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Compensation Management Main Principles

Compensation Management Main Principles. Michel de Tymowski. Ty M. W ork. Compensation management principles. Compensation basic principles Job Evaluation Pay for Performance. COMPENSATION BASIC PRINCIPLES. Society. Most employers believe that how people are paid

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Compensation Management Main Principles

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  1. Compensation ManagementMain Principles HRMG 5000 Fall 2007 Michel de Tymowski TyM Work

  2. Compensation management principles • Compensation basic principles • Job Evaluation • Pay for Performance HRMG 5000 Fall 2007

  3. COMPENSATION BASIC PRINCIPLES HRMG 5000 Fall 2007

  4. Society • Most employers believe that how people are paid • affects people’s behaviors at work • which affect an organization’s chances of success. Compensation systems can help an organization achieve and sustain competitive advantage. • Sometimes differences in compensation among countries are listed as a cause of loss of jobs from more developed, higher-wage economies to less developed ones. Therefore, understanding productivity differences among international locations is crucial. HRMG 5000 Fall 2007

  5. Society (cont’d) • Some consumers may view increases in compensation as the cause of price increases. They may not believe that higher labor costs are to their benefit. • Economic realities are relevant to compensation management. • an organization’s capacity to pay • its industrial sector • as well as geographic location • are all key factors that must be considered. HRMG 5000 Fall 2007

  6. Society (cont’d) • An organization’s economic reality is not static • Today’s decisions about compensation will have an impact on the organization’s financial health for many years and, generally, this impact is difficult to reverse. • Employees have varied needs and view them differently • The challenge for the organization therefore is to adopt compensation policies and programs that maximize employee motivation. • Compensation is also status, both within the organization and in society. HRMG 5000 Fall 2007

  7. Society (cont’d) • Supervisors consider it important to be paid more than their subordinates, and on a different basis. • The same applies to the various perquisites an organization provides to certain employees. • Often, what counts with such benefits is not their monetary value but rather the prestige and status they confer. • Organization and individuals pursue different objectives by means of compensation. HRMG 5000 Fall 2007

  8. Society (cont’d) • For the organization • the exchange is designed to recruit and retain the necessary labor, and to elicit employees behavior that will enable it to fulfill its mission. • For individuals • the objective may come down to satisfying needs. These may differ considerably from one individual to another and may also change with time. • Compensation is a contribution for the organization, a reward for the individual. HRMG 5000 Fall 2007

  9. The Elements of Compensation HRMG 5000 Fall 2007

  10. The Elements of Compensation • Organizations regularly adjust pay. This is done by taking into account many factors, such as : • changes in the economy • the amount of the changes made by other organizations in the community or similar labor market • the organization’s ability to pay • as well as any increase in an employee’s performance or year of service HRMG 5000 Fall 2007

  11. Cash Compensation – Base • Base wage is the cash compensation that an employer pays for the work performed. • Base wage tends to reflect the value of the work or skills and generally ignores differences attributable to individual employees. • The base wage represents the “no risk” part of the total wage. The individual performance will represent the “risky” part by impacting the level of total wage. HRMG 5000 Fall 2007

  12. Cash Compensation – Merit Pay/COL adjustments • Merit pay increases are given as increments to the base pay in recognition of past work behavior. • Some assessment of past performance is made, with or without a formal performance evaluation program, and the size of the increase is varied with performance. • Thus, outstanding performers could receive an 5 to 7 percent merit increase 8 months after their last increase, • whereas an average performer may receive, say, a 2 to 3 percent increase after 12 or 15 months. • In contrast to merit pay, cost-of-living adjustments give the same percent increase across the board to everyone, regardless of performance. HRMG 5000 Fall 2007

  13. Cash Compensation – Incentives • Incentives tie pay increases directly to performance • However, incentives differ from merit adjustments. • First, incentives do not increase the base wage, and so must be re-earned each pay period. • Second, the potential size of the incentive payment will generally be known beforehand. • Whereas merit pay programs evaluate • past performance of an individual • and then decide on the size of the increase the performance objective for incentive payments is called out very specifically ahead of time. HRMG 5000 Fall 2007

  14. Cash Compensation – Incentives • Incentives can be tied to : • the performance of an individual employee • a team of employees • a total business unit • or some combination of individual, team, and unit • The performance objective may be : • expense reduction • volume increases • customer satisfaction • revenue growth • return on investments • or increases in total shareholder value • the possibilities are endless. HRMG 5000 Fall 2007

  15. Compensation Management Model HRMG 5000 Fall 2007

  16. Policies Four Policies • Every employer must address the policy decisions : • (1) internal alignment • (2) external competitiveness • (3) employee contributions, and • (4) management of the pay system. These policies are the foundation on which pay systems are built. They also serve as guidelines for managing pay in ways that accomplish the system’s objectives. HRMG 5000 Fall 2007

  17. Policies - Internal Alignment Internal Alignment • Internal alignment refers to comparisons among jobs or skill levels inside a single organization • Jobs and people’s skills are compared in terms of their relative contributions to the organization’s business objectives HRMG 5000 Fall 2007

  18. Policies - External Competitiveness External Competitiveness • External competitiveness refers to compensation relationships external to the organization: • comparison with competitors. • Increasingly, organizations claim their pay systems are market-driven, that is, based almost exclusively on what competitors pay HRMG 5000 Fall 2007

  19. Policies - External Competitiveness Employee Contributions • How much emphasis should there be on paying for performance? • Should one programmer be paid differently from another if one has better performance and/or greater seniority? • Or should there be a flat rate for programmers? • Should the company share any profits with employees? • With all employees? HRMG 5000 Fall 2007

  20. Policies - Management Management • Ensuring that the right people get the right pay for achieving objectives in the right way. The system will not achieve its objectives unless it is properly managed. • Are we able to attract skilled workers? • Can we keep them? Do our employees believe our pay system is fair? • Do they understand what is expected of them? • Do they understand how their pay is determined? • How do the better-performing firms, with better financial returns and a larger share of the market, pay their employees? • Are the systems used by these firms different from those used by less successful firms? • How do our labor costs compare to those of our competitors? HRMG 5000 Fall 2007

  21. Techniques - Internal Consistency Internal Consistency • An organization trying to ensure internal consistency in compensation must : • first analyze and describe its jobs, then either : • evaluate the jobs • do a competency & skill job assessment • a maturity curve approach (applicable for certain group of professionals) HRMG 5000 Fall 2007

  22. Techniques - Competitiveness Competitiveness • An organization interested in making its pay competitive must first define its labor market Domestic and international for senior management). • Having selected the market or markets, the next step is to collect information about the various elements of compensation. • Base salary? • Total Cash? • Working time? • Time off? • Benefits? • Other perks and allowances? • Once the survey or surveys have been done, the organization must determine the level of compensation in relation to the market. HRMG 5000 Fall 2007

  23. Techniques - Employee Contribution Employee Contribution • An organization that wishes to recognize the contribution of its employees may use techniques and practices that vary according to what contribution it wishes to emphasize • individual performance • group performance • years of services • training • The organization must develop an employee performance appraisal system and determine criteria for measuring individual performance HRMG 5000 Fall 2007

  24. Market Sector • Salary aggressiveness HRMG 5000 Fall 2007

  25. How to motivate employees • To remunerate managers in a competitive way based on their responsibilities as well as their individual performance • Establish a coherent salary structure (external equity) • Create an internal equity within a competitive market environment • Establish a link between individual performance and the job requirement HRMG 5000 Fall 2007

  26. Reward System Reward System Job Analysis Benefits Job Description Managing Base Pay Job Evaluation Working conditions HRMG 5000 Fall 2007 Variable Pay Long-term Incentives Recognition Awards Recruitment Selection & Hiring Training & Dev’mt Career planning Perf. evaluation HR Planning

  27. JOB ANALYSIS HRMG 5000 Fall 2007

  28. Job Analysis INTERNAL STRUCTURE Job Based Person Based PURPOSE Collect, summarize Work information Determine what to value Assess value Translate into structure HRMG 5000 Fall 2007 Skills Competencies Job analysis Job descriptions Job Evaluation Classes/Comp factors Factor degrees & weighting Job-Based structure

  29. Writing Job Descriptions • It is a written record of the duties and responsibilities of a specific job compiled through job analysis • It consists of statements which identify and describe the scope and contents of a job • It provides an outline of the essential functions and major duties of a job • It does not describe all details of a job HRMG 5000 Fall 2007

  30. Writing Job Descriptions • Typical Problems with Job Descriptions • Often poorly written, providing little guidance. • Often not updated as job duties and specifications change • May violate the law by including specifications unrelated to the job • Job duties written in vague rather than specific terms • Could limit the scope of the job-holder • Could restrict ability to cope with change • Creates significant administrative workload • Not always linked to other HR activities or processes but generally supervisors have a good feel for the job ! HRMG 5000 Fall 2007

  31. JOB EVALUATION HRMG 5000 Fall 2007 “Job evaluation is the process of arranging jobs within an organization into a hierarchy based on their relative requirements, so that employees are paid in proposition to the requirements of their job.”

  32. Job Evaluation • The Importance of Value Systems Job evaluation • means an assessment of the work, not the incumbent • involves establishing a hierarchy of job based on requirements • to pay the incumbents of a position in proportion to the requirement of their job, and not to determine pay levels or specific pay differentials • to create internal pay equity based on the various job requirements • technical characteristics are less important than the use made of them • Success is measured by the results it achieves, not the method used HRMG 5000 Fall 2007

  33. What Approach? INTERNAL STRUCTURE Job Based Person Based Skills Competencies HRMG 5000 Fall 2007 Job Ranking General ranking Paired ranking Job to Job Comparison Qualitative driven Classification Job-to-predetermined- standard comparison Job Slotting Reporting basis Market Pricing Based on external competitive salary data Quantitative driven Point Method Job-to-factor Evaluation

  34. Job Evaluation Alternatives Less Complexity Greater Complexity ALTERNATIVES HRMG 5000 Fall 2007

  35. What Approach? • Market Pricing • Uses the labor market to determine the value of jobs • Readily comprehensive • Easily applicable • Simple Issues • Overlooks the question of internal pay equity • Hierarchy is based solely on market price • Ignores the fact that pay is only one component of compensation • Does not consider the specific characteristics of organizations HRMG 5000 Fall 2007

  36. What Approach? • Market Pricing(continued) • Structure developed on competitive market practices • Based on market surveys • The competitive market data drives the salary structure 50 ’000 HRMG 5000 Fall 2007 Compagny XYZ 40 ’000 Euro 30 ’000 20 ’000 5 6 7 8 9 10 11 12 13 14 15 Grades

  37. What Approach? • Job Slotting • structured around the organization chart • Job positioned following the organization charts • Usually defined by departments/type of activities HRMG 5000 Fall 2007 Marketing Finance 40 ’000 40 ’000 Euro Euro 30 ’000 30 ’000 20 ’000 20 ’000

  38. What Approach? • Point Method • Classical position evaluation (Hay type) • Position profile/responsibilities & challenge • Computer aided job evaluation • Multiple choice questionnaire approach based on weighted factors • Mix evaluation • Similar to the classical evaluation plus individual skills & competencies • Competency evaluation • Individual profile (competencies, aptitudes, and know-how) HRMG 5000 Fall 2007

  39. Classical Evaluation (Hay type) • Based on the profile, responsibilities & challenge of the position • Job descriptions essential for the exercise • Structured around factors such as: Know-How • Education, experience, management responsibilities, supervision/motivation of subordinates/employees Problem Solving • Challenge and thinking environment Accountabilities • Freedom of action and accountabilities on revenues/budgets HRMG 5000 Fall 2007

  40. Classical Evaluation (Hay type) • Assigns point values based on compensable factors. • Each job receives a total point value, and relative worth can be compared. • Is also known as Hay plans, from the consulting company at the origin of this method HRMG 5000 Fall 2007

  41. Computer aided evaluation (NetComp) • Based on the profile/responsibilities & challenge of the position evaluated through a defined position questionnaire (multiple choice) • Structured around factors such as: • Know-How(education, experience, international dimension) • Communication(internal & external to the organization) • Dimension(revenue/budget, number of employees) • Effectiveness(reporting, contribution et impact of error) • Leadership(level of decision and management) • Challenge(level of autonomy, creativity and working environment) HRMG 5000 Fall 2007

  42. Reward System Reward System Job Analysis Developing a Salary Structure Benefits Job Description Managing Base Pay Jpb Evaluation Working conditions HRMG 5000 Fall 2007 Variable Pay Long term Incentives Recognition Awards Recruitment Selection & Hiring Training & Dev’mt Career planning Perf. evaluation HR Planning

  43. Some Definitions • External competitiveness • The pay relationships among organizations - the organization’s pay relative to its competitors • Salary Structure • Refers to the range of pay rates for different jobs within a single organization • Pay Level • The average of the array of rates paid by the employer • Pay Forms • The various types of payments, or pay mix, that make up total compensation HRMG 5000 Fall 2007

  44. Pay Mix • Different Mixes Base Options HRMG 5000 Fall 2007 Bonus Benefits Base Options Bonus Benefits

  45. Pay-Mix Policy Alternatives HRMG 5000 Fall 2007

  46. Pay Mix and Structure • Pay Mix varies within the Structure Internal Job Structure HRMG 5000 Fall 2007

  47. Factors Influencing Pay levels Business Sector Legislation Labor Supply & Demand HRMG 5000 Fall 2007 Location Size Market productivity Market Pay Levels

  48. Factors Influencing Organization Comp Policy Business Strategy Union Influence Prestige & Tradition HRMG 5000 Fall 2007 Other HR mgmt policies & practices Capacity to Pay Compensation factors The Organization Compensation Policy: • Lead • Lag • Follow Competition

  49. The Pay Model • Three important contributions to keep in mind • There is no “going rate” and so managers make conscious pay level and mix decisions influences by several factors • There are both product market and labor market competitors that impact the pay level and mix decisions • Alternative pay level and mix decisions have different consequences HRMG 5000 Fall 2007

  50. Salary Structure • Over engineered structure • Rigid • Heavy administrative burden • Sometimes inefficient • Simple structure • Easily adaptable • Flexible • Suitable for small organization • Can easily be manipulated • Find the right mix HRMG 5000 Fall 2007

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