Compensation (HRM)

Compensation: Establishing Strategic Pay Plans

Akash Tilokani121420006

Human Resource ManagementCollege Of Engineering , Pune

Forerunners in technical education

Rings of the Presentation

College Of Engineering , PuneForerunners in technical education

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Compensation• All forms of pay going to employees

and arising from their employment.• Two Components: Direct financial and

Indirect financial.• Direct financial can be based on time

or on performance.• Scope: Direct financial payments

based on time and the related things.


Factors Determining Pay Rates

• Legal• Unions• Company Strategy and Policy• Geography• Equity


Legal Factors(Acts, Commissions, Statutory Provisions)

• Minimum Wages Act, 1948: Wages are fixed for scheduled employment, specified in the act.

• Companies Act, 2013: Framework for remuneration of top management of Indian companies.

• Working Journalists and Other Newspaper Employees and Miscellaneous Provisions Act, 1955

• MNREGA, 2005: Minimum wages for 100 days of financial year.

• Pay Commissions: For government employees• Payment of Wages Act, 1936 & Equal Remuneration Act,

1976• The Unorganized Workers Social Security Act, 2008


Unions• Formal collective bargaining agreements

between trade unions and employers form the foundation of pay plans.

• Restricted to public sector employment or formal private sector employment.

• Involvement, may be at industrial level, multi unit company level or at plant level.

• Representatives of government employees – Pay Commission – Government

• Example, of IIT and IIM faculty members and Armed forces


Company Strategy and Policy & Geography

• Compensation plan should help in achieving the Company objectives.

• Need to produce Aligned reward strategy.• Examples of few companies.• Geography affects the pay rates: for this IT

companies have established units in smaller cities.• Various allowances are given to adjust effects

geography: Hardship allowances, Relocation allowances

• Various ways to adjust the effect: Raising the salaries, Differentials for on going costs, lump sump, etc.


Equity• Equity theory of motivation postulates that people are

strongly motivated to maintain a balance between what they perceive as inputs and their rewards.

• External: Pay rates in one company compared to other companies.

• Internal: Pay rates of a job as compared to other jobs in the same company.

• Individual: Individual’s pay compared with co worker’s pay.

• Procedural: Perceived fairness of the processes while making decision of allocations.


Establishing Pay PlansFollowing are the steps involved in establishing pay rates:1. Salary Surveys2. Job Evaluation3. Group Similar Jobs into Pay Grades4. Price Each Pay Grade5. Fine Tune Pay Rates


Salary Surveys• Survey of what others are paying• Helps in ensuring external equity• Can be informal, newspaper or internet

salary survey• Three ways to use: price benchmark jobs,

price 20% or more directly in market place, other information on benefits

• Examples, Paycheck India, William M. Mercer, Inc.


Job evaluation• Formal and systematic comparison of jobs

to determine the worth of one job relative to another.

• Helps in ensuring internal equity.• Principle is simple, job which has greater

requirements should be allocated more as compared to job which has lesser requirements

• Two basic approach: Intuitive approach and comparison based on common factors.


Continued…• Focus on second approach, common

factors are called compensable factors.

• Compensable factors: developed (Wal Mart uses its own CFs) or used as given the equal pay act.

• Choice of appropriate CFs is necessary.

• Three steps in preparing job evaluation: identifying the need, getting cooperation and formation of evaluation committee.


Continued…Following are the methods used in job evaluation:1. Ranking Method2. Classification Method3. Point Method4. Factor Comparison Method


Ranking MethodBased on some overall factors like ‘Job difficulty.’Involves following steps:1. Obtain job information2. Select and group jobs3. Select compensable factors4. Rank jobs5. Combine ratings


Classification Method• Simple, widely used method in which raters

categorize jobs into groups; all jobs are roughly of same value in a group.

• Groups are called classes if they contain similar jobs and grades if they contain jobs that are similar in difficulty but otherwise different.

• Ways of classification: write class or grade description and place jobs into classes or grades based on how well they fit these description. Second is to write a set of compensable factors based rules for each class and then categorize.


Point Method• It is a quantitative technique.• Involves: identifying several

compensable factors, each having several degrees and a degree to which these factors are present in the job.

• The result is a quantitative point rating for each job.

• Most widely used method.College Of Engineering , Pune


Factor Comparison Method• Also a widely used method• Refinement of ranking method• Ranking is done for each job, several

times – each for the compensable factor

• After the above is done, combination of rankings is done and one single numerical rating is generated for each job.


Grouping jobs into Pay Grades• Assigning the pay rates could be the next step

after job evaluation; suitable for small scale works but not for large scale entities like government; thus, the need of grouping

• Involves grouping of similar jobs (in terms of the job evaluation method) into Pay Grades

• Depends on the method used for job evaluation• If point method is used, jobs within some range

will be grouped together into pay grades.


Pricing Each Pay Grade• Formal step of assigning the pay

rates to each pay grade• If organization is small, it directly

comes after job evaluation and opposite is true for a big organization

• Use of wage curves is made to assign pay rates to each pay grade



Continued…• Wage curve shows the pay

rates currently paid for jobs in each pay grade relative to the points or rankings assigned to them in the job evaluation.

• Purpose; draw a relationship between points obtained and pay rates

• Steps; find out average pay for each pay grade – plot pays and points – fit a line through plotted points – wages along the line are target wages

Fine Tune Pay Rates• It may not be possible to give all the

jobs in a grade same pay rate.• Method to develop vertical pay

ranges for all horizontal pay grades and the graph so obtained is called as a wage structure.

• Choice of going for the range in pay rates may be done arbitrarily or with respect to specific issues of the organizationCollege Of Engineering , Pune


Continued…

• Some rates may not fall in the range; would go above or below the range established for a particular grade.

• Suitable adjustments are done for the conditions above.College Of Engineering , Pune


References• Dessler, G., Varkkey, B., Human

Resource Management, 12th edition, Pearson Publications, 2012.

• Aswathappa, K., Human Resource Management, Tata McGraw-Hill Publications, 2010.

• en.m.wikipedia.org/wiki/Job_evaluation


Thank You


Compensation (HRM)

Leadership & Management

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