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Compensation Planning
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Job Evaluation for Management
Positions
Hay Profile Method
Job evaluation technique using three factorsknowledge, mental activity/problem solving ,
and accountabilityto evaluate executive and
managerial positions.
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Characteristics of Key Jobs
Key JobsJobs that are important for wage-setting purposes
and are widely known in the labor market.
Characteristics of Key JobsThey are important to employees and the
organization.
They vary in terms of job requirements.They have relatively stable job content.
They are used in salary surveys for wage
determination.
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Compensation
Pay is a statement of an employees worthby an employer.
Pay is a perception of worth by an
employee.
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Motivating Employees through
Compensation
Pay Equity (also Distributive Fairness)
An employees perception that compensation
received is equal to the value of the work
performed.
Explains how people respond to situations in
which they feel they have received less (or more)
than they deserve. Individuals form a ratio of their inputs to outcomes in
their job and then compare the value of that ratio with
the value of the ratio for other individuals in similar
jobs.
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Relationship between Pay Equity and
Motivation
The greater the perceived disparity between my input/output ratio andthe comparison persons input/output ratio, the greater my motivation
to reduce the inequity.
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The Wage Curve
Wage CurveA curve in a scattergram representing the
relationship between relative worth of jobs and
wage rates. Pay Grades
Groups of jobs within a particular class that are
paid the same rate.
Rate Ranges
A range of rates for each pay grade that may be
the same for each grade or proportionately greater
for each successive grade.
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The Wage Curve (contd)
Competence-based Pay, (also skill-based payor knowledge-based pay)
Compensation for the different skills or increased
knowledge employees possess rather than for thejob they hold in a designated job category.
Red Circle Rates
Payment rates above the maximum of the payrange.
Broadbanding
Collapses many traditional salary grades into a
few wide salary bands.
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Expectancy Theory and Pay
Expectancy TheoryA theory of motivation that holds that employees
should exert greater work effort if they have
reason to expect that it will result in a reward thatthey value.
Employees also must believe that good
performance is valued by their employer and will
result in their receiving the expected reward.
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Pay-for-Performance and Expectancy
Theory
Figure 9.3
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Factors Affecting the Wage Mix
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The Wage MixInternal Factors
Compensation StrategySetting organization compensation policy to lead,
lag, or match competitors pay.
Worth of a JobEstablishing the internal wage relationship among
jobs and skill levels.
Relative Worth of an Employee
Rewarding individual employee performance
Ability-to-Pay
Having the resources and profits to pay
employees.
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The Wage MixExternal Factors
Labor Market ConditionsAvailability and quality of potential employees is
affected by economic conditions, government
regulations and policies, and the presence of
unions.
Area Wage Rates
A firms formal wage structure of rates is
influenced by those being paid by other areaemployers for comparable jobs.
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The Wage MixExternal Factors
Collective BargainingEscalator clauses in labor agreements that provide
for quarterly upward cost-of-living wage
adjustments for inflation to protect employees
purchasing power.
Unions bargain for real wage increases that raise
the standard of living for their members.
Real wages are increases larger than rises in theconsumer price index; that is, the real earning
power of wages.
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The Wage MixExternal Factors
Cost of Living - Consumer Price IndexLocal housing and environmental conditions can
cause wide variations in the cost of living for
employees.
Inflation can require that compensation rates be
adjusted upward periodically to help employees
maintain their purchasing power.
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Significant Compensation Issues
Equal Pay for Comparable Worth
The concept that male and female jobs that aredissimilar, but equal in terms of value or worth to
the employer, should be paid the same.
Wage-Rate Compression
Compression of pay differentials between job
classes, particularly the pay differentials betweenhourly workers and their managers.
Low-wage Budgets
Current wage budgets reflect the general trendtoward tight compensation cost controls.
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Principle of wage policy in India
Minimum wageFair wage
Living wage
based on the needs of workers,capacity of the employer to pay and general
economic conditions of the country
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The Compensation Structure
Wage and Salary surveyA survey of the wages paid to employees of other
employers in the surveying organizations
relevant labor market.Helps maintain internal and external pay equity
for employees.
Labor Market
The area from which employers obtain certain
types of workers.
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Strategic Compensation Policy
Concerns The rate of pay within the organization and whether it is to be above,below, or at the prevailing community rate. Quartile positioning
The ability of the pay program to gain employee acceptance while
motivating employees to perform to the best of their abilities. Motivate
The pay level at which employees may be recruited and the pay
differential between new and more senior employees. Equity
The intervals at which pay raises are to be granted and the extent to
which merit and/or seniority will influence the raises. Merit
The pay levels needed to facilitate the achievement of a sound financial
position in relation to the products or services offered. Competitive
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Common Strategic Compensation Goals
To reward employees past performance
To remain competitive in the labor market
To maintain salary equity among employees
To mesh employees future performance with
organizational goals
To control the compensation budget
To attract new employees
To reduce unnecessary turnover
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Total Compensation
Direct Indirect
Bonuses / Variable Pay
Gainsharing /ESOP
Security Plans Pensions
Employee Services Educational assistance Recreational programs
Commissions
Wages / Salaries
Insurance Plans MedicalLifeAccident
Time Not WorkedVacations Breaks Holidays
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Strategic Compensation Planning
Strategic Compensation PlanningLinks the compensation of employees to the
mission, objectives, philosophies, and culture of
the organization.Serves to mesh the monetary payments made to
employees with specific functions of the HR
program in establishing a pay-for-performance
standard.Seeks to motivate employees through
compensation.
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Incentive SchemesIssues
High incentive earning become the basis for wage for the
next negotiations
Who will set the norm
Standard performance?
Be based on scientific work measurement
Direct and Indirect workers
Planning before implementingGroup incentive schemes
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Compensation Philosophy
Job Band 7 and above
The top performers ( 2 EAs +) be positioned at the 75%ile
The next best (2 HAs +) be positioned at 66%ile
The new employees be given a 15 to 20% increase
Job band 8-10 The top performers at 66%ile to Median Range
The next best at Median
The new employees be given a 15 to 20% increase
Job band 11 and 12
Entry level and professionals like diploma holders etc. Top two categories get near to Median
The new employees be given a 15 to 20% increase
Others also be given increases in line with 2006 corrections
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Types of Incentive Plans
INDIVIDUAL GROUP ENTERPRISE
Piecework Team compensation Profit sharing
Standard hour plan Scanlon Plan Stock options
Bonuses Rucker Plan Employee stock
Merit pay Improshare ownership plansVariable Pay Earnings-at-risk plans (ESOPs)
Sales incentives
Incentives forprofessional employees
Executive compensation
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Successful Incentive Plans
Employees have a desire for an incentive plan.
Employees are encouraged to participate.
Employees see a clear connection between the
incentive payments they receive and their jobperformance.
Employees are committed to meeting the standards.
Standards are challenging but achievable.
Payout formulas are simple and understandable.
Payouts are a separate, distinct part of compensation.
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Merit Pay
Merit Pay Program (merit raise)Links an increase in base pay to how successfully
an employee achieved some objective
performance standard. Merit Guidelines
Guidelines for awarding merit raises that are tied
to performance objectives.
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Motivation Through Merit Raises
Develop employee confidence and trust inperformance appraisal.
Establish job-related performance criteria.
Separate merit pay from regular pay.
Distinguish merit raises from cost-of-living
raises.
Withhold merit payments when performance
declines.
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Problems with Merit Raises
Inadequate funding for merit increases.
Vagueness in how to define and measure performance.
Employees not believing that merit compensation is tied to
effort and performance
Allowing organizational politics to influence merit pay
decisions.
Failing to differentiate between merit pay and other types of pay
increases.
Mistrust between management and employees.
An overall merit pay plan that does not motivate.
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Group Incentive Plans
Team Incentive PlansCompensation plans where all team members
receive an incentive bonus payment when
production or service standards are met or
exceeded.
Establishing Team Incentive Payments
Set performance measures upon which incentive
payments are based
Determine the size of the incentive bonus.
Create a payout formula and fully explain to
employees how payouts will be distributed.
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Group Incentive Plans
Gainsharing PlansPrograms under which both employees and the
organization share the financial gains according to
a predetermined formula that reflects improved
productivity and profitability.
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Lessons Learned: Designing Effective
Gainsharing Programs
Enlist total managerial support.
Include all groupslabor, management, employees.
Prevent political gamesmanship.
Bonus formulas must be fair, precise and easilycalculated, offer frequent payouts, large enough toencourage employee effort, and create a pay-for-performance environment.
Be certain that employees are predisposed to againsharing reward system.
Launch the plan during a favorable business period.
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Clarifications ?
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