Basic Factors in Determining Pay Rates (Employee Compensation)

Employee compensation
includes all forms of pay going to employees and arising from their employment. It has two main components:

1- Direct financial payments:

wages, salaries, incentives, commissions, and bonuses
• Fixed Pay: Salaries & Wages)
• Variable Pay: Financial Incentives
2- Indirect financial payments:
financial benefits like employer-paid insurance and vacations
• Financial Benefits: Insurance & Training
• Non-financial benefits: flextime & telecommuting

Factors influencing compensation design.

➢ Several factors must be considered to formulating employee pay plan such as:
• Strategic policy consideration:
o The HR responsibility is to define a compensation & benefits philosophy (in alignment with the
organization’s strategic direction) to:
▪ Attract the right people to the right jobs (salary)
▪ Retain employees (benefits)
▪ Motivate them to perform at higher levels (incentives, bonuses, profit share, rewards…etc)
• organizational culture:
o organizations typically take one of two approaches toward employees either entitlement or contribution
(and sometimes a mix of the two)
▪ Entitlement orientated culture “part of the family.”
Typically, when developing the compensation & benefits program, less emphasis is put on
employee’s contributions, initiatives and responsibility (full medical coverage, transportation, free
meals…etc)
▪ Contribution oriented culture “contributors or partners”
Typically, when developing the compensation & benefits program, more emphasis is put on
employee’s contributions, initiatives and responsibility (partial medical coverage, matching pension
programs). Emphasis is mainly on incentives and stock options…etc)
• ensuring equity:
o The equity theory of motivation:
▪ postulated that people are motivated to maintain a balance between what they perceive as their
contributions and their rewards. Equity theory states that if person perceives an inequity a tension or
drive will develop that motivates him or her to reduce the tension and perceived inequity
o External equity
▪ refers to how a job’s pay rate in one company compares to the job’s pay rate in other companies.
o Internal equity
▪ refers to how fair the job’s pay rate is when compared to other jobs within the same company (for
instance, is the sales manager’s pay fair, when compared to what the production manager earns?).
o Individual equity
▪ refers to the fairness of an individual’s pay as compared with what his or her coworkers are earning
for the same or very similar jobs within the company, based on each person’s performance.
o Procedural equity
▪ refers to the “perceived fairness of the processes and procedures used to make decisions regarding
the allocation of pay.
o Methods to address equity issues:
▪ Salary survey, job analysis and job evaluation, performance appraisal and incentive pay,
communications, attitude surveys, grievances mechanisms and employee’s participation.
 o Salary Compression
▪ Long tenured employees usually face salary compression.
▪ It often occurs when the salaries of newer or less experienced employees are similar to or even
higher than those of more longer-term employees.
▪ There are several reasons why salary compression may occur:
▪ External market conditions, inflation. Limited salary increases and merit increases vs. market
adjustments.
• legal consideration:
o Employers do not have free rein in designing pay plans. Various laws specify things like minimum wages,
overtime rates, and benefits.
o Probationary pay, minimum wage, minimum periodical annual increments, deductions, overtime and
shift pays.
o Deductions have a maximum ceiling of:
▪ 5 days per month due to disciplinary actions.
▪ 10% per month for loans
▪ 25% per month in personal affairs prosecution
▪ 50% per month for in case of alimentary debt
o The minimum overtime premiums are:
▪ 35% of normal pay for overtime worked during daylight.
▪ 70% for that worked at night.
▪ 100% on rest days.
▪ 200% on official holidays.
o Leaves
▪ Annual leaves:
✓ 21 days for those spending 1 full year in service
✓ 30 days after completing 10 years of service with one or more employer or over 50 years of age.
✓ 7 additional days for workers engaged in hard, dangerous, unpleasant works or remote areas
✓ Public holidays
▪ Maternity:
✓ Maternity (twice by law, 3 times based on ministerial decree)
✓ 180 days fully paid +1 hour breast-feeding for 24 months for females who completed 10 months
in service
▪ Pilgrimage:
✓ Up to one month fully paid, one time eligibility after 5 years of service with the same employer.
o Tax Calculation:
▪ 15000 – 30000 LE (2.5%)
▪ 31,000 – 45,000 LE (10%)
▪ 46,000 – 60,000 (15%)
▪ 61,000 – 200,000 (20%)
▪ 201,000 LE – 400,000 (22.5%)
▪ More than 400,000 (25%)
➢ Aligned Reward Strategy
• To create a bundle of rewards a total - reward package – that specifically elicits the employee behaviors that
the firm needs to support and achieve its competitive strategy.
• The HR compensation manager along with top management creates pay policies that are consistent with the
firm’s strategic aims.
Job Evaluation Methods
Compensable factors are certain basic factors the jobs have in common that are used to establish how the jobs
compare to one another, and that determine the pay for each job
Compensable factors: (skills, effort, responsibility, working conditions)

➢ There are 4 main methods for evaluating jobs:

• Ranking:
Ranking each job relative to all other jobs, usually based on some overall factor.
Steps on job ranking:
1- Obtain job information: Job analysis is the first step
2- Select and group jobs: rank jobs by department or in clusters
3- Select a compensable factor: explain the definition of the factor(s) to the evaluators carefully so that they
all evaluate the jobs consistently.
4- Rank jobs: For example, each rater gets a set of index cards, each of which contains a brief description of
a job. Then they arrange these cards from lowest to highest.
5- Cobine ratings: Usually, several raters rank the jobs independently. Then the rating committee (or the
employer) can simply average the raters’ rankings.
6- Compare current pay with what others are paying based on salary survey: Next, we show on the same
table (in the middle column) what others in the community are paying for similar jobs, based on a salary
survey that we conduct. This helps us ensure that our pay will be externally equitable.
7- Assign a new pay scale: Finally, we compare what we are currently paying for each job with what others
are paying, and decide (in this case) to adjust our pay scale by raising what we pay for each job. The last
column therefore shows our new pay scale.

• Job Classification
Raters categorize jobs into groups; all the jobs in each group are of roughly the same value for pay purposes.
✓ Classes contain similar jobs such as administrative assistants.
✓ Grades are jobs similar in difficulty but otherwise different such as mechanics, electricians, and
machinists.
✓ Jobs are classed by the amount or level of compensable factors they contain and then raters write grade
definitions.
✓ Grade definitions writing description of the level of say, responsibility and knowledge required by jobs in
each grade, then similar jobs can be combined into grades or classes.
✓ The main advantage is that most employers usually end up grouping jobs into classes or grades anyway,
regardless of the evaluation method they use.
 • Point Method
A quantitative technique that involves:
✓ Identifying several compensable factors, each having several degrees
✓ Awarding points for each degree or each compensable factor.
✓ The evaluation committee determines the degree to which each compensable factor (like “responsibility”
and “effort”) is present in the job.
✓ Calculating a total point value for the job by adding up the corresponding points for each factor.
• Computerized Job Evaluations
allow the computer program to price jobs more or less automatically, by assigning points based on the
questionnaire responses.

What determines executive pay:

• Company’s size and performance
• Job complexity: (span of control, the number of functional divisions, management level)
• Employer’s ability to pay (Total profit and rate of return)
• CEO Human Capital (education level, field of study, work experience)

Compensating executives and managers:

• Base pay
• Short-term incentives
• Long-term incentives
• Executive benefits/perks

Compensation for a company’s top executives usually consists of 4 elements:

1- Base pay: fixed salary, guaranteed bonuses “golden handshake”
2- Short-term incentives: cash or stock bonuses
3- Long-term incentives: stock options
4- Executive benefits and perks: retirement plans, life insurance, and health insurance

Contemporary topics in compensation

1. Competency-Based Pay
• Competencies:
▪ Demonstrable characteristics of a person, including
knowledge, skills, and behaviors, that enable performance
• What is competency-based pay?
▪ Paying for the employee’s range, depth, and types of skills
and knowledge, rather than for the job title he or she
holds.
• Pros.
▪ Higher quality and lower absenteeism.
• Cons
▪ Pay program implementation problems.
▪ Costs of paying for unused knowledge, skills, and behaviors.
▪ Uncertainty that the program improves productivity
2. Broadbanding
• Consolidating salary grades and ranges into a few wide levels or “bands”
each of which contains a relatively wide range of jobs and salary levels.
• Advantages
✓ More flexibility in assigning workers to different job grades, job
rotations.
✓ Provides support for flatter hierarchies and team
✓ Gives companies more flexibility for pay raises.
Financial incentives
financial rewards paid to workers whose production exceeds a predetermined standard. pay for performance plans:
1- Individual Employee incentive programs
a) Piecework Plans
• The worker is paid a sum (“piece rate”) for each unit he or she produces.
b) Merit Pay
• Is a salary increase the firm awards to an individual employee based on his or her individual
performance?
• Becomes permanent ongoing reward for past performance.

2- Sales Incentives Programs

a) Salary plan:
• Straight salaries:
Best for: account servicing, training customer’s sales force. Then main disadvantage, is that straight
salary may demotivate potentially high-performing salespeople.
b) Commission plan:
• Pay is percentage of sales results.
• Keeps sales costs proportionate to sales revenues
• May cause a neglect of non selling duties such as servicing small accounts and pushing hard-to-sell
items
• Can create wide variation in salesperson’s income
• Likelihood of sales success may be linked to external factors rather than to sales person’s
performance
• Can increase turnover of salespeople and feeling of inequity
c) Combination plan:
• Pay is a combination of salary and commissions, usually with a sizable salary component. (70% : 30%)
(60% : 40%)
• This plan gives salespeople a floor (safety net) to their earnings.
• Salary component covers company=specified service activities such as client servicing and account
handling
3- Incentives for managers and executives
a) Short-Term Incentives:
1- The annual bonus
Plans intended to motivate short-term performance of managers and tied to company profitability.
b) Long-Term incentives
1- Stock options
The right to purchase a specific number of shares of company stock at a specific price during a
specific period.
2- Golden parachutes
Payments companies make in connection with a change in ownership or control of a company.
4- Teams/Group Incentive Plans:
• Team (or Group) incentive Plans
▪ A Plan in which production standards is set for specific work group, and its members are paid
incentives if the group exceeds production standard. Incentives are based on teams performance.
• How to Design Team Incentives
a) Set individual work standards.
b) Set work standards for each team member and then calculate each member’s output.
• Members are paid based on one of three formulas:
a) All receive the same pay earned by the highest producer
b) All receive the same pay earned by the lowest producer
c) All receive the same pay equal to the average pay earned by the group
 5- Organization wide incentive Plans
1- Profit sharing plans: a plan whereby employees share in the company’s profits
2- Gainsharing plan: an incentive plan that engage in a common effort to achieve productivity objectives
and hence share the gains.
3- Employee stock ownership plans (ESOP): are company-wide plans in whish the employer contributes
shares of its own stock to a trust established to purchase shares of the firm’s stock for employees. The
trust holds the stock in individual employee accounts and distributes it to employees upon separation
from the firm if the employee has worked long enough to earn ownership of the stock.

Benefits:
➢ Indirect financial and no financial payments employees receive for continuing their employment with the
company:
1- Pay for time not worked:
Common time-off-with-pay benefits include holidays, vacations, jury duty, funeral leave, military duty,
personal days, sick leave, sabbatical leave, maternity leave, and unemployment insurance payments for laid-
off or terminated employees.
2- Insurance benefits
3- Retirement benefits
4- Personal family-friendly service such as EAP

Flexible benefits programs

➢ There are several flexible work schedule options:
• Flextime: a work schedule in which employees workdays are built around a core of midday hours, and
employees determine, within limits, what other hours they will work.
• Telecommunicating: using technology to work away from the office- is popular
• Compressed workweeks: Many employees, like airlines pilots, don’t work conventional 5 days, 40- hours
workweeks. Workers like these typically have compressed workweek schedules- they work fewer days each
week, but each day they work longer hours. Some firms have four 10-hour day workweeks. Some workers—
in hospitals, for instance—work three 12-hour shifts, and then take off for 4 days.
• Job sharing: allows two or more people to share a single full-time job. For example, two people may share a
40-hour-per-week job, with one working mornings and the other working afternoons.
• Work sharing: refers to a temporary reduction in work hours by a group of employees during economic
downturns as a way to prevent layoffs. Thus, 400 employees may all agree to work (and be paid for) only 35
hours per week, to avoid a layoff of 30 workers.
➢ Effectiveness of flexible work schedule arrangements:
studies show that flexible work schedules have positive effects on employee productivity, job satisfaction, and
employee absenteeism; the effect on absenteeism is generally greater than on productivity.