Compensation & Benefits

1. Compensation & Benefits OBJECTIVES COST

2. HRM Assignment On any of the topics below: Human Resource Planning. Selection Practices. Training & Development. Performance Management . Reward & Compensation Systems. Change Management. Narrate details of Unique Practices in their organizations. Presentation on 29/9. All participants require to be present

3. The Compensation problem for Managers • How much to pay employees; • How much emphasis to place on financial compensation as part of the Total reward system; • How much emphasis to place on attempting to hold down the rate of pay; • Whether to implement a system of individual incentives to reward differences in performance and productivity and, if so, how much emphasis to place on these incentives

4. What is Compensation? Compensation represents both the intrinsic and extrinsic rewards employees receive for performing their jobs.

5. Intrinsic Compensation • Intrinsic Compensation represents employees’ critical psychological states that result from performing their jobs • Research indicates employees experience enhanced psychological states when their jobs rate high on five core job dimensions: skill variety, task identity, task significance, autonomy, and feedback. • Jobs that lack these core characteristics do not provide much intrinsic compensation • Intrinsic compensation may help reduce excessive turnover. Eg. New technologies, learning and training opportunities etc • Also, provide the basis for nonmonetary recognition rewards

6. Intrinsic Compensation • Skill variety : The degree to which the job requires the person to perform different tasks and involves different skills, abilities, and talents • Task identity : The degree to which a job enables a person to complete an entire job from start to finish • Task significance : The degree to which the job has an impact on the lives or work of other people

7. Intrinsic Compensation • Autonomy : The amount of freedom, independence, and discretion the employee enjoys in determining how to perform the job • Feedback : The degree to which the job or employer provides the employee with clear and direct information about job outcomes and performance

8. Extrinsic Compensation • Extrinsic Compensation include both monetary and nonmonetary rewards • Monetary compensation represents “core compensation” • Non-monetary rewards(Employee benefits)include protection programs (i.e medical insurance), paid time off(i.e vacations), and services (i.e day care assistance)

9. Theories of Compensation

10. Theories of Remuneration • Reinforcement theory • Expectancy theory • Equity theory • Agency theory Human Resource Management, 5E

11. Influencing Factors of Remuneration

12. Influencing Factors of Remuneration Human Resource Management, 5E

13. Remuneration Model Job Description Job Evaluation Job Hierarchy Pay Survey Pricing Jobs

14. Challenges of Remuneration Skill-based Pay Monetary vs. Non-Monetary Rewards Salary Reviews Employee Participation Pay Secrecy Remuneration Below Market or Above Market Rates Eliticism or Egalitarianism Comparable Worth Human Resource Management, 5E

15. Skill-based Pay and Job-based Pay Compared Human Resource Management, 5E

16. Wage Concepts • Minimum wage • provides for sustenance of life but also for preserving efficiency • Fair wage • comparable with standard wages elsewhere • Living wage • providing essentials plus certain comforts Human Resource Management, 5E

17. Advantages of Incentives • Motivation to perform better • Enhanced employee earnings • Reduced cost of production • Increased production capacity • Reduced supervision, reduced accidents, reduced absenteeism • Case of Rail Factory, Bangalore Human Resource Management, 5E

18. Disadvantages • Quality is dented • Introduction of new machines and methods opposed • Enhanced earnings are taken as regular earnings • Jealousies creep in • Difficulty in setting rates • Difficulty in setting standards • Ethically incorrect to pay more when normal wages are already paid • Standards are perceived to be ceilings • Incentives only remove dissatisfaction but may not offer satisfaction Human Resource Management, 5E

19. The Compensation Process Cycle Comp. & Ben. : XIMR, Mumbai : Devdatta Mahajan

20. The Compensation Process Cycle

21. Strategic Perspective of Compensation Comp. & Ben. : XIMR, Mumbai : Devdatta Mahajan

22. Strategic Perspective of Compensation The strategic perspective involves thinking about how compensation can assist in achieving organization success, while not being fixated on pay techniques.

23. Generic Business-level Strategies Innovator Cost Cutter Customer –focused.

24. Compensation System Strategy Reward Innovation in Products and Processes Market-Based Pay Flexible – Generic Job Descriptions Innovator: Increase Product Complexity and Shorten Product Life Cycle Focus on Competitors’ Labor Costs Increase Variable Pay Emphasize Productivity Focus on System Control and Work Specifications Cost Cutter: Focus on Efficiency Customer Focused: Increase Customer Expectations Customer Satisfaction Incentives Value of Job and Skills Based on Customer Contact

25. Characteristics of Compensation Programs • Internal Equity: A measure of how an organization values each of its jobs to one another • External competitiveness: A measure of an organization’s pay structure compared to that of its competitors • Affordability: A measure of how costly a compensation program is to a company • Legal Defensibility: Compensation programs must adhere to specific laws designed to provide fairness in How employees are paid • Understandable/ Saleable: To be accepted and understood, compensation programs must be well communicated

26. Characteristics of Compensation Programs • Efficient to Administer: Simple and straightforward, balanced between what appears to be the“best” program and what is efficient, effective and easy to administer • Safeguard organizational resources: Rewards should reflect both individual employee and company performance • Flexible: Capable of changing as needed without requiring a redesign every time a new need arises • Meets the organization’s unique needs: Unique characteristics of the organization (industry, geographical area etc.)

27. 1 2 3 4 5 How is Pay structure developed? Steps in Establishing Pay Rates Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). Determine the worth of each job in your organization through job evaluation (to ensure internal equity). Group similar jobs into pay grades. Price each pay grade by using wage curves. Fine-tune pay rates.

28. Step 1. The Wage Survey:Uses for Salary Surveys To market-price wages for jobs To make decisions about benefits To price benchmark jobs The Salary Survey

29. Job Evaluation • Job Evaluation : • Formal process used to create a job-worth hierarchy within an organization. The hierarchy is called Job Grades (JG) • Two major objectives: • To develop internal standards of comparison • To measure relative job values within the organization • Used to establish pay differentials among employees within a company • Job Analysis -> Job Documentation - > Job Evaluation

30. Compensable Factors • Compensable factors are the key to quantitative methods of job evaluation • Compensable factors can be defined as: • Any criterion used to provide a basis for judging job value in order to create a job-worth hierarchy • The elements used to measure a job’s worth • Intrinsic elements in jobs that add value to the organization and for which it wants to pay • For eg. Skill, effort, responsibility, Working conditions

31. Compensable Factors • Skill • Experience • Knowledge • Manual dexterity – relates to specific movements required • Analytical ability • Creativity • Communication – verbal and written • Complexity of the job • Effort • Physical demands of the job • Mental exertion required

32. Compensable Factors • Responsibility • Supervisory duties • Budgetary responsibility • Decision making • Accountability • Impact the job has on the organization • Working conditions • Hazardous environment • Temperature conditions • Odors • Loud noises • Or lack of hazardous environment

33. Hay Profile Method • Job evaluation technique using three factors – knowledge, mental activity(problem solving), and accountability – to evaluate executive and managerial positions. Fourth factor – working conditions is used when evaluating non-management jobs • Knowledge • Technical • Managerial • Human relations • Problem solving • Thinking environment • Thinking challenge • Accountability • Freedom to act • Magnitude • Impact • Working Conditions • Physical Effort • Working environment • Sensory attention • Physical risks

34. Establishing Pay Rates (cont’d) • Step 4. Price Each Pay Grade—Wage Curve • Shows the pay rates paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. • Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.

35. FIGURE 11–5Plotting a Wage Curve

36. Establishing Pay Rates (cont’d) • Step 5. Fine-Tune Pay Rates • Developing pay ranges • Flexibility in meeting external job market rates. • Easier for employees to move into higher pay grades. • Allows for rewarding performance differences and seniority. • Correcting out-of-line rates • Raising underpaid jobs to the minimum of the rate range for their pay grade. • Freezing rates or cutting pay rates for overpaid (“red circle”) jobs to maximum in the pay range for their pay grade.

37. FIGURE 11–6Wage Structure

38. Elements of Core Compensation Variable Pay : • Discretionary compensation that is contingent upon performance or results achieved • Based on organizational/group/individual performance • Profit-Sharing plans • Group/Team Incentives • Individual incentives • Short-term incentive plans • Sales incentive plans/commissions • Executive incentive plans • Discretionary bonus (annual or spot) • Equity-based compensation

39. What is a Pay Structure? • Pay Structure : A series of pay ranges, or “grades”, each with a minimum and maximum pay rate • Jobs are grouped together in ranges that represent similar internal and external worth • The mid-point or middle-pay value for the range usually represents the competitive market value for the job or group of jobs • Base-pay policy line: It connects the mid-points of the pay ranges in the pay structure

40. Anatomy of a Pay Structure • Pay Ranges: A “pay range” has a minimum pay value, a maximum pay value and a “midpoint” or central value. • Range Spread: The difference between the maximum and the minimum is the “range spread” • Range Width: Range width usually is expressed as a percentage of the difference between the minimum and maximum divided by the minimum. • To perform the calculation, one of the three points (minimum, midpoint or maximum) on the pay range needs to be specified along with the range width.

41. Pay Structure Example

42. Mid-point • Central value of the pay range • Key element in pay administration • Used as a reference point in salary administration decisions as a point or “target.” • The midpoint is usually the reference used because it is typically set to equal the market average. • Must not be an organization’s only market reference point.

43. Compa-Ratio : Monitoring Comp. Costs • A statistic that expresses the relationship between base salary and the midpoint, or between the midpoint and market average.

44. Compa-Ratio: Monitoring Comp. Costs • Compa-ratios can be calculated for individuals, groups of individuals and the company as a whole. • Most companies strive to have the overall work force paid at or around a compa-ratio of 100 percent. • Individual compa-ratios vary according to how long the individual has been in the job, previous work experience and job performance. • A mature, long service work force will tend to have a higher compa-ratio (often above 100 percent) than a younger group of employees with a shorter service record

45. Why companies monitor Compa-Ratio? • Important tool for managing compensation costs. • In some cases, companies cap pay at the midpoint for the purpose of paying “at market” for base salaries. • The remainder of the range is available only to high performers and often is paid on a lump-sum basis from year to year. • These companies increase base salaries only when range midpoints move and their compa-ratios drop below 100 percent.

46. Range Penetration • Another tool to track an organization’s compensation • Compare individual pay in relation to the total pay range • It refers to how far into the range a particular individual’s salary has penetrated. • Range penetration is calculated using the minimum and maximum of a pay range. • Range penetration is a preferred tool because it does not focus on one number alone, the midpoint (like compa-ratio).

47. Illustration of Range Penetration

48. Pay Grades • Groups of jobs within a particular class that are paid the same rate or rate range • Multiple jobs that have similar value based on internal comparisons and external market data are grouped • The purpose of grades is to be able to refer to a compensation range • Grades need not always be numerical; alpha grades can serve the purpose just as well. • There are many grades or levels within a pay structure. • The number of grades will vary based on findings from market research as well as the company’s compensation policy.

49. Types of Structures for Base Pay • Multiple grades with Salary Ranges • Broadbanding

50. Multiple Grades with Salary ranges • Roles or jobs are assigned a salary range with the midpoint closest to market value of the role or job • Grades and corresponding salary ranges generally number 20 to 35 • Range spreads are commonly 75% for management jobs and 50% for non-management jobs