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INTRODUCTION TO COMPENSATION
Importance of Pay Pay represents by far the most important and contentious element in the employment relationship, and is of equal interest to the employer, employee and government to the employer because it represents a significant part of his costs, is increasingly important to his employees' performance and to competitiveness, and affects his ability to recruit and retain a labour force of quality;
to the employee because it is fundamental to his standard of living and is a measure of the value of his services or performance;
to the government because it affects aspects of macro-economic stability such as employment, inflation, purchasing power and socioeconomic development in general. While the basic wage or pay is the main component of compensation, fringe benefits and cash and non-cash benefits influence the level of wages or pay because the employer is concerned more about labour costs than wage rates per se. The tendency now is towards an increasing mix of fringe benefits, which therefore have an important impact on pay levels. In industrialized countries, and sometimes in countries with high personal tax rates, the non-pay element of executive compensation has substantially increased in recent years. Objectives of Pay Pay determination may have one or more objectives, which may often be in conflict with each other. The objectives can be classified under four broad headings. The first is equity, which may take several forms. They include income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power), the concept of equal pay for work of equal value. Even pay differentials based on differences in skills or contribution are all related to the concept of equity. A second objective is efficiency, which is often closely related to equity because the two concepts are not antithetic. Efficiency objectives are reflected in attempts to link a part of wages to productivity or profit, group or individual performance, acquisition and application of skills and so on. Arrangements to achieve efficiency may be seen also as
being equitable (if they fairly reward performance) or inequitable (if the reward is viewed as unfair). A third objective is macro-economic stability through high employment levels and low inflation, for instance. An inordinately high minimum wage would have an adverse impact on levels of employment, though at what level this consequence would occur is a matter of much debate. Though pay and pay policies are only one of the factors which impinge on macro-economic stability, they do contribute to (or impede) balanced and sustainable economic development. A fourth objective is the efficient allocation of labour in the labour market. This implies that employees would move to wherever they receive a net gain; such movement may be from one geographical location to another, or from one job to another (within or outside an enterprise). Such movement is caused by the provision or availability of financial incentives. For example, workers may move from a labour surplus or low wage area to a high wage area. They may acquire new skills to benefit from the higher wages paid for skills. When an employer's wages are below market rates employee turnover increases. When it is above market rates the employer attracts job applicants. When employees move from declining to growing industries, an efficient allocation of labour due to structural changes takes place. The need for a Compensation StrategyFor any / all of the following reasons: 1 To attract and retain the best in the industry 2 To have compensation strategy aligned to each business to better serve independent business needs 3 Should attract lateral hires 4 Need for greater flexibility in taking compensation decisions 5 Need to align employee career movement 6 Adding value through personnel costs GOALS OF A COMPENSATION STRATEGY 1 Capable applicants are attracted towards the Organization and it helps acquire qualified competent personnel 2 To retain current employees so that they do not quit If compensation levels are not competitive, it will result in higher turnover 3 Motivate employees to perform better 4 Encourage value – added performance Reward the desired behaviour 3
5 Control costs Through a rational compensation system, employees can be obtained and retained at a reasonable cost 6 Promoting continuous development through competence – related and skill – based pay schemes, effective performance management 7 Promoting teamwork through team pay 8 Promoting flexibility by replacing hierarchical and rigid pay structures 9 Providing value for money by evaluating the costs as well as benefits of reward management practices 10 Facilitating easy understanding by all, including employees, operating managers and HR personnel 11 Providing value for money by evaluating the costs as well as benefits of reward management practices 12 Easy administration CHARACTERSTICS OF A SOUND COMPENSATION STRATEGY 1 Be congruent with and support corporate values, beliefs, philosophy and culture 2 Emanate from business strategy and business plans (medium and long – term) 3 Fit the desired management style 4 Provide the competitive edge required; be based on an industry benchmarking study 5 Be based on an Organization’s ability to pay 6 Be adaptable to changing business conditions 7 Ensures Equity – both internally and externally 8 Complies with the legal regulations as imposed by the government 9 Is effectively communicated 10 Careful selection of performance measures, determination of performance awards and distribution mechanisms 11 Union participation and involvement in designing the policy to facilitate comprehension and acceptance 12 Provisions for modifications and periodically reviewed A COMPENSATION STRUCTURE COMMUNICATES 1 2 3 4 5 Organization Philosophy / Culture Career Progression Benefits to Employees Individual v/s Team Focus Performance Recognition giving the message to align Total COMPENSATION with Business Situation, Needs & Goals 4
6 Generate Flexibility / Variability of Costs 7 Focus on Effectiveness of Total Compensation Policy FACTORS INFLUENCING COMPENSATION POLICY Philosophy Organization Mission, Vision, Goals & Values – Inclination towards People Development, Attraction & Retention of Talent Inter / Intra Level Relativity, Compa Ratio Assess Competitiveness – Current & Targeted Percentile Positioning Budget Considerations
Parity Positioning Paying Ability
FACTORS AFFECTING COMPENSATION POLICY EXTERNAL FACTORS 1. Parity: External equity (prevalent pay structures in industry / geographic location) 2. Demand and supply: of labour and market condition 3. Geographic location: cost of living and inflation ORGANIZATION - RELATED 1. Philosophy: mission, vision, goals & values – inclination towards people development, attraction & retention of talent, goodwill & organization culture 2. Parity: internal equity (relevant differentiating factors performance, seniority, skills, responsibilities, interpersonal abilities, individual vs. Team vs. Organization roles) 3. Paying ability: budget considerations / financial implications / limits of ability to pay; business performance 4. Legalities: compliance of statutory and government requirements 5. Trade unions: influence in collective bargaining 6. Fringe benefits: statutory (overtime payment, canteen subsidy, employee provident fund, gratuity) & non-statutory (conveyance allowance, LTA, loans, insurance) INDIVIDUAL RELATED 1. Job – related: job requirements and internal consistency 2. Competition: availability of special competent personnel 3. Flexibility: due to varied levels of competencies and skills of managers 5
4. Responsibilities: individual productivity and performance contribution to output 5. Individual assessment: qualifications and relevant experience WHAT IS A COMPENSATION SYSTEM
Allocation, conversion, and transfer of a portion of the income of an organization to its employees for their monetary & in-kind claims on goods & services A Monetary claims are wages or salaries paid to an employee in the form of money / or a form that is easily and quickly transferable to money at the discretion of the employee 1. Wages & salaries in the form of money could be 2 types: present payments (earned & acquired at present time) & deferred payments (earned but not acquired until some future time) 2. Coins / paper money / cheques, credit cards 3. Stock option plans / pension plans / post retirement income adjustments B In-kind claims are claims on goods & services made available & paid for either totally or in some percentage by the employer in lieu of money provide an equivalent value for what has been offered & received little or no immediate monetary gain organizations purchase the usually desired goods & services to take advantage of – 1. Economies of scale available through group purchasing 2. The benefits available through tax laws & regulations 3. Government laws requiring certain services NON-COMPENSATION SYSTEM Situation – related rewards, related to the physical & psychological well – being of each employee, these rewards satisfy the emotional & intellectual demands - Impact on the intellectual, emotional & physical well-being of the employee 8 DIMENSIONS OF COMPENSATION SYSTEM - PAY FOR WORK & PERFORMANCE - money provided in short – term (weekly / monthly / annual bonuses & awards) - permits employees to pay for goods & services desired - depends on: job requirements; outputs that meet or exceed quantity, quality & timeliness standards; 6
innovations leading to improved productivity; dependability; loyalty - includes: base pay, premiums & differentials, short – term bonuses, merit pay, travel expenses, clothing reimbursement etc - PAY FOR TIME NOT WORKED - days off with pay for holidays, longer paid vacations, election official, witness in court, paternity leave, maternity leave, time off to vote, personal leave, relocation payments, lunch & rest periods etc - although they increase labour costs, but they enhance quality – of – work – life opportunities for most employees - LOSS-OF-JOB INCOME CONTINUATION - job security is a prime consideration - loss of job could be due to any of the following: * accident * sickness * personal performance * interpersonal dynamics problems * firm’s decline / end - unemployment insurance, supplemental unemployment benefits (subs), severance pay, job contract etc help unemployed workers subsist until new employment opportunities arise - DISABILITY INCOME CONTINUATION - health or accident disability can lead to non – performance of normal assignments - family expenses persist - social security, workers’ compensation, sick leave, travel accident insurance, accidental death and dismemberment, short & long-term disability plans are provided - DEFERRED INCOME - providing income after retirement - includes social security, pension plans, profit sharing (long term), stock option plans - funds invested in these draw tax-free interest thus employees can defer tax obligations - SPOUSE (FAMILY) INCOME CONTINUATION - Providing dependents with income when an employee dies or is unable to work due to total and permanent disability - life insurance plans, social security, pension plans, workers’ compensation - HEALTH, ACCIDENT AND LIABILITY PROTECTION Income continuation & payment for the expenses incurred for overcoming the illness / disability wide variety of insurance plans available medical, hospital, surgical insurance (for self & 7
dependents) major medical, dental & vision care. hearing aid, postretirement medical plans, prescription drugs, visiting nurse liability – related insurance: group legal, group automobile, group umbrella liability, employee liability - INCOME EQUIVALENT PAYMENTS - Perks or perquisites - tax free: charitable contributions, giving of gift, employee assistance programs, counseling, child adoption, child / elderly care, subsidized food service, discounts on merchandise, fitness programs, parking, commuting assistance (transportation to & from work), fly first class, professional memberships, professional journals, special relocation & moving allowances, pay for spouse on business trips, home entertainment allowance, domestic staff allowance, mobile phone, use of assistant for personal services - Tax favoured: medical expense reimbursement, chauffeur – driven car, company plane / yacht, company provided facilities, personal use of credit cards, vacation accommodation, special loan arrangements, club membership, concierge services DIMENSIONS OF NON-COMPENSATION SYSTEM • Enhance dignity and satisfaction from work performed - Least expensive & most powerful rewards - Employee recognition leads to self - worth & pride - Employees should feel that they are needed & their efforts are being appreciated • Enhance physiological health, intellectual growth, and emotional maturity Provide a safe working environment: provision of safe equipment, risk free environment, minimization of noxious fumes, avoidance of extreme heat, cold & humidity conditions, elimination of contact with radiation & other disease–related materials, reduced noise levels, clean workstation, stress & technological advancements – affect emotional well-being of the individual: providing a stable & secure lifestyle, training & development opportunities to overcome health-related problems • Promote constructive social relationships with coworkers - an inexpensive & valuable reward is a work environment where trust, fellowship & loyalty emanate from the top levels of management, percolating to the grassroots 8
comradeship of workplace associates opportunity to develop productivity – promoting social relationships - moving towards team – based operations • Design jobs that require attention and effort - restructuring job tasks to make it challenging - sense of accomplishment from work - job rotation to increase flexibility - turning supervisors to mentors - making jobs more interesting & less repetitive Organizations increase quality & productivity; reduce employee turnover, absenteeism, tardiness, waste of physical resources, theft & malicious damage • Allocate sufficient resources to perform work assignments - all necessary human, technical and physical resources should be made available to support & aid the employee in accomplishing the assignment - the organization must enable employees to gain the required skills & knowledge necessary to perform the assignment - organization should do everything possible to assist the employee in completing the assigned work successfully • Grant sufficient control over job to meet personal demands − employee participation in decision-making process − casual dress day − scheduling work activities − flexible work schedules: compressed workweeks, flextime programs, work from home choice − job sharing (2 part-time employees share 1 full-time job) • Offer supportive leadership & management − employee faith & trust in management − skill & interest in coaching & counseling of employees − praise for a job well done − constructive feedback leading to improvement in job performance − sufficiently flexible leadership with policies, rules, regulations so that an employee can meet job responsibilities without infringing on rights & opportunities of other employees TRADITIONAL COMPONENTS OF A COMPENSATION PROGRAM Fixed cash compensation - largest component of the total compensation & rewards package - monetary remuneration based on ‘time worked’ & not on 9
output / performance - base wages & salaries – depends on the internal value (determined by job evaluation) & external value (through market pay surveys) of employee - after-tax paycheck - determines lifestyle of the employees - leisure activities restricted / defined by the paycheck - most critical part of the four components
Wage & salary add-ons - monetary remuneration - paid over & above the salary - includes payments for working overtime, shift differentials, premium pay for working on holidays / weekends - least critical of the four components Incentive payments - pay- for - output system - performance pay – linked to both the company & the individual - difficult to measure in the service industry which employs 70% of the workforce of the total employed people - in several professions, it is difficult to measure output & pay incentives Employee benefits & services - hidden payroll or fringe benefits - indirect financial & non-financial payments - supplementary compensation totally dependent on organizational philosophy - includes benefits provided by an employer to his employees & his family (in some cases) - benefits for employment security; health protection; old age & retirement; personnel identification, participation & stimulation - two types: mandatory employee benefits: voluntary benefits MANDATORY EMPLOYEE BENEFITS • Employer is compelled to provide for certain benefits by the operation of the law • Paid holidays – factories act, 1948 a weekly paid holiday • Paid vacations – one day for every 20 days worked • Retrenchment compensation – industrial disputes act, 1947 10
(one month notice or one month’s pay) – paid @ 15 days wage for every completed year of service with a maximum of 45 days wage in a year • Lay-off compensation - industrial disputes act, 1947 (@ 50% of the total of the basic wage & da for the period of their lay-off) – paid upto 45 days in a year • Workmen’s compensation – workmen’s compensation act, 1923 – payment to meet the contingency of invalidity & death of a worker due to employment injury or occupational disease • Health benefits – employee state insurance act, 1948 – sickness benefit, maternity benefit, disablement benefit, dependent’s benefit, medical benefit • Canteen facility – factories act, 1948 – canteen in factories employing more than 250 workers • Provident fund – contributions by employer & employee are 8.5% of basic salary – benefit payable on retirement, voluntary separation or death • Employee pension scheme – introduced in 1995 –employer contribution is directed to pension + 1.66% of employee wages contributed by central govt. • Entitled to pension @ 1 / 70th of salary for each year of service • Gratuity – after 5 years of continuous service – 15 days’ salary per year of service upto a ceiling of INR 3,50,000/• Companies with more than 10 employees • Given in case of separation, superannuation, death or disablement • No contribution of employees towards this benefit • PSU scheme – public sector scheme • Various pension schemes with accrual rates varying from 1/100 to 1/60 • Both employer & employee contribute • Membership is mandatory for all those in PSUs • Leave encashment scheme – claim encashment of unutilized leave at the termination of service • Not-taxable in the hands of the retired employee • Payable to dependents in case of death of employee VOLUNTARY EMPLOYEE BENEFITS • Its is entirely the choice of the employer to provide these benefits to the employees • Shift premium – for IInd & IIIrd shifts for the odd hours • Company housing accommodation – some companies even pay for the utility bills (electricity / water & society charges) • Subsidized food & transport 11
• Group mediclaim / personal accident insurance – adequate coverage for the hospitalization expenses incurred due to illness, disease or injury sustained in accident / pregnancy (for female) for employee & immediate family dependents • Educational facilities – sponsor higher education of employees & family members • For certifications / trainings / memberships etc • co-operative credit societies – for fostering self-help than going to money lenders • Legal aid – provide legal assistance & aid through company lawyers or others as & when required • Recreational facilities – gyms, clubs, internet café, one film per week shows etc • Regular meetings & gatherings – of employees with their families to express talent, creativity & relieve of work stress • Loans – at subsidized rates of interests for housing deposits, vehicle purchase, marriage, illness or death of a close family member • Personal health care – extensive health check-up periodically • cellular phones / laptop – on basis of business requirement • Corporate credit card – to take care of official expenses arising out of business trips • Gifts – on various occasions like birthday, anniversary, festivals – to strengthen bond between employer & employee TOTAL COMPENSATION
COMPENSATION STRUCTURE – VARIOUS PERSPECTIVES
SALARY TRENDS AVERAGE SALARY INCREASE IN TOTAL COST TO COMPANY (TCC) FOR THE YEAR 2006 ACROSS ASIA PACIFIC –
8.0% 4.5% 5.5%
8.0% 6.5% 3.5% 4.0% 4.5% 3.0%
1 Average salary hike in 2006 for India at 14%, making it the highest in Asia Pacific 2 Employees in management staff cadre received average salary hike of 16% in 2006 PERFORMANCE LINKED AWARDS 13
VARIABLE PAY TREND 1 Employee expectations are on the rise 2 Senior/ Top Management received the highest percentage of variable pay in their compensation in the range of 17% to 30% 3 Variable Pay increasing in year 2006 Banking Sector from 13% to 24% IT from 13% to 18% Manufacturing from 10% to 16% FMCG from 14% to 18% PERCEIVED BENEFITS 1 International Educational Advancement Program & Tuition Reimbursement 2 Signing Bonus 3 Investment company makes on Employee & Training imparted (National/ International) 4 OPPORTUNITIES OF LEARNING – Early responsibility in career, freedom at work and innovate 5 JOB PROFILE – Work Content, Challenging Assignments 6 CAREER PROSPECTS & GROWTH OPPORTUNITIES – “Growing our own timber” 7 FUTURE PLANS OF COMPANY – Growing organization 8 TREATMENT OF PEOPLE – Strong values of trust, caring, fairness and respect within organization, healthy relationship at work. NEW COMPENSATION APPROACHES Changing environmental pressures Three changes having impact on organization structure & management systems: Product markets have become global increased competition in domestic & foreign markets Rapidly changing technology greater need to employ technically & professionally skilled workers keep their knowledge – base & competencies current Fast – changing demographic composition of Workforce * higher age group of employees, more women employees, rising level of formal education Organization’s response Major changes in organization structure & management systems new model: flat, flexible, team-based, participative, diverse, quality- focused, dynamic, globally-oriented 14
changes in the job from being specialized & stable multidimensional horizontal growth of employees new approaches to compensation & rewards FOUR NEW APPROACFHES TO COMPENSATION SKILL-BASED PAY Employees are paid according to their number of skills - skills are grouped in ‘skill-blocks’ – as an employee acquires each block, his pay goes up - skill block includes different types of skills: **breadth skills which focus on all related jobs in an integrated production process **depth skills which aim to increase specialization in a particular area **vertical skills which are generally possessed by managers & professionals Advantages to organizations a workforce is created that can perform multiple tasks organization gets flexibility to rotate employees & take care of organization menaces like absenteeism, overtime, turnover, work-flow interruptions due to production bottlenecks and variations in product demand better problem solving capability improved productivity & quality of services/ products stronger employee commitment employees become familiar with the operations & tend to recognize the value their own contributions Advantages to the employees acquire more self-control over their own earnings develop greater capacity for self-management experience more varied and enriched task assignments these contribute to job satisfaction to a great extent BROADBANDING Delayering of pay structure - a typical pay structure consists of grades & ranges - a grade is a grouping of jobs falling within a certain range of evaluation points - attached to grades are pay ranges – minimum to maximum spread * successively higher grades will have higher minimum & higher maximum pay rates 15
- pay structure typically consists of a tall hierarchy of narrowly defined grades, each with a relatively limited pay range * such structures create in employees a strong motivation to strive towards upward mobility as a means to obtain higher compensation rewards Broadbanding is defined as Consolidation of existing pay grades into a small number of wide bands results in broad minimum-maximum pay spread for each band compared to conventional pay structures, broadband structures have fewer bands & broader pay ranges best – suited to the needs of flexible, flatter & performance-oriented organizations of today Allow flexibility in moving employees between jobs within a band without formal job titles & pay grade changes Flat structures place increased emphasis on lateral career moves & skill development that can be rewarded through broadbanding Greater scope for pay growth through within- bandpay increases than through promotions to a higher band Example1 of how broad banding works Band I - Executives, entry-level staff Band II - Sr. Executives, supervisors, coordinators Band III - Assistant managers Band IV - Managers, business managers Band V - General managers, national managers Band VI – CTO, CFO, CMO Band VII - President & CEO Example2 of how broad banding works In a HR consultancy firm there are 3 bands across the organization with a wide pay range in the same band: Entry level: requires good quantitative skills, knowledge of basic MSOffice, ability to analyze & ability to learn fast Proficiency level: skills in project management, problemsolving, resource management, thorough subject knowledge Mastery level: a leadership position requiring visionary skills & ability to give direction to the organization To move up the ladder, the employee needs to add value that would clearly separate his accountability & key performance indicator *here advancement means adding newer competencies VARIABLE PAY 16
Defined as - financially measurable reward paid to an individual based on his overall performance - a powerful tool that enhances employee productivity & performance TEAM REWARDS - These are awarded to teams or groups based on their collective performance in achieving the assigned targets - periodically targets are monitored to encourage improved productivity & reward - provide each member an opportunity to receive a bonus on the output of the team a whole - most appropriate when jobs are inter-related - generally payouts are determined by team rankings (based on criteria like ratings by internal & external customers, achievement of quarterly team objectives & the management input recognizing special circumstances) - within same team also, all members do not receive same payout – it is subject to peer evaluation - major problem in this is designing a model team-based pay system Steps for setting up team rewards Appraising teams to evaluate the performance of team against kras / preset targets communicate the results to ensure transparency measure the performance of the team (actuals vs. Targets) every month rewarding teams Make the minimum level of performance the benchmark of team reward make team performance mandatory for individual rewards distribute the team reward in proportion to the basic pay of the grade to which each team member belongs build a geometric rate of progression of the award for each successive target link the individual award to the basic pay of the grade to which the individual belongs VARIABLE PERFORMANCE LINKED PAY (VPLP) The corporate buzzword today Becoming a more common method for rewarding employees while linking their performance more closely to the employer’s 17
financial success Some companies are allowing all levels of employees to participate in these programs Variable pay is an innovative way to bring wages and salaries in line with companies’ market performance A simple concept that’s based on rewarding employees for increased sales or efficiency rewarding employees who increase productivity or efficiency provides incentive for other employees who want to share in the bounty rather than rewarding every employee with a pay raise or bonus, variable pay rewards the individual worker, or a team of workers, for extraordinary efforts Indian companies increasingly adopting VPLP more than 85% organizations having VPLP
Objectives / Benefits of VPLP A powerful tool to enhance employee productivity & thus impact bottomline align rewards to business goals build a high-performing organizational culture links overall compensation strategy with the organization’s business strategy helps differentiate between a mediocre & a star employee a very effective motivational technique helps team members understand their job expectations better a valuable retention tool helps upgrade skills of team members by inducing a competitive environment Types of Plans Individual – Based Pay Individual-based plans are the most widely used Of the individual-based plans commonly used, merit pay is by far the most popular - its use is almost universal - merit pay consists of an increase in base pay, normally given once a year - supervisors’ ratings of employee performance are typically used to determine the amount of merit pay granted - once a merit pay increase is given to an employee, it remains a part of that employee’s base salary for the rest of his or her tenure with the firm 18
Team – based pay Normally reward all team members equally based on group outcomes these outcomes may be measured objectively or subjectively the criteria for defining a desirable outcome may be broad or narrow as is less commonly done in individual-based programs, payments to team members may be made in the form of a cash bonus or in the form of non-cash awards such as trips, time off, or luxury items Plant – wide / company – based pay Plant-wide or company-wide pay-for-performance plans reward all workers in a plant or business unit on the basis of the performance of the entire plant or business unit profit and stock prices are generally not meaningful performance measures for a plant or unit because they are the result of the entire corporation’s performance most corporations have multiple plants or units, a factor that makes it difficult to attribute financial gains or losses to any single segment of the business - therefore, the performance indicator most frequently used to distribute rewards at the plant level is plant or business unit efficiency, which is normally measured in terms of labor or material cost savings compared to an earlier period or another plant or business unit They are the broadest type of variable-pay incentive programs Reward employees on the basis of the entire corporation’s performance the most widely used program of this kind is profit sharing. Profit sharing is a company-wide pay-for-performance plan that uses a formula to allocate a portion of declared profits to employees typically, profit distributions under a profit-sharing plan are used to fund employee retirement plans Features of VPLP Can be in cash or kind generally offered in terms of extra perks as soft housing loans, company cars, junkets abroad, mediclaim policies If overall company performance is poor, SBU / team performance does not warrant VPLP 19
Largely, it does not exceed 30% of an executive’ s annual pay Minuses of VPLP Recalculations in the case to reward nonexempt (hourly) employees VPLP requires employers to include certain types of variable compensation, such as bonuses, in employees’ regular hourly wage rates as a result, companies that pay variable compensation to nonexempt employees must often recalculate employees’ regular hourly pay rates by factoring in the variable pay the recalculation then affects the overtime pay calculations employers who are designing variable compensation programs that include nonexempt employees must be sure to review their programs. failure to do so could cost significantly more in penalties and payment of back wages Unspoken assumptions Several underlying assumptions are behind the variable-pay concept, which derive from the very nature of the society that we live in and are not necessarily accurate: - money motivates people to work harder - increased motivation will increase performance - fair measurement of work performance is possible Money as a motivator • there is no doubt that money can be a powerful motivator • however, it isn’t always Performance measurement motivation is clearly linked to performance however, in many cases motivation is not the problem - the performance problem may be due to lack of skills, poor organization, bad strategy etc - measuring performance is difficult and the most significant practical problem in VPLP - even harder to manage is the problem of perception: even where there are real, perhaps obvious, performance differences, the employee who doesn’t perform well is more likely to attribute his or her low output to favoritism rather than performance Implementation 20
Failure of this motivational technique due to • inadequate planning • poor implementation • poor communication of details of the scheme across the organization • undefined evaluation method • individual objectives are not quantified for variable pay calculation Effective implementation by -well – defined individuals & group targets -effective communication of the scheme to the employees -commitment from the top -effective performance-evaluation mechanism * simple, measurable performance criteria that is understood by all -timely payouts • Employers need to do a better job of mapping individual employee performance and linking it with compensation Conclusion To create and implement an efficient variable-pay plan, an employer must make a commitment to define employee expectations in behavioral and measurable terms - This means making goals achievable, profitable, and practical for both the company and its workers - the key to the success of variable compensation is to have something you can measure and understand—something that is linked to creating economic value for the company - instead of continually ratcheting up base pay, manufacturing and service companies are adopting and expanding the use of incentive compensation programs, at all levels, to reward outstanding achievement without increasing fixed costs EVA (Economic Value Added) • It is a performance metric that calculates the creation of shareholder value • Eva is the calculation of what profits remain after the costs of a company's capital - both debt and equity – are deducted from operating profit • True profit should account for the cost of capital • Steps to calculate EVA: Calculate net operating profit after tax (NOPAT) Calculate total invested capital (TC) 21
Determine a cost of capital (WACC) Calculate EVA = NOPAT – WACC% * (TC) • It is a financial performance method to calculate the true economic profit of a company • Used for: setting organizational goals, performance management, determining bonuses, communication with shareholders & investors, motivation of managers, capital budgeting, corporate valuation, analyzing equity securities (the non-debt securities of a corporation representing an ownership interest) • Links employee performance with profits • It is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise • An estimate of true economic profit • Amount by which earnings exceed or fall short of the required minimum rate of return that shareholders could get by investing in other securities of comparable risk • Calculated by combining 3 factors: net operating profit after taxes, capital & cost of capital • Continuous improvement in EVA brings continuous increase in shareholder’s wealth since a sustained increase in EVA brings increase in market value of the company • Incorporates 2 principles of finance into management decision – making • Primary objective of any company is to maximize the wealth of its shareholders • The value of a company depends on the extent to which investors expect future profits to exceed or fall short of the cost of capital • NIIT, TCS & Godrej have implemented EVA in India • Across the world, Seimens, Sony, Whirlpool, Johnson & Johnson, Cadbury, Bausch & Lomb have implemented EVA • New concept for productivity enhancement, investor’s confidence & employee motivation Steps for implementing EVA• Measuring of EVA – concept defined & explaining throughout the company • Managing through training programmes – oriented to educate the managers how they would earn in direct proportion to the wealth that the company would make • Motivation of employee benefits / rewards through performance linked remuneration scheme • Preparing mindset of employees in the long-run, to understand the impact of EVA on their personal remuneration 22
INCENTIVE PLANS: Five Types: Merit Pay Gainsharing ProfitSharing Stock Options ESOPs Merit Pay: An incentive plan implemented on an institutional wide basis to give all employees an equal opportunity for consideration, regardless of funding source. The merit increase program is implemented when funds are designated for that purpose by the institution's administration, dependent upon the availability of funds and other constraints. .
Advantages • Allows the employer to differentiate pay given to high performers. • Allows a differentiation between individual and company performance. • Allows the employer to satisfactorily reward an employee for accomplishing a task that might not be repeated (such as implementation of new systems).
Gainsharing: A technique that compensates workers based on improvements in the company's productivity. How does Gainsharing work? A Company shares productivity gains with the workforce. Workers voluntarily participate in management to accept responsibility for major reforms. This type of pay is based on factors directly under a worker’s control (i.e., productivity or costs). Gains are measured and distributions are made frequently through a predetermined formula. Because this pay is only implemented when gains are achieved, gainsharing plans do not adversely affect company costs. What are the 'Gains' that are measured?
Increases in production with equal or less effort. Equal levels of production with less effort.
What are examples of Gainsharing formulas?
Calculate gain in hours: The actual hours worked minus the expected hours (for the given level of output) equals the gain in hours. Disadvantages
• Adherence to the FLSA requires employers to recalculate each worker's "regular rate" of pay. To overcome this limitation, employers Helps companies achieve sustained increases in productivity. Employees become more involved the productivity gains made by the
• • •
employer. Employees can share in the benefits of employee sponsored improvements. Enhances commitment to organizational goals. Leads to improvements in other measures of company performance, including: teamwork, product quality, lower rates of absenteeism, defects, and "downtime."
may restrict this type of compensation to exempt employees. The formulas and program may be difficult to understand. Requires a shift to a more team oriented management style.
When does Gainsharing work best? Works best when company performance levels can be easily quantified. Employee involvement significantly enhances the effectiveness of incentive pay. When used simultaneously, productivity gains from combining these techniques can exceed gains achieved separately. What is the best way to implement Gainsharing? Meet with executives to develop a clear understanding of Gainsharing. Develop various formulas and models to be used in predicting future gains and the costs associated with sharing those gains. Prepare rules, presentation materials, and dissemination of policy. Retrain supervisors and administrators. Teams of employees are selected by peers to develop cost-saving measures. Through their personal knowledge about their jobs, employees are able to reduce waste and increase efficiency. Profit Sharing: An incentive based compensation program to award employees a percentage of the company's profits. How does Profit sharing work? The company contributes a portion of its pre-tax profits to a pool that will be distributed among eligible employees. The amount distributed to each employee may be weighted by the employee's base salary so that employees with higher base salaries receive a slightly higher amount of the shared pool of profits. Generally this is done on an annual basis.
Advantages Disadvantages • Brings groups of employees to work • The pay for each employee moves together toward a common goal up or down together (no individual (the success/benefit of the differences for merit or company). performance). • Helps employees focus on • Focuses only on the goal of profitability. profitability (which may be at the expense of quality). • The costs of implementing the plan rise and fall with the company's • For smaller companies, these plans revenues. may result in drastic swings in earnings for employees which the • Enhances commitment to
organizational goals. •
employees may find difficult to manage their personal finances. Adherence to the FLSA requires employers to recalculate each worker's "regular rate" of pay. To overcome this limitation, employers may restrict this type of compensation to exempt employees.
When does Profit sharing work best? When company earnings are relatively stable (or steadily increasing). What is the best way to implement Profit sharing? Meet with executives to develop a clear understanding of profit sharing. Develop various formulas and models to be used in predicting future gains and the costs associated with sharing those gains. Prepare rules. Stock Options: The ‘right’ to purchase stock at a given price at some time in the future. Stock Options come in two types: 1. Incentive stock options (ISOs) in which the employee is able to defer taxation until the shares bought with the option are sold. The company does not receive a tax deduction for this type of option. 2. Nonqualified stock options (NSOs) in which the employee must pay infome tax on the 'spread' between the value of the stock and the amount paid for the option. The company may receive a tax deduction on the 'spread'. How do Stock options work? An option is created that specifies that the owner of the option may 'exercise' the 'right' to purchase a company’s stock at a certain price (the 'grant' price) by a certain (expiration) date in the future. Usually the price of the option (the 'grant' price) is set to the market price of the stock at the time the option was sold. If the underlying stock increases in value, the option becomes more valuable. If the underlying stock decreases below the 'grant' price or stays the same in value as the 'grant' price, then the option becomes worthless. They provide employees the right, but not the obligation, to purchase shares of their employer's stock at a certain price for a certain period of time. Options are usually granted at the current market price of the stock and last for up to 10 years. To encourage employees to stick around and help the company grow, options typically carry a four to five year vesting period, but each company sets its own parameters.
o Allows a company to share ownership with the employees. o Used to align the interests of the employees with those of the company.
o In a down market, because they quickly become valueless o Dilution of ownership o Overstatement of operating income
Nonqualified Stock Options Grants the option to buy stock at a fixed price for a fixed exercise period; gains from grant to exercise taxed at income-tax rates
Advantages Disadvantages o Aligns executive o Dilutes EPS and shareholder interests. o Executive o Company receives investment is required tax deduction. o May incent shorto No charge to term stock-price earnings. manipulation
Restricted Stock Outright grant of shares to executives with restrictions to sale, transfer, or pledging; shares forfeited if executive terminates employment; value of shares as restrictions lapse taxed as ordinary income
Advantages Disadvantages o Aligns executive o Immediate dilution and shareholder interests. of EPS for total shares o No executive granted. o Fair-market value investment required. o If stock appreciates charged to earnings over restriction period. after grant, company's tax deduction exceeds fixed charge to earnings.
Performance shares/units Grants contingent shares of stock or a fixed cash value at beginning of performance period; executive earns a portion of grant as performance goals are hit
Advantages Disadvantages o Aligns executives o Charge to earnings, and shareholders if stock is marked to market. used. o Difficulty in setting o Performance performance targets. oriented. o No executive investment required. o Company receives tax deduction at payout.
When do Stock options work best? -Appropriate for small companies where future growth is expected. -For publicly owned companies who want to offer some degree of company ownership to employees. What are important considerations when implementing Stock Options? -How much stock a company be willing to sell. -Who will receive the options. -How many options are available to be sold in the future. -Is this a permanent part of the benefit plan or just an incentive. ESOPs Employee Stock Ownership Plan (ESOP): An ESOP is a defined contribution employee benefit plan that allows employees to become owners of stock in the company they work for. It is an equity based deferred compensation plan. Several features make ESOPs unique as compared to other employee benefit plans. First, only an ESOP is required by law to invest primarily in the securities of the sponsoring employer. Second, an ESOP is unique among qualified employee benefit plans in its ability to borrow money. As a result, "leveraged ESOPs" may be used as a technique of corporate finance. ESOPs • An opportunity to buy stock at a set price some time in future for a stated period • Stock option is the right or privilege to buy stock under an offer valid for a stated period • A form of variable pay compensation package Objectives of ESOPs • Instrument for attracting critical skills / highly valued or scarce skills • Inculcates employee feeling of ownership and commitment • Creates additional wealth for employees • Supplement retirement / social security benefits • For employee retention particularly for groups apprehended of high turnover • Helps introduce a performance management system without incurring full cash out flow / lessening possible individual differences in the immediate cash bonus • Enforces corporate governance Infosys, Wipro, Maruti Udyog Limited, GE, Godrej, P & G, Zee Network, Castrol etc have introduced ESOPs 27
Features of ESOPs • It is a qualified, defined contribution employee benefit plan that invests primarily in the stock of the employer • A company has to create a trust fund for employees and funds it by contributions of stock, cash or buy stock or cash to pay back the ESOP’s loan and to buy back stock in order to set-up a ESOP system • Shares held by ESOP trust are distributed to the employees through an employee option scheme • Return on an ESOP portfolio is linked to company performance since investment is through employer’s securities • All employees except part-time directors are eligible to ESOPs of the company • The terms, price & offer of ESOPs is done by compensation committee of the board of directors • Options granted to employee are not transferable to any other person • ESOP trust provides a warehouse for sponsoring company’s shares which can be sold or transferred to employees in future • Reservation up to 5% can be made by the issuer of the company for employees of his company or promoters of the company 3 stages: • Grant of option (enable employee to purchase a certain number of shares of the company stock at a determined price, usually within a specified period of time) • Vesting (employee gets right to apply for the shares) • Exercise of option (on payment of exercise price, employee is conferred the shares of the company) • There is a minimum period of one year between grant of options and vesting of options & company shall have the freedom to specify lock in period • Typically, lock-in period of 3-5 years with the provision that if employee separates from the service of the company (except in the case of death / medical incapacity), the shares would be forfeited & reverted to the trust • Shares are not physically transferred to employees at this stage • Once the shares are transferred in favour of the employee, only then the latter may decide to sell them in the market (this sale will attract capital gains tax) • During the lock-in period, the shares registered in the name of the employee would be kept in the custody of the trust
Types of ESOPs • One-off, uniform • An offer plan where the company may decide to include non-performers, trainees, short-service staff, temps • A one-time allotment for an equal number of shares, options or warrants to all at the market value • SEBI guidelines allow allotment of options below the market price for shares, subject to the differential being accounted in the books of the company • One-off, differential / discretionary • Also a one-off scheme where company may differentiate allotments by grades, seniority or market value of special skills • Factors like achievements, potential, loyalty, hard work & contribution to corporate performance if considered, then the discretionary element will go up considerably • Ongoing schemes • Use a combination of uniform, differential & discretionary allotments dynamically. • May be warrants, shares or options that can be issued as “sign-on” bonus on confirmation / promotion / superannuating / recognition of outstanding contribution • Given to some or all individuals • Have a vesting schedule • Are structured to enable flexibility • Proxy: stock appreciation rights / phantom shares • Notional units apportioned to employees • Are productivity / contribution – linked incentive programmes rather than stock option plans • An employee is allotted notional units / shares of the company based on certain criteria at a set price • Employee is required to exercise his option within a given period (say 2 years) – when the share price is high & will be eligible to draw the differential or the whole in cash on deduction of tax • Provision is made to enable employees to decline the shares & opt for the cash differential between the cost of exercise & the market price • It would have the effect of a stock appreciation right / phantom share Some definitions • Phantom stock – a bonus that rewards employees based on the value of the company’s stock & the dividend performance of the stock 29
• • •
Discount stock option – stock option with an exercise price which is less than the fair market value on the sale of the grant Indexed stock option – the exercise price is equal to the fair market value at grant, but the price adjusts upward or downward depending on an index (in relation to the market / industry / peer group performance / any other measure) Performance accelerated stock option – has a fair market value exercise price & a service – based vesting schedule (longer than traditional options which are generally for 10 years), but which becomes exercisable at an earlier date in case specified performance goals are achieved Performance contingent stock – has a fair market value price, which becomes exercisable only when performance goals are achieved. It lapses in case the set goals are not achieved Purchased stock option – down payment required to be made (% of the market price) before the option may be exercised Reload/restoration stock option – stock option automatically granted upon the exercise of a previously granted stock option to the extent that the optionee uses shares rather than cash to pay the purchase price of the original option (the exercise price of the reload option is the fair market value on the date of the grant & reload option expires on the same date as the original option Variable - priced stock option – with an exercise price that fluctuates upward or downward in relation to stock price performance (yo-yo stock option or indexed stock option)
Premium stock option – exercise price greater than the fair market value on the date of the grant How does ESOP work? The ESOP operates through a trust, setup by the company that accepts tax deductible contributions from the company to purchase company stock. The contributions made by the company are distributed to individual employee accounts within the trust.
The amount of stock each individual receives may vary according to pre-established formulas based on salary, service, or position.
The employees may ‘cash out’ after vesting in the program or when they leave the company. The amount they may cash out may depend on the vesting requirements.
When an ESOP employee who has at least ten years of participation in the ESOP reaches age 55, he or she must be given the option of diversifying his/her ESOP account up to 25% of the
value. This option continues until age sixty, at which time the employee has a one-time option to diversify up to 50% of his/her account. This requirement is applicable to ESOP shares allocated to employee's accounts after December 31, 1986. Employees receive the vested portion of their accounts at either termination, disability, death, or retirement. These distributions may be made in a lump sum or in installments over a period of years. If employees become disabled or die, they or their beneficiaries receive the vested portion of their ESOP accounts right away.
Advantages Disadvantages • Capital Appreciation. Companies • Dilution. If the ESOP is used to sell some or all of their equity to finance the company’s growth, the employees and by doing so convert cash flow benefits must be weighed corporate and personal taxes into against the rate of dilution. tax-free capital appreciation. This • Fiduciary Liability. The plan allows the owner to sell 100% of his committee members who or her company, get money out taxadminister the plan are deemed to free and still maintain control of the be fiduciaries, and can be held company. liable if they knowingly participate • Incentive Based Retirement. in improper transactions. Provides a cost-effective plan to • Liquidity. If the value of the stock motivate employees. After all, who appreciates substantially, the ESOP works harder, owners or and/or the company may not have employees? sufficient funds to repurchase stock, • Tax Advantages. Enables tax upon employees’ retirement. advantaged purchasing of stock of • Stock Performance. If the value of a retiring company owner. With this the company does not increase, the purpose, a company owner may sell employees may feel that the ESOP their shares to the ESOP and incur is less attractive than a profit no taxable gain on the sale. A sharing plan. In an extreme case, if company owner can sell all or some the company fails, the employees of the company to the employees will lose their benefits to the extent cost free. Owners who sell 30% or that the ESOP is not diversified in more of their company to an ESOP other investments are allowed to "roll-over" the proceeds into other securities and defer taxation on the gain. • Company reduces it's tax liability. A company can reduce its corporate income taxes and increase its cash flow and net worth by simply issuing treasury stock or newly issued stock to its ESOP.
What is the best way to implement ESOP? 1. Determine how you want to use the ESOP. Will it be used as an employee benefit plan? Or, as an incentive program?
2. Conduct a feasibility study to determine the value of the company’s stock and impact of the contributions that must be made to the trust. 3. An ESOP requires different accounting procedures and a different method of allocating stocks and other investments among the employees than other types of plans. For this reason the plan should be designed by an ESOP specialist in order to avoid IRS difficulties. What are the alternatives to ESOP? 1. Employee stock options. an a in Profit Sharing. An ESOP differs from a profit sharing plan in that ESOP is required to invest primarily in employer securities, while profit sharing plan is usually prohibited from investing primarily employer securities.
LAWS & REGULATIONS RELATED TO COMPENSATION PAYMENT OF WAGES ACT, 1936 An Act to regulate the payment of wages to certain classes of employed persons MINIMUM WAGES ACT, 1948 An Act to provide for fixing minimum rates of wages in certain employments EQUAL REMUNERATION ACT, 1976 An Act to provide for the payment of equal remuneration to men and women workers and for the prevention of discrimination, on the ground of sex, against women in the matter of employment and for matters connected therewith or incidental thereto. PAYMENT OF BONUS ACT, 1965 Act to provide for the payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production or productivity and for matters connected therewith. EMPLOYEES' STATE INSURANCE ACT, 1948 An Act to provide for certain benefits to employees in case of sickness, maternity and employment injury and to make provision for certain other matters in relation thereto EMPLOYEES' PROVIDENT FUNDS AND MISC. PROVISIONS ACT, 32
1952 An Act to provide for the institution of provident funds 2*[3*[, family pension fund and deposit-linked insurance fund]] for employees in factories and other establishments THE PAYMENT OF GRATUITY ACT, 1972 An Act to provide for a Scheme for the payment of gratuity to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops or other establishments and for matters connected therewith or incidental thereto THE WORKMEN'S COMPENSATION ACT, 1923 An Act to provide for the payment by certain classes of employers to their workmen of compensation for injury by accident PROBLEMS & ISSUES Whether extrinsic rewards such as performance-related pay actually motivate employees to better performance is a matter of controversy. It has been claimed that monetary rewards usually have a limited timespan in regard to their motivating effect. Therefore extrinsic rewards such as performance pay, even if they can exert a continuing impact on performance, should
be consistent with overall management objectives, so that performance pay may not be consistent with, for example, a purely cost reduction strategy & only be used to reinforce a motivational system in which intrinsic (non monetary) rewards exist, such as reorganization of work processes, training, employee involvement/consultation in decision-making, two-way communication, opportunities to contribute ideas, career development plans and goal setting.
Some of the reasons for the failure of performance-related pay and some of the problems and issues facing employers flow from a variety of circumstances such as the following: i. Inadequate criteria to measure performance, or criteria which are not easily understood, communicated and accepted. Performance pay should therefore be negotiated. Inappropriate performance appraisal systems in that the objectives of the appraisal system (e.g. where it is intended to identify training needs or suitability for promotion) do not match the objectives of the reward system. The absence of regular feedback on performance.
The reward system is not designed to meet the objectives sought to be achieved. There could be a variety of objectives e.g. to satisfy distributive justice, attract and retain capable staff, match particular levels of pay in the labour market, change organizational culture (e.g. towards greater customer satisfaction) or to reinforce it. The absence of a right mix of extrinsic and intrinsic rewards. The lack of an appropriate quantum of pay which should be subject to performance criteria. This occurs when the amount which depends on performance is too small, or it is too large and therefore the amount placed at risk (when performance is poor) is not acceptable to employees. The absence of periodic evaluation of the scheme. Non-recognition of the fact that performance, especially profit, is sometimes (even often) dependent on factors outside the control of employees e.g. management decisions, exchange rates, recessions.
There are many arguments in favour of performance-related pay which are theoretically attractive. However, it is not easy to find evidence which unequivocally supports or disproves these views, because of the scarcity of empirical evidence or because the introduction of the scheme has been faulty. Governments can sometimes facilitate the introduction of performance-based pay. In Britain for instance, the Finance Act of 1987 introduced tax relief for approved schemes to encourage their adoption and proliferation. Two benefits at the macro level have been claimed for performance pay. The first relates to employment. If increases in basic pay are transferred to a profit-related scheme (e.g. 10% of basic pay), the employer may be more inclined to hire new employees as his wage cost is less than otherwise. If the percentage of profit to be shared remains fixed, additions to the workforce do not cost the employer more in terms of the profit-related pay. On the other hand, new recruitment would reduce the quantum existing employees will receive unless profits increase, and consequently dissatisfaction among employees could set in. The second argument is that if basic pay is reduced as a percentage of total earnings, increased earnings will not result in inflationary tendencies as such increases are the result of increased profits/productivity. The benefits to management and employees are: 34
• • • •
where performance/profits increase, higher pay is an incentive to employees where profits reduce, the reduction in the performance-related pay can cushion employees against redundancies employee identification with the success of the business is enhanced variations in pay lead to employees becoming more familiar with the fortunes (or misfortunes) of the business. This would depend on the information-sharing practices of the management.
Several criticisms of a general nature (apart from those directed at particular types of schemes) have been made against performancerelated pay. Among them are the following: i. ii. iii. where the performance earnings fall employees are less inclined to accept reductions in their guaranteed pay positive employment effects could be negated due to opposition from employees to recruitment as it would dilute their earnings since performance/profits depend on a variety of factors beyond the control of employees, it is not possible to link pay to the performance of employees. If it is linked to the overall performance of the enterprise, then management decisions should logically be subject to scrutiny by employees. it is difficult to determine whether the amounts paid out under schemes are more than matched by performance gains.
Even though the evidence is not always clear whether profit-sharing, for instance, raises productivity levels, the positive link between profitsharing and productivity is clearer in enterprises with employee participation arrangements. Where the extra payments replace a fixed wage component and is not an additional component of pay, there is a greater likelihood that the extra pay is matched by performance increases. In the case of group incentives payments are never proportionate to individual performance, as poor performers ("free riders") benefit from the efforts of others.
Unit II : WAGE THEORIES & LABOUR MARKET
ECONOMIC THEORIES CLASSICAL SOCIAL WAGE THEORIES A. Subsistence Theory Propounded by David Ricardo, 1817 Also known as the "Iron Law of Wages“ 35
Was an alleged law of economics that asserted that real wages in the long run would tend to the value needed to keep the workers' population constant Ricardo drew a distinction between a natural price and a market price. For Ricardo, the natural price of labor was the cost of maintaining the laborer. However, Ricardo believed that the market price of labour or the actual wages paid could exceed subsistence level indefinitely due to countervailing economic tendencies Ricardo believed that the market price of labor could long exceed the subsistence or natural wage He also claimed that the natural wage was not what was needed to physically sustain the laborer, but depended on "habits and customs The labourers are paid to enable them to subsist & perpetuate the race without increase or diminution The theory maintains that wages cluster around the bare subsistence level of workers. A wage rate much above the subsistence level causes an increase in the number of workers; competition will then lead to a depression of wages back towards the cost of subsistence. Wages that are below subsistence reduce the size of the working population; in that case competition will raise wages, but only up to the subsistence level again. * Subsistence means minimum resources required for existence * Diminution means change toward something smaller or lower B. Wage Fund Theory 1 Developed by Adam Smith (18Century) 2 The wage-fund theory is that wages are advanced out of a fixed fund of capital, from which an excess withdrawal, either through legislation or through union pressure, will ultimately reduce the amount available for other workers. 3 Any increase in wages would also have to be taken out of profits, and their reduction would cause a decline in savings, which provide the capital from which the wage fund is derived. 4 Basic assumption – wages are paid out of a pre-determined fund of wealth which lay surplus with wealthy persons – as a result of savings. This fund could be utilized for employing labourers for work. If the fund was large, the wages would be high; if it was small, the wages would be reduced to the subsistence level The demand for labour & the wages that could be paid them were determined by the size of the fund C Residual Claimant Theory - Propounded by Francis Walker in 19th Century - There are 4 factors of any business activity: 36
Land, Labour, Capital, Entrepreneurship Wages represent the amount of value created in the production which remains after payment has been made for all these factors of production, thus implying that The labour is the residual claimant - After all the factors of production have received their compensation for their contribution to the process, only then the labourers’ wages come to the fore Theory does not explain how trade unions are able to increase the wages No role of labourers in productivity D Marxian Theory - In the surplus-value theory as propounded by Karl Marx, the value produced by the worker in excess of what is paid in wages is called surplus value - The surplus value, exacted from the worker, constitutes the capitalist's profit - According to this theory, labour was an article of commerce – could be purchased on payment of subsistence price The price of any product was determined by the labour time needed for producing it The labourer was not paid in proportion to the time spent on work, but much less The surplus went over, to be utilized for paying other expenses • JUSTIFICATION THEORIES A. Marginal Productivity Theory - Developed by Philips Wicksteed & John Bates The wages are based upon an entrepreneur’s estimate of the value that will probably be produced by the last of marginal worker It assumes that the wages depend on the demand for, and supply of labour Workers are paid what they are economically worth The employer has a larger share in profit as has not to pay for the non-marginal workers As long as each additional worker contributes more to the total value than the cost in wages, it pays the employer to continue hiring When this process becomes non-viable & uneconomic, the employer may resort to superior technology - This theory maintains that employers will only pay a wage that is, at most, equal to the amount of extra value added to the total product by one additional worker B. Bargaining Theory 37
Propounded by John Davidson Wages are determined by the relative bargaining power of the workers / trade unions & of employers - When a trade union is involved, basic wages, fringe benefits, job differentials, and individual differences tend to be determined by the relative strength of the organization & the trade union - The bargaining theory modifies the marginal-productivity theory by: Taking into consideration other factors (e.g., laws and social and political changes) that might affect the determination of wage levels Acknowledging that certain basic assumptions (equal bargaining power of employer and employee, free competition between the two, and mobility of labor) that characterize the marginal-productivity theory do not hold in our present economic system C. Supply & Demand Theory - Inter-relation between wages & employment - Unemployment were to disappear if workers were to accept a voluntary cut in wages – have wage flexibility for promoting employment at a time of depression. - These wage cuts would bring down costs and thereby fall in price - This lowering in prices would cause additional demand which will increase production - This will increase employment of workers D. Competitive Theory - Employers compete amongst themselves by offering a higher pay / wage to attract employees while employees compete with another for jobs by offering their services for a lower wage - Competition then, is essentially a disequilibrium process by which excess demand and excess supply cause changes in wages • Behavioral Theories A. Employee’s acceptance Level - This theory takes into consideration, the factors which may induce an employee to stay on with the company – Size & reputation of the company Power of the union Wages and benefits that the employee receives in proportion to the contribution made by him / her B. Internal Wage Structure - Wage Structure affected by – 38
Social norms / traditions / customs prevalent in the organization Psychological pressures on the management Prestige attached to certain jobs in terms of social status The need to maintain internal consistency in wages at all levels The ratio of maximum & minimum wage differentials Norms of span of control Demand for specialized labour C. Wage & Motivators - Purchasing power provided by monitory income helps workers to take care of their basic needs: Food / Clothing / Shelter / Transportation / Insurance / Pension Plans / Education / Other physical maintenance & security factors - Monitory income includes: Wages / Merit increases / performance – based bonuses EVOLUTION OF MODERN-DAY WORKFORCE Advent of the Labour Force During the period of foreign rule, Britishers introduced industrialization and thereby heralded the advent of labour sector in this country. With the emergence of native industrialists the labour sector expanded. The pace of industrialization and the expansion of labour sector were accelerated by the first and second world wars. • In the early years the workers organized to obtain wages to meet limited needs for livelihood and convenience to work decently. Labour struggle became a part of national movement. The concepts of freedom, democracy, secularism and socialism, were indoctrinated in the labour movement, thanks to agitations for rights of workers. • The trade union leaders of yesteryears played a glorious role in this respect. We are still striving to ensure social security measures envisaged in the directive principles of the Indian Constitution such as right to work, living wages, security in work place etc. • Today the economy of the nation itself is facing grave crisis due to the impact of globalization, and the labour sector is in the dark shadows of economic and social problems. The threats faced by the economy of the nation, industry, agriculture and thereby the labour sector are due to the impact of the global pressures and hence beyond our control. Yet we are compelled to defend ourselves to protect our economic and social security • Consequent on the grave crisis in the Indian economy, significant reforms based on liberalization, globalization was 39
enforced from 1991. It was these economic reforms that dictated the industrial policy from then on. Only after a couple of years of reforms that negative effects on other sectors of polity came to be felt, the most affected being the Labour Need of the Hour Ensuring equity as well as accelerating the rate of growth of economy in the labour market is the need of the hour – It is necessary to ensure significant improvements in the quality of labour, productivity, skill development and working conditions, and to provide welfare and social security measures particularly, to those in the unorganized sector It is also necessary to ensure that all adult persons looking for work are employed at levels of productivity and income, which are necessary to afford them a decent life. A significant proportion of workers presently earn below the subsistence wages Another unfortunate facet of labour markets is the persistence of child labour which must be eradicated in the shortest possible time Background • Modern day professions as we know them had their origin in the post-industrial age after World War II when most Western nations saw a long spell of growth • This era also saw the emergence of modern day consumerism. To cater to the emerging needs of the market, huge corporations built gigantic factories to manufacture products and serve the needs of consumers • They also started employing thousands of people to manufacture, service and market the products • Sometime during this period (in 1956), William H Whyte wrote his much acclaimed book titled the Organization Man—a term which caught the fancy of an entire generation of working professionals. For Whyte Organization Men are People who only work for the Organization. They are the ones of our middleclass who have left home, spiritually as well as physically, to take the vows of organization life, and it is they who are the mind and soul of our great self-perpetuating institutions • For nearly half century after the book appeared, Organization Man typified the working class. In most parts of the world, huge corporations—private, public and government-owned—employed hundreds of thousands of Organization Men • In the US, Fortune 500 companies created millions of jobs. Similarly, UK, Europe, the Eastern bloc, and India saw the emergence of huge government owned corporations and Public Sector Undertakings (PSUs) that employed millions 40
• In many parts of the world, government service was the career choice for a generation of the best and the brightest. In India, joining the Indian Administrative Service (IAS) or Police Service (IPS) was the dream • In the US, President Kennedy’s "send a man to the moon" project captured the imagination of a whole generation of youngsters who either wanted to become rocket scientists or astronauts for NASA • A whole generation of the best and brightest from top universities competed to give their life and souls, and dedicate their professional lives to mammoth corporations by joining the burgeoning ranks of Organization Men. In return, they were assured of a steady paycheck, raises, promotions and a golden watch at retirement, with a guaranteed pension to boot • Educated professionals were not the only ones welcomed by these organizations There was a need for everyone—from the mailroom clerk and janitor to shop floor workers, supervisors and managers; and everyone else in between One common aspect binding all employees was their unrelenting loyalty to the organization. There was very little individualism and entrepreneurship shown (or expected) by employees, and most of the decision-making took place in ivory towers at head offices The organizations asked for, and got the unwavering following of its organization men; in return, it guaranteed employment, almost taking on a patriarchal role for families of organization men Transition There is little debate over the fact that we are experiencing a major shift in the job market worldwide Changes in the marketplace are leading to a fundamental shift in careers and professions across the board Perhaps the most important shift in the paradigm is the move from Organization Man to Free Agents or Gold Collar Workers Individuals will not remain loyal to one single organization, just as most organizations have given up on guaranteeing lifetime employment New entrants to the job-market, and even those who have been working in the corporate world for a while are starting to realize that we cannot hope to become, or remain, Organization Men The New Generation This workforce contains the now generation, me generation, new breed, and new X generation These generations have been variously described 41
as having lower overall job satisfaction, less desire to lead (move up the organizational hierarchy) and to defer to authority; believe that they are entitled to a good job; have a strong a desire to control their own destiny; have a low absenteeism threshold They have also been described as having a lower respect for authority, and a greater desire for self-expression, personal growth, and self-fulfillment This group also tends to be more educated than their predecessors, in most cases, they are more educated than their supervisors Impatience and self-confidence define today's educated young worker In older times, people used to do anything to get a job - Today everyone thinks they're entitled to a job In the old days, such attitudes were unimaginable; they would have been self-defeating Companies are no longer in the driver's seat - Employees are in control now Labor Market Discrimination What is Discrimination? The valuation in the market place of personal characteristics of the worker that are unrelated to worker productivity. o These personal characteristics may be sex, race, age, national origin, religion, education or sexual preference Labor market discrimination may take the form of different wage rates for equally productive workers with different personal characteristics Labor market discrimination may also take the form of exclusion from jobs on the grounds of social class, union membership, or political beliefs Labor Market Discrimination Discrimination is a cause of labour market failure and a source of inequity in the distribution of income and wealth and it is usually subject to government intervention e.g. through regulation and legislation Discriminatory treatment of minority groups leads to lower wages and reduced employment opportunities, including less training and fewer promotions. The result is that groups subject to discrimination earn less than they would and suffer a fall in relative living standards Why does discrimination occur in the labour market? 42
The 'Taste' Model - Discrimination arises here because employers and workers have distaste for working with people from different ethnic backgrounds or final customers dislike buying goods from salespeople from different races i.e. people prefer to associate with others from their own group. They are willing to pay a price to avoid contact with other groups. With reference to race, this is equivalent to racial prejudice Employer ignorance – Discrimination also arises because employers are unable to directly observe the productive ability of individuals and therefore easily observable characteristics such as gender or race may be used as proxies – the employer through ignorance or prejudice assumes that certain groups of workers are less productive than others and is therefore less willing to employ them, or pay them a wage or salary that fairly reflects their productivity, experience and applicability for a particular job Occupational crowding effects – Females and minorities may be crowded into lower paying occupations. There is little doubt that a permanent gap exists between average pay rates for females and males in the labour markets of UK, US, Africa, Europe & Asia
Quality in Labour Market Towards Productive Employment Country like India has tremendous labor cost advantage as far as daily or monthly wage rates are concerned. But there are limitations due to poor quality of training and skills, nonprofessional approach, low productivity and too many labor laws. The labor market is deregulated & there is increased mobility of labor in global markets Many other low cost countries like china, Mexico, Turkey, SAARC region neighbors, some north African and Latin American countries are moving fast on learning curve and will offer tough competition to Indian exporters in low cost labor advantage The real labor cost will rise in countries like India erasing much of low cost advantage of labor Labour market demands are changing with greater emphasis on the quality of jobs Labour market reforms are necessary to cope with the accelerating economic and social restructuring associated with globalization, technological processes and the development of an inclusive knowledge and information society and economy In an era of globalization where capital, technology, high skills and high productivity play a major role in labour markets In India, like in many other developing countries, the growth of labour force is accelerating and will remain high for quite 43
sometime It needs rapid economic growth with effective and efficient utilization of labour by upgrading its skills to ensure development and employment generation. Intervention is required in labour markets to promote employment and its quality. Quality in work — including training, career prospects and work organization — makes a valuable contribution towards increasing employment and productivity Improvements in the quality of work may increase the efficiency of production processes by allowing employers to exploit fully the potential of new technologies They are further likely to increase employees’ motivation and job satisfaction Upgrading the quality of labour force by pursuing suitable education and skill development policies Low quality of jobs and low productivity is directly attributable to low level of skills. The latter poses a serious challenge to integration of the labour force in world economy There is overwhelming evidence that whereas educated and skilled workers are generally able to derive some benefits of new opportunities as a result of globalization, it is the uneducated and unskilled workers on whom the burden of restructuring falls Designing appropriate training systems is, therefore, an important means to deal with labour market instabilities like under-employment, skill mismatch and redundancy Higher productivity of labour would, apart from dignity of labour, improve the living standards of workers and also help the industry in facing international competition An increase in overall productivity and skill upgradation will lead to progressive absorption of large number of workers from informal or unorganized sector in the formal or organized sector and ensure rapid economic growth Quality of labour force alone determines their employability abroad or in institutions of foreign origin including multinational organization Manpower development to provide rising labour force with skills and training according to the emerging demand pattern is essential to eliminate the mismatch between the supply of and demand for labour
UNIT III Reward Management in TNCs (Transnational Corporations)
Transnational Corporation means a for-profit enterprise marked by two basic characteristics: – It engages in enough business activities -- including sales, distribution, extraction, manufacturing, and research and development -- outside the country of origin so that it is dependent financially on operations in two or more countries – Its management decisions are made based on regional or global alternatives – In an era of declining constraints on their mobility and the attraction of cheaper wages in less-industrialized nations eager to draw foreign investment, TNCs are eliminating jobs in their home countries and shifting production abroad – In less-industrialized regions, the lure for TNCs of fewer costs and regulations offers little promise to workers of decent working conditions, sufficient pay, or job security. – Tax breaks and subsidies governments use as incentives are no guarantee that the TNCs will not move on after the benefits have expired, and as cost advantages now found in Singapore appear in, say, Bangladesh, the countries currently experiencing an influx of investment may eventually find themselves in the same position as that of the US and other industrialized nations today. – TNCs are corporations that operate in more than one country. Usually, headquarters are in one or more nations and production or services are in another have become some of the most powerful economic and political entities in the world today. – Such companies have a geocentric orientation and attempt to be responsive to both national markets, while simultaneously seeking global coordination – The number of transnational corporations in the world has jumped from 7,000 in 1970 to 40,000 in 1995 What is the difference between Multi National Corporation and Trans National Corporation? – MNCs operate in several different countries while transnational implies "just across the border" as in the US and Canada. Obviously, both operate internationally – A MNC has a centralized headquarters & is a corporation with extensive ties in international operations in more than one foreign country. Examples are Coke, Pepsi, General Electric, Exxon, WalMart, Mitsubishi, Diamler Chrysler – A transnational company has no "head office" and moves whatever base of operations it has fluidly between its national offices. It is a MNC that operates worldwide without being identified with a national home base i.e. it is said to operate on a borderless basis. Examples are Daewoo, Saint Gobain, Daimler-Benz, Sony, Samsung 45
Group, Shell Oil etc Reward Management - The type and amount of compensation necessary to attract technically and culturally qualified international managers and technical professionals to the three nationals or country categories involved international human resource management activities from which employees are selected whether the people are: – PCNs (parent country nationals) – TCNs (third country nationals) or – HCNs (host country nationals) HR managers focus on their strategic objectives to develop a comprehensive compensation plan, in terms of considering base pay, short and long-term incentives, benefits and growth opportunities The objective of this kind of strategy is to ensure that both TNC/MNCs’ long and short-term objectives coexist in the compensation system without overlap, which would duplicate a single pay plan for the same objectives. The purpose of the planning is also designed to ensure that the compensation system attracts and retains the desired employees and that it motivates them to do those things that support the business plan The type and amount of compensation necessary to attract technically and culturally qualified international managers and technical professionals to the three nationals or country categories involved international human resource management activities from which employees are selected whether the people are: – PCNs (parent country nationals) – TCNs (third country nationals) or – HCNs (host country nationals) HR managers focus on their strategic objectives to develop a comprehensive compensation plan, in terms of considering base pay, short and long-term incentives, benefits and growth opportunities The objective of this kind of strategy is to ensure that both TNC/MNCs’ long and short-term objectives coexist in the compensation system without overlap, which would duplicate a single pay plan for the same objectives. The purpose of the planning is also designed to ensure that the compensation system attracts and retains the desired employees and that it motivates them to do those things that support the business plan Global Staffers An expatriate is an employee working in a country other than their country of origin. An expatriate may also be referred to as a PCN or 46
parent-country national - PCNs (Parent Country Nationals) – Those personnel who are of the same nationality as the contracting government or personnel from headquarters – They come from the home country of the operation. – The policy of using PCNs is usually employed when one or more of the following situations exists: (1) the host country cannot readily supply desired managerial personnel, (2) efficient communication with headquarters is required, and (3) the company adopts a centralized approach to globalization - TCNs (Third Country Nationals) – Those personnel of a separate nationality to both the contracting government and the area of operations i.e. whose nation of residence is neither the host country nor the home country – Such an employee normally is recruited from outside the host country and – relocated from the point of recruitment to the host country HCNs (Host Country Nationals) – These are Indigs (Indigenous Personnel) / Nationals / Locals – those personnel who are indigenous to the area of operations – Whose basic residence or home is the host nation – Local colleagues of the expatriate, they are valuable socializing agents, sources of social support, assistance, and friendship to expatriates. Expatriates are more likely to adjust when HCNs engage in this behavior Reward Management The vehicle for “going global” is often an international strategic alliance creating a world of “stateless corporations” - a collaboration between two or more TNC/MNCs that allows them to jointly pursue a common goal TNC/MNCs are staffed either by recruiting expatriates from the regular organizations or by creating an international cadre of managers, professionals, and workers of very diverse cultural backgrounds Companies like Gillette, Sony are already doing their own international cadre of managers now – Recruiting people directly to an international career will assure a supply of employees who expect and want to go overseas – Consistency within the growth of international business operations will require effective international human resource management (IHRM) • Involves moving people around the world • Helps HR Managers to formulate and implement policies and activities in the home-office headquarters • HR Manager’s responsibilities include selecting, training, and 47
transferring PCN abroad, and formulating policies for the firm as a whole and for its foreign operations – In staffing international operations, HR managers face a confusing array of choices in recruiting and selecting from one of three types of employees of an international firm. The three nationals or country categories involved in international HRM activities are: • The host-country where the subsidiary may be located • The home country where the firm is headquartered • Other countries that may be the source of labor or finance – For example, P&G employs Eritrean citizens (HCNs) in its Eritrean operations, often sends U.S. citizens (PCNs) to the Gulf countries on assignment, and may send some of its Italian employees on assignment to its Mexican operations (as TCNs) – These three types of employee groups have very different cultural backgrounds. Therefore, TNC/MNCs’ HR managers must coordinate policies and procedures to manage from the firm’s home country as well as in subsidiaries around the world in shaping international compensation and reward systems. – These policies and practices must effectively balance the needs and desires of HCNs, PCNs and TCNs as well - Failure to recognize differences in managing human resources in international environment frequently results in major difficulties in international operations Managing of a global workforce can be an important factor in the success or failure of an TNC/MNC: TNC/MNC’s HR managers must staff their international business operations with personnel who are technically competent, culturally proficient, and cost-effective. In almost all cases, it is generally argued that it is cheaper to employ HCNs than to send expatriates (PCNs or TCNs). TNC/MNCs may find expatriates too expensive to employ in large numbers The International Compensation Challenge – Compensation is one of the most complex areas of international human resource management – Pay systems must conform to local laws and customs for employee compensation while also fitting into global MNC policies – Managers face diverse political systems, laws & regulations, confront different economic climates, economic development, tax policies, diverse culture, customs, the role of labor unions, standard of living • For example, union influences may play an important role in determining wage policies in some countries such as Australia where the Australian Government and unions negotiate pay rates for workers that apply nationwide. • In Hong Kong, by contrast, labor unions are extremely weak, and 48
– – – –
– – – –
wage rates are determined by the free market All these different factors between international communities affect international compensation systems. Therefore, finding the right method for TNC/MNCs to determine a compensation package in an international market is simply becoming a nightmare It is also important for MNCs to consider carefully the motivational use of incentives and rewards among the employees drawn from three national or country categories The traditional function of pay to attract, retain and motivate employees has not changed - The emphasis has shifted from the attraction and retention functions to the motivation function. TNC/MNCs must ensure that those skilled employees are compensated for achieving goals that make the international business operations succeed As different countries have different norms for employee compensation, HR managers should consider carefully the motivational use of incentives and rewards among international community: • For Americans money is likely to be the driving force even though no financial incentives such as prestige, independence, and influence may be motivators • Other cultures are more likely to emphasize respect, family, job security, a satisfying personal life, social acceptance, advancement, or power Since there are many alternatives to money, the rule is to match the reward with the values of the culture There are wide variations both between countries and among organizations within countries concerning how to compensate workers The principal problem is salary levels for the same job and the jobs are different between countries in which an TNC/MNC operates Compensation policies can create conflict if local nationals compare their pay packages to the expatriate’s and conclude that they are being treated unfairly • Can create resentment and envy on the part of HCN managers and lower their morale and productivity
Unique Compensation Issues in International Scenario – Incentives provided to stimulate movement or expatriation to a foreign location / host country – Allowances for repatriation to home country – Additional tax burdens placed on employees working in a foreign location – Labour regulations in home and host country – Cost-of-living allowances in the host country – Home country and host country currency fluctuation 49
Formal and informal compensation practices unique to the host country Determining home country for setting base pay of TCNs
Compensation Strategy for Global Staffers – A successful compensation strategy involves keeping expatriates motivated while meeting TNC/MNC goals and budgets. TNC/MNCs’ HR managers must build an expatriate pay package by: • Meeting corporate goals at home and abroad • Keeping expatriates motivated • Complying with company budgets – This strategic perspective on the linkage between IHRM and strategy is so critical for a TNC/MNCs’ success. A TNC/MNC that can develop a highly trained, flexible, and motivated international workforce is at an advantage relative to its competitors, especially if that workforce can be used strategically to support corporate goals. It is essential that there is synergy among business objectives, staffing, and compensation. A sound expatriate strategy is a key to international business success and should be a major interest of senior management Management challenges concerning International Benefits & Compensation HR managers focus on their strategic objectives to develop a comprehensive compensation plan, in terms of considering base pay, short and long-term incentives, benefits and growth opportunities The objective of this kind of strategy is to ensure that both TNC/MNCs’ long and short-term objectives coexist in the compensation system without overlap, which would duplicate a single pay plan for the same objectives. The purpose of the planning is also designed to ensure that the compensation system attracts and retains the desired employees and that it motivates them to do those things that support the business plan The compensation costs of a family with children are shifted to hardship allowance for schooling, childcare, increased residence cost and all fringe benefits associated with supporting a family life cycle
Designing the Compensation Program Balance business objectives with the compensation programs such as base salary, taxes, allowances, cost-of-living allowances (COLAs), housing and reimbursable
expenses. The levels of salary and types of fringe benefits paid to the three primary labor pools of international managers are well documented. What has not received adequate attention is the difference among PCNs, HCNs, and TCNs. For example, executives, middle managers and supervisors who are expatriate managers in international assignments, receive a variety of “package” of benefits In addition to salary, taxes and benefits, international managers also receive different allowances as part of their overall compensation to accept an overseas position The most noticeable differences among the three labor pools of international managers are Overseas premiums – • The foreign service premium is based on the expatriate’s level in the company, the family size, and the location • Another type of premium is the hardship allowance and home leaves. The U.S. Department of State established a hardship list in 1996 to help organizations providing expatriate managers hardship allowances as a percentage of their base salary Housing allowances – • Entails substantial additional costs • TNC/MNCs differ in policies regarding employee contributions to housing Cost-of-living allowances – • Provided to help PCN or TCN enjoy a standard of living abroad that is comparable to what they would enjoy in the home country Tax equalization – • PCNs pay no more income tax and no less than if he or she stayed home Repatriation allowances – • Paid on return of employee to his/her country of origin to live there permanently • Performance-based bonuses
– – – •
• • •
Additional Payments and services – Lifestyle enhancement services • Provision for employee & family to learn the local language • Education & training of employee & family on local culture, customs and social expectations • Counseling services for employee & family • Assistance in finding a home at the foreign work site / school & suitable education programmes for children & dependents • Company car, driver, domestic staff, child care • Use of Fitness facilities / subsidized health care services 51
• • – • • • • • • • • • • •
Assistance in finding suitable & acceptable employment for spouse Assistance in joining local civic, social, professional organizations Allowances & Premiums Foreign service premium & tax equalization allowance Temporary living allowance Hardship premium Currency protection Mobility premium Home-leave allowance Stopover allowance Completion of assignment bonus Assignment extension bonus Emergency loan Extended work-week payment
The Expatriate Compensation Balance Sheet: Summary – Expatriate (PCN or TCN) compensation programs are an important issue in managing reward systems. Compensation plans for expatriate managers must be: Conclusion Competitive, cost effective, motivating, fair and easy to understand, consistent with international financial management, easy to administer, and simple to communicate
UNIT III: CEO Compensation - Compensation of Chief Executives & other employees
Some quotes “CEOs should be compensated 15 times more than the lowestpaid salary of an employee in a company. I am against mandating a ratio, but it can be anything from 15 to 25 times the lowest salary.” -Infosys' Narayana Murthy at CII's leadership conference on the issue of high CEO compensation. "The excessive flab on CEO emoluments should be cut.“ - Anu Aga, Chairman, Thermax. "CEOs 25 years ago never got a million dollars; their compensation was based on common sense. Back then, CEOs were 52
seen as diligent managers who had skill motivating people and just got promoted up through the ranks." - Robert Stobaugh, Professor Emeritus, Harvard Business School.
Current Compensation Packages SALARIES AT THE TOP Annual pay* (Rs crore) Sunil Bharti Mittal Pawan Kant Munjal Rajiv Bajaj Naveen Jindal B Muthuraman K V Kamath Aditya Puri Pankaj R Patel Malvinder Mohan Singh Azim Premji CMD, Bharti Airtel MD, Hero Honda MD, Bajaj Auto EVP and MD, Jindal Steel MD, Tata Steel MD and CEO, ICICI Bank MD, HDFC Bank CMD, Cadila Healthcare CEO, Ranbaxy CMD, Wipro 12.68 15.22 2.08 13.54 2.2 2.48 1.28 9.93 2.62 2.53 Salary hike (%) 78.34 15.74 362.2 248 13.4 35.51 -1.5 32.4 -2.23 -1.93 Co's sales Co's profit growth Growth (%) (%) 58.47 100.45 13.61 -11.68 24.16 10.13 36 15.36 60.73 53.93 13.47 15.13 33.49 23 20.41 22.45 31.08 24.14 70.11 40.66
Gajendra Patni ED, Patni Computer 2 26.58 13.96 5.84 Notes: The payments are according to the 2005-06 annual report; The sales and profit growth figures are for 2006-07
Compensation Comparison USA is a market leader in top managerial compensation CEO and top managerial salaries in India have climbed but are puny in comparison to the global standards Both globally and nationally, CEO pay has increased way ahead of sales and other employee wages Both globally and nationally, Corporate performance not kept pace with CEO pay increase Historical Perspective: in India In 1980s, restrictions on managerial compensation resulted in complete erosion of earnings at senior and middle levels (Companies Act 1956) – Resulted in Chief Executives looking for better options abroad In 1988 restrictions on directors’ salaries were raised to INR 15,000/-pm under Section 269, Companies Act, 1956, Schedule XIII In 1993, revision of Schedule XIII by the Government. Director’s Salary limit raised to INR 50,000/- pm plus commission equal to annual salary 53
– Perks could be drawn equal to annual salary or INR 4,50,000/- pa whichever was less – Overall limit of INR 10,50,000/- pm including perquisites was kept 1990s was a tumultuous period for Executive compensation – Salaries were low, stable and predictable – Legal ceilings existed on remuneration (salary and commissions) of directors – Ceilings designed keeping in mind government officials Bureaucratic structure- relationship with performance of business was non-existent Post liberalization and globalization, the trend reversed Mega bucks for the chief executives from 1991 onwards – Inflation – Demand for competent, talented grew but supply did not match – MNCs recruited high quality manpower or their global operations at comparatively lower rates – Indian family owned companies had to match the remuneration offered by MNCs – Complex compensation structure (allowances, benefits included) against high tax structure – Wide differences industry – wise in salary levels due to demand and supply trends, profitability, growth rate etc 1980s was boom period for advertising Early 1990s – for financial services Late 1990s – petrochemical, IT, power, insurance 2000 – IT and telecom, biotechnology Revision of salaries for government officials in 1996 & PSU employees in 1997 had a spiraling effect The % increase in chief executive salaries was not the same as those of the junior level employees
Present Compensation trends IT is highest pay master – strategy for employee retention especially of employees with skill sets not easily available Annual increments not related to tenure but only to performance Compensation structure still not appreciated in 54
terms of employee satisfaction and real cost Salary increases reduced from 2000 in all sectors Entry-level MBAs & engineers packages has come down Highest compensation sectors are: – FMCG – IT – Telecom – Engineering – Durables Components CEO Compensation Base Salary Short-term performance bonuses Variety of Equity (stock ownership) related components Severance packages (golden parachutes) Retirement plans Wide variety of benefits and perquisites Benefits and perquisites include: • Company-provided car - Medical expense reimbursement • Parking - College tuition reimbursement for children • Chauffeured limousine • Kidnap and ransom protection • Counseling service (financial & legal services) • Attending professional conferences & meetings • Spouse travel • Use of company plane and yacht • Home entertainment allowance • Special living accommodations • Club membership • Special dining rooms • Season tickets to entertainment events • Special relocation allowance • Use of company credit card • No – and low-interest rate loans
Features of Executive Compensation
Performance criteria must have approval of 55
shareholders, directors outside the compensation committee, be formula driven Should not be compared to wage & salary schemes of the other employees Chief Executives are not as organized as Unionized staff A level of secrecy needs to be maintained Remuneration depends on competence, experience, length of service, loyalty to founders, excelling areas like M&A specialist, turnaround specialist etc Not based on individual performance but rather on organizational performance Subject to statutory ceilings especially in the public sector – Ceilings do not apply private sector Supposed to be guided by job evaluations, JDs, salary grades with ranges of pay in each grade & salary survey – but exorbitant in reality Problems of Executive Compensation Enormous differences between the pay, income and wealth of the front-line and the top executives – opposed heavily this disparity Increases in compensation received by Chief Executives are far out of line with those provided to the rest of the workforce – While CEO received almost 36% raise, workers received only 3.9% raise in some cases This exorbitant CEO compensation is a direct cause of the rise in union membership – Leads to demoralizing other employees – Unfair to shareholders – Can even lead to distorted behavior
CEO Compensation - The high compensation to CEOs had been a debatable issue over the years among corporates as well as the investors all over the world. Market analysts and stakeholders had criticized companies for paying exorbitant compensations to CEOs and argued that this would widen the gap between the top level and other levels of management. - By early 2001, paying high compensation to CEOs became a very controversial issue due to the global economic slump and poor performance of corporates. The issue was strongly debated not only in the US, but also in countries including UK, South Korea and India. 56
- The shareholders were not happy with the fact that CEOs' salaries continued to rise in spite of the poor performance of the stocks. They argued that, though the compensation of the CEO was linked to the company's performance, there were instances where, in spite of the poor performance of the company, the CEO concerned got a decent hike in compensation package. Guidelines for CEO Compensation Corporate Governance A corporate governance aspect to CEO-pay - Revolves around the decision process involved in fixing a CEO's compensation; In some, corporate HQ lays down the broad guidelines while the actual compensation is a function of local market conditions - In the Indian context it is the board of directors that decides the compensation of CEOs - Since most CEOs also chair the board, this means they write their own pay-cheques. However, some companies (especially the progressive ones) have compensation committees in place Corporate Governance: What the ideal situation should be - At a theoretical level, compensation committees are a must in companies that weave performance-based and stock-based variables into the overall salary. - With an increasing number of companies moving to such compensation structures, committees, logic dictates, should become the norm. - More important, regulations may soon insist on external representation on these committees. Company’s Act 1956 In India the Companies Act is the legislation that primarily shapes the remuneration of top managerial personnel. Until 1993, the Act provided for an upper limit in the amount of compensation to be paid. It had been pointed out that the "regulation of director's remuneration becomes necessary for several reasons, prominent among them being the prevention of diversion of corporate funds for personal use and the impact which an unduly high executive reward has upon the rest of society." However, over the years, with the shift in India's economic policy towards a market-oriented capitalistic economy, this particular legislation has been amended to increase the maximum pay package limits that are payable to the managerial personnel. While other reforms have taken their time to be incorporated in to the Act, the maximum pay ceiling for CEOs has been increased 57
systematically and more frequently. One of the main reasons put forward for this regular increase has been the need to attract and retain talent at the senior level. Additionally, it has been argued that the risk and responsibility at the senior level needs to be compensated by a sufficient increase in the pay packet. Needless to mention the risk and responsibilities at the CEO's level pertain to the uncertainty associated in fulfilling organizational objectives. This automatically indicates a strong relationship between the CEO's compensation and organizational performance. Logically the CEO's job should be at stake if the organizational objectives are not fulfilled. Indian law does not require that the compensation committee have a charter. The scope of the Company’s remuneration committee includes determination of the Board’s compensation and the Company’s policy on specific remuneration packages for executive directors including pension rights and any other compensation payments Managerial remuneration & Companies Act 1956 - The Companies Act, 1956, contemplates five categories of managerial personnel: - a) An ordinary director, who is the director simplicities; b) a part-time paid director, being a director in the part-time employment of the company; - a whole-time director, being a director in the whole-time employment of the company; d) a managing director, being a director entrusted with substantial powers of management; and e) the manager, having the management of the whole, or substantially the whole, of the affairs of the company. - The remuneration payable to a director may take any one or more of the following forms: Sitting fee for each meeting of the Board, or a committee thereof, attended by him; monthly, quarterly or annual payments made to him; or a commission payable to him at specified percentages of the net profits of the company computed in the manner referred to in Section 198(1). - Thus, the Companies Act enlarges the ordinary meaning to the word `remuneration' to payment in money or otherwise for services rendered. - A CEO may be paid remuneration by way of a monthly payment and/or at a specified percentage of the company's net profits. - While, some companies prefer not to pay any commission and in lieu thereof absorb the element of commission into the monthly salary so as to ensure a steady income for the CEO irrespective of fluctuations in the net profits of the company from year to year, others go to the extent of linking the CEO's pay with the share price of the firm by issuing employee stock options to him/her. 58
- Consider the remuneration paid to Corporate CEOs (that is, Managing Directors or Chairman in some organizations). Section 198 of the Companies Act, 1956, limits the overall maximum managerial remuneration payable by a public company to persons entrusted with managerial functions to 11 per cent of the company's net profits (percentage of the net profits as contemplated by Section 198 (1) is to be computed in the manner laid down in Sections 349, 350 and 351 in the Companies Act). - This percentage is exclusive of fees payable to directors for attending meetings of the Board or committees thereof. The Section is concerned especially with managerial remuneration payable to managing directors. On the other hand, Section 309 is concerned with total remuneration payable to directors; whatever is the nature of such remuneration, managerial or otherwise. - Obliging to the frequent demands/representations of the different industry chambers and with the shifting economic policy, the Companies Act was amended from time to time. For example, from a salary limit of Rs 90,000 pa in 1969-74, in 1994, the upper limit for salary was eliminated (the only limiting factor being Section 198). - The Guidelines should have logically helped corporations in substantially raising their managerial remuneration packages. - It should have also helped remove the stigma attached in paying large remuneration. - However, despite these positive incentives regarding pay packages, one could question its impact on corporate performance - Did such phenomenal increases in the limits of managerial remuneration help raise the performance of organizations? - Were the increases in these limits made to cope up with the pressures of competition and globalization, or was there something more to it? Recommendations - Companies should have completely independent compensation committees that decide CEO pay - In the absence of such committees, there should at least be a special sub-committee that decides CEO pay - Whichever form the committee takes, CEO pay should always be aligned with the performance of the company's stock - The usage of more sophisticated measures of financial performance, like Total Shareholder Returns (TSR) or Economic Value Added (EVA) - To use a balanced measurement matrix that includes nonfinancial parameters like customer satisfaction and employee engagement - Some companies could even split the variable pay component 59
into two parts – • One of these is related to a company's performance in the shortterm (typically sales and profits) • Another to its performance in the long-term (Market Value Added or Market Capitalization). The short-term bonus is typically capped as a percentage of the CEO's salary, while the long-term reward takes the form of stock options. New trends expected - Changes expected– Sign-on bonuses – Golden parachutes – Severance packages, all mechanisms that insure CEOs from uncertainties prevalent in today's job market will become more prevalent • Additional stock option grants
UNIT IV: JOB EVALUATION
JOB ANALYSIS -The analysis, measurement, control and redesign of a set of activities – performed on ongoing jobs -A detailed and systematic study of jobs to know the nature & characteristics of people to be employed for each job -Involves identification and description of what is happening on the job – It is a labor intensive, time consuming job – Demands a greater understanding of human behaviors, job requirements, writing skills – Differentiate compensation provided to employees on basis of job content, job specifications, working conditions, employee job performance wrt the required tasks, the knowledge and skills required to perform them, and the conditions under which they must be performed – Helps in establishing a sound compensation system, using criteria that measures and differentiates job & performance requirements so that all employees receive fair and just treatment - It is conducted in the following situations– Employees or union reps demand change in JDs and assignments of jobs to pay grades, or – Development of a classification system that reflects more accurately the work they perform, or – Reallocation of job activities at the time of organizational restructuring, or – Redesigning of the organization & its jobs - Preliminary considerations for undertaking this costly operation– Senior Management support – Workforce Cooperation & Involvement • All employees must understand the responsibilities and duties of their jobs • Employees and supervisors must be in agreement to these responsibilities and duties • All employees must receive fair rewards for the knowledge necessary to solve work-related problems, make decisions and accept other responsibilities to perform their jobs successfully - Steps for conducting this process – Schedule the necessary and logical work steps • Developing budget & forecasting financial requirements 61
• Determine the organizational use of job content and other related data • Learn about the structure, operations, jobs of the organization • org. chart, process chart, procedure manuals • Identify and select methods for collecting job content data and other related facts • through interview, questionnaire, observation, diary/log, or combination of any of these Uses of Job Analysis – Employment – Training – Organization design and staffing – Compensation – Performance review – Safety and health – Affirmative action planning during organizational design & job design – Employee counseling – Hiring the handicapped The analysis of the job– Activity / task / function / element / duty / responsibility / behavior / essential job function / competency JOB DESCRIPTION - Statements of fact that describe the job - An organized factual statement of job contents in the form of duties & responsibilities of a specific job - Emphasizes the job requirements - Contents include – Job identification - Job title, location, supervisor, grade, pay range, plant/division & department/section – Job summary – Job definition - Responsibilities & Duties – KSAs (knowledge, skills & ability) & competency – Machines, tools, equipments, materials – Relation with other jobs – Nature of supervision & accountabilities – Working environment & conditions Process of preparation of JDs – Observation of job being performed – Discussion with the supervisor of the job – Getting questionnaire filled up by supervisor – Discussion with employees – Getting questionnaire filled up by employees Uses of JD – In planning activities including organization design, staffing 62
levels, career ladders, career paths, job design, pay system design In day-to-day operations including recruitment & screening, designing selection tests, hiring and placement, orientation, developing procedures, training and development In exercising Control to ensure compliance with legal requirements & meeting union demands especially while setting performance standards, following legislations, collective bargaining
INTERNAL & EXTERNAL EQUITY Once job analysis has been done organizations need to decide upon the pay structures. Pay structure refers to the process of setting up the pay for a job in an organization. The process deals with internal and external analysis to estimate the compensation package for a job profile. Internal equity, External equity and Individual equity are the most popular pay structures. Job description provides the in depth knowledge about the job profile and its worth. Pay structures are the strong determinant of employee’s value in the organization. It helps in analyzing the employee’s role and status in the organization. It provides for fair treatment to all employees. Pay structures also include the estimation of incentives. The level of incentives also depends on the level of job position in the organizational hierarchy. Internal Equity The internal equity method undertakes the job position in the organizational hierarchy. The process aims at balancing the compensation provided to a job profile in comparison to the compensation provided to its senior and junior level in the hierarchy. The fairness is ensured using job ranking, job classification, level of management, level of status and factor comparison.
External Equity Here the market pricing analysis is done. Organizations formulate their compensation strategies by assessing the competitors’ or industry standards. Organizations set the compensation packages of their employees aligned with the prevailing compensation packages in the market. This entails for fair treatment to the employees. At times organizations offer higher compensation packages to attract and retain the best talent in their organizations.
The first thing employers should consider when developing compensation packages is fairness. It is absolutely vital that businesses maintain internal and external equity. Internal equity refers to fairness between employees in the same business while external equity refers to relative wage fairness compared to wages with other farms or businesses. No matter the compensation level, if either internal or external equity is violated, a business will most likely experience employee dissatisfaction and employees with begin to balance their performance through a variety of ways ranging from decreased productivity to absenteeism and eventually to leaving the business. So, what constitutes a fair wage? One approach to determining a fair wage is a market survey. These are typically fast and easy ways to establish compensation guidelines for many businesses. A few phone calls to other employees in similar businesses can determine the "market" value for a specific job. JOB EVALUATION Job evaluation can be defined as “a systematic procedure designed to aid in establishing pay differentials among jobs…” *Compensation: Milkovich, George T. and Jerry M. Newman; BPI/Irwin, 1990; p. 103. Process to determine and compare the demands which the normal performance of particular jobs makes on normal workers without taking into account of the individual abilities or performance of the workers concerned Process of analysis & assessment of jobs to ascertain 65
reliably their relative worth using the assessment as a basis for a balanced wage structure Rating of the jobs to determine their position in a job hierarchy Widely used in the establishment of wage rate structures & elimination of wage inequities Applied to jobs rather than the qualities of individuals on the jobs Basic goal is to ascertain the relative worth of each job through an objective evaluation so that relative remuneration may be fixed for different jobs. A systematic procedure which enables wage structure to be fair & equitable Some Principles of Job Evaluation • Clearly defined and identifiable jobs must exist. These jobs will be accurately described in an agreed job description. • All jobs in an organisation will be evaluated using an agreed job evaluation scheme. • Job evaluators will need to gain a thorough understanding of the job • Job evaluation is concerned with jobs, not people. It is not the person that is being evaluated. • The job is assessed as if it were being carried out in a fully competent and acceptable manner. • Job evaluation is based on judgement and is not scientific. However if applied correctly it can enable objective judgements to be made. • It is possible to make a judgement about a job's contribution relative to other jobs in an organisation. • The real test of the evaluation results is their acceptability to all participants. • Job evaluation can aid organisational problem solving as it highlights duplication of tasks and gaps between jobs and functions. JOB EVALUATION vs. JOB ANALYSIS - Job evaluation is a step ahead of Job analysis - Job analysis is not concerned with the calculation of a job’s worth while job evaluation is the basis for a balanced wage structure - Job analysis is only concerned with the collection of data concerning the particular job while Job evaluation follows the job analysis which provides basic data to be evaluated - Job evaluation measures the value of JDs & translates it in terms of money to have a balanced wage structure - Job evaluation starts from job analysis & ends with the 66
classification of jobs according to their worth JOB EVALUATION Objectives: – Establishing a sound wage foundation for incentive & bonus programmes – Maintaining a consistent wage policy – Enabling management to gauge &control its payroll costs more accurately – Provide framework for periodic review of wages & salaries – Classify functions, authority & responsibility which in turn aids in work simplification & elimination of duplicate operations – Reduces employee grievances and labor turnover thus increasing employee morale & improving management-employee relationship – Serves as a basis for union negotiations Importance – Valuable technique for management to establishing a rational & consistent wage & salary structure both internally & externally – Helps in bringing harmonious relations between labor & management by eliminating wage inequalities – Standardizes process of determining wage differentials – Takes into account not only skill differences but other factors like risks, working conditions also – all relevant factors taken into consideration – Provides a rate for the job not for the man – Helps keep down costs of recruitment & selection of workers, retaining workers Limitations – No standard list of factors to be considered for job evaluation – Lacks scientific precision - All job factors cannot be measured accurately – Wages fixed for a job on basis of job evaluation may not retain them – Individual merit is ignored which is not appreciated by workers & employees – Presumes that jobs of equal worth will be attractive but not so in reality – as there are no prospects of a rise – Is inflexible, which does not have high chances of survival in a dynamic environment – Regarded with suspicion by trade workers as methods are not scientific & often are difficult to understand Process – A thorough examination of the jobs 67
Preparation of JDs & analysis of job requirements Comparison of one job with others Arrangement of jobs in their corrective sequence in terms of value to the firm – Relation of the sequence to a money scale Requirements – Should be carried out with a high degree of integrity & fairness; calls for mutual trust between management and unions; evaluators must have wide knowledge of the jobs; workers must be informed of the purpose & assurance must be given that no pay-cuts due to job evaluation will happen METHODS FOR CONDUCTING JOB EVALUATION NON-QUANTITAVE METHODS 1 Ranking or job comparison 2 Grading or job classification QUANTITATIVE METHODS 1 Factor comparison method 2 Point rating method
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RANKING Ranking simply orders the job descriptions from smallest to largest based on the evaluator’s perception of relative value or contribution to the organization’s success. This method is one of the simplest to administer. Jobs are compared to each other based on the overall worth of the job to the organization. The 'worth' of a job is usually based on judgments of skill, effort (physical and mental), responsibility (supervisory and fiscal), and working conditions. Advantages Disadvantages
• • Simple. Very effective when there are relatively few jobs to be evaluated (less than 30). • • • Difficult to administer as the number of jobs increases. Rank judgments are subjective. Since there is no standard used for comparison, new jobs would have to be compared with the existing jobs to determine its appropriate rank. In essence, the ranking process would have to be repeated each time a new job is added to the organization.
Ranking Methods 1. Ordering Simply place job titles on 3x5 inch index cards then order the titles by relative importance to the organization. 2. Weighting 3. Paired Comparison Grouping After ranking, the jobs should be grouped to determine the appropriate salary levels. JOB CLASSIFICATION Jobs are classified into an existing grade/category structure or hierarchy. Each level in the grade/category structure has a description and associated job titles. Each job is assigned to the grade/category providing the closest match to the job. The classification of a position is decided by comparing the whole job with the appropriate job grading standard. To ensure equity in job grading and wage rates, a common set of job grading standards and instructions are used. Because of differences in duties, skills and knowledge, and other aspects of trades and labor jobs, job grading standards are developed mainly along occupational lines. The standards do not attempt to describe every work assignment of each position in the occupation covered. The standards identify and describe those key characteristics of occupations which are significant for distinguishing different levels of work. They define these key characteristics in such a way as to provide a basis for assigning the appropriate grade level to all positions in the occupation to which the standards apply. Advantages
• • Simple. The grade/category structure exists independent of the jobs. Therefore, new jobs can be classified more easily than the Ranking Method.
• • Classification judgments are subjective. The standard used for comparison (the grade/category structure) may have built in biases that would affect certain groups of employees (females or minorities). Some jobs may appear to fit within more than one grade/category.
FACTOR COMPARISON A set of compensable factors are identified as determining the worth of jobs. Typically the number of compensable factors is small (4 or 5). Examples of compensable factors are: 69
1. Skill 2. Responsibilities 3. Effort 4. Working Conditions Next, benchmark jobs are identified. Benchmark jobs should be selected as having certain characteristics. 1. equitable pay (not overpaid or underpaid) 2. range of the factors (for each factor, some jobs would be at the low end of the factor while others would be at the high end of the factor). The jobs are then priced and the total pay for each job is divided into pay for each factor. See example matrix below:
Job Evaluation: Factor Comparison The hourly rate is divided into pay for each of the following factors: Pay for Pay for Pay for Pay for Working . Skill Effort Responsibility Conditions 4.50 5.50 6.00 9.00 2.00 2.50 3.50 3.50 2.00 2.50 4.00 7.00 0.50 0.50 1.50 1.50
Job Secretary Admin Assistant Supervisor Manager
Hourly Rate $9.00 $11.00 $15.00 $21.00
This process establishes the rate of pay for each factor for each benchmark job. Slight adjustments may need o be made to the matrix to ensure equitable dollar weighting of the factors. The other jobs in the organization are then compared with the benchmark jobs and rates of pay for each factor are summed to determine the rates of pay for each of the other jobs. Advantages
• • • The value of the job is expressed in monetary terms. Can be applied to a wide range of jobs. Can be applied to newly created jobs.
• • The pay for each factor is based on judgments that are subjective. The standard used for determining the pay for each factor may have build in biases that would affect certain groups of employees (females or minorities).
POINT METHOD A set of compensable factors are identified as determining the worth of jobs. Typically the compensable factors include the major categories of: 1. Skill 2. Responsibilities 3. Effort 4. Working Conditions 70
These factors can then be further defined. 1. Skill 1. Experience 2. Education 3. Ability 2. Responsibilities 1. Fiscal 2. Supervisory 3. Effort 1. Mental 2. Physical 4. Working Conditions 1. Location 2. Hazards 3. Extremes in Environment The point method is an extension of the factor comparison method. Each factor is then divided into levels or degrees which are then assigned points. Each job is rated using the job evaluation instrument. The points for each factor are summed to form a total point score for the job. Jobs are then grouped by total point score and assigned to wage/salary grades so that similarly rated jobs would be placed in the same wage/salary grade. Advantages
• • • The value of the job is expressed in monetary terms. Can be applied to a wide range of jobs. Can be applied to newly created jobs.
• • The pay for each factor is based on judgments that are subjective. The standard used for determining the pay for each factor may have built-in biases that would affect certain groups of employees (females or minorities).
Job Evaluation - The Future As organisations constantly evolve and new organisations emerge there will be challenges to existing principles of job evaluation. Whether existing job evaluation techniques and accompanying schemes remain relevant in a faster moving and constantly changing world, where new jobs and roles are invented on a regular basis, remains to be seen. The formal points systems, used by so many organisations is often already seen to be inflexible. Sticking rigidly to an existing scheme may impose barriers to change. Constantly updating and writing new jobs together with the time that has to be spent administering the job evaluation schemes may become too cumbersome and time consuming for the benefits that are derived. 71
COMPETENCY-BASED COMPENSATION SYSTEMS & SKILL-BASED COMPENSATION SYSTEMS All of these evaluation methodologies are based on one or a combination of the following two approaches: (1) an analysis of the job as a whole or (2) an analysis of the job's individual components. Most evaluation methods compare jobs in the organization to one another and a few compare jobs against a set scale. After a review of the various job evaluation methodologies, the compensation management system will retain a modified version of the position classification method or whole job evaluation approach. This nonquantitative whole job approach determines the relative value of positions by comparing them with job descriptions as well as with other positions. COMPENSABLE FACTORS Human resource professionals or line managers should be able to assign positions to the appropriate career groups by comparing the overall duties and responsibilities listed in the employee work profile to the concept of work outlined in the career group description. The compensable factors will be used primarily to determine the appropriate role to which a position should be allocated within a career group. Definitions of the three compensable factors are as follows: 1. Complexity of Work This factor describes the nature of work in terms of resources (e.g., machines, manuals, guidelines and forms) used or encountered and the processes applied. This factor takes into account the number and variety of variables considered, the depth and breath of activity and the originality exercised. Difficulty - the relative character of the work process and the corresponding, thinking, analysis and judgment required of the employee while doing the work. Scope and Range of Assignments - the breadth and variety of the employee's assignments. Knowledge, Skills and Abilities - the level of information, experience and qualifications needed by the employee in order to perform the assigned duties. Nature of Contacts - the extent of the employee's human interactions within and/or outside the organization in terms of both frequency and the depth of information exchanged. 72
2. Results This factor describes the work outcomes and the range and impact of effects, such as the benefit or harm to citizens, the gain or loss of resources and the goodwill created. Impact - the range of people, things, and organizations directly affected by the employee. Effect of Services - the extent to which decisions and work products made by the employee affect the level of service, quality of work, welfare of constituents, the organization's image and cost of operations. Consequence of Error - the potential costs of the employee's mistakes in terms of financial and human costs, efficiency, morale, physical maintenance and image. 3. Accountability This factor describes the employee's responsibility or authority exercised in terms of guidance given to fellow workers, independence and autonomy of functioning and finality of decisions made. Leadership - the level of control the employee has over resources such as people, functions, facilities and budget. Judgment and Decision-making - the types and kinds of decisions made by the employee and the finality of these decisions and actions taken. Independence of Action - latitude or freedom of action exercised by the employee. COMPETENCY-BASED SYSTEM For the past fifty years, the concept of "jobs" has been the focus of all human resource practices that affected recruitment, selection, performance planning, performance evaluation, pay systems, training and career development. Organizations have hired employees, evaluated performance, paid salaries, developed skills, and planned careers based on jobs. In the 1990s, a new idea gained acceptance in a number of organizations that more closely aligned human resource practices with organizational strategies, missions and cultures. A number of organizations' switched from a traditional job-based structure to a competency-based structure that emphasized the development and attainment of behaviors, knowledge and skills compatible with and aligned to the organization's mission and business strategies. The focus of competencies is centered on characteristics of the employee, including behaviors, skills and knowledge that can be demonstrated and positively affect the organization. Competencies emphasize the attributes and activities that are required for an 73
organization to be successful. Therefore, human resource practices using Competency Models tap into the employee capabilities that are aligned to the organization mission and business need. Competency Models when implemented in totality can impact all of the agency's human resource practices including recruitment, selection, compensation decisions, performance planning, performance evaluation and career development. Like other alternative pay and job evaluation systems, a Competencybased System is fairly labor intensive and requires the agency's commitment to designate the necessary staff resources during the development stages. Agencies will also want to consider the financial and human resources required to administer such a system. Additionally, Competency-based Systems should not be perceived as a "one size fits all" approach. It is important that an agency identify the specific work unit(s) where competencies may be identified that directly and positively impact the success of employees and the agency. What are Competencies? Competencies are identified behaviors, knowledge, and skills that directly and positively impact the success of employees and the organization. Competencies can be objectively measured, enhanced and improved through coaching and learning opportunities. There are two types of competencies, Behavioral and Technical. Depending on the purpose of the Competency Model, one or a combination of these competency types may be used. Behavioral Competencies are a set of behaviors, described in observable and measurable terms that make employees particularly effective in their work when applied in appropriate situations. Behavioral Competency Models may be designed to describe common or "core" behaviors that are applicable to employees throughout an agency, or may be more narrowly defined to reflect behaviors unique to an Occupational Family or Career Group. Technical Competencies are underlying knowledge and skills, described in observable and measurable terms that are necessary in order for employees to perform a particular type or level of work activity. Technical Competencies typically reflect a career-long experience in an agency. What is a Competency Model? A Competency Model is a listing of Competencies that apply to a particular type of work. Competency Models can include Behavioral 74
Competencies only, Technical Competencies only, or both. An example of a Competency Model for Human Resource Professional follows: Human Resource Professional Behavioral Competencies Agency (implies company) Mission Focus Customer Focus Teamwork Consultation Achievement Orientation Technical Competencies Compensation Expertise Recruitment/Selection Expertise Employee Relations Expertise Employee Benefits Expertise Training and Development Expertise How are Competency Models used? Competency models can serve as a way to integrate human resource practices under the Compensation Management System. Agencies that elect to use Competency Models need to consider exactly how they will be used to support the agency's mission and desired strategic outcomes, and determine the extent to which Competency Models will impact and affect the agency's human resource practices. The following is a list of human resource practices that should be taken into consideration when determining the purpose and intent of an agency's rationale for using Competency Models: Training and Development - connection to agency business need is a major focus of Competency Models. These models can serve as a tool to assess employees' current behaviors, knowledge and skills; identify learning areas for development and improvement and be used for career planning purposes. Recruitment and Selection - models can be developed to identify criteria for recruiting and assessing applicants for agency positions. Performance Management - models can be used to support the assessment of employee performance. Compensation Decisions - models can be developed to determine internal alignment and how pay will be administered based on defined competencies (e.g. starting pay, promotions, in-band adjustments, etc.). How are Competency Models linked to pay? 75
The Compensation Management System, employee compensation is based on an evaluation of the following pay factors: Agency business need; Duties and responsibilities; Performance; Work experience and education; Knowledge, skills, abilities and competencies; Training, certification and license; Internal salary alignment; Market availability; Salary reference data; Total compensation; Budget implications; Long term impact; and Current salary Competency Models can be used to help evaluate performance or to determine internal salary alignment and starting pay. Various formats may be used to determine actual employee pay rates. Formats can range from comprehensive inventories of individual competency ratings to pay matrices that reference a general evaluation of competencies and expertise. Comprehensive inventories provide detailed information that can be used for development purposes and simpler pay matrices can save time in determining pay. With a comprehensive inventory including staged competency rating, an assessment form (or automated format) may be used. The feedback provider checks off indicator levels for each competency. This data results in a competency rating summarized into a total rating score, which is then mapped to a pay band. A pay matrix is a point system in which points are accumulated based on educational level, work experience, and other value added compensable factors such as licensure, certification and specialized coursework that lead to a competency level. These pay matrices serve as a guide for determining pay for new hires and pay adjustments for current employees. Total pay matrix points are converted to a range of pay on the pay band. The total matrix points help identify internal alignment considerations and are used with the other pay factors to arrive at appropriate pay. How are Competency Models linked to performance planning and evaluation? Competency Models provide the supervisor and employee with a clear understanding of performance expectations, and address training and 76
development activities necessary for successful performance. Models that include specific performance criteria ensure that supervisors and employees share the same understanding of performance expectations. Most Competency Models require an employee selfassessment of their performance that provides input to the supervisor in their appraisal of the employee. Additionally, some may elicit performance feedback from other internal and external peers, direct reports and customers. How is Competency-based System evaluated? The final step in the development of a Competency Model is the design and implementation of an on-going evaluation plan to measure the effectiveness of the model's content and usage. Competency Models must be reviewed and modified periodically to reflect changes in desired behaviors and technical knowledge and skills that result from an evolving work environment. The evaluation plan, at the minimum, should include the individual(s) responsible for evaluating the Competency Model, evaluation timelines and may follow the same process used to develop the original Competency Model. SKILL-BASED COMPENSATION SYSTEM The Compensation Management System is designed to provide a direct link between organizational performance and employee contribution and pay. Skill-based Systems are one method of achieving this linkage. Skill-based pay refers to a pay system in which pay increases are linked to the number or depth of skills an employee acquires and applies and it is a means of developing broader and deeper skills among the workforce. Such increases are in addition to, and not in lieu of, general pay increases employees may receive. The pay increases are usually tied to three types of skills:
• • •
horizontal skills, which involve a broadening of skills in terms of the range of tasks vertical skills, which involve acquiring skills of a higher level depth skills, which involve a high level of skills in specialised areas relating to the same job.
Skill-based pay differs in the following respects from traditional pay systems which reflect skills differences in a structure consisting of rates of pay for unskilled, semi-skilled and skilled workers:
Skill-based pay is a person-based and not a job-based, system. It rewards a person for what he/she, rather than the job, is worth. Job worth is reflected in a basic rate of pay for minimum skills, but pay progression is directly linked to skills acquisition (rather than to general pay increases applicable to all) . It rewards (and therefore emphasizes) a broad range of skills which makes the employee multi-skilled and therefore flexible. It positively encourages skills development. A skill-based pay system may not necessarily reflect how well the skill is used, as this falls within the performance component of pay. But there is nothing to prevent injecting performance criteria into the system. In such cases the system will be more performance-oriented than a structure which merely recognizes different rates of pay for skills. The system needs to be underpinned by opportunities for training which is critical to the success of the system. The traditional structure is not dependent on such opportunities.
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Reasons for Skill based Pay More than ever before in industrial relations history a commonality of interests in the skills of employees has developed between employers and employees. Skills provide employees with a measure of protection against unemployment, as well as opportunities for higher earnings. At the same time, skills provide employers with an important means of achieving competitiveness. Many countries today are seeking to advance to more technology and skill-based industries, while others have become (or are becoming) 'post industrial' societies, in which the application of knowledge determines productivity, performance and competitiveness. Comparative advantage based on, for instance, cheap labour or raw materials, has declined in importance relative to competitive advantage based on the ability to add value to a particular resource or advantage. Such comparative advantage partly (often largely) depends on people - their standards of literacy and education, work attitudes, value systems, skills and motivation. Critical today is the ability to innovate and develop clusters of competitive enterprises in particular industries. For the more industrialized countries this means 'capturing' some of the key industries of the next century - micro-electronics, biotechnology, new materials science industries, telecommunications, civil aviation, computers and software, robotics and machine tools and entertainment. An employee with skills is most flexible and productive when he develops a broad range of skills, is able to learn the next higher skill, develop analytical skills and is also able to work in a team. 78
Important aspects of today's skills package include multi-skills, cognitive skills, interpersonal and communication skills, positive work attitudes and quality consciousness. Training is no longer only for current competence, but is also to prepare for the next stage of skills. Thus pay systems which promote current and future skills needs are increasing in importance among employers. The impact of rapid technological change, the increasing globalization of product markets, greater customer choice and the emphasis on quality necessitate a frequent updating of skills, and flexibility to respond to rapid changes in the requirements of markets. A flexible workforce, which is one that is multi-skilled, ensures that production is not interrupted due to the narrow skills of workers, and that workers are themselves responsible for the quality of products. [Top] [Contents ] [Previous ] [Next]
Introducing The System
Introducing a skill-based pay system requires several steps to be taken and several issues to be addressed:
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The skills requirements of the enterprise should be analysed The availability of resources for training should be ascertained The jobs to be covered by the scheme should be identified The individual jobs have to be grouped into 'job families' on the basis that in each 'family' the skills needs are similar. The skills within each job family and the tasks needed to perform the job should be analyzed The above will lead to an identification of the skill blocks or levels. The skill level is the pay grade relative to the competence to use particular skills, and the skill block is the training input which has to be completed to the satisfaction of the certifying authority in order to gain entitlement to the extra pay. It is not unusual for skill levels to consist of several skill blocks, each to be acquired through training. Training modules have to be formulated The way in which certification is obtained that the skill has been acquired should be agreed upon.
The base rates for 'job families' have to be set, as well as the payments that will be made thereafter when an employee moves upwards through the skills route. The criterion for extra payment is not acquisition of the skill, but its application. The period during which the skill should be applied before a new one is acquired should normally be decided on, as the skill should benefit the employer who should receive a return on the investment made. A difficult question is how obsolete skills should be dealt with e.g. through retraining or redundancy.
Problems in Skill-based Pay There are several problems associated with the introduction of skillbased pay which should not be underestimated. They can be extremely costly having regard to
• • • • •
the extra payment involved training costs the fact that some skills may be paid for but used infrequently the possibility that unusable skills may be acquired unless the system is properly administered the fact that it is not always easy for an employer to anticipate accurately what skills will be needed in a few years' time
The administration of the system is complex, both in regard to certification of skills acquisition and payment. Therefore, unless administered properly, the costs can outweigh the productivity and flexibility gains. Further, the employees who reach the maximum of the skill levels can be demotivated when extra payments, as distinct from general pay increases, cease. Therefore the gains from flexibility, improved quality, the elimination of some jobs and so on depend on the employer's ability to administer the system properly, making clear also that it is not the acquisition of any skills, but agreed skills, that fall within the scope of the scheme. Hence the need to negotiate the system. It is easier to introduce skill-based pay in an entirely new (greenfield) site, than in an already existing one where there is in existence a pay system based on different criteria.
Some of the circumstances which contribute to the success of skillbased pay are: 80
• • • •
the employer's commitment to continuous training and development the value attached by the employer to personal growth and encouragement of a learning orientation dismantling strong bureaucratic hierarchies and narrow job demarcations participative management practices, independent and cooperative forms of work
[Top] [Previous [Contents ] [Next] Appropriate Industries ] Skill-based pay systems are most appropriate to enterprises which depend on a high level of skills, and in which labour costs represent a relatively small portion of total costs, unlike in labour intensive industries. Though such pay systems have been commonest in manufacturing organizations, they are applicable to service industries as well though the objectives may differ. In banks and airlines, for example, skill-based pay can be used to encourage people to work in areas where manpower is most needed at a given point of time due to customer flows. Skill-based pay is particularly consistent with knowledge-based work. Advantages of Skilled Based Pay Among the advantages of skill-based pay are the following:
It contributes to job enlargement and enrichment by breaking down narrow job classifications. Flexibility is increased by encouraging the performance of multiple tasks. It enables job rotation, and filling of temporary vacancies due, for instance, to absenteeism. It therefore contributes to a leaner workforce. It enhances productivity and quality through better use of human resources. It facilitates technological change, which may meet with resistance in a purely job-based system. The higher pay levels, continuous training, and job enlargement through the broadening of skills, tend to reduce staff turnover.
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Elimination of unnecessary jobs can result from a workplace having broad, rather than narrow, skills. It also reduces the need for supervision. Job satisfaction is engendered through employees having greater control over the planning and implementation of their work. Broadening of skills leads employees to develop a better perspective of operations as a whole. It is an incentive for self-development. It provides employment security through skills enhancement. It reduces the need to look to promotion to higher levels (which are always limited) as the only way to enhance earnings, and it facilitates the planning of an employee's career development path. Since the reward flows from the application of a skill and it does not reduce opportunities for others to similarly increase their skills and earnings, there is likely to be less competition among individuals. Since the pay increases on account of skills are linked to a measurable standard, the criticism of subjectivity often associated with performance appraisals and individual-based performance-related pay, is avoided
• • • • •
Skill-based Systems reward employees for the range, depth and type of skills they possess that are key to the organization's work functions and operations. Additionally, Skill-based Systems may be used to directly link an employee's compensation to work-related skills learned and used on the job. As the needs of the organization change, compensable skills can be added or eliminated to encourage employee development to meet the changing business needs. Skill-based Systems represent a person-based rewards system, as opposed to a job-based reward system. Agencies interested in developing a Skill-based System must identify what goal(s) they are seeking to achieve. Questions to consider are "what outcomes or results will be expected from implementing a Skillbased System?" and "what skill sets are valued?". Some potential answers may be increased productivity, multi-skilled workforce, acquisition of new skills needed for changing work environment, increased employee morale, or to solve a specific problem, issue or need.
In a Skill-based System, the focus is on skill acquisition that can be observed and objectively measured. Therefore, this type of system is most commonly found in trades or labor settings. Skill-based Systems can be designed from two perspectives: • horizontal or breadth of skills where cross training is emphasized (e.g. a multi-skilled trades worker possess electrical, plumbing, and carpentry skills); and • vertical or depth of skills where specialization and expertise is valued (e.g. an electronic technician possesses the entire range of electrical and electronic skills). Skill blocks are identified sets of skills, knowledge and tasks that are required based on the work to be performed. Skill blocks focused on breadth of skills or the versatility of the individual tend to have an array of different categories of skills. Skill blocks that focus on the depth of skills or expertise in a particular area tend to have a more narrowly defined, specialized set of skills. Determining whether the Skill-based System will be based on breadth, depth or a combination is a key design decision. Like other alternative pay and job evaluation systems, a Skill-based System is fairly labor intensive and requires the agency's commitment to designate the necessary staff resources during the development stages. Additionally, Skill-based Systems should not be perceived as a "one size fits all" approach. It would be highly unlikely, given the workforce, that an agency would implement a Skill-based System agency-wide for the entire employee population. It is important that an agency identify the specific work unit(s) where observable and measurable skills may be identified and would contribute to the overall success of the work unit(s) and agency. While there are many benefits to implementing a Skill-based System under the right circumstances, it is not totally free from potential risks. Poorly designed Skill-based Systems can lead to paying for skills that are not used or not relevant to the business needs of the agency. Employees may reach their maximum pay rates with the attainment of the entire set of identified skills which limits opportunity for further salary increase but allows for a fully skilled workforce. Paying employees based on skills attained and used makes it more difficult to make pay comparisons with the labor market that focuses on jobbased rather than individual skill-based comparisons. Agencies will need to convert skill blocks into benchmark descriptions in order to continuously review and match salary reference data. What are skills and skill blocks? 83
Skills are the basic components of a Skill-based System. These skills typically are grouped into skill blocks that include predefined set of skills, knowledge and tasks. When performed by employees, these skill blocks will add value to the work process and increase the likelihood of the work unit's success. Skills and skill blocks should be directly related to the business needs of the agency. Based on business needs, agencies should encourage employees in a Skill-based System to achieve the highest potential skill level required. As more skill blocks are acquired and are used, the potential value of the employee increases. How are Skill-based Systems used? Skill-based Systems can serve as a way to integrate human resource practices under the Compensation Management System. Agencies that elect to use Skill-based Systems need to consider exactly how they will be used to support the agency's mission and desired strategic outcomes. Furthermore, agencies will need to determine the extent to which this type of system will impact and affect the agency's human resource practices. The following is a list that should be taken into consideration when determining the purpose and intent of an agency's rationale for using Skill-based Systems. Training and Development - connection to agency business need is the cornerstone to Skill-based Systems. The agency's commitment to learning is vital to the success of the system. Employees must be given the opportunity to acquire the knowledge and/or skills required for the progression through the skill blocks. The skills identified within a skill block may serve as curriculum for training. Training plans should be well documented, include specific training objectives and communicated to employees.
Recruitment and Selection - systems can be developed to identify knowledge and skills for recruiting and assessing applicants for agency positions.
Performance Management - systems can be used to support the assessment of employee performance.
Compensation Decisions - systems will determine how pay will be administered based on defined skill blocks and guide other pay decisions (e.g. starting pay, promotions, in-band adjustments, etc.). What are the steps for developing Skill-based Systems? The following is a suggested approach, but agencies need to tailor the process to meet business needs and objectives. 84
1. Identify the group of employees to be covered: This step consists of linking the business goals with the Career Group or agency work unit(s) that are most appropriate for a Skill-based System. Typically, skill blocks are created to reflect the skills needed for employees in Career Group(s), Role(s) or functions within a Role. Skill-based Systems compliment job and pay structures that have broad Roles and extended pay bands. 2. Gather data: Identify knowledge and skills that are important to the work unit(s) and can be objectively measured. The use of Focus Group(s) comprised of Subject Matter Experts (managers and employees) is the desired method to be used to identify skills and skill blocks. It may be helpful to initially have the Focus Group(s) identify the tasks performed in the work unit(s) and then identify the skills needed to perform these work tasks. The "essential' tasks or skills should be explicitly identified, organized into skill blocks and rank ordered by degree of difficulty or complexity. Each skill must be clearly articulated to the point that verifiable measures or standards of performance can be established. 3. Develop skill and skill inventories: Based on the information identified in the data collection step, skill inventories are developed that list the discrete knowledge and skills needed to complete the required tasks. The skill inventories are helpful to both supervisors and employees for career development purposes and outline clearly how performance will be measured and assessed. How are Skill-based Systems validated? After the skill blocks and/or skill inventories have been developed, each skill should be validated. Functional supervisors that have a detailed understanding of the work and its relationship to business need should be asked to validate the accuracy of the identified skill blocks and/or skill inventories. As business needs or skill requirements change, functional supervisors should provide input to modify the skill blocks and/or skill inventories. How are Skill-based Systems linked to pay? The Compensation Management System, employee compensation is based on an evaluation of the following pay factors: • Agency business need; • Duties and responsibilities; • Performance; • Work experience and education; • Knowledge, skills, abilities and competencies; • Training, certification and license; • Internal salary alignment 85
• • • • • •
Market availability; Salary reference data; Total compensation; Budget implications Long term impact; and Current salary
Using the skill blocks, agencies determine which skills are compensable. Market data can be obtained to identify a sub-band or pay band to support a Skill-based System. Once the sub-band or pay band has been established, the skill blocks can then be assigned to the continuum. Thus, the skill blocks become the unit measurement for pay increases within a sub-band or pay band. There are a number of design options that should be taken into consideration when administering pay in a Skill-based System. Progression through a skill block can be compensated by a variety of methods including constant dollar amount, increasing dollar amount, fixed percentage or increasing percentage amount. The timing of pay increases should also be considered. Oftentimes an agency will want to establish some limitations on the pay increase process in order to control cost. For example, a control measure may be to require the employee to remain at a skill level for a fixed period of time or another option would be for the agency to establish a policy that sets the maximum increase an employee may receive during a specific time period. The timing of pay increases and any cost control measure has a significant impact on both employee morale and cost escalation. Consideration should be given to any other type of direct compensation awards the employee may be eligible for such as recognition awards, retention and market-based adjustments. Other compensation actions should support the goals and intent of the Skillbased System. Procedures must be developed for establishing starting pay for new hires and/or employees transitioning from a traditional pay and job evaluation system to a Skill-based System. A key issue during the transition is how current employees will be moved to the Skill-based System. Key implementation decisions such as how current employees will be paid initially under the system need to be determined (e.g. placed at the entry level or obtain an initial or baseline assessment certifying the employee's current skill level). Lastly, consideration must be given to how the agency will handle employees whose skills diminish (e.g. freeze employee's pay or reduce pay). 86
How is a Skill-based System linked to performance planning and evaluation? Skill-based Systems provide the supervisor and the employee with a clear understanding of the performance expectations and clearly address the learning activities that are necessary for successful performance. Additionally, this type of system helps supervisors and employees to share the same understanding of expected performance. Agencies must determine the overall method for determining the employee's skill level. The process developed will serve as a way to certify that the employee has met all performance standards established for a skill block. Evaluation methods to consider include checklists, skill demonstration or testing. Consideration must be given to the timing of the performance measure. Questions to be answered include: Will performance be measured at a designed time (annually, semi-annually, quarterly)? Will the employee be assessed on skills only one time or will the continued mastery of the skill be required? After identifying a method for assessing the employee's skills, the next step is to identify who will assess the performance. Evaluators can be managers, technical and functional experts, peers or an assessment team with optional rotating membership. The evaluation of skills can be accomplished either by a paper or automated process. How are Skill-based Systems evaluated? The skill block(s) and pay mechanism that is established must make sense in terms of the goal the agency is seeking to accomplish and must be understandable to employees. An evaluation plan should be established and implemented to ensure that the Skill-based System is effectively meeting the agency needs and reflects the desired knowledge and skills needed by the agency. KNOWLEDGE-BASED PAY It is defined as the compensation predicated upon an employee's level of skill and educational attainment. Knowledge-based pay can be an incentive for employees to acquire additional training and education, thus upgrading overall work force skills. Pay-for-learning programs, also known as pay-for-knowledge, skill-based compensation, knowledge-based pay, or pay-for-skill programs can be defined as follows: Pay-for-learning structures link pay to depth or breadth of the skills, abilities, and knowledge a person acquires that are relevant to the work. Structures based on skill pay individuals for all the skills for which they have been certified regardless of whether the work they are doing requires all or just a few of those particular skills. Simply put, 87
pay-for-learning programs compensate employees for knowledge and skills that they posses, not for the job in which they are performing. The critical processes to determine a skill-based structure should include the following steps. An organization must make sure that there pay-for-learning structure is: 1) Internally aligned with work relationships within the organization, perform a 2) Skill analysis: a systematic process to identify and collect information about skills required to perform work in an organization, select 3) Skill blocks, 4) Skill certification, and, 5) Skill-based structure. Skill analysis decisions also include: what is the objective of the plan, what information should be collected, what methods should be used to determine and certify skills, who should be involved, and how useful are the results for pay purposes. Upon answering these questions in their respective order, it is important to remember that skill-based systems focus on inputs, not results. There success is closely correlated with how well the plan is aligned with an organization’s strategy. The information that is collected should be very specific information on every aspect of the production process. There are many different methods used to verify certification of skills, some companies use peer review, on-the-job demonstrations, tests, and also completion of formal courses related to certain subject areas. The most important group of people that should be involved in building a skill-based structure, are the employees of an organization. Employee involvement is almost built into skill-based plans, as there opinion in all levels will ensure that they find the pay-for-learning system to be fair. Skill-based pay systems can be found in some form in approximately 5 to 8 percent of U.S. corporations. They are usually applied to so-called blue-collar work, most of these firms are in manufacturing and assembly work where the work can be specified and defined. The advantage of a skill-based plan is that people can be deployed in a way that better matches the flow or work, thus avoiding bottlenecks as well as idle hands. So far skill-based pay systems, particularly multi-skillbased systems, have been thought to be most successful and have been implemented with the greatest ease in new plants with a participative team management style. In a participative new plant environment, such systems fit the management style, reinforce employees for learning new skills, and implementation is easier because traditional attitudes about job ownership don't have to be overcome. In established planes, such systems are more difficult to 88
implement precisely because of traditional views about job ownership but offer the possibility of breaking down such views and providing an incentive for veteran employees to learn new skills. Using Pay-for-Learning Systems As stated before, pay-for-learning plans can focus on depth or breadth. In fact, there are two basic forms of skill-based pay systems, increased-knowledge-based systems and multi-skill-based systems. Increased-knowledge or depth deals with specialists, such as: specialists in corporate law, finance, or welding and hydraulic maintenance. These are a few examples to help understand that specialists are likely paid based on their knowledge as measured by education level. Increased knowledge-based systems pay employees based upon the range of skills they possess in a single specialty or job classification. These are probably the most common skill-based pay systems and at their simplest are nothing more than technical skill ladders. For example, skilled trades often have a pay scale that increases as employees acquire additional skills and move from an entry to a journeyman level. Similar pay progressions based upon skill level can be found in universities, law offices, and research and development labs. Increased knowledge based systems are sometimes called "Vertical" systems because pay is tied to the depth of knowledge or skill in a defined job. Multi-skill based systems or breadth deals with generalists with knowledge in all phases of operations including marketing, manufacturing, finance, and human resource. Employees in a multiskill system earn pay increases by acquiring new knowledge, but the knowledge is specific to a range of related jobs. This means that pay increases come with certification of new skills, rather than with job assignments. Multi-skilled based systems are a newer, less common, and more revolutionary form of skill-based pay. In this case, pay progression is tied to the number of different jobs an employee can perform throughout the entire organization. For example, in a manufacturing environment, employees might be paid higher rates based upon their ability to perform jobs upstream and downstream from their normal assignment in the production process. Maximum pay rates would be paid to employees who can perform most or all jobs within the plant. Because they tie pay to the number of different jobs a person can perform, Multi-skilled-based systems are sometimes called horizontal systems. These will enhance the benefits of greater labor flexibility and job mobility for employees. 89
Advantages of Pay-for-Learning Systems 1• Greater Flexibility 2• Leaner Staff 3• Improved Problem Solving 4• Improved Horizontal Communication 5• Improved Vertical Communication 6• Supports Employment Security 7• Improved Lob Satisfaction Limitations of Pay-for-learning 1• Increase in Labor Costs 2• Increase in Training Costs 3• Increased Administrative Costs 4• Potential bureaucracy Real World Use of Pay-for-Learning Systems There are well-known companies using pay-for-learning systems. AT&T, Corning, Ford Motor Company, General Mills, General Motors, Maxwell House, and Volvo to name a few. General Mills uses four skill “categories” corresponding to the steps in the production process: materials handling, mixing, filling, and packaging. Each skill category has three blocks: 1) entry level, 2) accomplished, and 3) advanced. An employee can start at entry level and after becoming certified on the skill needed for the next block, will be compensated for learning those skills. The employee can continue this process as allowed.
What is valued Quantify the value Mechanisms to translate into pay Pay structure Pay increase Managers focus Employee focus Procedures Advantages Limitations Skill Blocks Skill Levels Certification and price skills in external market Based on skills certified/market Skill acquisition 1) Utilize skills efficiently 2) Provide training 3) Control costs via training, certification, and work assignments Seek skills Skill analysis, and Skill certification Continuous learning, Flexibility, and Reduced work force Requires cost controls and Potential bureaucracy
TEAM BASED COMPENSATION Teams have become a popular way to organize business because they offer companies the flexibility needed to meet the demands of the changing business environment. While many companies have been quick to organize their workforce into teams, they have not been as eager to implement team-based compensation systems. However, if team-based organizations continue to utilize old, individually-oriented pay systems, they will not fully realize the benefit of highly cooperative and motivated work teams. Team compensation is a way of rewarding performance in team settings. That is, individuals are rewarded based on the performance of the team as opposed to individual performance. There are different kinds of compensation such as a portion of base pay, other financial rewards such as gain-sharing, and non-financial rewards such as movie passes and gift certificates. Teams are defined as groups of individuals who work together to develop products or deliver services for which they are mutually accountable. Because of this new shift in organizational structure, employees are being Organizations have been using teams more and more to carry out different functions in the asked to work with others and their collective performance is evaluated. Traditionally, employees have been compensated based on their individual performance, but now they are being evaluated based on how their teams perform. Therefore, it does not seem to make much sense to compensate employees individually based on how their whole team performs. Therefore, organizations are moving toward compensating individuals based on team performance. Team compensation is a way of rewarding performance in team settings. That is, individuals are rewarded based on the performance of the team as opposed to individual performance. Team compensation is often referred to as team-based rewards or team-based pay. People learn to behave in certain ways based on the rewards they receive. Therefore, in order to convey to people that they want them to produce more in teams, reinforcement of behaviors that lead to and sustain team performance is necessary. Individual bonuses work against the team, thus lessening the team spirit. Some examples of different forms of team-based rewards are: a portion of the individual’s base pay, other financial rewards such as gain-sharing, and non-financial rewards such as recognition and praise. Gain-sharing combines pay for performance and employee involvement; as performance improves, employees share financially in the gain generally monthly or quarterly. In surveys of the Fortune 1000
companies in 1990 and then in 1993, team-based pay has increased its prevalence and usage in organizations from 59% to 70% in three years time. Anfuso, however, warns that only 1 to 20% of the workforce in these organizations receive team-based incentives. If companies stress the organizational role of the employee, then the employee will view their incentives as entitlements based upon that membership role. This will de-emphasize the "personal" role where they only think about themselves and not about the organization as a whole. This helps the organization in that it increases the amount of commitment from the employee. Team pay has also been associated with an increased level of motivation. A company needs to be prepared to support organizational changes in order to reward the new behaviors and results produced. This allows them to become capable team members. Therefore, it is recommended that team-based reward systems should be implemented in order to reinforce team behavior. Various forms of team-based rewards are used in organizations - they fall into three categories: a proportion of their base pay, other financial rewards, and non-financial rewards. 5-10% of the base pay is usually a sufficient amount to reward individuals. Gain-sharing, defined more specifically, is another type of financial reward that shares group improvement in productivity, cost savings, and quality with each employee in the group. Other types of financial rewards are lump-sum awards where individuals receive an amount of money that is independent of their base pay, discretionary bonuses given to teams based on after-the fact judgment of their performance, and profit sharing where the employees share a percentage of the organization’s profit. Finally, non-financial rewards are another alternative. For example, organizations may award teams by recognizing them for exceeding expectations on the job. Additional examples include coffee mugs, T-shirts, plaques, TV, DVD Player, vacation vouchers etc. Several companies give team bonuses to sales, management, and engineering staff. Their performance criteria are based on customer satisfaction, sales revenue, and market share. It is important to link employee objectives to company goals. The team’s performance is measured against the team revenue target and the market share. The bonus is paid quarterly but not to poor performers. Strategy and culture, are important first steps in any kind of design process of a team-based compensation plan. Pay sends a loud message to the employees about what is important in an organization. If teamwork is what the company wants to emphasize, then it is important that the pay structure reinforces that behavior. Strategy and culture and competencies (personal attributes and behaviors such as attitudes, motives, and traits that predict longer-term success) all need
to be aligned with compensation in order to be effective. Culture is important in the sense that it tells the organization where you are and allows you to assess where it is that you want to be. This process allows the organization to identify missing values, skills, and behavior necessary to make the transition from one to the other. Team rewards are very difficult to develop and must be customtailored to the organization’s configuration. The effectiveness of rewards depends upon the review and evaluation processes. Therefore, it is imperative that organizations set up these programs only when the organization feels that they have a stable design and has assessed which teams should be rewarded. Design Considerations There are many considerations in the designing of the new compensation plan. After the alignment of pay with strategy, culture, and competencies of the employee, then the next step is to determine the type or types of team in a particular organization. There are four types of teams: The first is the parallel team that is defined as a parttime team that can be temporary or permanent that employees participate on in addition to their normal activities. The second type of team is a process team that carries out the work processes and is done collectively by members of a team. A project, or time-based team, is the third type of team and is the opposite of a parallel team in that members work full-time for the duration and until completion of a project. A fourth type is a hybrid organization that includes a mixture of the teams described above. Another consideration that the organization should take into account is the number of job categories in an organization. The concept is termed broad banding, or encompassing more jobs into fewer bands, and it is used to determine the number of pay grades. The narrower the band, the fewer the differences, and the greater the equality of pay opportunity among the people within that band. After determining the bands, one must determine the parameters used to pay every job. This is the base pay for each job. Setting base pay is usually based on market pricing and job evaluations. Market pricing indicates what others in the market would pay for the same job. Job evaluations assess what skills and work is involved in a particular job. Also, one must determine the total pay allocated to the base pay. The next step in the design of a team-based compensation system is the performance appraisal stage. The criteria upon which the rewards are given are necessary in order to create the link between strategy and reward. An organization must define the performance criteria of their employees. There are four criteria used in measuring team
performance. The first is a demonstration of behavioral competencies that are personal attributes and behaviors such as attitude, motives, and traits that predict longer-term success. The second criterion is the acquisition and/or the demonstration of skills and knowledge. Thirdly, there needs to be an achievement of specific objectives within a specified period of time, best known as management by objectives (MBO’s). Finally, the results (quantitative or qualitative) are used to measure the performance of the team. These criteria are different depending on the type of team present in an organization. The parallel teams would primarily use the MBO’s approach followed by the demonstration of behavioral competencies and the results of the team effort. In a process team, the primary criterion used is the demonstration of behavioral competencies followed by the acquisition of skills and knowledge and results. Finally, in a project team, the most important criteria is what the results are followed by demonstration of behavioral competencies and the achievement of specific objectives in a specified period of time. Another component of pay is the increase in base pay. Individuals will sometimes ask for raises and in a team-based environment, it is much more difficult. One reason for the difficulty lies in the fact that different types of teams require different ways in which to handle the demands to increase base pay.
Table 1. Different Approaches to Increase Base Pay as a Function of Team Type Team Type Increase Approach • • • • • • Parallel Merit Increases are desired with team and regular job performance Process General Wage Increase Skill-based Pay Pay tied to demonstration of Competencies Peer Evaluations that assess the team members’ contribution to the performance of the entire team Project Merit Increases are desired where the demonstration of required skills and competencies are the criteria used to determine whether or not an increase is in order.
Note: Adapted from Compensation for Teams: How to Design and Implement Team-Based Reward Systems (p. 125), by S. E. Gross, 1995, NewYork: American Management Association. Copyright 1995 by The Hay Group, Inc.
The third component of pay is recognition. Recognizing team results is very important in the sense that it can motivate team members and increase the team’s level of cohesiveness. If team members are praised for a job on which they all contributed, their teamwork will be reinforced. Recognition can actually have more of a motivating effect that reaches into the future. Non-monetary rewards such as plaques, trophies, vacation trips, and small gifts can be the best incentive for team members. However, the most important part of this kind of recognition is that management must give it with sincerity. In implementing recognition, the organization must reward teams that exceed objectives, they must determine who is eligible, and they should have several levels of recognition. For example, appreciation non-cash rewards, awards for significant financial contribution, and awards for extraordinary financial results. It is recommended that noncash rewards be the primary type of recognition for all team types, and cash be the secondary reward for parallel and process teams but not for project teams. The fourth main component of a compensation plan is the incentive plan. There are nine basic elements to an incentive plan that needs to be assessed beforehand. These are eligibility to receive incentives, participation, measurement, alignment of team and organizational goals, funding, timing (shorter time between payoffs is better because it raises motivation), benefits, administration, and evaluation of the whether or not the plan needs changes. Implementation of a reward system is the next step after identifying and assessing the different pay components. There are three phases to implementation. The first phase is labeled feasibility, which asks whether the strategy in the organization is feasible at the stage, they are in currently. It includes planning, environmental assessment, readiness diagnostic, and the compensation strategy. The second phase is the design phase and it includes the design concept, the design components, testing of the compensation strategy, transition approach, union participation strategy, and administrative requirements. The third phase is the actual implementation of the program and it includes education/communication program, organizational integration, and ongoing monitoring. As mentioned earlier, it is important that the organization be ready to implement the new compensation system. The team design needs to be stable before implementing a new pay structure. The organization must stress communication and flexibility. There must be management support of teams; the culture must be one of cooperation; and there also needs to be strong administrative support that records team performance. Only after these elements are in place should an organization attempt to design and implement a team-based compensation system.
For any team-based pay plans to be implemented, there must be a link to the organization’s strategy. Team goals should be subsumed under the organization’s overall goals and objectives. Pay should be aligned with the accomplishment of those objectives. A performance measurement system also needs to be established. It is imperative that there are explicit measures of how well the team is performing in reaching the desired goals. These measures usually include such factors as productivity and quality. This is important in meeting goals and also measuring how much the team members should be paid according to their measured performance from the predetermined criteria. Another important design consideration is the allocation method to the team members. Various methods of distributing rewards - Equal payments to all members of the team; differential payments to team members based on their contribution to the team’s performance; and differential payments determined by a ratio of each group member’s base pay to the total base pay of the group. The first method fosters cooperation, whereas the second method may result in some members feeling slighted. A measure of cooperation and teamwork must be built in to this plan if used. The third ratio method reflects the market rates of the jobs. The last design consideration is the payment method. Team rewards should be kept separated from base pay so that the team member knows that their reward is strictly because of the performance of their team. Team pay results in- Improved productivity (Better results are reported for those using team incentives than those using individual incentives in a team environment. These results seem to be long-term, as well); Improved employee satisfaction with the job and pay (This is due, in large part, to the improvement of their skills through teamwork and to the greater control over their pay than in the past); Reduced costs (Production costs are often decreased as employees perform more effectively and efficiently as a team); Reduced turnover and absence(because employees feel that they have a stake in the production, and they are more satisfied); An advantage to the customers is that the product is improved and the service quality is improved (This is because the employees start becoming well versed in the operations of the team and can, therefore, identify some of the important product and service improvements that can be made). Conclusions Because more and more organizations are moving toward the use of teams to do most of the work, a shift in the way that workers are being compensated are in order. No longer is it appropriate to reward employees strictly on how they perform individually when they are no longer performing individually. Their performance is based solely on how the team performs. Therefore, organizations need to start
compensating individuals based on how their team performs through team-based rewards. Under whatever circumstances, the compensation plan must be one that can be communicated easily to the employees. Another consideration that must be taken into account is fairness. Fairness is subjective, but it can be remedied by having employees participate in the design of the compensation plan. There are a number of prerequisites to an effective teaming environment that creates a foundation for the reward system. These are: interdependent jobs; accurate and objective measures of the team’s performance; management support for teams, the organizational culture emphasizes cooperation among the team members at all levels; there are effective communication skills and flexible channels between managers and employees; a flat organizational structure that is ideal in fostering a team approach, because there are fewer levels of hierarchy; a small group size that facilitates communication and cooperation; no union or positive unionmanagement relations that forces a hierarchy on the organization; there is strong administrative support that records performance based on team accomplishments; and there are variable external environmental factors that have flexibility to deal with changing technology. One must not forget the individual in a team. The rewarding of individuals is still important, but it must be combined with some sort of team-based reward as well. The most effective recognition programs are those that recognize outstanding individuals but also reward the collaborative efforts of the team. Ideally, individual rewards should reward the fact that the employee has been a "team player." This helps to foster an environment of cooperation and collaboration. All team-based reward systems are different in different organizations. There is no template that can be placed in an organization to determine what kind of plan they should use. Finding the "correct formula" for any particular organization will be the most difficult part, but with a lot of planning, an organization will be able to find the right mix of rewards for the teams in their organization.
ROLE OF WAGE BOARD & PAY COMMISSIONS A Pay Commission is a panel comprised of members of the Union Cabinet of India for hiking the salaries of government employees. Pay Commissions were set up to reshape & revise the salary structure of central government servants. The Central Pay Commissions were set up in the past at intervals of 10 to 13 years. These Pay Commissions examined various issues such as pay and allowances, retirement benefits, conditions of service, promotion policies, etc. and submitted recommendations thereon. The extant rules do not stipulate any specific time period for constitution of a Pay Commission for Central Government employees. Till now five Central Pay Commissions have been constituted as under: Pay Commission First Pay Commission Second Pay Commission Third Pay Commission Fourth Pay Commission Fifth Pay Commission Date of Appointment May, 1946 August, 1957 April, 1970 June, 1983 April, 1994 Date of Submission of Report May, 1947 August, 1959 March, 1973 Three Reports submitted in June, 1986; December, 1986 and May, 1987 respectively. January, 1997
The first pay commission was constituted in May 1946, and had submitted its report in a year. The second panel had been set up in August 1957 and had given its report exactly after two years, with a financial impact was Rs.396 million. The third pay commission set up in April 1970 gave its report in March 1973, and created proposals that cost the government Rs.1.44 billion. The fourth was constituted in June 1983, its report was given in three phases within four years and the financial burden to the government was Rs.12.82 billion.  The Fifth Pay Commission was set up in 1994 and implemented in 1997 at a cost of Rs. 17,000 crore. In July 2006, the Cabinet approved setting up of the sixth pay commission which. The cost of hikes in salaries is anticipated to be about Rs. 20,000 crore for a total of 5.5 million government employees as per the 6th Pay Commission. The employees had threatened to go on a nationwide strike if the government failed to hike their salaries. Reasons for the hikes include rising inflation due to the forces of globalization and liberalization of the Indian economy. The Class 1 officers in India are grossly underpaid with an IAS officer after 25 years of work experience earning just Rs.550000 as his take
home pay. Even a fresh graduate can earn Rs.20000 as initial salary but the person with talent and skill who even earned reputation as good and result oriented worker in government job is getting much lesser salary after serving for more than a decade in government department is very much dejected which reduces his performance leve. The government should be model employer in all aspects. But if the burden on taxpayers keeps increasing in return for successively inferior governments there are only two ways to deal with the situation: Impose a wage freeze across the board for next 10 yrs and resume revision based on performance. Alternatively,make the 6th pay commission a permanent performance evaluation cum pay commission with statutary authority and appellate remedies to deal with grievances of each organised group including cadres based on mutually agreed norms by an independent body of people outside the government. Sixth Pay Commission Last year, the central government approved the setting up of the sixth pay commission to upwardly revise salaries and perks for its 550,000 employees across the country. A cabinet meeting headed by Prime Minister Manmohan Singh decided that the term of the commission would be for 18 months. 'The commission will comprise one chairman of the rank of minister of state, one part time member and one member-secretary of the rank of secretary or additional secretary in the central government. The proposal is estimated to cost the government an additional Rs.200 billion ($4.2 billion). The Commission will consider certain aspects of service conditions of central government employees. But several guesstimates are being made before the report is announced. For over four million government employees, including military personnel, the Sixth Pay Commission may not usher in a dramatic new era where salaries are more in tune with skyrocketing wages in the private sector. As per the draft salary structure that is now under discussion between the commission and the finance ministry, even at the top-most level — the Union cabinet secretary — the fixed salary will be just about Rs.80,000 per month, up from Rs.30,000 earlier. As head of the Indian bureaucracy, the cabinet secretary notionally runs India’s largest corporation of almost 3.3 million people, excluding over a million men in military uniform. His proposed salary wouldn’t be a patch on CEO salaries in the corporate sector, where annual compensation packages run into crores of rupees for even mediumsized companies.
At the bottom of the totem pole, starting salaries for Class IV employees would rise from a basic of Rs2,550 to Rs6,500 — which is the new minimum pay for anybody working in government. And the jump is not as high as it seems since the new basic salary would absorb the earlier dearness allowance (DA). 1 2 3 4 5WAGE BOARDS 6 7The Wage Board Division comes under Ministry of Labour and Employment and majorly deals with the following: 81. Payment of Bonus Act, 1965 92. Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955 In the 1950s and 60s, when the organized labour sector was at a nascent stage of its development without adequate unionization or with trade unions without adequate bargaining power, Government in appreciation of the problems which arise in the arena of wage fixation due to absence of such bargaining power, constituted various Wage Boards. The Wage Boards are tripartite in character in which representatives of workers, employers and independent members participate and finalize the recommendations. The utility and contribution of such boards in the present context are not beyond question. Except for the Wage Boards for journalists and nonjournalists newspaper and news-agency employees, which are statutory Wage Board, all other Wage Boards are non-statutory in nature. Therefore, recommendations made by these Wage Boards are not enforceable under the law. The importance of the non-statutory Wage Boards has consequently declined over a period of time and no non-statutory Wage Board has been set up after 1966, except for sugar industry, where last such Wage Board was constituted in 1985. The trade unions, having grown in strength in these industries, are themselves able to negotiate their wages with the management. This trend is likely to continue in future. The Working Journalists and other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955 (45 of 1955) (in short, the Act) provides for regulation of conditions of service of working journalists and non-journalists newspaper employees. The Section 9 and 13 C of the Act, inter-alia, provide for constitution of two
Wage Boards for fixing or revising rates of wages in respect of working journalists and non-journalists newspaper employees, respectively. The Central Government shall, as and when necessary, constitute Wage Boards, which shall consist of 1(a) Three persons representing employers in relation to Newspaper Establishments; 2(b) Three persons representing working journalists for Wage Board under Section 9 and three persons representing non-Journalist newspaper employees for Wage Board under Section 13 C of the Act. 3(c) Four independent persons, one of whom shall be a person who is, or has been a judge of High Court or the Supreme Court, and who shall be appointed by the Government as the Chairman thereof. Since 1955, the government has constituted 5 wage boards at regular intervals for the working journalists and non-journalist newspaper employees. The following table gives the details of the constitution of wage boards and other relevant details: Constitution of Wage Boards for Working Journalists and Non-Journalists Newspaper Employees in the Past
S. No. Name of the Wage Board Date of appointment of Wage Board 02-05-1956 12-11-1963 25-2-64 Date on which final report was submitted to the Govt NA 17-07-1967 17-7-67 Date of acceptance of recommendations by the Govt. 10-05-1957 27-10-1967 18-11-67 Remarks
Wage Board for Working Journalists (a) Wage Board for Working Journalists (b) Wage Board for Non-Journalist Newspaper Empl.
(a) Wage Board for Working Journalists (b) Wage Board for Non-Journalist Newspaper Employees Wage Boards for Working Journalists and Non-Journalist Newspaper Employees Wage Boards for Working Journalists and Non-Journalist Newspaper Employees
Converted into 1 man Tribunals on 9th Feb 1979.
05-12-2000 and 15-12-2000
The last Wage Board, namely the Manisana Wage Board, was set up on 2nd September 1994, which submitted its report to the Government on 25th July, 2000. The Government accepted the recommendations of the Manisana Wage Board, and notified the same for implementation with minor modifications, vide notifications dated 5.12.2000 and
15.12.2000. The prime responsibility for implementing the recommendations of the Wage Board rests with the concerned State Governments / Union Territories under the provision of the Act. The newspaper employees unions have been demanding constitution of fresh Wage Boards as more than 10 years have elapsed after the constitution of last Wage Board and they felt the last Wage Boards had not taken into consideration the boom in the newspaper sector on account of globalization and liberalization. Although the Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955 does not say anything about the periodicity of constitution of Wage Boards, it was felt that the time was ripe for constitution of fresh Wage Boards as more than 10 years have elapsed since the last Wage Boards were constituted. The Cabinet in its meeting held on 18.12.2006 approved the proposal for constitution of two Wage Boards, one for working journalists and another one for non-journalist newspaper employees, under Sections 9 and 13 C of the Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955. The Wage Boards have been given 3 years to submit there reports to the Government. The present Wage Boards have been constituted vide Notification No.V-24040/3/2004-WB dated 24th May, 2007 under the Chairmanship of Dr. Justice K. Narayana Kurup, formerly Judge High Court of Kerala and Acting Chief Justice High Court of Madras. Sh. K.M.Sahni, former Secretary, Ministry of Labour and Employment has been appointed as full-time Member-Secretary of the Wage Boards. The Wage Boards have started functioning from Delhi. The Composition of the two Wage Boards is indicated in the relevant notifications. Wage boards are constituted under the Working Journalists and other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955 that regulates the conditions of employment of journalists and employees of news agencies and newspapers. It has been instrumental in recognizing the key role decent working conditions play in building quality media. The country’s three major journalists groups – the Indian Journalists’ Union, the National Union of Journalists, India and the All India Newspaper Employees Federation – formed a confederation to demand that the government made good on promises to re-launch the country’s wage board system.
Commission A commission is compensation based on a percentage of sales in units or dollars. Competency-based pay A combination of skill-based, knowledge-based and credential-based pay Cost-of-living adjustment (COLA) Wage increase or decrease pegged to the rise and fall in the cost-of-living index. Differential piece rate (Taylor plan) A piecework plan that pays on the basis of two separate piecework rates: one for those who produce below or up to standard and another for those who produce above standard. Feedback pay Based on aligning pay with strategic business objectives and then establishing a direct connection between the job holder and his or her part in accomplishing these goals. Gainsharing plans Companywide group incentive plans that, through a financial formula for distributing organization-wide gains, unite diverse organizational elements in the common pursuit of improved organizational effectiveness. Guaranteed annual wage (GAW) A plan in which the employer guarantees the employee a certain number of weeks of work at a certain wage after the worker has passed a probation period. Knowledge-based pay Knowledge-based pay rewards employees for acquiring additional knowledge both within the current job and in new job categories. Merit pay Individual pay increases based on the rated performance of the individual employee in a previous time period.
Open system A pay system where pay ranges and even an individual's pay are open to the public and fellow employees. Pay compression A situation in which employees perceive too narrow a difference between their own pay and that of their colleagues. Production bonus system An individual incentive system that pays an employee an hourly rate plus a bonus when the employee exceeds the standard. Profit sharing plans Profit-sharing plans distribute a fixed percentage of total organizational profit to employees in the form of cash-deferred bonus amounts. Salary Pay calculated at an annual or monthly rate rather than hourly. Secret system A compensation system where pay is regarded as privileged information known only to the employee, the supervisor, and staff employees such as HRM and payroll. Severance pay An income bridge from employment to unemployment and back to employment, provided by some employers. Skill-based pay An alternative to job-based pay that sets pay levels on the basis of how many skills employees have or how many jobs they can do. Spot gainsharing A gainsharing system that focuses on a specific problem in a specific department rather than on performance improvements for the whole organization. Standard-hour plan An individual incentive plan that sets wages on the basis of completion of the job or task in some expected period of time. Straight piecework An individual incentive plan where pay fluctuates on the basis of units of production per time period. Suggestion system A formal method of obtaining employees' advice for improvement in organizational effectiveness; it includes some kind of reward based on the successful application of the idea. Supplementary Unemployment Benefits (SUB) The employer adds to unemployment compensation payments to help the employee achieve income security. Total Compensation Approach Total compensation is made up of base pay, variable pay, and indirect pay (benefits). Variable pay Any compensation plan that emphasizes a share focus on organizational success, broadens the opportunities for incentives to nontraditional groups (such as non-executives or
non-managers), and operates outside the base pay increase system. Wage Pay calculated at an hourly rate. Summary
1. Determination of individual pay - Pay differentials are based on individual differences in experience, skills, performance; expectations that seniority and higher performance deserve higher pay; reasons for choosing to pay employees at different rates for doing the same job include: pay differentials allow firms to recognize that different employees performing the same job make substantially different contributions to meeting organizational goals; differentials allow employers to communicate a changed emphasis on important job roles, skills, knowledge, etc; differentials provide organizations with an important tool for emphasizing norms of the enterprise without having employees change jobs; without differentials, the pay system violates the internal equity norms of most employees, reducing employee satisfaction with pay and making attraction and retention of employees more difficult; pay differentials allow firms to recognize market changes between jobs in the same grade without requiring a major overhaul of the whole compensation system
2. Methods of Payment a. flat rate -single rate in unionized firms (treating everyone equally) b. recognizing individual differences - assumes workers are not interchangeable/equally productive c. payment for time worked: wage (calculated on hourly basis); salary (calculated on monthly/annual basis); pay adjusted upwards through four types of increases: general across-theboard increase, merit increase, cost-of-living-adjustment (COLA), seniority d. variable pay: incentive compensation - based on shared organizational success, available to nontraditional groups & operates outside base pay, plans need to be based on clear goals, unambiguous measures; key design factors need to include: management support, employee acceptance, supportive organizational culture (teamwork, trust), timing (minimal risk of economic downturn), total compensation approach includes: variable pay puts a percentage of employee's paycheck at risk, pay rate will not rise above lower base pay if goals aren't met, flexibility can be built into the system of total compensation, base pay: matched closely with the competition, variable pay: methods like gainsharing, lump-sum bonuses, indirect pay: like benefits e. merit incentives - study shows merit needs to be 6-7%; less (unmotivate) more (demotivate) in practice merit pay systems fail because: employees fail to make the connection between pay & performance, secrecy of reward is perceived by other
employees as inequity, size of merit award has little effect on performance f. individual incentives - straight piecework, differential piece rate, standard hour plan, production bonus system, straight sales commission, variation (salary plus commission) / (salary plus draw) g. team/group incentives (used when:) there is a strong dependence among individuals in a group, it is hard to determine which individual is responsible for the level of achievement because of interrelated work, the organization wishes to reinforce teamwork, group planning and problem-solving h. organization-wide incentives - suggestion systems, gainsharing incentive plan (Scanlon plan, Rucker plan, ImproShare, Winsharing), spot gainsharing, profit-sharing incentive plan, Lincoln Electric plan, cash & deferred bonuses, i. ownership- defined contribution plans vs. defined benefits j.. people-based pay (alternative to job-based pay) - skill-based pay (breadth of skills), knowledge-based pay (depth of skills), credential-based pay (qualification dependent), feedback pay (fulfill strategic goals – research bonus ex. NDSU), competencybased pay (skills + knowledge + traits + motives), k. executive pay - executive salaries, bonuses, stock options, executive perquisites, executive pay package dependent on comparative performance. The pay design has five underlying principles: compensation committees consist of stockholders & directors who link CEO compensation to shareholder returns, variable performance-based pay is emphasized over guarantees (bonuses), CEOs are encouraged to invest in company stock (stock options), performance yardsticks are linked to actual key productivity indices or to competition, CEOs are held responsible for cost of capital, forcing them to look for vehicles of growth rather than amassing wealth 3. Issues in Compensation Administration - pay secrecy or openness, pay security, guaranteed annual wage (GAW), supplementary unemployment benefits (SUB), COLAs, severance pay, pay compression solutions for pay compression - reexamining how many entry-level people are needed, reassessing recruitment itself, focusing on the job evaluation process emphasizing performance, basing all salaries on longevity, giving first line supervisors the authority to recommend equity adjustments for victims of pay compression
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