What is Employee Compensation?

Employee compensation refers to all forms of pay accruing to

employees and arising from their employment.
It consists of both direct financial payments (wages, salaries,
incentives, commissions, bonus) and indirect financial payments
(club membership, insurance etc)
Direct financial payments made on the basis of time or
performance
Time based pay can be hourly or daily (blue collared workers)
or monthly as salary (managers)
Performance based pay can be piecework or commissions
Most pay structures today are a combination of time based pay
and incentives (based on productivity, sales, profits or cost
reduction efforts)
 Factors influencing compensation

INTERNAL EXTERNAL

Labor market
Compensation rates
policy of orgn
Cost of living
Worth of job COMPENSATION
Collective
Employee’s Bargaining
relative worth
Govt
legislations
 EQUITY THEORY & COMPENSATION
The compensation structure of an organization
addresses 4 forms of equity:
External equity – refers to how a job’s pay rate in one
company compares with other companies
Internal equity – refers to how fair a job’s pay rate is
compared to other jobs within the same company
Individual equity – refers to the fairness of an
individual’s pay as compared to the pay of coworkers in
same or similar jobs based on each individual’s
performance
Procedural equity – refers to perceived fairness in
processes and procedures used in allocating pay
 ESTABLISHING PAY RATES
Conduct a salary survey of what other employers are
paying for comparable jobs (external equity) to price
benchmark jobs
Conduct job evaluation (internal equity) to determine
worth of all jobs in relation to benchmark jobs
Group similar jobs into pay grades (consists of jobs
having equal difficulty or equal importance)
Price each pay grade
Fine tune pay rates which involves
Developing pay ranges
Correcting out of line rates
 JOB EVALUATION
The purposes of job evaluation are
 To determine the position and place of a job in the
organizational hierarchy
 To clarify the responsibility and authority associated
with each job
 To manage internal and external consistency in
compensations
 To ensure employee satisfaction related to compensation
 To provide the basis for classification of new or
changed jobs
 Can logically explain wage differentials in organization
 Information collected for job evaluation can be used for
decisions related to selection, transfer and promotion of
employees.
 PRINCIPLES OF JOB EVALUATION
 The job dimensions have to be properly selected and
rated in accordance with the demands of the job
 The dimensions selected for rating must be clearly
defined to ensure clear understanding by the employees
 The evaluation program and its objectives must be
explained and illustrated to employees at all levels for
cooperation and confidence in this initiative
 Employees must be actively involved in this exercise
 Market factors must be considered while evaluating
factors
 PROCESS OF JOB EVALUATION
 Preparation of job evaluation plan- purpose, method charted out
 Job analysis- the first step of job evaluation which includes both
responsibilities and competencies i.e JD & JS
 Selection of job dimensions- factors or parameters along which
jobs have to be measures and monetary values determined
 Classification of jobs- jobs arranged in sequential order on the basis
of monetary worth
 Implementation of evaluation- results of evaluation put to use
 Maintenance- job scores have to be updated and modified
according to change in job profiles, organizational needs and
market conditions
TECHNIQUES OF JOB EVALUATION
Non-Quantitative Techniques
 Ranking- simplest and oldest method. Brief JDs of jobs
prepared containing degree of knowledge, skills, effort and other
dimensions involved in jobs and then ranks assigned to jobs
depending on their worth to the organization. Highly subjective
-Relative ranking- a key or representative job is identified
and evaluated. Then relative importance of other jobs determined
and they are ranked
-Paired comparison- each job is paired with every other jon
and then ranked
-Single factor ranking- single most important
factor/dimension of a job is compared with single most important
factor/dimension of other jobs and ranked.
 PROS & CONS OF RANKING METHOD
 Method of evaluation is very simple
 Is quick and inexpensive to implement
 Is appropriate for small organizations with few jobs
 Not suitable for large organizations with wide variety
of jobs
 Though job dimensions are identified no standard for
ranking
 Ranking is done but extent of difference is not done
 Job specification not considered in evaluation
TECHNIQUES OF JOB EVALUATION
Non-Quantitative Techniques
 Job classification or job grading- raters categorize jobs
into groups and all jobs in a group are roughly the same value for
pay purposes.
The groups are called classes if they contain similar jobs and
grades if they are of same level of difficulty but otherwise
different
Class or grade descriptions are written and jobs placed under
grades and classes based on how well they fit the descriptions.
Another method is to determine job dimensions/factors and define
and segregate grades based on the amount/level of each factor and
then place jobs in appropriate grades by matching job descriptions
to grade definitions
Finally assigning monetary values to different grades
PROS & CONS OF JOB GRADING METHOD
 Cumbersome method as grade definitions
have to cover different jobs from different
functions
 Simple and easy to understand once grade
definition and job classification is complete
 Once grades are established any changed or
new job can be easily evaluated
 More comprehensive than ranking method
TECHNIQUES OF JOB EVALUATION
Quantitative Techniques
 Point rating method- most widely used method using a
quantitative point scale. The steps are
- job factors or compensable factors of jobs are determined using the
JAD.
- Job factors being generic or very broad in meaning so sub factors
are developed which are specific to the job being evaluated
- define degree statements which are written statements describing
increasing/decreasing degree of importance of each sub factor
- assign points to factor, sub factor and degree
- a chart is prepared with values and definitions of each factor, sub
factor and degree
- expert committee calculates point value of each job which is used to
determine the level/grade and pay scale of the job
TECHNIQUES OF JOB EVALUATION
Quantitative Techniques
 Factor comparison method- is a sophisticated technique
which is analytical and quantitative but also cumbersome and complex. It
is based on the principles of both point rating and ranking method. The
steps are:
- determine and define specific factors across different jobs using job
description and job specification
- Identify key or benchmark jobs which contain above factors and have
an established pay rate
- Factors in each benchmark job are compared and ranked based on their
importance to the job which is called factor comparison
- The factors are then assigned monetary values and all values should add
up to the pay of the benchmark job which is called factor evaluation
- the other jobs are then evaluated based on this evaluation of the
benchmark jobs.
TECHNIQUES OF JOB EVALUATION
Quantitative Techniques
 Decision Band method- developed by Thomas Paterson is
not a conventional method of job evaluation. In this method value
of a job depends on the decision making requirements.
DBM has 6 levels of decision making or “decision bands” ranging
from the most critical decisions affecting organizational goals to
the simplest routine decisions.
LIMITATIONS OF JOB EVALUATION
 Changing technologies and systems bring about changes
in jobs and in job factors. Such changes may render job
evaluation techniques outdated and irrelevant.
 If not properly formulated and implemented it can give
rise to employee grievances
 Job evaluation brings in rigidity into the pay system and
reduces opportunities for managers to exercise discretion
 Job evaluation takes lot of time to be completed and may
involve formalization of rules. There might be a
mismatch between financial condition of organization
and established/proposed wage structure
 Job evaluation committees sometimes have to
compromise to accommodate the views and demands of
different interest groups like management, unions etc
ISSUES IN PRICING MANAGERIAL
AND PROFESSIONAL JOBS

HARD TO QUANTIFY JOB FACTORS