Compensation & Benefits - Job Evaluation

Job evaluation is the process of comparing a job against other jobs within the
organization to determine the appropriate pay rate.

Job Evaluation takes place early in the process of creating a compensation system
for the organization. This process may take several months and is usually
completed by a team of knowledgeable senior employees who understand the
functions of most of the organization's jobs. To maintain objectivity, employers
often hire consultants to complete this step in the compensation planning and
design process.
Often it may be used with market pricing, which uses the labor market to set jobs'
worth.
 Job Evaluation
• Internal Evaluation Methods - Four primary methods of job evaluations used to
set compensation levels are point factor, factor comparison, job ranking and job
classification.
• External Job Evaluation Method - Market-pricing. Market pricing emphasizes
external competitiveness .The external value of individual jobs enables employers
to create effective competitive pay plans and allocate compensation costs wisely.
The most common source for such market data is third-party compensation
surveys.
• Historically, job evaluations were internal comparisons of job worth; however, in
recent years employers have begun to use a combination of internal
comparisons and external market benchmarking.
 Compensation System Behavioural Motivation Issues
Compensation management is interwoven with various behavioural issues of
employees. Its an application of motivation theory .
1) Sociological Concept – In small societies status depends on many things which
are hard to measure ( family , friends, occupation, etc) In large societies Income
is easy to measure. In large societies the style of living and organisation pay is a
status symbol. Organisations create status structures of jobs by way of pay and
compensation.
2) Political Concept – Unions, Associations and joint consultative machineries
form the collective bargaining forum . The collective bargaining forum always
tries to exercise influences and uses power derived from political parties to
which they are affiliated
3) Equity Concept - The equity theory states tat if a person perceives an
inequality a tension or drive will develop that motivates him or her to reduce
the tension and perceived inequality
 Compensation System Behavioural Issues –Equity Issues
In compensation one can address different aspects of equity:-
i) External equity How job pay rate in one company compares with pay rate in
other companies . Many companies use salary surveys of what other
companies are paying to maintain this.
ii) Internal Equity – How fair the jobs pay rate is when compared to other jobs
within the same company. Companies use job analysis and job evaluation to
maintain this
iii) Individual Equity - Refers to the fairness of an individual’s pay as compared
with what his or her co-workers are earning for the same or similar job within
the company based on performance. Companies use performance appraisal
and incentives to maintain it
iv) Procedural Equity – Perceived fairness of the procedures and processes used
to make decisions regarding allocation of pay. Organisation Communication,
grievance mechanism and employee participation is used to maintain it.
 Compensation System Behavioural Issues –Equity Issues

ADP's annual People at Work study outlines the workforce trends of more than
32,000 workers across 17 countries. The report of 2022 showed that 76 percent
of employees would consider seeking new employment if they discovered an
unfair gender pay gap or the lack of a diversity, equity and inclusion (DE&I) policy
within their company.

• This employee sentiment is quickly surfacing to the top as a make-or-break issue

among workers," said Nela Richardson, ADP's chief economist.

• Women were slightly more likely than men to say they would consider new
employment if their companies lacked gender pay equity or a DE&I policy, the
report indicated. Generation Z employees were more likely than other age
demographics to say they'd search for a new job if they made this discovery.
 Compensation – Legal Issues
In India the major wage legislations are :-
1) Minimum Wages Act 1948
2) Payment of Wages Act 1936
3) Payment of Bonus Act – 1965
4) Equal Remuneration Act – 1976

When fixing compensation the company has to satisfy all legal

requirements ..mentioned above and PF, Gratuity etc.

The Code of Wages Bill 2017 was introduced . It seeks to unify and
consolidate the above four laws. However it has still not been fully
implemented
 Purpose of Compensation and Benefits
Purpose of Compensation and Benefits
1) Attract and retain competent personnel in the company
2) Motivate significant contributors
3) Extract the best from all employees in the face of competition
4) Make the organization competitive by hiring and retaining the best human
resources

Compensation & Benefits Includes

Salary , Monetary Benefits , Other benefits , Rewards – Short term incentives and
long term incentives
 Compensation - Salary - Structures
• Salary structures are an important component of effective compensation
programs and help ensure that pay levels for groups of jobs are competitive
externally and equitable internally. An effective salary structure allows
management to reward performance and the development of skills while
controlling overall base salary costs by providing a cap on the range paid for
particular jobs or locations.

Types of Structures
1) Traditional Pay
2) Broad band pay
3) Competency based
4) Comparable worth
5) Market based
 Compensation - Salary - Structures
• Traditional Pay structure – These are organized with numerous layers and range
structures (or pay grades) with a relatively small distance between each range.
Traditional structures provide a hierarchal system enabling employees to be
promoted from one pay grade to another. Salary increases are relatively small
jumps between pay grades. Employers can use traditional structures to prevent
employees from capping out at the maximum salary too quickly.

• Designed correctly, traditional structures enable the recognition of differing rates

of pay for performance and guarantee a reasonable level of control over internal
compression and salary expenditures.
• Organisation may use a variety of metrics to determine a pay raise, such as
performance and length of employment.
 Compensation Structures
Broad Band Compensation - Broad banding is defined as a strategy for salary
structures that consolidate a large number of pay grades into a few "broad
bands.
Broadband salary structures are more flexible and consolidate pay grades into
fewer structures with wider salary ranges.
Broadband structures tend to be used by relatively flat organizations with few
levels and small companies without a dedicated compensation staff to establish
traditional structures.

•The advantage of using a broadband structure for jobs is that companies have
more leeway while deciding the salary of an employee. The disadvantage is for
employees as it may result in greater pay inequalities.
Ass
 Compensation - Salary - Structures
Competency Based Pay refers to a salary structure where employees are
compensated based on their knowledge, skills and abilities rather than their
job title or position. A competency-based compensation plan motivates
individuals to improve their abilities and efforts in order to achieve the pay
rate they desire.
Comparable Worth is "equal pay for work of comparable worth." The doctrine of
"comparable worth" is an attempt to remedy the inequities of pay which result
from a long history of sex-segregated jobs and different pay scales for  male and
female jobs. Market rates, in this view, reflect past discriminatory practices, and
cannot be the only basis of deciding current pay equity.
Market based Structure
Salary - Fixed Pay , Benefits , Variable Pay - Rewards – Short term incentives
and long term
•Basic Salary
•Basic salary is the base income of an employee, comprising of 35-50 % of the total salary.
It is a fixed amount that is paid prior to any reductions or increases due to bonus,
overtime or allowances. Basic salary is determined based on the designation of the
employee and the industry in which he or she works in. Most of the other components,
like allowances, are based on the basic salary. This amount is fully taxable.
•Allowances
•Allowance is an amount payable to employees during the course of their regular job duty.
It can be partially or fully taxable, depending on what type it is. Allowances provided and
the limits on it will differ from company to company, according to their policies.
•Dearness Allowance - Dearness allowance is a certain percentage of the basic salary paid
to employees, aimed at mitigating the impact of inflation. It is paid by the government to
employees of the public sector and pensioners of the same.
•House Rent Allowance – A house rent allowance is that component of the salary which is
paid to employees for meeting the cost of renting a home. It offers tax benefits to the
employees for the sum that they pay towards their accommodation every year. Salaried
individuals residing in rented homes can claim this exemption and reduce their tax liability.
 Salary
• Conveyance Allowance - Conveyance allowance, also known as transport allowance,
is a kind of allowance offered by employers to their employees to compensate for
their travel expense to and from their residence and workplace.
• Leave Travel Allowance - Leave travel allowance is eligible for tax exemption. It is
offered by employers to their employees to cover the latter's travel expense when he
or she is on leave from work. The amount paid as leave travel allowance is exempt
from tax under Section 10(5) of Income Tax Act, 1961. Leave travel allowance only
covers domestic travel and the mode of travel needs to be air, railway or public
transport.
• Medical Allowance - Medical allowance is a fixed allowance paid to the employees
of an organization to meet their medical expenditure
• Books and Periodicals Allowance - Books and periodicals allowance is a type of
allowance provided to employees for helping them meet the expenses associated
with purchase of books, periodicals and newspapers. It is tax exempt to the extent of
actual expenditure incurred towards purchase of books and periodicals.
 Salary
• Gratuity
• Most firms with a workforce of 10 or more employees come under the Act. The
gratuity amount is paid in gratitude for the services rendered by the individual
during the period of employment. According to the Payment of Gratuity Act, 1972,
15 days salary is paid by the employer for each year of service. This is only payable
to those who have completed 5 or more years with the company.
• Employee Provident Fund
• Employee Provident Fund is an employee benefit scheme where investments are
made by both the employer and the employee each month. It is a savings platform
that aids employees to save a portion of their salary each month, from which
withdrawals can be made following a month from the date of cessation of service or
upon retirement. At least 12% of an employee’s basic salary is automatically
deducted and goes to the Employee Provident Fund every month. The contributions
are maintained by the Employees Provident Fund Organization (EPFO).
 salary
• ESIC
• If a company has 10 or more employees whose gross salary is below Rs.
21,000 per month, then the employer is required to avail ESIC scheme for
such employees. The employer's contribution is 3.25 % of wages paid and
employee contribution is 0.75 %
• Professional Tax
• Professional tax is a tax levied on the income earned by salaried employees
and professionals, including chartered accountants, doctors and lawyers,
etc. by to the state government. Different states have varying methods of
calculating professional tax. Employers deduct profession tax at prescribed
rates, from the salary paid to employees, and pay it on their behalf to the
State Government. The revenue collected is used towards the Employment
Guarantee Scheme and the Employment Guarantee Fund.
 Benefits
• Perquisites also referred to as fringe benefits, are the benefits that employees
enjoy as a result of their official position. These are generally given in addition to
the cash salary. The monetary value of perquisites gets added to the salary and
tax is paid on them by the employee.

Examples of Perquisites/Benefits
Canteen Food
Fuel
Car for personal use
Rent free accommodation
Free cooking gas
Free Electricity at residence
Company Holiday Homes
Medical Insurance
ETC
Variable Pay – Rewards - Incentives-
• Variable pay is a significant element of the direct compensation package in a growing
number of organizations. Short-term incentive plans often include:
• Gain-sharing or profit-sharing plans.
• Annual incentive plans.
• Commission plans.
• Cash recognition awards.
• In most short-term variable pay plans, participants have a target—typically a
percentage of base pay—that is paid out when the individual, team, business unit or
organization meets a goal or combination of goals. Over-target payouts may occur
when objectives are exceeded
• Sales employees are often compensated with commissions, in combination with
base pay. The main purpose of a sales compensation plan is to motivate sales
professionals to achieve specific objectives that directly translate to the
organization's bottom line..
 Variable
Long-Term Incentives (LTIs) are a form of variable compensation that is earned in
the present but whose payment is deferred and spread over time. This can be cash
compensation but often is in the form of stock or stock options. Their purpose is to
give employees an incentive to stay with the organization and to have a long-term
stake in company performance. LTI awards are often an important component of
executive compensation
For companies to grant equity and create employee ownership, two of the most
common ways are : 
• An ESOPS Plan which grants shares to participating employees according to the
plan’s parameters.
• An stock purchase plan ESSP-enables employees to purchase shares at a
discounted price. There is an immediate benefit as the market value of the shares
is higher than the purchase price.
 Long term incentive
Unless the equity is granted outright, the plans include a vesting schedule such
that the shares or options are not actually owned by the employee until a specific
period of time has passed. Typical vesting periods are 3 to 5 years, during which the
asset gradually becomes fully owned. For example, an award of 90 shares may vest
over 3 years, with 30 shares being earned per year.

Another LTI approach is profit sharing, typically implemented as a Deferred Profit

sharing Plan This is an incentive plan in which eligible employees are granted a
payment based on company profits during a given period of time, awarded as cash
or company stock. 
 Non financial Reward – Recognition
award
Employees not only want good pay and benefits; they also want to be treated fairly,
to make a substantial contribution to the organization through their work, and to
be valued and appreciated for their efforts. To show appreciation, many employers
implement ongoing recognition programs designed to thank employees for a
variety of achievements.
Some popular awards are :-
1) Long Service award
2) Employee of the Month
3) Leadership Awards
4) Employee Anniversary award