CHAPTER 11 - MANAGING COMPENSATION

1. CHAPTER 11 - MANAGING COMPENSATION

2. KEY CONCEPTS AND SKILLS • Aims of compensation • Roles played by top management and HR manager in compensation management • Four phases of compensation management • Job evaluation and main job evaluation methods • Concept of equity in compensation management • Conducting a salary and benefits survey • Calculation of salary structures • Designing a graded salary structure • How salary systems are monitored • Controlling salary reviews • Common problems of managing salaries

3. CHAPTER OUTLINE • Aims of compensation management • Roles of top management and HR manager • The compensation management process • Compensation management policies • Job evaluation: achieving internal equity • Requirements of a job evaluation system • Job evaluation methods • Salary Surveys: Achieving External Equity • Regional and organisational variables • Matching jobs or levels • Data commonly collected in surveys • Using salary survey data • continued next slide

4. CHAPTER OUTLINE • Salary structures • Variables in designing a graded salary structure • Aligning salary structure with market data • Choice of structure • Designing a graded salary structure • Salary budgets • Compa-ratio • Monitoring the salary system • Salary reviews • Procedures for grading jobs and fixing salaries • Red circles and green circles • Salary problems

5. MANAGING COMPENSATION • Compensation is what employees receive in exchange for their labour • Management of compensation concerned with design, implementation and maintenance of remuneration systems • Remuneration systems must provide for competitive levels of salary and benefits, and ensure that rewards are clearly linked to contribution and performance of employees

6. MANAGING COMPENSATION • With globalisation and increasing competition, traditional approaches to salary administration can no longer be used • System of compensation must today be dynamic to reward those who contribute to success of organisation • Traditional systems of rewarding employees on basis of loyalty and long service can no longer be followed

7. AIMS OF COMPENSATION MANAGEMENT • Overall Aims • To attract, retain and motivate people of the quality required by the organisation.

8. AIMS OF COMPENSATION MANAGEMENT • Aims of the Organisation • Acquire qualified employees • Retain good employees • Reward desirable behaviour • Ensure internal equity • Recognise responsibility • Further administrative efficiency • Control costs • Comply with legislation

9. AIMS OF COMPENSATION MANAGEMENT • Aims of the Individual Employee • Be treated fairly • Be paid according to own valuation of worth • Expect salaries to increase as and when they feel there are improvements in their performance • Want salaries to keep pace with inflation and increase in cost of living.

10. AIMS OF COMPENSATION MANAGEMENT • Aims of Trade Unions • To obtain maximum benefits for members without unduly prejudicing their future security • To keep ahead of inflation • To match or exceed market rates • To reflect increases in prosperity of organisation • Unions also want an equitable system, a system that reflects fairness and seniority of service

11. ROLES OF TOP MANAGEMENT AND HUMAN RESOURCE MANAGER • Key role for top management in providing policies and direction • Top management has to decide where they want organisation to go and what types of people it needs to get there. • HR managers can only provide needed advice as far as policy is concerned • Compensation policy should come from top management

12. ROLES OF TOP MANAGEMENT AND HUMAN RESOURCE MANAGER • HR manager must advise top management on best ways of achieving goals of organisation through compensation management system and then provide necessary background information needed to formulate policy • HR manager must ensure compensation management policies formulated will fit into corporate culture of the organisation and can be integrated with all other HR management functions.

13. THE COMPENSATION MANAGEMENT PROCESS • Major Phases of Compensation Management • PHASE 1 • Study jobs - JOB ANALYSIS • Products = Job Descriptions and Job Specifications PHASE 2 • Internal equity - JOB EVALUATION • Methods = Ranking, Job Grading, Points Method PHASE 3 • External equity - WAGE AND SALARY SURVEYS • Choices = Purchased Survey or Own Survey PHASE 4 • Matching internal and external worth - PRICING JOBS • To match JE worth with Labour Market worth

14. COMPENSATION MANAGEMENT POLICIES • Policies Areas • 1. Pay posture • 2. Influence of market rates • 3. Rewards for performance • 4. Equity • 5. Salary structure • 6. Amount of central control • 7. Total remuneration • 8. Communication

15. JOB EVALUATION: ACHIEVING INTERNAL EQUITY • System of comparing different jobs within organisation to provide basis for grading and determining a pay structure • Concerned with relative value of one job compared with that of another with basic purpose being to eliminate internal pay inequities

16. Concept of Internal Equity • Internal equity refers to relationship between what employees believe they should receive and what they actually receive • Equity concerned with felt justice • Employee’s perception of equity depends on two factors: • his perception of adequacy of salary compared to what he believes would be fair • comparison of his salary with that of other employees

17. REQUIREMENTS OF A JOB EVALUATION SYSTEM • Organisation must subscribe to belief that job evaluation process is foundation of a sound compensation system • Job evaluation system must: • provide a consistent measure of job worth that can be easily understood by everyone concerned • be perceived to be fair by all concerned • involve line managers from inception through administration and subsequent revision • be able to protect employees from favouritism, bias, and resultant internal pay inequities • measure the job and not the performance of the employee doing the job

18. JOB EVALUATION METHODS • Three basic job evaluation methods NON-QUANTITATIVE • Ranking method • Grading method QUANTITATIVE • Points method

19. Ranking Method • Simple and inexpensive method • Especially suitable for small and medium size organisations with few jobs • Judges each job as a whole • Determine relative place in hierarchy by comparing one job with another and arranging them in order of perceived importance for salary purposes. • Job descriptions form basis of ranking of jobs • JDs handed to committee of managers who place them in order of worth, without reference to persons performing these jobs or to present salaries paid • No specific factors selected for consideration.

20. Ranking Method • Several techniques of ranking may be used • 1. Using Benchmark Jobs • Benchmark jobs consist of top and bottom jobs, a job midway, and others at upper or lower intermediate points 2. Paired Comparison Technique • Uses scoring system to indicate degree of importance between two jobs 3. Using Organisation Chart • Extremely simple ranking technique which does not even use job descriptions

21. Job Grading or Classification Method • Standard made up of predetermined classification of job grades or classes. • Job description of job to be graded first read • Committee members then read grade definitions, and allocate job to particular grade • All jobs within one grade treated alike in terms of salary

22. Points Method • Most popular job evaluation method in use today • Used by large and small organisations • Method in which committee members do not keep entire job in mind and instead evaluate job based on certain factors

23. Steps involved in points method • 1. Select Factors • 2. Establish Factor Weights • 3. Determine Number of Degrees (or Levels) for Each Job Factor • 4. Determine Number of Total Points • 5. Distribute Point Values to Job Factor Degrees • 6. Prepare Job Evaluation Manual • 7. Conduct Job Evaluation Using Points Method

24. SALARY SURVEYS: ACHIEVING EXTERNAL EQUITY • Main sources of comparative data on market practice: • general published surveys • specialised surveys • company surveys • company or consultant based survey clubs • data from specialist journals or newspapers • analysis of job advertisements

25. SALARY SURVEYS: ACHIEVING EXTERNAL EQUITY • GENERAL POINTS TO CONSIDER • Survey not designed to show one salary level is the correct market rate • All it can do is to give indication of current going range for establishing salary levels or setting pay structures • Using salary surveys is about using judgement and surveys will not make judgements for their users • Most salary surveys also include survey of benefits

26. REGIONAL AND ORGANISATIONAL VARIABLES • Location • Industry • Organisation Size and Profitability

27. MATCHING JOBS OR LEVELS • For survey results to be reliable, jobs should be as similar as possible • Poor job matching can cause major survey errors • Job matching means looking beyond job titles and looking at actual tasks and levels of responsibility

28. MATCHING JOBS OR LEVELS • Different approaches in job matching: • Job Titles Only • Job Titles with Abbreviated Job Description • Full Job Descriptions • Use of a Common Method of Job Evaluation

29. DATA COMMONLY COLLECTED IN SURVEYS • Besides salary data, information also collected on organisational background • Survey data normally includes survey of benefits and terms and conditions of service

30. USING SALARY SURVEY DATA • Use of data from salary surveys involves judgement and compromise • Information will enable organisation to extract a derived market rate • Use as basis to formulate salary scales taking into account pay posture policy • No such thing as correct rate for a job • When all data from survey made available, proposed scale mid-point established

31. USING SALARY SURVEY DATA • Based on organisation’s pay posture, information on current and updated salaries, as well as estimates of movement in earnings and cost of living • Where organisations want to stay ahead of market mid-points often around upper quartile • Those which just want to keep pace with market rate would stay closer with median

32. SALARY STRUCTURES • Salary structure is device by which organisation distributes salaries to employees • Consists of scales for jobs or groups of jobs determined to be of equal value • Pay grade includes combination of different jobs evaluated as of approximately same value • For each grade, there will minimum and maximum salaries

33. CRITERIA FOR SALARY STRUCTURES • 1. Must be appropriate to needs of the organisation • 2. Must be flexible enough to enable organisation to respond to internal and external pressures • 3. Must provide encouragement for high flyers and at same time sufficiently rewarding for majority of employees • 4. Must reward performance and achievement, motivating ambitious employees to build a career with organisation • 5. Must provide appropriate distinctions for rewarding different levels of responsibility and performance

34. NUMBER OF STRUCTURES • May not be appropriate to have one salary structure covering all categories of employees • Higher level employees, terms and conditions of service very different from junior employees • Need to have sufficient flexibility in terms of spread from minimum to maximum to recognise and reward performance • For junior employees, jobs may have only limited opportunity for improving performance and wide salary range not suitable • Many large organisations adopt separate structures for different clusters of employees

35. GRADED SALARY STRUCTURES • A series of salary grades or ranges, each of which has a specified minimum and maximum salary called a rate range or salary scale • Assumption is all jobs placed into a grade are more or less of equal value • Actual salaries earned by individuals in same grade will vary

36. VARIABLES IN DESIGNING A GRADED SALARY STRUCTURE • 1. The number of salary grades. • 2. The differentials between salary grades • 3. The range width • 4. The degree of overlap • Variables cannot be decided in isolation because they interact.

37. Differentials, Range Widths, and Overlaps

38. Number of Grades • Will depend on: • 1. Salary scales of lowest paid job and highest paid job in cluster • 2. Number of levels of responsibility that can be clearly identified • 3. Size of differentials between each grade.

39. Differentials • Difference between midpoint of scale to midpoint of scale above it • Adequate differentials ensure higher scales for higher responsibility • If too narrow, e.g. < 10 %: • Lack of incentives for promotion • Too many borderline cases and need for frequent re-evaluations • Too many grades • Employees constantly upgraded without increases in responsibility.

40. Differentials • When differentials too wide: • Injustices when jobs on borderline between grades • Generally about 15 to 20 % at lower level • With higher level, wider differentials because higher grade significant higher responsibility. • Thus, may have composite structure with differentials about 15 % for junior grades and increasing to 20 to 40 % for middle and senior management • At very top management level, differentials can be very wide, especially for CEO from outside organisation.

41. Range Width • The difference between mid-point and minimum, stated as percentage of minimum • The difference between maximum and minimum is known as range spread • Thus, one range spread is equal to two range widths. • Must provide for organisation to reward good performance through increments • Give organisation flexibility to fit new employees with relevant experience • Room for increments.

42. Range Width • Broad-banded structure with large range widths will emphasise performance • Narrow-banded structure will emphasise grade and promotion • Appropriate range width vary depending on level • Junior level could be 15 to 20 % • 20 to 40 % for middle management • For senior management could be between 40 to 60 % or more.

43. Overlap • Occurs when maximum of scale higher than minimum of scale in grade just above • Recognises that experienced employee doing a good job more valuable than new comer in higher grade • Provides flexibility and occurs when range widths greater than differentials. • Double overlap occurs when maximum of rate range higher than minimum of rate range two grades above • May cause confusion and unnecessary unhappiness especially for those in higher grades • Double overlaps avoided by reducing range widths or increasing differentials.

44. ALIGNING SALARY STRUCTURE WITH MARKET DATA • Most appropriate is midpoint of salary scale • Because midpoint is salary level which represents value to organisation of an employee in job whose performance is fully acceptable • Starting salaries normally close to bottom of scale for those without necessary experience, but may be increased to as high as midpoint for fully qualified and experienced person • Thus midpoint generally not be below average of market rates • Use midpoints as basis to align with market data

45. ALIGNING SALARY STRUCTURE WITH MARKET DATA • Salary policy is relationship between market rates and midpoint of salary scales • If policy of upper quartile of market, salary policy line follows upper quartile of market • Upper quartile policy, easier to attract and retain above average employees but expensive • Some organisations adopt policy of just keeping pace with market rate = pay average market rates • Policy line would correspond with median market rates • Common policy is to be just slightly above median but below upper quartile, say 10 % above median.

46. OTHER TYPES OF SALARY STRUCTURES • Individual Job Range • A loose salary structure in which salary scales are provided for each job, and there are no grades specified. Single Rate Structures • A structure that assigns a specific salary rate for a job and there are no salary scales so that every employee in that job, no matter how senior he is, will be paid the same salary.

47. CHOICE OF STRUCTURE • Choice of salary structure will depend on type of organisation and industry as well as jobs covered • Large organisation with formal structures will find graded salary structure most appropriate • Smaller organisations may opt for individual job ranges • For organisations with large manual work-force, single rate structure may be most appropriate

48. DESIGNING A GRADED SALARY STRUCTURE • Basic aim to integrate data on external and internal relativities within a logical framework • External equity obtained from salary surveys • Internal equity determined by job evaluation

49. DESIGNING A GRADED SALARY STRUCTURE • Whole objective to obtain a structure that: • 1. Is in line with the organisation’s salary policy. • 2. Is designed to provide for consistent and equitable salary administration procedures. • 3. Has considered both internal and external equities. • 4. Is flexible enough to respond to changes. • 5. Will be accepted by the majority of employees.

50. DESIGNING A GRADED SALARY STRUCTURE • Step 1 – Scatter-graph • Points for various jobs plotted against current salaries • Product is scattergraph which should show positive correlation between actual salaries and points.