Establishing Strategic Pay Plans

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Introduction 
Employee compensation
All forms of pay or rewards going to employees and arising from their employment. 

Direct financial payments
Pay in the form of wages, salaries, incentives, commissions, and bonuses. 

Indirect financial payments
Pay in the form of financial benefits such as employer paid insurance, paid sick leaves, and paid vacations, fringe benefits like PF, Gratuity, canteen facilities etc.
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Ways to make direct financial payments 
Time Based
Hourly wage Salaries 

Performance Based
Piecework (calculated rate per piece) Sales commission 

Combination
Sales
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Factors determining the design of any pay plan 

legal factor,  union factor,  company policy and  equity

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1. Legal factor 

Non managerial workers:
1. 2. 3. 4. The Minimum wages Act, 1948 The Payment of wages Act, 1936 Equal remuneration Act, 1976 The Payment of Bonus Act, 1963

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Contd 

Top management remuneration:  The Companies Act, 1956: ‡ An upper ceiling of 15000/month(1991) ‡ Sec. 198: shouldn¶t exceed 11% of net profits ‡ Sec. 309(1): Remuneration Committee

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Union Influences on compensation decision 
Formal collective bargaining  Negotiations at Industry level : Common pay agreement  Negotiation at company level  In U.S.:  The National Labor Relations Act,1935  Fair Labor standards Act  40hours, 1.5 overtime pay rate, $7.25/hr, $6$12/hr in hazardous occupations

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Corporate Policy 
Aligned reward strategy
a total reward package Compensation strategy has an impact on company s productivity E.g. Oracle, Microsoft Various issues like Seniority based pay or performance based pay Salary Compression: 5th and 6th pay scales, outcome of inflation Geography: e.g. Motif in Ahmedabad
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Methods to Address Equity Issues 
Salary surveys (Salary.com)
To monitor and maintain external equity. 

Job analysis and job evaluation
To maintain internal equity. 

Performance appraisal and incentive pay
To maintain individual equity. 

Grievance mechanisms, and employees¶ surveys
To help ensure that employees view the pay process as transparent and fair.

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Process of Establishing Pay Rates
1. Conduct a salary survey (external equity) 2. Determine the worth of each job in your organization (internal equity ± job evaluation) 3. Group similar jobs into pay grades 4. Price each pay grade by using wave curves 5. Fine-tune pay rates

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Establishing Pay Rates 
Step 1. The salary survey
‡ ‡ ‡ ‡ Prevailing wage rates. Formal written questionnaire surveys telephone surveys newspaper ads are also sources of information.

‡ Price Benchmark jobs with the help of surveys Place 20% or more positions directly in the market place ‡ Collect data on Insurance, sick leave, vacation
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Sources for Salary Surveys 
Consulting firms (Hay Associates, Hewitt Associates)  Government agencies (US Dept. of Labor¶s Bureau of Labor statistics)  Internet

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Some Pay Data Web Sites

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Establishing Pay Rates (cont d) 
Step 2. Job evaluation
A systematic comparison done in order to determine the worth of one job relative to another 

Compensable factor
Skills, effort, responsibility, and working conditions (Equal Pay Act) Knowledge, Problem Solving, Accountability (Hay Consulting firm, Wal-Mart)
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Establishing Pay Rates (cont d)  Step 3. Group Similar Jobs into Pay Grades
A pay grade is comprised of jobs of approximately equal difficulty or importance as established by job evaluation.
‡ Point method: the pay grade consists of jobs falling within a range of points. ‡ Ranking method: the grade consists of all jobs that fall within two or three ranks. ‡ Classification method: automatically categorizes jobs into classes or grades.

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Establishing Pay Rates (cont d) 
Step 4. Price Each Pay Grade ² Wage Curve
Shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation.

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Plotting a Wage Curve

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Establishing Pay Rates (cont d)  Step 5. Fine-tune pay rates
Developing pay ranges
‡ Flexibility for performance differences ‡ Seniority

Correcting out-of-line rates
‡ Raising underpaid jobs to the minimum of the rate range for their pay grade. (i)Cut pay rates for overpaid (³red circle´) jobs to maximum in the pay range for their pay grade (ii)freeze the rate till general salary increases bring the other jobs into line

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Wage Structure

Note: This shows overlapping wage classes and maximum±minimum wage ranges.

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CTC 
The total expenditure company would incur to employ the employee  Includes monetary and non monetary benefits such as monthly pay, Accommodation, canteen facilities, telephone, medical reimbursements etc.

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Components of salary 
Basic salary  Allowances :  DA  HRA  Conveyance allowance  Reimbursements:  Meal Coupons  Mobile and Telephone bills  Medical reimbursements
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Contd 
Retirement benefits:  PF  Gratuity  Other Benefits and Perks  LTA  Medical allowance (health facilities)  Insurance  Miscellaneous benefits (servants, furnishings, company car etc.)
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