C3 & C4 Compensation & Incentives_2

7/29/2019 C3 & C4 Compensation & Incentives_2

1/81

Compensation

Management

Chapter 3


2/81

Definition - JE

A systematic process of analyzing &

evaluating jobs to determine their worth

in the organization

Indicator of managements attitude

Enable to attract, retain & motivateemployees


3/81

Compensation Traditional approach importance to

work in an org

Contemporary approach worth of anindividual in an org


4/81

Objectives - JE

Determine organizational hierarchy

Identify responsibility & authority

Updated data on JD &JS


5/81

Objectives contd

Internal & external consistency

Ensure employee satisfaction


6/81

Principles - JE

Proper selection of job dimensionsrating

Define the dimensions

Define the evaluation program to e/es


7/81

Principles contd

Active participation of e/es

Consider market factors demand forjobs


8/81

Process JE

1. Preparation of job evaluation planneed + method adopted

2. Job Analysis collection ofinformation related to jobs

3. Job Description tasks &responsibilities associated to the

job


9/81

Process contd

4. Job Specification knowledge +skill + attitude required

5. Selecting job dimensions &

assigning monetary values

6. Classification of jobs based onmonetary values


10/81

Process contd

7. Implementation & Evaluation

8. Maintenance


11/81

Techniques of job evaluation

Quantitative Non

Quantitative

Factor comparison Ranking

methodPoint Rating Job classification


12/81

Quantitative Methods

1. Point Rating Method

Jobs are evaluated using scales

Similar jobs are evaluated using

common scale

Steps

Prepare JD + JS on a sample jobidentify common job factors

Job factors are broken down to

concrete sub factors


13/81

Point Rating Method contd

Assign degree statements (specific

requirement of each sub factor)five degrees, in the form of phrases

Assign points to factors, sub factors

& degrees

Degree 1= 20 points = experience less than 6

months

2= 40 points = experience 6 months to 1 year


14/81


Preparation of chart

Jobs are ranked on the basis of points


15/81


16/81


Advantages

Accurate

Long lasting

Job description is consideredhigher validity

Disadvantages

Time consuming

Costly, more clerical wk


17/81

Factor Comparison MethodBased on the principles of Point Rating & Ranking Method

Steps

Select common factors across all jobs

Identify bench mark jobs

Bench mark jobs are compared & ranked on theirrelative importance factor comparison


18/81

Factor Comparison Method

contd Each factor is assigned a monetary value & in total =

pay of bench mark job factor evaluation

All jobs are then compared as against bench mark jobs

Advantages

Analytical & Reliable

Easy to communicate to supervisors


19/81


20/81

Factor Comparison Method

contd Logical approach monetary values

assigned on factor importance

Disadvantages

Procedure is complex

High dependence on the bench mark

jobs


21/81

Decision Band Method

Developed by Prof.Emeritus Thomas T.Paterson 1970

Refined by Ernst & Youngs compensation specialists

Monetary value = decision making requirements of the

job

Decisions are divided in to 6 data bands (levels of

decisions) simple to complex


22/81

Non Quantitative Techniques

1. Ranking Method

Jobs are assessed on the basis of,

Knowledge, Skill, Effort, Job

Dimension


23/81

Ranking Method contd

Steps

Job description

Assign ranks on the basis of worth to

the organization


24/81

Ranking Method contdAdvantages

Simple

Appropriate to small organization

Quick & inexpensive

Disadvantages Job specification not considered

Does not differentiate the jobs


25/81

Job Classification/Grading

Jobs are graded on the basis of their

significance & worth to the

organization

Steps

Defining the organization structure

Identify dimensions managerial,

supervisory, data entry


26/81

Job Classification/Grading

Determine the job grades grade1, grade

II job dimension & org structure

Using i/p from e/e, TU no. of grades,

grade description, job classification

Freezing the grades assign monetaryvalues to key grades then to all grades


27/81

Job Classification/Grading contd

Advantages Technique incorporated JD & Grade

definition

Better understanding of theorganizational structure

Comprehensive in nature

Disadvantages

Time consuming


28/81

Advantages of Job Evaluation

Helps to remove discrepancies in thewage structure

Gives logical explanation wage relatedissues

Facilitates the entry of new jobs to theorganizational wage structure

Helps to compare the wage structure


29/81

Limitations of job Evaluation Dynamic environment bring about change in job factors

outdated evaluation techniques

Poor formulation leads to grievances

Rigid pay systems no discretion to mgrs

Imbalance b/w designed pay structure & financialstrength of the org.

Cannot stick to the demands as union demands have tobe met


30/81

Wage & Salary Administration

Compensating e/es in a fair manner

Maintaining principle of equity

Matching e/es expectations


31/81

Compensation

What an e/e receives in return for his or her

contribution to the organization


32/81

Components of compensation

Wage & salary Incentives

Fringe benefits

perquisite

Non monetary benefits

P i i l G i


33/81

Principles Governing

Compensation Administration Principle of equity

Matching competitiveness in wage market

Matching e/e expectations

Eliminating discrepancies

Devise system to suit the org

Maintaining good IR


34/81

Purpose of Wage & Salary

Admn.

Attract Talent

Retain & Motivate Talent

Financial Mgt

Legal Requirement


35/81

Concepts of Different Wages1. Minimum Wages

Minimum wages act 1948

Enable an average worker to fulfill all his obligation

Minimum piece rate/ minimum time rate

Fixed by law

Revised every 5 years

Current min wage rate is Rs 133 / day - Karnataka

http://www.paycheck.in/main/officialminimumwages

http://www.paycheck.in/main/legal-outlook/salary

http://www.paycheck.in/root_files/MW%20Karnataka.pdf
http://www.paycheck.in/main/legal-outlook/salaryhttp://www.paycheck.in/main/legal-outlook/salaryhttp://www.paycheck.in/main/legal-outlook/salaryhttp://www.paycheck.in/main/legal-outlook/salary


36/81

Minimum Wages contdMinimum wages are fixed on 6 components,

Standard working class family considered earningsof women, children, adolescents - disregarded

Minimum food intake / member net calories

Rent

Per capita clothing (73 yards for a family of 4)


37/81

Minimum Wages contd

20% allotted to miscellaneous fuel,lighting etc

25% allotted to other requirementschildrens education, medical

requirements, minimum recreation


38/81

Concepts of Different Wages

contd2. Fair Wage Also consider the financial capacity of the e/r

Higher then minimum wage & less then living wage

fair wage committees recommendation

Related to productivity of the e/e

Prevailing wage rates considered


39/81

Concepts of Different Wages

contd3. Living Wage

Highest in value

Not only for basic necessities but other

comforts


40/81

Basic Wage Plans

1. Time Wage Plan Basis time period of employment

Implemented where o/p cannot bestandardized

Fixed amount irrespective of o/p

Extra benefit only through extra time


41/81

Basic Wage Plans contd2. Piece Wage Plan

Basis o/p of the e/e

o/p is measurable

Implemented where o/p can be standardized

Direct incentives compromise on qualitye.g. call centers

Payment by results


42/81

Basic Wage Plans contd

3. Skill Based Pay/ Knowledge Based Pay Basis job related skill

Recruitment below market rates

hotter the skills,the better the pay

Promoted & rewarded on acquisition of skillse.g. software industry better skills = better pay


43/81

Basic Wage Plans contd.

4. Competency Based Pay Basis knowledge, skills, behavior of

e/e

Competency of the best performing e/e

is identified

Comparative analysis


44/81

Basic Wage Plans contd

5. Broad banding Salary bands are defined

Overlapping is possible

HR Manager flexible on fixing thesalary with in a band

Non-promotional income opportunities

for em lo ees


45/81

Variable Compensation

Basis performance not on organizational hierarchy

Differentiates b/w performers & non performers

American Management Association Study 83comp grievances(83%), absenteeism(84%), lost-time(64%) comes down

Components production incentives, profit sharing,bonus

Variable Compensation


46/81

Variable Compensationcontd

Motivational tool at individual level &group level

Worker level piece rate/time rate (OT)

Manager level monetary & nonmonetary incentives, challenging

assignments, increased responsibility,

reward for innovative contributions Group level entire gp rewarded

motivate towards a common goal


47/81

Components of Executive

Compensation Packages


48/81

Executive Compensation

Reasonableness of ExecutiveCompensation

Would another company hire this person as

an executive?

How does the executives compensation

compare with that for executives in similar

companies in the industry

Is the executives pay consistent with pay for

other employees within the company?

What would an investor pay for the level of

performance of the executive?


49/81

Executive Compensation Compensation paid to top mgt.

Steps to design an EC package

Review of existing package identify the flaws

Analyze organizational objectives link the pay

- ST

bonus linked

increase in profit- LT stock options growth rate

LT objective retention (restrictive stock option)

E ti C ti


50/81

Executive Compensation

contd Analyze the financial status of the

company

Detailed EC plan designed

Maintain transparency


51/81

Common Executive Compensation Issues


52/81

Other Issues in Compensation Administration

1. Pay secrecy or openness

2. Pay security guaranteed annualwage, cost of living adjustments

3. Pay compression Narrow differenceb/w own pay & colleagues pay


53/81

Wage DifferentialsDifferences in wage paid for same or similar job work

schedule, hazards, cost of living

Individual level competence, experience,knowledge, gender

Organizational level size, stage of business cycle,image

Industry level business trend (high pay in IT,

service) changing Regional level India & US (Indians are preferred)

R d


54/81

Rewards e/e earns as a result of his employment

with the organization Stimulates e/es to perform

financial rewards (basic and

performance pay) and employeebenefits, which together comprise totalremuneration

Extrinsic tangible (promotion, bonus) Intrinsic intangible (informal

recognition, challenging tasks)

Financial bonus, incentives Non financial cafeteria benefit

Incentives


55/81

Incentives Variable rewards granted to employees

according to variations in theirperformance

Rewards to an e/e over & above his

base wage or salary, in recognition ofhis performance & contribution

Also called payment by results

Vary from individual to individual

Types of Incentives - Short


56/81

Types of Incentives Short

term IncentivesShort term Incentives (Blue collar workers)

1. Halsey Plan

Standard time + o/p is fixed

Guaranteed minimum wage on time basis

Incentives paid if work completed before time

Incentives = plan% * time saved * hourly rate


57/81

Types of Incentives contd.e.g. St. time = 8 hrs Actual time = 6 hrs

Plan % = 50% Hourly rate = Rs. 5/hr

Pay = 30 + 5

2. Rowan Plan Guaranteed minimum wage on time basis

Incentives = (Time saved * time taken *hourly rate)/

std. time

Pay = 30 + 7.50


58/81

Types of Incentives contd.

3. Barth System No guaranteed min. wageWage = (std. time * time taken) * hourly ratePay = (8 * 6) * 5 = 6.9 * 5 = 34.50

4. Task Bonus System

Std. pay & task is predetermined

Used for groups

Emphasis on team work & coordination Incentives issued only if individual tasks are

performed


59/81


5. Point Rating System Job is rated in terms of std. time

At the end of a specified period o/p is

assessed paid accordingly

e.g. std time value 10 units /hr

no. of working hrs/ day 8/ Rs. 5

end of the day e/e produces 100 units

(equivalent to 10 hrs of production)

a = Rs. 50


60/81


6. Progressive Bonus Based on efficiency of the e/e

Incentives start = o/p cross % of std o/p

If performance does not reach specific

% then daily hourly wages are paid


61/81

Long Term Incentives1. Annual Bonus one time cash bonus paid at the

end of the year

Basis profit + individual performance

Payment of Bonus Act 1965 8.33% of wage/salaryearned or Rs. 100 which ever is higher

2. Profit Sharing 1st implemented by Walt DisneyCorporation e/e earns a share of comp profit - %of the total profit

Distribution Plan annual or quarterly cash bonusis paid according to pre determined formula


62/81

Long Term Incentives contd Deferred Plan credit system, paid on retirement/

e/e leaves the organization

Combination Plan combination of 1+2 plans

- e/e receive a portion of profit cash bonus, restwill be put in deferred plan

3. Gain Sharing

External factors are not considered Rewarding groups for their successful performance

(team wk, coordination)

Independent of profit earned


63/81

Long Term Incentives contd

4. E/e stock plans issued at lower price than the market

price

Enhances accountability & loyalty Best form of reward

Types:

1. E/e stock purchase plan (ESPP)2. Restricted stock plan

3. E/e Stock Option Scheme (ESOS)

4. Stock Appreciation Rights (SAR) Phantom Shares

5. Phantom Stock

6. Premium priced options/ performance vesting options


64/81

Non Monetary Incentives

Recognize e/es contribution

Delegate challenging assignments

Additional responsibility + Authority

Free gifts & free tours

Why incentive plans fail?


65/81

Why incentive plans fail?

1. Performance pay cant replace good mgt.

ambiguous instructions, no clear goals, hostilewk force/mgt

2. You get what you pay for

Rewards a gp how many pieces producedrushed production, low qly

Incentive for reducing accidentsreduce no ofreported accidents

3. Pay is not a motivator

Adequate rewardthen other effective

motivatorsHerzberg

Wh i ti l f il? td


66/81

Why incentive plans fail? contd

4. Rewards rupture relationships

Encourage individuals or individual gpsto

pursue rewards for themselves

5. Rewards can have unintended consequences

Suppose income depends on performance

rating & productivitye/e focus on nos,

manipulate, engage in unethical or illegal

behavior

Guidelines for Effective


67/81

Guidelines for Effective

Incentive Plans

IP should be linked to the e/e performance

increase morale

IP should be transparent should becommunicated

e/e suggestion should be considered

Least importance to external factors

Guidelines for Effective Incentive


68/81

Guidelines for Effective Incentive

Plans contd.

Should be flexible

Should add value no negative influence

on bottomline

Should include both monetary & non

monetary incentives


69/81

Individual vs. Team Rewards

Distribute variable rewards at the team level

Make system simple and understandable.

Using Team-Based Reward Systems

Use skill-based pay for the base.

Use variable pay based on business entity performance

Maintain a high degree of employee involvement


70/81

Compensation

Administration

Process


71/81

Employee Benefits & Services

Meaning


72/81

Meaning

Which include any benefits that the e/e

receives in addition to direct remuneration

Indirect financial or non financial payments

e/e receive for continuing with theiremployment with the company

Also knownfringes, service Programmes,

hidden pay roll

Why Benefits & Services?


73/81

Why Benefits & Services?

Mitigate fatigue

Discourage labour unrest

Satisfy e/e objectives

Aid recruitment

Reduce turn over

Minimize overtime cost

Do Benefits motivate e/es?


74/81

Do Benefits motivate e/e s?

No satisfactory answer

Satisfaction at wk placeplays imp role

Fringe benefits fail in their motivationaleffectnot with performance, but with org

membership

Fringe benefits result inunhealthy

competition


75/81

Fringe benefits

Described as welfare expenses, wage

supplements, perquisites other than wages

Principles of Fringes


76/81

Principles of Fringes

Provided to the e/eprotect & promote their

well being

Must satisfy a real need

Cost-effective

Sound planning

e/e should educateto use these benefits

Types of Fringe Benefits


77/81

yp g

1. Legally required

Social security

Disability insurance

2. Contingent & Deferred

Pension plans

Gp life/health insurance

Guaranteed annual wage

Maternity, child care, sick leave

Dental benefits

Severance payone time payment when

terminating an e/e

Types of Fringe Benefits contd..


78/81

Types of Fringe Benefits contd..

3. Payment for the time not worked

Vacations

Holidays

Voting pay allowances

4. Other benefits

TA

Comp car & subsidies Uniform allowances

Meal allowances

Types of Non monetary Rewards


79/81

/ f S


80/81

Modern E/e Benefit Schemes

1. Golden Parachute

For top mgt executives

Provision of compensation for the lossof a job acquisition by another firm(not severance)

Bonus & other benefits, perquisites

Retirement benefits

M d E/ B fit S h td


81/81

Modern E/e Benefit Schemes contd.

2. Cafeteria Benefit Plan Flexible benefit plans

e/e can select the most suitable plan

Customized benefit plans after assessing

e/e needs

C3 & C4 Compensation & Incentives_2

Documents

Transcript of C3 & C4 Compensation & Incentives_2