terminations or so on, it's really hard to also use that same conversation
for development as well. i.e organizations should think about the purposes of development
and judgment to conflict with each other.

Another challenge is also different evaluation biases. Managers or person who evaluates
shouldn’t bring behavioural biases and any other.

2.1.3 Designing Performance Evaluations

Evaluation is done for the development of Employee, for getting accurate data for designing
compensation, raises and Promotions then designing bonuses etc. But evaluations can only be
effective when it done without any biases. To avoid that

Developing Good Benchmarks: Benchmarking Behaviour of employee is Developing good

benchmarks in the organization. For this development organizations usually use BARS
Method. BARS Method compares an Individual employee’s behaviour with standard
situational examples. Liker scale with 1 to 5 rating is used for this. To get a rating of 5 an
employee should be able to solve situational problems and tackle customers

But for this managers should set standards i.e he or she should know for what kind of
behaviour an employee gets a rating of 5.Then only this will become easy. Some of the
behaviours might be difficult to measure based on their output, because clients may differ. So
here we are benchmarking on inputs and use BARS to do that. Managers use Management by
objectives Method. This is a method used for benchmarking employee’s ratings with
achievement of prescribed goals. By this we are measuring if the employees can meet the
objectives. Hence, we are measuring output. MBO can be designed by considering the SMART
concept. Goals set must be Specific, Measurable, Attainable, Realistic and Time-bound.

Good Communication: Communication is the first and foremost factor to achieve any target
and Objective of the organization. Communicating the objectives and roles related to that job
to the employee’s prior is beneficial. Also communicating behavioural aspects which are
important to the job and themselves or if required training them is Important. This way
Organizations can develop good communicating system within the organization.

With this aspect’s organizations can avoid biases, improve performances and improve
performance assessments. This can eliminate conflicts and improves relationships between
superiors and subordinates.

2.2.1 To Incent Or Not To Incent

Short Term Incentives include bonuses, commissions, piece rates and other incentives that are
targeted on rewarding and incentivizing specific key performance indicators.

A Key Performance Indicator, is the performance measure that can be used to determine our
Short Term Incentives. So one way to think about it are our KPIs, our Key Performance
Indicators our inputs. And our outputs are those Short Term Incentives such as the
commissions, or bonuses, or so on.

And Short Term Incentives are just going to be one element in the pay mix. And again the
main purpose of Short Term Incentives are to motivate workers to work towards those Key
Performance Indicators. Key Performance Indicators could be measured in many different
ways either the objectives of the individual, the group, or the organization. They conclude
things such as profits, so for example, for a salesperson, the profits of the margins that associate
in the products that they sell. Or, revenue, the amount of revenue that salesperson might bring
in. Units such as the number of units sold, satisfied customers.

We use team incentives, or individual incentives or tournament or rank based incentives, will
depend a lot again our money, our mix and our messaging. And so when we have an individual
incentive, that means that I'm paid for my own personal measured performance. If you have a
team based incentive, for example, we have for example a manufacturing plant where there are
four of us who are working at a work station or one working it, then you might be paid based
on the performance of my entire team.

Next are Rank based incentives, for example a sales team has performed exceptionally well
and got good output. To get incentives one member may discourage other member to not
perform well and divert them in other direction and he or she will get those incentives. Deciding
on which method to use is the key to succeed in this process . This can be decided by
considering nature or type of work, objective of Business we are into, strategy which we are
following and few other factors.

2.2.2 Should Jobs Use Short Term Incentives ?

Short-term incentives are not a big part of total compensation. Rather, if we're looking at the
pay mix as a whole, most people are getting the majority of their pay through base pay, not
through short-term incentives. And so let's look at some examples. If you think about nurses,
or we think about perhaps office workers, salaried office workers, these are jobs where most
people aren't getting the majority of their pay through short-term incentives. But on the other
hand, short-term incentives are prominent pieces of total compensation package in some other
jobs. So for example, in a factory, a worker might be paid a piece rate that is a certain
commission for every unit that they produce. Or in agricultural work, people might be paid per
basket or bushel of produce that they pick. And in some jobs, we might see incentives, but their
use is relatively controversial, such as for teachers.

Problems Associated :

1.Alignment Problem: This implies the misinterpretation of performance of employees related

with the targets set.

2.Measurement Problem: Short term incentives cannot be paid for jobs that can be easily
done. Because everyone will be able to do it.

3.Metering problem: This problem is raised when the difference is not created between Good
and Bad output.

4.Control Problem: Incentives cannot be given based on the factors that are completely out of
job or not within control of the job. Because such factors don’t contribute much, so, they might
demotivate employees.

Once these problems are addressed then the pay mix created is a good one.

2.2.3 Designing Incentives

When we're designing these short term incentives we're talking about taking key performance
indicators and mapping those onto pay. So here we're going to put our key performance
indicators which can include profits, revenues, units produced, units sold, evaluation scores or
so on. And we're going to map that onto a graph with our key performance indicators on our x
axis and our pay on our y axis.

 Flat Rate:

Assumption is made that pay is not depended on performance. Hence the graph becomes a
flat line regardless of KPI’S.

 Implementing a pure price rate:

Increase in the KPI’s lead to increase in pay. So, there is direct relation between two
features, hence the graph will be a straight line.

 Piece rate with Guaranteed rate:

A bit of guaranteed or flat rate for reduced performance rates are combined. There is also piece
rate region in the graph where piece rates are given. We often see in organizations that for the
same amount of time they will have a guaranteed pay rate. But after the worker gains
experience or after the organisation has had some experience implementing that piece rate, by
decreasing it, they will phase out the guaranteed rate. Base pay serves as an insurance as
workers who are prone to risk that is who have to tackle problems outside the control feel the
base pay as an assurance whereas piece rate serves as an incentive. Another method of
providing incentives is giving bonuses.

Organizations where work is done on piece rate basis, they use ceiling which is some sort of a
piece rate region at which the worker earns a given rate for the units he or she has produced.
2.3.1 Varieties Of Long Term Incentives

Long term incentives are incentives that tie the rewards, long time rewards, to a company's
long term performance. And so how do they do this, well typically, these work because are
going to measure performance, in terms of, the share price, that's going to be the key
performance indicator. And the main that were going to reward them are using rewards that,
whose value also tied to the share price

Long term incentives are just one element of the pay mix which includes

 Base cash,
 Short term incentives,
 Long term incentives, and
 Benefits and perquisites.

2.3.2 Stock Options

Stock options from your employer give you the right to buy a specific number of shares of your
company's stock during a time and at a price that your employer specifies. Both privately and
publicly held companies make options available for several reasons: They want to attract and
keep good workers.

This is just an option not an obligation.

 Given number of shares (options granted)

 Given price (strike price)
 After a given amount of time (vesting period)

Example:

There are 2000 options at a price of $15 per share over 3 years

Let’s assume the stock price rose to $40 per share after 3 years that means the value of the
stock is increased. This implies the employees can get more value than earlier.

Another situation can also arise where stock price fell from $15 to $10 per share after 3 years.
There comes the question should we exercise the stock now. In this case employees can
purchase more stocks at lower price since the price might increase in the future.
The Black-Scholes Model calculates the fair value of option-like financial instruments, such as
the following: Employee stock options: a form of compensation that gives an employee the
right to buy company stock at a predetermined price after vesting conditions have been satisfied

There are two main forms of stock options.

1. Non-qualified stock options: Typically, useful for employees. Taxed on the difference
between stock price and strike rate is considered in this.
2. Incentive stock options. Typically used for executives. It is not taxed when exercised.

Restricted Stock Units: Organizations give limited shares to the worker i.e they set a number
of shares depending on profits.

WEEK – 3 American Laws