Post on 04-Jan-2016
HR
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Compensation ManagementCompensation ManagementMain PrinciplesMain Principles
Michel de Tymowski
WorkTyM
HR
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Compensation management principles Compensation management principles
Compensation basic principles
Job Evaluation
Pay for Performance
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COMPENSATION BASIC COMPENSATION BASIC PRINCIPLESPRINCIPLES
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SocietySociety
Most employers believe that how people are paid • affects people’s behaviors at work• which affect an organization’s chances of
success.
Compensation systems can help an organization achieve and sustain competitive advantage.
Sometimes differences in compensation among countries are listed as a cause of loss of jobs from more developed, higher-wage economies to less developed ones.
Therefore, understanding productivity differences among international locations is crucial.
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Society Society (cont’d)(cont’d)
Some consumers may view increases in compensation as the cause of price increases. They may not believe that higher labor costs are to their benefit.
Economic realities are relevant to compensation management.
– an organization’s capacity to pay– its industrial sector– as well as geographic location
are all key factors that must be considered.
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Society Society (cont’d)(cont’d)
An organization’s economic reality is not static
– Today’s decisions about compensation will have an impact on the organization’s financial health for many years and, generally, this impact is difficult to reverse.
Employees have varied needs and view them differently
– The challenge for the organization therefore is to adopt compensation policies and programs that maximize employee motivation.
Compensation is also status, both within the organization and in society.
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Society Society (cont’d)(cont’d)
Supervisors consider it important to be paid more than their subordinates, and on a different basis.
The same applies to the various perquisites an organization provides to certain employees.
– Often, what counts with such benefits is not their monetary value but rather the prestige and status they confer.
Organization and individuals pursue different objectives by means of compensation.
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Society Society (cont’d)(cont’d)
For the organization– the exchange is designed to recruit and retain the necessary labor, and to elicit employees behavior that will enable it to fulfill its mission.
For individuals– the objective may come down to satisfying needs. These may differ considerably from one individual to another and may also change with time.
Compensation is a contribution for the organization, a reward for the individual.
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The Elements of CompensationThe Elements of Compensation
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The Elements of CompensationThe Elements of Compensation
Organizations regularly adjust pay. This is done by taking into account many factors, such as :
– changes in the economy
– the amount of the changes made by other organizations in the community or similar labor market
– the organization’s ability to pay
– as well as any increase in an employee’s performance or year of service
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Cash Compensation – BaseCash Compensation – Base
Base wage is the cash compensation that an employer pays for the work performed.
Base wage tends to reflect the value of the work or skills and generally ignores differences attributable to individual employees.
The base wage represents the “no risk” part of the total wage. The individual performance will represent the “risky” part by impacting the level of total wage.
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Cash Compensation – Merit Pay/COL Cash Compensation – Merit Pay/COL adjustmentsadjustments
Merit pay increases are given as increments to the base pay in recognition of past work behavior.
– Some assessment of past performance is made, with or without a formal performance evaluation program, and the size of the increase is varied with performance.
– Thus, outstanding performers could receive an 5 to 7 percent merit increase 8 months after their last increase,
– whereas an average performer may receive, say, a 2 to 3 percent increase after 12 or 15 months.
In contrast to merit pay, cost-of-living adjustments give the same percent increase across the board to everyone, regardless of performance.
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Cash Compensation – IncentivesCash Compensation – Incentives
Incentives tie pay increases directly to performance
However, incentives differ from merit adjustments.
– First, incentives do not increase the base wage, and so must be re-earned each pay period.
– Second, the potential size of the incentive payment will generally be known beforehand.
Whereas merit pay programs evaluate – past performance of an individual – and then decide on the size of the increase
the performance objective for incentive payments is called out very specifically ahead of time.
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Cash Compensation – IncentivesCash Compensation – Incentives
Incentives can be tied to :
– the performance of an individual employee– a team of employees– a total business unit– or some combination of individual, team, and unit
The performance objective may be :
– expense reduction– volume increases– customer satisfaction– revenue growth– return on investments– or increases in total shareholder value
the possibilities are endless.
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Compensation Management ModelCompensation Management Model
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PoliciesPolicies
Four Policies
Every employer must address the policy decisions :
– (1) internal alignment– (2) external competitiveness– (3) employee contributions, and– (4) management of the pay system.
These policies are the foundation on which pay systems are built. They also serve as guidelines for managing pay in ways that accomplish the system’s objectives.
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Policies - Internal AlignmentPolicies - Internal Alignment
Internal Alignment
Internal alignment refers to comparisons
among jobs or skill levels inside a single organization
Jobs and people’s skills are compared in terms of
their relative contributions to the organization’s business objectives
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Policies - Policies - External External CompetitivenessCompetitiveness
External Competitiveness
External competitiveness refers to compensation relationships external to the organization:
– comparison with competitors.
Increasingly, organizations claim their pay systems are market-driven, that is, based almost exclusively on what competitors pay
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Policies - Policies - External External CompetitivenessCompetitiveness
Employee Contributions
– How much emphasis should there be on paying for performance?
– Should one programmer be paid differently from another if one has better performance and/or greater seniority?
– Or should there be a flat rate for programmers?
– Should the company share any profits with employees?
– With all employees?
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Policies - ManagementPolicies - Management
Management
Ensuring that the right people get the right pay for achieving objectives in the right way. The system will not achieve its objectives unless it is properly managed.
• Are we able to attract skilled workers?
• Can we keep them? Do our employees believe our pay system is fair?
• Do they understand what is expected of them?
• Do they understand how their pay is determined?
• How do the better-performing firms, with better financial returns and a larger share of the market, pay their employees?
• Are the systems used by these firms different from those used by less successful firms?
• How do our labor costs compare to those of our competitors?
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Techniques - Internal ConsistencyTechniques - Internal Consistency
Internal Consistency
An organization trying to ensure internal consistency in compensation must :
• first analyze and describe its jobs, then either :
– evaluate the jobs
– do a competency & skill job assessment
– a maturity curve approach (applicable for certain group of professionals)
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Techniques - CompetitivenessTechniques - Competitiveness
Competitiveness
An organization interested in making its pay competitive must first define its labor market Domestic and international for senior management).
Having selected the market or markets, the next step is to collect information about the various elements of compensation.
– Base salary?– Total Cash?– Working time?– Time off?– Benefits?– Other perks and allowances?
Once the survey or surveys have been done, the organization must determine the level of compensation in relation to the market.
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Techniques - Employee ContributionTechniques - Employee Contribution
Employee Contribution
An organization that wishes to recognize the contribution of its employees may use techniques and practices that vary according to what contribution it wishes to emphasize
– individual performance– group performance– years of services– training
The organization must develop an employee performance appraisal system and determine criteria for measuring individual performance
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Market SectorMarket Sector
Salary aggressiveness
Salary levels
Financial/Trading +++++Pharma/Bio medical ++++Oil/Chemicals ++++Fast Consumer Goods ++++High Tech/Telecom +++Industrial Goods ++Services ++
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How to motivate employeesHow to motivate employees
To remunerate managers in a competitive way based on their responsibilities as well as their individual performance
• Establish a coherent salary structure (external equity)
• Create an internal equity within a competitive market environment
• Establish a link between individual performance and the job requirement
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Reward SystemReward System
Reward SystemReward System
Job AnalysisJob Analysis
Job EvaluationJob Evaluation
Managing BasePay
Managing BasePay
Job DescriptionJob Description BenefitsBenefits
Working conditionsWorking conditions
Variable PayVariable Pay
RecognitionAwards
RecognitionAwards
Long-termIncentivesLong-termIncentives
RecruitmentRecruitment
Training & Dev’mtTraining & Dev’mt
Perf. evaluationPerf. evaluation
HR PlanningHR Planning
Selection & HiringSelection & Hiring
Career planningCareer planning
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JOB ANALYSISJOB ANALYSIS
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Job AnalysisJob Analysis
INTERNAL STRUCTUREINTERNAL STRUCTURE
Job BasedJob Based
Job analysisJob descriptionsJob analysis
Job descriptions
Job EvaluationClasses/Comp
factors
Job EvaluationClasses/Comp
factors
Factor degrees& weighting
Factor degrees& weighting
Job-BasedstructureJob-Basedstructure
Person BasedPerson Based
SkillsSkills CompetenciesCompetencies
PURPOSE
Collect, summarizeWork information
Determine whatto value
Assess value
Translate intostructure
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Writing Job DescriptionsWriting Job Descriptions
It is a written record of the duties and responsibilities of a specific job compiled through job analysis
It consists of statements which identify and describe the scope and contents of a job
It provides an outline of the essential functions and major duties of a job
It does not describe all details of a job
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Writing Job DescriptionsWriting Job Descriptions
Typical Problems with Job Descriptions
• Often poorly written, providing little guidance.• Often not updated as job duties and specifications change
• May violate the law by including specifications unrelated to the job
• Job duties written in vague rather than specific terms
• Could limit the scope of the job-holder • Could restrict ability to cope with change • Creates significant administrative workload • Not always linked to other HR activities or processes but generally supervisors have a good feel for the job !
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JOB EVALUATIONJOB EVALUATION
“Job evaluation is the process of arranging jobs within an organization into a hierarchy based on their relative requirements, so that employees are paid in proposition to the requirements of their job.”
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Job EvaluationJob Evaluation
The Importance of Value Systems
Job evaluation
– means an assessment of the work, not the incumbent
– involves establishing a hierarchy of job based on requirements
– to pay the incumbents of a position in proportion to the requirement of their job, and not to determine pay levels or specific pay differentials
– to create internal pay equity based on the various job requirements
– technical characteristics are less important than the use made of them
– Success is measured by the results it achieves, not the method used
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What Approach?What Approach?
INTERNAL STRUCTUREINTERNAL STRUCTURE
Job BasedJob Based
Job RankingJob Ranking
Person BasedPerson Based
SkillsSkills CompetenciesCompetencies
ClassificationClassification
Market PricingMarket Pricing
Point MethodPoint Method
General rankingPaired ranking
Job to JobComparison
Job-to-predetermined- standard comparison
Job-to-factor Evaluation
Based on external competitive salary data
Qualitative driven
Quantitative driven
Job SlottingJob Slotting Reporting basis
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Job Evaluation AlternativesJob Evaluation Alternatives
JOB RANKING CLASSIFICATIONMARKET PRICING
AND SLOTTINGPOINT FACTOR
COMPETENCY-BASED
• Jobs ranked using • Grades/bands defined • Market rates established • Point assigned to jobs • Jobs grouped accordinggeneral criteria of worth through description of for benchmark jobs; non- based on factors, levels to behaviors, skills and to Company (e.g., roles and major benchmark jobs slotted in and factor weights knowledge required forimportance or accountabilities; jobs salary structure based on success complexity) assigned to grades/ defined process
bands
• Simple • Easy to explain • Closely tied to market • Can compare jobs across • Captures organizationalvalues functions if criteria are values
• Easy to communicate • Easy to modify broadly pertinent • Credible • Strong basis for other HR
• Easy to maintain • Adaptable to job families • Is perceived to be programs • Easy to communicate objective and consistent
• Potential for bias • Unusual jobs may need • Interpretation needed to • Considerable effort • Much effort to developto be “forced” into slot jobs required to develop and implement
• May over-emphasize a definition factors single factor • Requires training
• May be viewed as • Difficult in fast-changing • Much effort to administer infrastructure • May be viewed discretionary unless market and implement
negatively if seen as definitions are clear and • Most appropriate indefining “value” to specific • Requires good market • Single program may not organizations where Company data be effective in all people’s capabilities
• May not be effective divisions/job families define their job (e.g., unless institution focuses consulting) on “roles” versus “jobs”
Description
Strengths
Limitations
Less Complexity Greater Complexity ALTERNATIVES
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What Approach?What Approach?
Market Pricing
• Uses the labor market to determine the value of jobs
• Readily comprehensive
• Easily applicable
• Simple
Issues
• Overlooks the question of internal pay equity
• Hierarchy is based solely on market price
• Ignores the fact that pay is only one component of compensation
• Does not consider the specific characteristics of organizations
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What Approach?What Approach?
Market Pricing (continued)
• Structure developed on competitive market practices
• Based on market surveys• The competitive market data drives the salary
structure
Eu
ro
Compagny XYZ
20 ’000
30 ’000
40 ’000
50 ’000
5 6 7 8 9 10 11 12 13 14 15
Grades
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What Approach?What Approach?
Job Slotting
• structured around the organization chart
• Job positioned following the organization charts
• Usually defined by departments/type of activities
Eu
ro
Marketing
20 ’000
30 ’000
40 ’000
Eu
ro
Finance
20 ’000
30 ’000
40 ’000
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What Approach?What Approach?
Point Method
• Classical position evaluation (Hay type)– Position profile/responsibilities & challenge
• Computer aided job evaluation– Multiple choice questionnaire approach based on weighted factors
• Mix evaluation– Similar to the classical evaluation plus individual skills & competencies
• Competency evaluation– Individual profile (competencies, aptitudes, and know-how)
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Classical Evaluation (Hay type)Classical Evaluation (Hay type)
• Based on the profile, responsibilities & challenge of the position
• Job descriptions essential for the exercise
• Structured around factors such as:Know-How– Education, experience, management responsibilities, supervision/motivation of subordinates/employees
Problem Solving– Challenge and thinking environmentAccountabilities– Freedom of action and accountabilities on revenues/budgets
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Classical Evaluation (Hay type)Classical Evaluation (Hay type)
• Assigns point values based on compensable factors.
• Each job receives a total point value, and relative worth can be compared.
• Is also known as Hay plans, from the consulting company at the origin of this method
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Computer aided evaluation (NetComp)Computer aided evaluation (NetComp)
• Based on the profile/responsibilities & challenge of the position evaluated through a defined position questionnaire (multiple choice)
• Structured around factors such as:
– Know-How (education, experience, international dimension)
– Communication (internal & external to the organization)
– Dimension (revenue/budget, number of employees)– Effectiveness (reporting, contribution et impact of error)
– Leadership (level of decision and management)– Challenge (level of autonomy, creativity and working environment)
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Reward SystemReward System
Reward SystemReward System
Job AnalysisJob Analysis
Jpb EvaluationJpb Evaluation
Managing BasePay
Managing BasePay
Job DescriptionJob Description BenefitsBenefits
Working conditionsWorking conditions
Variable PayVariable Pay
RecognitionAwards
RecognitionAwards
Long termIncentivesLong termIncentives
RecruitmentRecruitment
Training & Dev’mtTraining & Dev’mt
Perf. evaluationPerf. evaluation
HR PlanningHR Planning
Selection & HiringSelection & Hiring
Career planningCareer planning
Developing aSalary Structure
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Some DefinitionsSome Definitions
External competitiveness• The pay relationships among organizations - the
organization’s pay relative to its competitors
Salary Structure• Refers to the range of pay rates for different jobs within
a single organization
Pay Level• The average of the array of rates paid by the employer
Pay Forms• The various types of payments, or pay mix, that make up total compensation
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Pay MixPay Mix
Different Mixes
BaseOptions
Bonus
Benefits
BaseOptionsBonusBenefits
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Pay-Mix Policy AlternativesPay-Mix Policy Alternatives
Base
Options
Bonus
Benefits
Performance Driven
Base
Options
Bonus
Benefits
Market Match
Base
Options
Bonus
Benefits
Work/Life Balance
Base
Options
Bonus
Benefits
Security
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Pay Mix and StructurePay Mix and Structure
100%
75%
50%
25%
0%
Entry Mid-Level ExecutiveLevel Manager
Base Salary
Cash Incentive
Stock Incentive
Internal Job Structure
Pay Mix varies within the Structure
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Factors Influencing Pay levelsFactors Influencing Pay levels
Business SectorBusiness Sector
LegislationLegislation
Labor Supply & DemandLabor Supply & Demand
LocationLocation
SizeSize
Market productivityMarket productivity
Market Pay LevelsMarket
Pay Levels
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Factors Influencing Organization Factors Influencing Organization Comp PolicyComp Policy
Business StrategyBusiness Strategy
Union InfluenceUnion Influence
Prestige & TraditionPrestige & Tradition
Other HR mgmt policies & practices
Other HR mgmt policies & practices
Capacity to PayCapacity to Pay
Compensation factorsCompensation factors
The Organization Compensation Policy:-Lead-Lag-Follow Competition
The Organization Compensation Policy:-Lead-Lag-Follow Competition
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The Pay ModelThe Pay Model
Three important contributions to keep in mind
• There is no “going rate” and so managers make conscious pay level and mix decisions influences by several factors
• There are both product market and labor market competitors that impact the pay level and mix decisions
• Alternative pay level and mix decisions have different consequences
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Salary StructureSalary Structure
Over engineered structure• Rigid• Heavy administrative burden• Sometimes inefficient
Simple structure• Easily adaptable• Flexible• Suitable for small organization• Can easily be manipulated
Find the right mix
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Structure ApproachStructure Approach
Corporate structure for Worldwide Mgmt• Employee rotations within countries/regions• Many senior positions compete at international level
• Facilitate transfer/expatriate policy design• Facilitate management incentive design• Ease-up perquisites and benefits implementation
More local structure for professional, sales and mainstream employees• Better data at local level• Better local understanding of the job content
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What Criteria to be used to What Criteria to be used to Evaluate the ManagementEvaluate the Management
To remunerate managers in a competitive way based on their responsibilities as well as their individual performance
• Establish a coherent salary structure (external equity)
• Create an internal equity within a competitive market environment
• Establish a link between individual performance and the job requirement
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Development of a Salary StructureDevelopment of a Salary Structure
Analysis of evaluated jobs against competitive market values.
Development of a salary structure
Position Points market value regressionAccountant 125 23,000 22,700 Mktg assistant 158 25,000 26,900 Financial Analyst 210 28,000 29,100 Project Mgr 250 35,000 34,900 Product Mgr 300 41300 40,500 IT Director 335 46,960 45,900 HR Director 380 53,900 54,600 Finance& Admin Dir. 420 59,200 60,700
Grade min midpoint max5 120 18,000 22 500 27 000 6 160 20,700 25,900 31 050 7 200 23 805 29,800 35 710 8 240 27,376 34,200 41 060 9 280 31 482 39 400 47 220 10 320 36,200 45 300 56 570 11 360 41,635 52,000 65 050 12 400 47 880 59 900 74 810
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PercentilesPercentiles
Sample MEDIAN14
D1 D9975321
25 ile 2.5Median 5Mean 5.975 ile 890 ile 11
Terminologies :ABS Annual Base SalaryATR Annual Total RemunerationD1 lower decile (= 10th ile)Q1 first or lower decile (25th ile)Md medianAvg Average/meanQ3 Third or upper quartile (75th ile)D9 upper decile (90th ile)
Q1 Q3
50%
80%
100%
10% 10%
25%25%
1/3 2/3
33% 33% 33%
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Salary CurveSalary Curve
Salary Structure
-
20 000
30 000
40 000
50 000
60 000
0 200 400 600 800
Points/Grade
$ Smooth
Actual
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Development of a Salary StructureDevelopment of a Salary Structure
Salary Structure
Eu
ro
Compagny XYZ
20 ’000
30 ’000
40 ’000
50 ’000
5 6 7 8 9 10 11 12 13 14 15
Grades
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Min, Max, Range: Spread & Overlap Min, Max, Range: Spread & Overlap
Set pay ranges
• Determine minimum and maximum compensation for each grade.
• Determine the spread for each grade
• Set the overlap between pay ranges.
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Min, Max, Range: Example Min, Max, Range: Example E
uro
Compagny XYZ
20 ’000
30 ’000
40 ’000
50 ’000
5 6 7 8 9 10 11 12 13 14 15
Grades
Min
Max
Midpoint
Range Spread
RangeOverlap
Midpoint Spread
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Pay for PerformancePay for Performance
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Employees PerformanceEmployees Performance
Three general factors driving employees performance :
• Skills & ability to perform task
• Knowledge of facts, rules, principles and procedures
• Motivation to perform
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Does Compensation Motivate Does Compensation Motivate Behavior?Behavior?
Person Characteristics Preferred reward Characteristics
Materialistic Relatively more concerned about pay level
Low self-esteem Want large decentralized organization with little
pay for performance
Risk takers Want more pay-based on performance
Risk averse Want less performance-based pay
Individualists Want pay plans based on individual performance,
not group performance
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What is expected from a Reward What is expected from a Reward SystemSystem
Rewards must :
• Help organizations attract and retain employees
• Must make high performance an attractive option for employees
• Must encourage employees to built new skills and gradually foster commitment to the organization
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Merit PayMerit Pay
Merit Increase Matrix Overall Salary increase budget 2006
Country : France
Average market increase: 3.0%
Cost-of-living : 1.5% .
Merit increase : 1.5%
Pop.
Distrib. 2006/07 P10 Q1 Q3 P90
P
8% >>>> E A 5.0% - 5.8% 4.2% - 5.0% 3.8% - 5.0% 3.0% - 3.8%
R
F
37% >>>> O B 4.2% - 5.0% 3.8% - 5.0% 3.4% - 3.8% 2.6% - 3.0%R
M
44% >>>> C 3.4% - 3.8% 3.0% - 3.1% 2.8% - 3.0% 0.7% - 0.9%
L
V
11% >>>> L D 0.4% - 0.5% 0.2% - 0.3% 0.0% - 0.0% 0.0% - 0.0%
Pay positioning