Compensation Management

Ranjeet Nambudiri
Indian Institute of Management, Indore

03/11/2021 1
Trade-Offs for Munroe Davis

• Money or Relationship
•
• Short term gains or Long-Term benefits

• Security or Performance

• Ambitious or Greedy

• Own need or Firm’s need

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Employee costs…some questions

• You can reduce employee costs by reducing / freezing the salary?

• Low employee costs are a potent and sustainable competitive weapon?

• Individual incentive plans improve performance?

• People work for money?

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Compensation

Compensation

Direct Indirect

Benefits
Base Pay
Medical / Life insurance
Wages / Salaries
Paid time off
Variable Pay
Retirement pensions
Bonuses / Incentives
Stock options

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Components of Employee Remuneration

Financial Hourly and monthly Wages , Salaries

Incentives Individual and group

Fringe benefits and PF, Gratuity, Medical care, Insurance

perquisites Company car, club membership, paid
holidays, furnished house, stock
options etc.
Non Job content Challenging assignments, recognition,
financial responsibilities etc.

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Theoretical bases for C&B

• Reinforcement theory

• Expectancy theory

• Equity theory
• External equity
• Internal equity
• Procedural and distributive justice

• Agency theory

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 Factors affecting Compensation Mix

• Organizational Life cycle / Firm Size (Devers et al. 2007)

• Hierarchy
• Nature of the job
• Unions and bargaining agreements
• Market wages and benchmarks desired

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Factors affecting compensation

Internal Business strategy

Job evaluation

Performance
External Legislation
Economy / Labor market
Location / Cost of living

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Linking strategy with compensation

Business Market position Compensation Compensation mix

Strategy and maturity objectives

Invest to grow Growing rapidly Retain best talent High fixed + above-average
variable linked to performance
Moderate benefits

Protecting Normal growth / Reward management Medium Fixed and variable.

market stable skills Std. Benefits.

Reinvest – Decline Cost control Low fixed. High variable. Std.

harvest earnings Benefits. Reward productivity.
Cost control

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 Wang and Singh (2014)
CEO salary (cash component / fixed) is linked with organization’s cash ability
(Agarwal, 1981; Mehran & Tracy, 2001)

Start-Up
Stock options > Base pay > Bonus > Benefits
Growth stage
Stock options > Bonus > Base pay > Benefits
Maturity stage
Bonuses > Stock options > Benefits > Base pay
Decline stage
Stock options > Bonuses > Benefits > Base pay

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Establishing compensation systems

• Link : Business strategy – Roles and responsibilities – compensation

– Does our compensation system have the ability to elicit ‘desired behavior’

1. Conduct salary surveys

2. Job evaluation to determine worth of each job
3. Group similar jobs into par grades
4. Price each pay grade using wage curves

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Job Evaluation Methods: Ranking

• Ranking each job relative to all other jobs, usually based on some overall
factor.
• Steps in job ranking:
1. Obtain job information - JD
2. Select and group jobs – e.g., by department or clusters
3. Select compensable factors, e.g., job difficulty
4. Rank jobs
5. Combine ratings of all raters

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Job Evaluation Methods: Job classification

• Raters categorize jobs into groups or classes of jobs that are of roughly the
same value for pay purposes.
– Classes contain similar jobs.
• Administrative assistants
– Grades are jobs similar in difficulty but otherwise different.
• Mechanics, welders, electricians, and machinists
– Jobs are classed by the amount or level of compensable factors they
contain.

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Job Evaluation Methods: Point Method

• A quantitative technique that involves:

– Identifying the degree to which each compensable factor is present in
the job
• E.g., ‘level of responsibility’ on a scale of 1-5
– Awarding points for each degree of each factor.
– Calculating a total point value for the job by adding up the
corresponding points for each factor.

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 Job Evaluation Methods: Point Method –
Decision Points
• Salary surveys for benchmark data
• Job evaluation committee – Choice of members / composition?
• Step 1: Identify compensable factors ? (skills, efforts, responsibility, working
conditions etc.)
• Hay group: Know-how, Problem solving, Accountability
• Customized, say CF1, CF2, CF3
• Step 2: Identify the most critical ? – say CF 2 - 100
• Step 3: Identify relative weights ? - CF 1 – 85 ; CF 3 - 60
• Step 4: Hence, CF weightages
– CF 2 : 40 %
– CF 1 : 35 %
– CF 3 : 25%
15
03/11/2021
Job Evaluation Methods: Point Method –
Decision Points
• Step 5: Number of scale points ?
– Should allow differentiation yet not too broad to have too many jobs in one class

• Step 6: Maximum points ? – 500

• Step 7: Hence, CF Range
– CF 2 Max: 0.4 * 500 = 200
– CF 2 Min : 40
– Class width (200-40)/ 4
– CF 2 range -

40 80 120 160 200

• Step 8: JEC allots points for each job / each CF ?

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 LEVELS
CRITICAL FACTORS MINIMUM LOW MODERATE HIGH
I II III IV
1 RESPONSIBILITY
a) Use of company
20 40 60 80
resources
a) Assisting trainees 5 20 35 50
a) Service quality 20 40 60 80
a) Safety
25 50 75 100
employees/guests

2 SKILL
a) Education/Training 25 50 75 100
a) Experience 45 90 135 180

3 EFFORT
a) Mental (e.g.
35 70 105 140
judgement)
a) Physical (e.g. dexterity) 25 50 75 100

4 WORK ENVIRONMENT

a) Unpleasant conditions 20 40 60 80
a) Hazards 20 40 60 80
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Total points 1000
 Front office Housekeepin Skiboard Maintenance Chef Dishwasher
Mgr. g supervisor Instructor technician

1A 60 40 80 60 60 20

1B 50 35 50 50 35 5

1C 40 60 60 40 60 40

1D 25 50 100 100 75 25

2A 75 50 75 75 100 25

2B 135 90 180 135 180 45

3A 105 70 140 105 70 35

3B 25 50 100 75 50 25

4A 20 40 40 40 60 80

4B 20 40 80 80 40 40
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Competency based pay

• Competency?
• Competency based pay?
• Utility
– Believed to support high performance work systems
– Defines specific skills and links compensation with those skills
– Encourages development of skills among employees
– Enables flexibility and movement among jobs

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Factors affecting success of variable pay plans

• Consistent with corporate culture

• Clear separation from base pay
• Communication clarity
• Performance linkage, measurable
• Results in desired behavior
• Linked to organizational objectives
• Availability of resources

Do incentive plans motivate

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Types of variable pay plans

Individual plans Group / team Organizational

Piece rate Gainsharing Profit sharing

Commissions Quality improvement ESOPs

Bonuses EVA

Special recognition
(Cheers)
Safety awards

Attendance bonuses

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Performance Based Pay Structure
Component Linked to Linked to Band CPI VCPI IPI Total
performance of Variabilit
y
F
CPI : Organization Revenue 50%
Company
E
Performance-linked
Incentive D
VCPI : Unit Operating C
Variable Company Margin
B
Performance-linked
Incentive A2
A1
IPI : Individual Operating 5%
Individual Margin
Performance-linked
Incentive Variability % of Gross

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Do monetary incentives motivate?

• Do this and you’ll get that…..OR

• Temporary compliance
• Extrinsic – higher the cognitive element of the job more the commitment is
intrinsic
• Impact on relationships
• Undermine interest for the job
“ If they want to bribe me to do it, it must be something I wouldn’t want to do.”

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 Thank you for your time and attention

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