Compensation -An Overview
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Transcript of Compensation -An Overview
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Compensation:An Overview
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Total Compensation
Direct Indirect
Bonuses
Gain sharing
Commissions
Wages / Salaries
Security Plans Pensions
Employee Services Educational assistance
Recreational programs
Insurance Plans Medical Dental Life
Time Not WorkedVacations Breaks Holidays
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Objectives of Compensation Planning
Some of the important objectives that are sought to be achieved through
effective compensation management are listed below. (Dessler, Fisher, Gomez).
1. Attract talent
2. Retain talent
3. Ensure equity
4. New and desired behavior
5. Control costs
6. Comply with legal rules
7. Ease of operation
The most important objective of any pay system is fairness or equity. The term equity has three
dimensions (Cascio).
1. Internal equity
2. External equity
3. Individual equity
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Compensation Equity Issues
Compensation equity: Is compensation judged to be fair?
3 Compensation equity issues
#1: Individual equity: compare the pay of individuals whodo the same job in the same organization and judge if it is
fair
Example: A retail store has 2 Assistant Store Managers (2 people
doing the same job in the same organization)
If they are paid the same, is that perceived as being fair?
If they are paid differently, is the pay difference perceived as being
fair?
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Compensation Equity Issues 3 Compensation equity issues (more)
#2: Internal equity: compare the pay of different jobs in the
same organization and judge if it is fair
Example: A retail store has an Assistant Store Manager and a
Store Manager (2 different jobs in the same organization)
If they are paid the same, is that perceived as being fair?
If they are paid differently, is the pay difference perceived as being
fair?
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Compensation Equity Issues 3 Compensation equity issues (more)
#3: External equity: compare the pay of the same job in
different organizations and judge if it is fair
Example: Retail store X has a Store Manager and retail store Y has
a store manager (the same job in two different organizations)
Do the two stores pay their store managers the same or not?
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Strategic Compensation Policy Concerns
1. The rate of pay within the organization and whether it is to be above, below, or at
the prevailing community rate.
2. The ability of the pay program to gain employee acceptance while motivating
employees to perform to the best of their abilities.
3. The pay level at which employees may be recruited and the pay differential
between new and more senior employees.
4. The intervals at which pay raises are to be granted and the extent to which merit
and/or seniority will influence the raises.
5. Wage and salary administration plans and programs should be responsive to thechanging local and national conditions.
6. Wage and salary plans should be sufficiently flexible.
7. Job evaluation must be done scientifically.
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Difference between wage and salary1. Wage earners are paid by the hour, Salary earners are paid by the year.
2. Salary earners usually receive paid time when they are not working, Wage
earners often have to give up pay for time off.
3. Salaries are often calculated as packages.
4. Wage earners get paid more for working more than 40 hours per week, Salary
workers are rarely offered overtime pay.
5. Salaries can contain all kinds of benefits and perks
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State Regulation of Wages
The Government has adopted various methods to regulate wages in India
such as prescribing minimum rates of wages, regulating payment of
wages, settlement of wage-related disputes through adjudication
process, setting up of wage boards, etc.
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Internal Influences on Compensation
1. Job needs
2. Ability to pay
3. Cost of living
4. Prevailing wage rates
5. Unions
6. Productivity
7. Demand and supply of labour
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External Influences on Compensation
External influences include:
I. The labor marketII. The economy
III. The government
IV. Unions
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1.The Labor Market and Compensation
In times of full employment, wages may have to be higher
Styles of managing and rewarding are changing in response to diversity
The easiest relationship to imagine between rewards and diversity has to
do with benefits ,tax laws in relation to expats etc.
The increasing level of formal education will also impact reward systems Two other types present compensation challenges: Technological experts &
Temporary or contingent workers.
Compensation specialists must base their compensation plan on a
competitive, global marketplace
Off shoring jobs, projects, and work
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2.Economic Conditions and Compensation
The economic conditions of the industry and competitiveness affect an
organizations ability to pay high wages
A productivity index used to determine a general level of wages:
The Bureau of Labor Statistics Output per Man-hour inManufacturing
The percentage increase in average weekly earnings in the U.S. is
closely related to:
The percentage change in productivity
Plus the percentage change in the consumer price index
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3.Government Influences & Compensation The government directly affects compensation through wage controls and
guidelines
Pay raises may be prohibited at certain times
Laws establish minimum wage rates and work hours
Discrimination is prohibited
Wage freezes are government orders that forbid wage increases
Wage controls limit the size of wage increases
Wage guidelines are voluntary wage controls
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Wage and Hour Regulations
It was passed to counteract the abuses encountered by production workers in themanufacturing sector
FLSA is administered by the Dept. of Labor, which also acts as the enforcement agency
There are four provisions:
1. Minimum wage
2. Overtime
3. Child labor4. The Equal Pay Act of 1963
The Fair Labor Standards Act (FLSA) of 1938 is the basic
pay regulation act
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Overtime Pay
Virtually all hourly (nonexempt) employees must receive overtime
compensation for working:
More than 40 hours per week
More than 8 hours per day
Salaried employees do not receive overtime pay.
Distinguishing between exempt and nonexempt workers is not always
easy
Exempt employees are in managerial, administrative, or
professional positions and are paid on a salaried basis
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The Payment Of Wages Act ,1936
Providing regular payment of wages without unauthorized deductions to persons
employee s in any industrial establishment. The act permits the following
permissible deductions:
1. fines
2. Deductions for absences
3. Deductions for loss of goods entrusted to the workers
4. House given by employer
5. Advances given by employer
6. Provident fund
7. Insurance premium etc.
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Minimum Wages Act ,1948
Wage that must invariably be paid weather the company or big/small, makes profit
or not.
The 15th Labor Conference 1957 quantifies minimum wages as thus:
Minimum food requirements based on calorie intake
Clothing requirement on basis of per capita consumption of 28 yards per annum;72
for all four members.
Rent corresponding to the minimum housing area under Govt. Industrial Housing
Scheme.
Fuel, Lighting and other miscellaneous items of expenditure should constitute 20
% of the minimum wage.
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Equal Pay Act of 1963 (EPA)
EPA is an amendment to the FLSA
Its goal is to guarantee that women holding the same jobs as men will be
treated with respect and fairly compensated regarding all rewards of work
Comparisons cannot be made between individuals holding the same job at
different companies
The gender pay gap in 2001 averaged 26 percent in the US economy
Four elements establish the equality of positions:
Skill
Effort
Responsibility
Working conditions
A difference in wages includes additional forms of compensation, such as:
Vacations and holiday pay, leave of absence, overtime, lodging, food, and
reimbursement for clothing or other expenses
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Union Influences
Unions exert influence on compensation programs
Unionized workers work longer hours and make more than non-unionized
workers
Unions tend to be pacesetters in demands for pay, benefits, and improved
working conditions
There is supportive interaction between unions and the government
The union is more likely to increase the compensation of its members when:
It is financially and competitively strong
It has the finances to support a strike It has the support of other unions
The economy is strong
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Who Makes Compensation Decisions
Compensation decisions are influenced from the top to the bottom of theorganization
In publicly held organizations, stockholders and the board greatly influence pay,especially at the top of the organization
Top management determines + HR
How much of the firms budget is earmarked for pay
The form of pay to be used (time based vs. incentive)
Other pay policies
Both large and small organizations now involve more individuals in determiningpay
At Whirlpool Corporation, top managers and compensation specialists jointlyestablish financial and operating goals
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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.
A motivation theory that explains how people respond to
situations in which they feel they have received less (or
more) than they deserve.
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Expectancy Theory and Pay
Expectancy Theory
A 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 that they 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 and employees productivity ,satisfaction &motivation
Research on the relationship between pay,
employee satisfaction, and productivity continues,but with contradictory results
It can still be concluded, however, that pay is an
important outcome to employees
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Compensation Decisions
Pay for a position is set relative to three groups:
Group A: employees working on similar jobs in other
organizations
Group B: employees working on different jobs within the
organization
Group C: employees working on the same job within the
organization
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The Pay-Level Decision
Managers compare the pay of people working inside the
organization to those outside it
High-pay strategy:
Companies using this strategy are calledpacesetters
Low-pay strategy:
The manager pays at the minimum level needed to hire enough employees
Comparable-pay strategy:
Pay is set at the current market rate in the community or industry.
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1.Pay Surveys
Pay surveys collect data about compensation paid to employees by all
employers in:
A geographic area
An industry An occupational group
Pay surveys are conducted by:
Professional and consulting enterprises
Trade associations
The government
Unions
Competitors
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2.Job Evaluation
Frequently used methods of job evaluation:
Job ranking
Classification
Point system
Factor comparison
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Ranking of Jobs
Ranking is the system used primarily in smaller, simpler
organizations
The evaluator rank-orders whole jobs, from the simplest to the most
challenging through job analysis.(or job specifications) If an organization has many jobs, this system is clumsy to use and the
ratings may be unreliable
One way can be to group jobs and then rank them.(by deptt. Or
clusters)
Select compensable factors.
Ranking is the least frequently used method of job evaluation
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Classification or Grading System Classification or grading groups a set of jobs
Sets are then ranked by difficulty or sophistication
Bases ranking on compensable factors such as judgment, originality,
qualification, difficulty, originality ,experience making grade definitions.
The evaluator first decides how many classifications the job structure has to
be broken into Then, definitions are written for each class
After the classes are defined, job are compared with the definition and placed
into the proper classification
Class I Computer work, no managerial responsibility
Class II Computer work, no managerial responsibility, team involvement
Class III Computer work of medium complexity, no managerial responsibility, team
responsibilities
Class IV Computer work of medium complexity, managerial responsibility, team authority
Class V Complex computer work, managerial responsibility, team leadership
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Point System
The greatest number of job evaluation plans use the point
system
Identify compensable factors
Assign weights to them.
Calculate the net worth of the job.
Requires evaluators to assign points on the basis of:
Skill required
Physical and mental effort needed
Degree of dangerous/unpleasant working conditions Amount of responsibility
When these are summed, the job has been evaluated
Degrees
Factor Weight 1st 2nd 3rd 4th 5th
1. Education 50% 50 100 150 200 250
2. Experience 25 12 12 24 36 48
3. Complexity of job 12 12 24 36 48 60
4. Relationships with others 8 8 24 40
5. Working conditions 5 10 15 20 25
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Factor Comparison Method:
Define a set of compensable factors
Select a set of benchmark (key) jobs
Jobs with well-known, stable job content
Jobs that are common in many organizations
Jobs that represent the full range of jobs being evaluated
Jobs that represent the range of each compensable factor
Example: jobs with various skill levels, effort levels, etc.
Jobs for which market pay data is available
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Factor Comparison Method:
Rank the benchmark jobs on the basis of each compensable
factor
Example: Rank the jobs from least skilled to most skilled
Collect market pay data for the benchmark jobs
For each benchmark job, allocate market pay across the
compensable factors
Example: If market pay for a benchmark job is $15, how much of
that $15 is for skill, how much for effort, how much for
responsibilities, and how much for working conditions?
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Factor Comparison Method (more)
Slot all the non-benchmark jobs into their proper places on
the pay scale for each compensable factor
Determine the pay for each job by adding up the pay from
each compensable factor
Example: Pay = pay from skill + pay from effort + pay from
responsibility + pay from working conditions
Example: Fisher, Schoenfeldt, & Shaw (2006), Table 11.7, p. 498 Job 4: Pay = $3.50 for skill + $2.50 for effort + $3.75 for
responsibilities + $1.25 for working conditions = $11.00
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Pay Classes, Rate Changes, Classifications
The pay-structure process is completed by establishing:
Pay curves
Pay classes
Rate ranges
Job classifications
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The Pay Curve
All jobs within a given labor class receive the same rate of
pay
In this example, pay classes are determined by the point
value that was set through job evaluation
A pay class (pay grade) is a grouping of jobs that are similar
in terms of difficulty and responsibility
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The Pay Curve
Points
Payclasses
100 125 150 175 200 225 250 275 300 325 350
Pay curve
Class 1 Class 2 Class 3 Class 4 Class 5
$
$3500
$3200
$3100
$2900
$2700
$2500
$2300
$2100
$1900
MonthlyPay
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The Pay Curve
The next slide shows how data from a wage and salary
survey are combined with
A compensation trend line is derived by establishing the
general pay pattern
The trend line can then be determined
The pay rate for any job can be ascertained by calculating
the point value of the job and then locating that value on
the trend line
Minimum and maximum limit lines can be set by setting
a percentage above or below the trend line
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The Pay Curve
Points
Pay
classes
$
$6250
$6000
$5750
$5500
$5250
$5000
$4750
$4500
$4250
$4000
$3750
$3500
$3250
$3000
0 500100 150 200 250 300 350 400 450
Class 1 Class 2 Class 3 Class 4 Class 5 Class 6 Class 7 Class 8
Monthly
Pay
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Delaying and Broad banding
Broad banding:
More emphasis on individual performance
Multiple salary grades and ranges are collapsed into a few
wide levels (bands)
Entry-level employees start at the range minimum;
movement upward is based on performance (merit)
Allows managers to reward top performers while saving
money on mediocre employees
When shifting pay decisions to managers, the firm must guardagainst abuse: favoritism can result in unfair use