Compensation & Reward

Management
 Pay Model
1. Concepts Compensation techniques Compensation objectives

2. Internal equity  Job Analysis  Job Description  Job Evaluation

3. External equity  Market definitions  Surveys Policy lines  Pay

structures

4. Employee equity  Seniority Increases  Performance Evaluation 

Increase Guidelines

5. Administration  Planning  Budgeting  Monitoring  Evaluation

 Forms of Compensation

COMPENSATION

Indirect Direct

Employee Pay for Incentives Cost of

Protection Services time Merit Pay – Short living
Base Pay
Programs & not (Reward) & Long Adjust
Perquisites worked Term ments
 Strategic Issues related to Pay

1. Pay decisions to be guided by strategic

stages of an organization

2. Pay design to reconcile employee

difference
Equity : Conceptual Foundation
• Internal equity

– Comparisons inside an organization – among jobs

– Weighs jobs in terms of relative value of their contributions to the

organization’s objectives

– 2 aspects:
aspects

• Relative similarities & differences in the work content of jobs

• Relative value / contribution of the work to the organization’s
objectives

– How much do you wish to pay accountants in comparison with

purchase clerk within the same organization?
 Equity : Conceptual Foundation
• External equity

– Comparisons outside an organization

– Several options regarding external equity:

• Some employers may set their pay levels higher than their
competition hoping to attract best applicants
• Another employer may offer lower base pay but greater opportunity
to work overtime, greater job security or better benefits than other
employers

– How much do you wish to pay accountants in comparison with

what other employers would pay them?
 Equity : Conceptual Foundation
• Employee equity

– Comparisons among individuals doing the same job for the

same organization

– Should all such employees receive the same pay? Or should

one programmer be paid differently from another if one has
better performance & / or greater seniority?

– How much do you wish to pay accountant A in comparison with

accountant B based on their performance and length of their
service, etc., within the same organization?
 Job Evaluation : Perspective & Design
• Results of Job Analysis & Job Description serve
as input for evaluating jobs & establishing job
structure

• Job Evaluation involves the systematic evaluation

of the Job Description based on many factors:

– Content of the work

– Relative value of the work to the organization
– Culture of the work place
– External market forces
 Job Evaluation : Methods
• 4 fundamental JE methods:
methods
1. Ranking – whole job is compared against other whole jobs on
some general notion of value / job content

2. Classification – concepts of value / work content are divided

into categories / classes & jobs are slotted into these
categories

3. Factor comparison – content & value are broken down into

factors & jobs are evaluated by the degree of each factor the
job possesses.

4. Point plan – content and value are broken down into factors
and jobs and evaluated by the degree of each factor the job
possesses
Job Evaluation : Ranking Method
• Rankings of jobs according to relative value

• Involves ordering of Job Descriptions from highest to lowest in

value

• 2 ways of ranking usually considered

1. Alternation ranking
2. Paired comparison

• Disadvantages:
Disadvantages
– Criteria / factors on which jobs are ranked are usually so crudely
defined that evaluations become subjective
– Evaluator(s) using this method must be knowledgeable about every
single job under study
– Number alone can make this task formidable (50 jobs will require 1225
paired comparison!!)
Job Evaluation : Alternation Ranking
Jobs Rank
• Ordering No. Title Most Valued
the job 1 Welder  Tool maker
descriptions 2 Machine operator Welder
alternatively 3 Packer 
at each
4 Grinder 
extreme (all
5 Unit assembler
jobs are
6 Janitor
considered)
7 Tool maker 
8 Spray painter  Spray painter
• Eg. of
9 Engine operator Grinder
alternation
ranking 10 Inspector Packer
Least Valued
 Job Evaluation : Paired Comparison
• Comparing all
possible pairs of
jobs Job Numbers
1 2 3 4 5 6 7 8 9
• No. of pairs to 1 A A B A B B A A
compare = 2 B
[n (n-1)] / 2 3 B A
4 A
• Eg. If you have 5 5 B
jobs then there are 6 A B
10 paired
7 A
comparisons
8 B

• 9 B
Jobs with highest
total no. of “Most
Valuable”
Valuable ranking A = Better B = Worse
becomes the
highest-ranked job.
 Job Evaluation : Classification Method
• Slotting Job Descriptions into a series of classes /
grades that cover the range of jobs

– Classes:
Classes a series of carefully labeled slots / pigeon holes
– Labels are the class descriptions that serve as the standard
against which the Job Descriptions are compared

• Steps:

1. Determine jobs / units to be included in study

2. Conduct Job Analysis / prepare Job Descriptions
3. Select evaluators
4. Define classes
5. Identify & slot benchmarks
6. Prepare classification manual
7. Apply system to non-benchmark jobs
Job Evaluation : Factor Comparison Method

• Jobs are evaluated based upon 2 criteria:

criteria

a. A set of compensable factors

b. Wages for a select set of jobs

• More sophisticated than the previous 2 methods, however, its

complexity often limits its usefulness

• Basic Steps:

1. Conduct Job Analysis

2. Select benchmark jobs
3. Rank benchmark jobs on each factor
4. Allocate benchmark wages across factors
5. Compare factor & wage allocation ranks
6. Conduct the job comparison scale
7. Applying the scale
 What is a Benchmark Job?
• Benchmark jobs (also called key jobs)
jobs serve as a
reference points & must possess certain characteristics:
characteristics

a. Content are well known & agreed upon by the parties involved
b. Contents change very little over time
c. Current pay rates are generally acceptable & differentials
among jobs relatively stable
d. Taken together, they contain the entire range of each
compensable factor
e. Accepted in the external labour market for setting wages

• 15 – 25,
25 however number depends on range & diversity
of work to be evaluated
 Job Evaluation : Point Method
• 3 common chs:

1. Compensable factors
2. Factor degrees numerically scales
3. Weights reflecting relative importance of each factor

• Steps in designing the point plan:

a. Conduct Job Analysis

b. Choose compensable factors
c. Establish factor scales
d. Derive factor weights
e. Prepare evaluation manual
f. Apply to benchmark jobs
 Job Evaluation : Point Method
• Example – Characteristics of Point Job Evaluation method, Factors,
Scaled Degrees, Weights -

Weights Compensable Factors Degrees

(3) (1) (2)
40% Skills Required 1 2 3 4 5
30% Effort Required 1 2 3 4 5
20% Responsibility 1 2 3 4 5
10% Working Conditions 1 2 3 4 5

Here in this example, a Job ‘X’’s 240 total points may result from:

• 2 degrees of skills required = 2 X 40 = 80

• 3 degrees of effort required = 3 X 30 = 90
• 3 degrees of responsibility required = 3 X 20 = 60
• 1 degree of working conditions = 1 X 10 = 10
•
• TOTAL = 240
Designing Pay level &
Structure
 Major Decisions
• Major Steps:
Steps

1. Determine the pay level policy

2. Design, conduct, & analyze surveys
3. Update the data
4. Construct the policy lines
5. Design ranges, flat rates, & / or incentives
 Determine Pay Level Policies
• 3 classes of pay level policies:

1. To lead
2. To meet
3. To follow competition

• Relative importance of pay level factors (ranked by

importance)

a. Rates paid by other employers in the industry or area

b. Union strength
c. Cost of living changes
d. Surplus / shortage of qualified workers
e. Employee unrest
f. Employer’s overall financial position
g. Firm’s profits
 Determine Pay Level Policies
POLICY EFFECTS : What difference does the pay policy make?

1. PAY WITH COMPETITION

– Labour Costs = its Competitors (Market Rate)

2. LEAD POLICY

– Labour Costs > Market Rate

– Rationale is to maximize ability to attract & retain quality employees & to
minimize employee dissatisfaction with pay
– Some employers are able to pass higher pay rates on to consumers in form of
higher product prices
– Sometimes an entire industry can pass high pay rates on to consumers if pay is
relatively low proportion to total operating

3. LAG policy

– Labour Costs < Market Rate

– Lower pay levels probably contribute to turnover
 Design & Conduct Surveys
• Systematic process of collecting information &
making judgments about the compensation
paid by other employers

• Surveys have 3 basic purposes:

purposes

1. To establish the pay level & structure or to update

them in response to changing external pay rates
2. To analyze personnel problems that may be pay
related
3. To participate as “good citizens”
citizens in response to
requests from other employers / public agencies
 Design & conduct surveys
WHAT INFORMATION TO COLLECT?

1. NATURE OF ORGANIZATION

– To assess similarities & differences among organizations in the survey –

include financial information, size, & organization structure

2. NATURE OF TOTAL PAY SYSTEM

– All the basic forms of pay included to assess similarities & differences in
the pay packages offered
– Sometimes benchmark benefit package to including only the most
expensive & variable benefits

3. INCUMBENT DATA

– Actual rates paid to incumbent which include total earnings, hours worked,
date, & amount of last increase, bonus, incentive, & so on
 Design & conduct surveys
TYPES OF ANALYSIS?
ANALYSIS

• 2 components of the pay system

models are emerging

– An internally equitable job structure based Constructing

upon job analysis & job evaluation has Pay Policy
been developed – Internal Equity Lines
(horizontal axis)
axis

– Key jobs from that structure were selected

& the rates paid for those jobs by
competitors in the external market have
been surveyed – purpose is to establish
external equity (vertical axis)
axis
 Construct Pay Policy Line
• ‘Quick’ analyses help check usefulness of survey data

– Note down the illustration

• Construct market pay lines

– Note down the illustration

• Updating survey data

• Set the employer’s pay policy line

– Note down the illustration

 Design Pay Ranges
• Design pay ranges for jobs inside the organization

• Why bother with ranges?

– Wide variation of rates paid for similar jobs & skills reflects two
external pressures:

1. Existence of quality variations (skills, abilities, experience) among

individuals in the external market
2. Recognition of differences in the productivity-related value to employers of
these quality variations

– Ranges reflect the following org.al pressures:

1. Intention to recognize individual quality & performance variations with pay

2. Intention to meet employees’ expectations that pay increases will occur
over time
 Design Pay Ranges
• Construction of ranges

– Develop classes or grades

• Note down the illustration

– Set midpoints, maximums, and minimums

• Note down the illustration

– Degree of overlap