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Published by: Mark Jose on Aug 25, 2010
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The purpose of a compensation system should not be to get the right behaviors from the wrong people but

to get the right people on the bus in the first place, and to keep them there From Good to Great

Compensation must encourage timely product/service delivery to meet customer demand. Pay should reward quality, flexibility,and teamwork because of their importance to everyday operation. Pay should motivate continuous improvement. ~Pay Design Maynard Industrial Engineering Handbook

Variable pay is generally based on some measure of performance. either an individual measure. but increasingly. such as insurance or flexible hours. BENEFITS AND INDIRECT COMPENSATION are less tangible forms of compensation that companies offer. VARIABLE PAY is cash compensation that does not roll into base pay. or an organizational measure. increases are based on longevity with the company and merit. It is generally a measure of a position s worth to the organization given the duties its incumbents carry out and the competitive wage rate for that work in external labor market BASE PAY PROGRESSION defines the movement of base pay over time.BASE PAY LEVEL is the amount of cash compensation paid on a regular basis (pay period). these can have just as strong an effect . Although this is not cash that goes into an employee s pocket. Traditionally. a team measure. it is based on the acquisition of business-related skills and competencies.

This situation led to what is commonly termed as broadbanding in HR circles that reflects not only depth but also breadth of skills. .Base pay is currently being used to serve two objectives: Attract key talent Retain key talent But its traditional application within the context of job evaluation and salary grades tend to move workers directly into narrow and functional silos . It also tends to propagate holding a job mentality and not to perform an entire business process .

leaner operating structure which leads to fewer opportunities for promotion. .Many organizations that are challenged with the increasingly critical need to become more competitive and responsive in a global economy radically alter the content of jobs to achieve a flatter. In simple terms. it refers to the concept of collapsing many traditional pay grades into relatively few wide bands that are use to monitor and evaluate pay. In addition. the need for cross-training and the ability to easily and quickly move employees laterally from job to job becomes more pronounced which led to broadbanding .

Organizations that find that their overall business objectives require extensive training and development of the workforce and/or have a particular need to emphasize flexibility in moving employees or expanding job responsibilities have found broadbanding to be an effective approach. organizations that need to exercise tight control over compensation actions and costs often conclude that little or no advantage will result from converting to wide bands. Conversely. .

base pay progression has been based on three factors: Time in grade Merit Promotion But as organizations realized that its success is really based on capabilities and acquiring new ones (organizational development).Traditionally. the old view is found wanting and a new paradigm comes into play: Skill-based pay Competency-based pay .

the employee·s pay increases until he or she achieves the target.Skill-based pay is a policy that rewards employees for acquiring and using work-related skills. For each skill block accomplished. [2] activity. and [3] result. The method must be built on a foundation of three components: [1] knowledge. This approach works very well when activities and the results are distinguishable at a micro level and recur with reasonable frequency. Skill-based pay is not simply pay for knowledge. It is important to remember that a skill-based pay system will increase labor cost that s why it is important to ask what are we getting for these higher rates? . Skill-based pay generally specifies a sequence of skill blocks that must be mastered to be fully qualified in one·s work.

Such focus develops a very clear vision for how the workforce needs to develop to make the organization successful. .Successful skill-based pay programs start with a focus on the process.

Examples of competency-based pay include engineering and technical organizations where employees are expected to apply highly intellectual capacities to complete knowledge work .Competency-based pay differs from skill-based pay in that it is based on broad competencies rather than narrow. taskrelated skills A competency-based system reinforces the specific technical and professional knowledge required to perform in broad technical or professional capacity.

the pay the the base pay the higher employee can expect. the higher the base delivers to the organization. they increase on the employee depend pay.Competency-based and skillCompetency-based and skillbased pay share the same goals based pay share the samedo not and characteristics. The more value the employee delivers to the The more value the employee organization. . Both goals and characteristics. Bothjob or depend on time on the do no depend on time on the job or seniority or promotions to seniority or promotions to increase pay. Instead. Instead. employee can expect. they depend on the employee asset developing into a strong developing into a strong asset for for the organization. the organization.

Competency-based and skillbased pay share the same goals and characteristics. The more value What about paying for the employee performance? delivers to the organization. they assures that the right capacities depend on the when needed. will be in place employee developing into a strong asset for the organization. tools foron time on the job or seniority or or competency Pay for skillspromotions to increase pay. Both do no These programs are effective depend developing a workforce. . Instead. the higher the base pay the employee can expect.

or can linked directly to the performance of the individual. such as a holiday bonus. It could be independent of performance. Companies look at variable pay for three reasons: It could make compensation cost more manageable by relating it to ability to pay. encourage interest in the business. It provides a platform to teach the business. team or organization.Variable pay is compensation that is nonrecurring (does not roll into base pay). . create line of sight between efforts and business results. It gives an opportunity to link pay to performance.

If performance in strong asset for the organization. If performance is not organization. Both do no competency based pay.there. pay value performance is The more is the employee delivers to the there. in long term.Competency-based and skillVariable pay is a complement based pay share the same goals not a substitute for skill or and characteristics. Instead. pay is not (e. Variable they depend onpaysemployee contrast.g.) . The depend on time on the job or later represents an investment seniority or promotions to is in skill development. the for developing into aeach period. which increase pay. the higher the base there. Profit pay the employee can expect.pay. sharing or gain sharing.

quality and customer service) 2. The following are its characteristics: 1. and evolve the program as the business grows and changes . Goals are set by making forward-looking business judgments and are not dictated by historical data 3. The plans have sunsets operating year to year with a requirement to revise. Current operating environments require firms to perform on multiple performance dimensions called ´goal sharingµ. cost productivity. Participation goes wall to wall embracing all employees to reflect a team culture 4. renew.g. Measures address three or four key performance areas (e.But technological events of recent years have rendered gain-sharing obsolete.

Both do no 1. 5 things must Competency-based and skillhappen: based pay share the same goals and characteristics.In order for the program to be successful. The plan increase focus on depend on the employee the business developing into a strong asset for 4. the higher the base improvement in business pay the employee can expect. The plan is understood increase pay. The more value designed the employee delivers to the 5. performance. The plan contributes to organization. The plan operates as the organization. The plan gets attention and depend on time on the job or generates excitement seniority or promotions to 2. . Instead. they 3.

They fade away and leave a depend on the employee bitter taste developing into a strong asset for 4. They sometimes same as based pay share theend upgoals andentitlements characteristics. Both do no 2. The more value the ready or not communicated employee delivers to the organization.And the program fails because: Competency-based and skill1. the because base eloquently or higher the pay employees were not involved the employee can expect. They end up on source of depend on time as athe job or contention between seniority or promotions to management and labor increase pay. It is poorly executed in the the sense that everybody is not organization. Instead. they 3. in goal-setting .

it must be evaluated on an annual basis to make sure that it is achieving its objectives. .If a variable pay plan is going to be successful in the long run.

Companies thinking strategically about compensation today offer flexibility. key benefits. and different office environments to employees to make them more satisfied and productive. .As employee population has grown more diverse in the last two decades. Recognizing the need to customize rewards match the diversity of employee needs has brought benefits and indirect compensation to the forefront of alternative rewards. the workforce s expectations regarding what they seek in the form of rewards has become varied.

New benefit plans also offer employees the option to pick and choose benefits and perks that fit their lifestyles and let them more seamlessly incorporate work into their lives. allowing employees some choice in designing their own package makes sure that the link between pay and performance and pay and perceived incentive is strong. . In a flexible and diverse workforce.

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