COMPENSATION

MANAGEMENT
 WHY?

 Money important motivation for employees.

 To design the lowest – cost pay structure to
attract , motivate and retain competent
employees.
 Compensation is what employees receive in
exchange for their contribution to the
organisation.
 Poorly compensated jobs leads to absenteeism
and other forms of employee withdrawal.
 OBJECTIVES

 Acquire qualified personnel

 Retain present employees
 Ensure equity
 Reward desired behavior
 Control costs
 Administrative efficiency
 TOTAL RETURNS

Compensation refers to all forms of financial returns

and tangible services and benefits employees receive
as part of an employment relationship.
It has two main components :
 Direct financial payments( wages ,salaries, incentives

,commissions and bonuses).

 Indirect payments ( as financial benefits like

employer-paid insurance and vacations ).

 Total returns

Relational returns

Recognition and status

Total compensation
Employment security
Learning
opportunities
Benefits
Cash compensation Challenging
work

Allowances
Long-term
Base Income
incentives Work/life
Merit protection
Short-term focus
incentives
 ESTABLISHING SRTATEGIC PAY PLANS

 LEGAL CONSIDERATIONS IN
COMPENSATION:

 Davis – Bacon Act (1931)

 Walsh – Healey Public Contract Act (1936)

 Title VII of the 1964 Civil Rights Act

 Fair Labour Standards Act 1938

 Equal Pay Act 1963

 Employee Retirement Income Security Act 1974

 ESTABLISHING PAY RATES:

The process of establishing pay rates while ensuring

external and internal equity consists of five steps:
 Conduct a salary survey of what other employers are
paying for comparable jobs.
 Determine the worth of each job in your organization

through job evaluation ( to ensure internal equity).

 Group similar jobs into pay grades.

 Price each pay grade using wage curves.

 Fine – tune pay rates- pay ranges.

Contd…
Step 1. The Salary Survey

 Aims at determining prevailing wage rates.

 Provides specific wage rates for specific jobs.

 Formal written questionnaire surveys –most

comprehensive.
 Other sources of information- telephone surveys and

newspaper ads.
 Survey data to price benchmark jobs.

 Surveys also collect data on benefits like insurance ,

sick leave and vacation, providing basis for decisions

regarding employee benefits.
 Compensation information in questionnaires generally

includes – number of employees, overtime policies,

starting salaries and paid vacations.
Contd…
Many employers use surveys published by consulting
firms , professional associations , government agencies,
Department of labor and self conducted surveys.

Step 2. Job Evaluation

 A systematic comparison done in order to determine the

worth of one job relative to another.
 Results in a wage or salary hierarchy.

 Identifying compensable factors plays a central role.

 Compensable factors – skills, effort , responsibility,

and working conditions.

 These factors depend on the job and job evaluation

method.
Contd…
 It is mostly a judgmental process.
 Demands close cooperation among supervisors , HR

specialists, employees and union representatives.

 An evaluation committee is chosen.

 The committee consists of 5 members , most of whom

are employees .
 Evaluation committee usually identifies 10 or 15 key

benchmark jobs – to be evaluated first and serve as

benchmarks against which the relative importance of all
other jobs can be compared.
 Next selection of compensable factors by HR

department.
 Actual evaluating the worth of each job by any of the

following methods:-
Contd…
 Ranking
 Job classification
 Point method
 Factor Comparison
Job evaluation methods: Ranking
- The simplest method of job evaluation that involves
ranking each job relative to all other jobs , usually
based on overall difficulty. There are several steps in
the job ranking method:
1. Obtain job information
2. Select jobs
3. Select compensable factors
4. Rank jobs
5. Combine ratings
Contd…

Job Evaluation Methods: Job Classification ( or Job

Grading)
- A method for categorizing jobs into groups.
- The groups are called classes if they contain similar

jobs
- The groups are called grades if they contain jobs that

are different but are similar in difficulty.

- The usual procedure is to choose compensable factors

and then develop class or grade descriptions for each

class in terms of amount or level of compensable factor
in those jobs.
- Compensable factors – e.g. difficulty and variety of

work , supervision exercised , judgment exercised ,

responsibility , experience , knowledge required etc.
Contd…

- Based on compensable factors , raters write a grade

description/ definition.
- E.g.

Grade Nature of Level of

assignment responsibility
GS-7 Performs specialized duties in Work is assigned in
a defined functional area terms of objectives ,
involving a wide variety of priorities and
problems ; develops deadlines; the
information; identifies employee works
interrelationships… independently in
resolving
conflicts…
Contd…
Job Evaluation Methods: Point Method
- The point method is a more quantitative technique.
- It involves :
1. Identifying several compensable factors each having
several degrees , as well as
2. The degree to which each of these factors is present in
the job.
- Assign a different number of points to each degree of
each factor.
- Once the evaluation committee determines the degree to
which each compensable factor is present in the job , it
can calculate a total point value for the job by adding
up the corresponding points for each factor.
- It is the most widely used job evaluation method.
Contd…
Job Evaluation Method: Factor Comparison
- A widely used method of ranking jobs according to a
variety of skill and difficulty factors , and then adding
up these rankings to arrive at an overall numerical
rating for each given job.
- This method is a refinement of the ranking method.
- It involves five steps:
1. Determine the compensable factors
2. Determine key jobs
3. Apportion present wages for key jobs
4. Place key jobs on a factor comparison chart
5. Evaluate other jobs.
Step 3. Group similar jobs into pay grades
 A pay grade is comprised of jobs of equal difficulty.

 The committee groups jobs into pay grades after

determining the relative worth of each job.

Step 4. Price Each Pay Grade- Wage Curves
 Wage curve shows the relationship between the value of

the job and the average wage paid for this job.
 It involves assigning pay rates to the pay grades.

 The wage curve shows the pay rates currently paid for

jobs in each pay grade , relative to the points assigned to

each job by the job evaluation.
 Pay rates – vertical axis

 Pay grades (in terms of points ) – horizontal axis

Contd…
 If the current rates being paid for any of your jobs/
grades fall well above or below the wage line, raises or a
pay freeze for that job may be in order.

Step 5. Fine – Tune Pay Rates

 It involves developing pay ranges and correcting out of

line rates.
 Most employers do not pay just one rate for all jobs in a

particular pay grade .

 Pay ranges may appear as vertical boxes within each

grade, showing minimum, maximum and midpoint pay

rates for that grade- called as wage structure.
 Pay ranges are series of steps or levels within a pay

grade , usually based upon years of service.

Contd…

Advantage for using pay ranges for each pay grades :

-Easier to attract experienced employees into a pay grade
if the starting salary for the lowest step may be too low
to attract them.
 PAY FOR PERFORMANCE AND
FINANCIAL INCENTIVES

 TYPES OF INCENTIVE PLANS:

 Individual incentive plans - Income over and above base

salary.
 Group incentive program

 Profit sharing plans

Variable pay – same as incentive plans and defined as :

- Any plan that ties pay to productivity or profitability.

INCENTIVES FOR OPERATIONS EMPLOYEES :

 Piecework plans :
-A system of pay based on the number of items processed by each
individual worker in a unit of time , such as items per hour or items
per day
- It is the oldest incentive plan.
 Straight piecework:
- An incentive plan in which a person is paid a sum for each item he or
she makes or sells , with a strict proportionality
between results and rewards.
 Standard hour plan:
- A plan by which worker is paid a basic hourly rate but is paid an extra
percentage of his or her base rate for production exceeding the standard
per hour or per day.
 INCENTIVES FOR MANAGERS AND EXECUTIVES:

 Short term incentives: The annual bonus:

- Plans that are designed to motivate short- term
performance of managers and are tied to company
profitability.
- Formulas for determining executive bonus fund:
1. Ten percent of net income after deducting 5% of average
capital invested in business.
2. Twelve and one – half percent of the amount by which net
income exceeds 6% of stockholder’s equity
3. Twelve percent of net earnings after deducting 6 % of net
capital.
Contd…
 Long- term incentives:

- Stock options – The right to purchase a stated number of

shares of a company stock at today’s price at some time in
future.
- Mega- option grants –Large upfront grants in lieu of
annual grants.
 INCENTIVE FOR SALESPEOPLE:
 Salary Plan- fixed salaries

 Commission plans – pay salespeople for only results.

 Combination plans –salary and commissions.

- It can be in three ways:
- 80% base salary and 20% incentives
- 70 / 30
- 60 / 40
 BENEFITS
 Pay for time not worked
 Insurance Benefits
 Retirement Benefits
 Pay For Time Not Worked:
 Also called supplemental pay benefits.
 Unemployment insurance – Provides benefits if a person is
unable to work through some fault other than his or her
own.
 Vacations and Holidays
 Sick Leave – Provides pay to an employee when he or she
is out of work because of illness.
 Parental Leave – women taking leave during pregnancy.
 Severance pay – A one – time payment some employers
provide when terminating an employee.
 Insurance Benefits:
 Worker’s compensation – Provides income and medical

benefits to work – related accident victims or their

dependants regardless of fault.
 Hospitalization , Health and Disability Insurance.

 Life Insurance
 Retirement Benefits:

 Social Security – Federal program that provides three types

of benefits :
- Retirement income at the age of 62
- Death benefits payable to employee’s dependants
- Disability benefits payable to disabled employees

 Pension Plans - Plans that provide a fixed sum when

employees reach a predetermined retirement age or when
they can no longer work due to disability.