Designing Compensation System: Part IVDr. G C Mohanta, BE(Mech), MSc(Engg), MBA,

PhD(Mgt) Professor

1

Building Pay Structure That Recognise Individual

Contributions

2

Designing Merit Pay SystemsMerit increase amounts

Diminishing marginal returns Just-meaningful differences Increase as substantive (equity theory)

TimingCommon review date Anniversary date

Recurring vs. non-recurring merit pay increases

Present level of base payRewarding performance: Merit pay grid

Performance and position in range 3

Merit Pay GridC

urr

en

t A

nn

ua

l Sa

lary

Performance Rating

ExcellentAbove

Average PoorAverageBelow

Average

7% 5% 3% 0% 0%

9% 7% 6% 2% 0%

12% 10% 8% 4% 0%

$60,000

$55,000

$50,000

$45,000

$40,000

$35,000

$30,000

$25,000

$20,000

Q3

Q2

Q1

Merit Pay GridHigher Pay for Performance

(1)Well Above Average

(2) Above Average

(3) Average

(4) Below Average

(5) Well Below Average

Q4 (max pay)

7%

5%

3%

1%

0%

Q3

8%

6%

4%

2%

0%

Q2

9%

7%

5%

3%

0%

Q1 (min pay)

10%

8%

6%

4%

0%

Performance

Lo%

Hi%

Position in Range

High % Low %

Percent increase already allocated: 6.3%

Sales Force as a Special GroupHigh initiative needed, customer focus,

feedback to companyExtended periods without supervision, need

to stay motivated regardlessIncentives when willingness to work hard can

make the difference between success and failure

Designing Sales Incentive - Compensation Plans

Alternative sales compensation plansSalary only Salary-plus-bonus plans Salary-plus commission Commission-plus-draw Commission-only

Determining fixed pay and the compensation mixInfluence of salesperson on buying decisionCompetitive pay standardsAmount of non-sales activitiesNoncash incentives

Designing Pay for Knowledge Program

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Jobs vs Skills or CompetenciesJobs

Clear expectationsSense of progressPay based on value of workInflexible

Skills or CompetenciesContinuous learningFlexibilityLateral movement

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Competency Based PaySkill Based Pay

Pay for Knowledge

Competency Based Pay

Competency based payWhere the company pays for the employee’s

range, depth, and types of skills and knowledge, rather than for the job title he or she holds

CompetenciesDemonstrable characteristics of a person,

including knowledge, skills, and behaviours, that enable performance

Competency Based Pay

Depth of knowledge: Pay for having a deep level of knowledge within a job, e.g. teachers pay increases with amount of education: bachelors, masters, doctorate degree

Breadth of knowledge: Pay for generalist knowledge

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Pay is tied to skills, abilities & knowledge that an employee possesses

Manufacturing jobsFlexibility to reassign people to where

work is needed

Skill Based Pay

Skill & Competency AnalysisSkill Analysis: Systematic process to

identify skills to perform work: What does the employee knowSkills: basic unit of knowledge & expertise

Competency Analysis: Systematic process to identify competencies required for success What can the employee doCompetencies: basic units of knowledge &

abilities

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Skill or Competency EvaluationPerson centered approach rather than job

centeredDetermine the skill blocks that are valued: skill or

skill units, rather than jobsQuantify the valueDevelop certification proceduresMastery of skill units is measured and certified

Pay changes do not necessarily accompany job changes

There is little emphasis on seniority in pay determination

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Designing Pay-for-Knowledge Programs

Establishing skill blocksTransition matters

Skills assessment; Aligning pay with knowledge structure; Access to training

Training and certificationIn-house or outsourcing training

Expertise, timeliness; Size of employee population to be trained; Sensitivity or proprietary nature

Certification and recertification

Top Twenty Competencies• Achievement orientation• Concern of quality• Initiative• Interpersonal

understanding• Customer-service

orientation• Influence and impact• Organization awareness• Networking• Directiveness• Teamwork & cooperation

• Developing others

• Team leadership

• Technical expertise

• Information seeking

• Analytical thinking

• Conceptual thinking

• Self-control

• Self-confidence

• Business orientation

• Flexibility17

Steps in Developing Competency Based Compensation System

1. Developing a Competency model2. Competency Mapping3. Linking Competencies to Compensating

factors4. Designing compensation on the basis of

actual competencies 

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Developing Competency Model

Competency model identifies various competencies required for performing a job

Describe competencies in form of indicators Each competency can be quantified on a

scale based on its relative importance with respect to each job

Serves as a reference for all competency management activities in organization

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Procedure for Developing Standard CompetenciesAnalyse job/role to identify competencies requiredJob descriptions & job specifications show

competency required for satisfactory performance of duties & responsibilities

Discuss with Job holders and immediate superiors to identify critical competencies

Validate the competencies and develop a standard competency dictionary

Validation can be done by opinion survey or interviewing experts in related areas

Rate each competency, known as ‘Critical Rating’ , on a scale 1 to 5, based on its relative importance & contribution to performance

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Competency Mapping and Gap Analysis

Design structured questionnaire for employee and his immediate superior

Ask employee to rate his/her own competency level in the questionnaire

Ask immediate superior to rate the competency level of the employee

Compute weighted average rating to get final score

70% weight may be given to superior’s rating & 30% to employee’s rating

Analyse Gap in each competency level of the employee

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Competency Criticality Rating

Employee Rating

Gap

Production 5 2.24 2.76

Technical 4 2.1 1.9

Quality 5 2.31 2.69

Cost 5 2.24 2.76

Organising 3.7 2.1 1.6

Achievement 4 1.82 2.18

Communication 3.2 1.89 1.31

Maintenance 3.7 2.1 1.6

Safety 2 2.1

Discipline 4.6 2.1 2.5

Attitude 5 1.75 3.25

Reliability 5 2.1 2.9

Leadership 4.3 2.1 2.2

Interpersonal 4.6 1.82 2.78

Processing 4.7 2.38 2.32

Gap Analysis Using Competency Mapping

COMPETENCY MAPPING FOR E.C.No.:878

Compensation FactorCompensation Factor is the weighted

average of competency ratings of an employee

Compensation factor used - to design compensation strategies - to fine tune the policy and adjust for

internal and external equities

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Computing Compensation Factor F

Let us assumeCR = Criticality Rating for each competencyCp = Summation of Criticality Ratings of all

Competencies = ΣCRER = Employee RatingWR = Weighted Rating = CR*ERCompensation Factor, F = Σ(CR*ER)/Cp

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Compensation Factor Computation for Employees

Competency CR ER1 WR1 ER2 WR2 ER3 WR3 ER4 WR4 ER5 WR5Production 5 2.24 11.2 3.46 17.3 2.9 14.5 3.61 18.05 2.83 14.15Technical 4 2.1 10.5 3.39 16.95 3.55 17.75 3.76 18.8 3.39 16.95Quality 5 2.31 11.55 3.31 16.55 2.58 12.9 3.3 16.5 2.31 11.55Cost 5 2.24 11.2 3.6 18 2.85 14.25 3.65 18.25 2.74 13.7Organising 3.7 2.1 10.5 3.09 15.45 3.25 16.25 3.15 15.75 3.01 15.05Achievement 4 1.82 9.1 3.28 16.4 2.94 14.7 2.82 14.1 3.18 15.9Communication 3.2 1.89 9.45 3.15 15.75 2.76 13.8 3.8 19 2.66 13.3Maintenance 3.7 2.1 10.5 3.16 15.8 2.85 14.25 3.3 16.5 2.7 13.5Safety 2 2.1 10.5 3.51 17.55 3.7 18.5 3.09 15.45 3.36 16.8Discipline 4.6 2.1 10.5 3.46 17.3 3.2 16 3.18 15.9 3.46 17.3Attitude 5 1.75 8.75 3.74 18.7 3.41 17.05 3.71 18.55 3.6 18Reliability 5 2.1 10.5 3.51 17.55 2.88 14.4 3.3 16.5 3.6 18Leadership 4.3 2.1 10.5 3.3 16.5 3.09 15.45 3.51 17.55 2.69 13.45Interpersonal 4.6 1.82 9.1 3.9 19.5 3.09 15.45 3.6 18 3.39 16.95Processing 4.7 2.38 11.9 3.61 18.05 3.12 15.6 3.48 17.4 3.47 17.35 Cp 63.8 F 2.441 4.034 3.618 4.017 3.636CR = Criticality Rating, ER = Employee Rating, WR = Weighted Rating = (CR * ER), F= Compensation Factor = Summation of (CR*ER)/Cp

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Determination of Basic Based on Percentage Increment on Basic

Emp. No. Basic F F*10 Incr. New Basic [Incr.= (F*10)%]

E1 8500 2.44 24.41 2075 10575 E2 8000 4.03 40.34 3227 11227 E3 8500 3.62 36.18 3075 11575 E4 8500 4.02 40.17 3414 11914 E5 8500 3.64 36.36 3091 11591

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Determination of Basic Based on Fixed Increment Value

Emp. Basic F F*Incr. New BasicNo. (Incr. = 500)E1 8500 2.44 1221 9721E2 8000 4.03 2017 10017E3 8500 3.62 1809 10309E4 8500 4.02 2009 10509E5 8500 3.64 1818 10318