• Pay is a statement of an employee’s worth by an employer. • Pay is a perception of worth by an employee.


Total Compensation

Direct Wages / Salaries Commissions Bonuses Gainsharing

Indirect Time Not Worked
• Vacations • Breaks • Holidays • Medical • Dental • Life

Insurance Plans

Security Plans
• Pensions

Employee Services
Presentation Slide 9–1

• Educational assistance • Recreational programs

Compensation Management and Other HRM Functions
Aid or impair recruitment


Supply of applicants affects wage rates Selection standards affect level of pay required Increased knowledge leads to higher pay A basis for determining employee’s rate of pay Pay rates determined through negotiation

Pay rates affect selectivity

Selection Training and Development Compensation Management Labor Relations

Pay can motivate training Training and development may lead to higher pay Low pay encourages unionization

Presentation Slide 9–2


Strategic Compensation Planning
• Strategic Compensation Planning
– Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization. – Serves to mesh the monetary payments made to employees with specific functions of the HR program in establishing a pay-for-performance standard. – Seeks to motivate employees through compensation.

Significant Goals Driving Pay and Reward Changes

Figure 9.1


Linking Compensation to Organizational Objectives
• Value-added Compensation
– Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.
• “How does this compensation practice benefit the organization?” • “Does the benefit offset the administrative cost?”


Common Strategic Compensation Goals
To reward employees’ past performance To remain competitive in the labor market To maintain salary equity among employees To mesh employees’ future performance with organizational goals • To control the compensation budget • To attract new employees • To reduce unnecessary turnover • • • •

Strategic Compensation Policy Concerns
• The rate of pay within the organization and whether it is to be above, below, or at the prevailing community rate. • The ability of the pay program to gain employee acceptance while motivating employees to perform to the best of their abilities. • The pay level at which employees may be recruited and the pay differential between new and more senior employees. • The intervals at which pay raises are to be granted and the extent to which merit and/or seniority will influence the raises. • The pay levels needed to facilitate the achievement of a sound financial position in relation to the products or services offered.


The Pay-for-Performance Standard
• Pay-for-Performance Standard
– The standard by which managers tie compensation to employee effort and performance. – Refers to a wide range of compensation options, including merit-based pay, bonuses, salary commissions, job and pay banding, team/ group incentives, and various gainsharing programs.

Designing a Pay-forPerformance System
• How will performance be measured? • How will monies to be allocated for compensation increases. • Which employees will be eligible? • How will payouts be made? • How often will payouts occur? • How large will the payouts be? • Will employees perceive the rewards as valued?

Motivating Employees through Compensation
• Pay Equity (also Distributive Fairness)
– An employee’s perception that compensation received is equal to the value of the work performed. – A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
• Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.


Relationship between Pay Equity and Motivation

The greater the perceived disparity between my input/output ratio and the comparison person’s input/output ratio, the greater my motivation to reduce the inequity.
Figure 9.2


Expectancy Theory and Pay
• Expectancy Theory
– A theory of motivation that holds that employees should exert greater work effort if they have reason to expect that it will result in a reward that they value. – Employees also must believe that good performance is valued by their employer and will result in their receiving the expected reward.

Pay-for-Performance and Expectancy Theory

Figure 9.3


Motivating Employees through Compensation
• Pay Secrecy
– An organizational policy requiring that compensation levels and decisions about employee compensation be kept secret and, usually, prohibiting employees from revealing their compensation information to anyone.
• Can create employee misperceptions and distrust of compensation fairness and pay-for-performance standards.


The Bases for Compensation
• Hourly Work
– Work paid on an hourly basis.

• Piecework
– Work paid according to the number of units produced.

• Salary Workers
– Employees whose compensation is computed on the basis of weekly, biweekly, or monthly pay periods.

The Bases for Compensation (cont’d)
• Nonexempt Employees
– Employees covered by the overtime provisions of the Payment of wages Act.
• They must be paid time and one-half their regular pay for all work performed after forty regular hours of work.


The Bases for Compensation (cont’d)
• Exempt employees
– Employees who not covered in the overtime provisions of the Fair Labor Standards Act.
• Managers, supervisors, and white-collar professional employees are exempted on the basis of their exercise of independent judgment and other criteria.


Components of the Wage Mix Labor Market Compensation Strategy
Conditions of the Organization Area Wage Rates Cost of Living Worth of the Job


Collective Bargaining Legal Requirements

Employee’s Relative Worth Employer’s Ability to Pay
Presentation Slide 9–3


Factors Affecting the Wage Mix

Figure 9.4


The Wage Mix—Internal Factors • Compensation Strategy
– Setting organization compensation policy to lead, lag, or match competitors’ pay.

• Worth of a Job
– Establishing the internal wage relationship among jobs and skill levels.

• Relative Worth of an Employee
– Rewarding individual employee performance

• Ability-to-Pay
– Having the resources and profits to pay employees.

• Labor Market Conditions

The Wage Mix—External Factors

– Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.

• Area Wage Rates
– A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.

• Cost of Living

The Wage Mix—External Factors

– Local housing and environmental conditions can cause wide variations in the cost of living for employees. – Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.


• Collective Bargaining

The Wage Mix—External Factors

– Escalator clauses in labor agreements that provide for quarterly upward cost-of-living wage adjustments for inflation to protect employees’ purchasing power. – Unions bargain for real wage increases that raise the standard of living for their members. – Real wages are increases larger than rises in the consumer price index; that is, the real earning power of wages.

Consumer Price Index (CPI)
• A measure of the average change in prices over time in a fixed “market basket” of goods and services


Job Evaluation
• Job Evaluation
– The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.


Different Job Evaluation Systems



Job vs. job Job vs. scale

Job ranking system Job classification system

Factor comparison system Point system

Figure 9.5


Job Evaluation Systems
• Job Ranking System
– Oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth. – Disadvantages
• Does not provide a precise measure of each job’s worth. • Final job rankings indicate the relative importance of jobs, not extent of differences between jobs. • Method can used to consider only a reasonably small number of jobs.


Paired-Comparison Job Ranking Table

Directions: Place an X in the cell where the value of a row job is higher than that of a column job.
Figure 9.6


Job Evaluation Systems
• Job Classification system
– A system of job evaluation in which jobs are classified and grouped according to a series of predetermined wage grades. – Successive grades require increasing amounts of job responsibility, skill, knowledge, ability, or other factors selected to compare jobs.


Point System
• Point System
– A quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it. – Permits jobs to be evaluated quantitatively on the basis of factors or elements—compensable factors—that constitute the job.

• Point Manual
– A handbook that contains a description of the compensable factors and the degrees to which these factors may exist within the jobs.

Point Values for Job Factors of The Indian Association of Industrial Management

1. Education 2. Experience 3. Initiative and ingenuity 14 22 14 28 44 28 42 66 42 56 88 56 70 110 70

4. Physical demand 5. Mental or visual demand 10 5 20 10 30 15 40 20 50 25

6. Equipment or process 7. Material or product 8. Safety of others 9. Work of others 5 5 5 5 10 10 10 10 15 15 15 15 20 20 20 20 25 25 25 25

Job Conditions
10. Working conditions 11. Hazards 10 5 20 10 30 15 40 20 50 25

Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass.


Factor Comparison System
• Factor Comparison System
– A job evaluation system that permits the evaluation process to be accomplished on a factor-by-factor basis by developing a factor comparison scale. – The compensable factors of a job evaluated are compared against the compensable factors of key jobs within the organization that serve as the job evaluation scale.

Characteristics of Key Jobs
• Key Jobs
– Jobs that are important for wage-setting purposes and are widely known in the labor market.

• Characteristics of Key Jobs
– They are important to employees and the organization. – They vary in terms of job requirements. – They have relatively stable job content. – They are used in salary surveys for wage determination.

Presentation Slide 35 9–4

Job Evaluation for Management Positions
• Hay Profile Method
– Job evaluation technique using three factors —knowledge, mental activity, and accountability—to evaluate executive and managerial positions.


The Compensation Structure
• Wage and Salary survey
– A survey of the wages paid to employees of other employers in the surveying organization’s relevant labor market. – Helps maintain internal and external pay equity for employees.

• Labor Market
– The area from which employers obtain certain types of workers.

Collecting Survey Data
• Outside Sources of Data
– Bureau of Labor Statistics (BLS)
• National Compensation Survey

– State and local wage surveys – Online survey data


Collecting Survey Data
• Conducting Employer-initiated Surveys
– Select key jobs. – Determine relevant labor market. – Select organizations. – Decide on information to collect: wages/ benefits/ pay policies. – Compile data received. – Determine wage structure and benefits to pay.

Sl.No. Officers cadre Group C Group C Group B Group A Group A Existing pay scale 22400-52524500 18400-50022400 14300-40018300 12000-37516500 10000-32515200 8000-275-13500 CDA Corresponding IDA pay scale(NEW) 25000-650-30200 23750-600-28550 18500-450-23900 17500-400-22300 16000-400-20800 14500-350-18700

Housing rent allowance
Sl. No. 1. 2. 3. 4. Classification of cities/Towns A-1 A, B-1 & B-2 C Unclassified Rates of HRA 30% of basic pay 15% of basic pay 7.5% of basic pay 5% of basic pay

City Compensation allowance
Sl. No. 1. 2. 3. 4. Classification of cities/Towns A-1 A B-1 B-2 Rates of CCA Rs.300/Rs.240/Rs.180/Rs.120/41

Group insurance scheme
S. No. Category Monthly Premium Sum Assured


Executives drawing IDA pay scale of Rs.13000-18250/-


Rs. 3 lakhs


Executives drawing IDA pay scale of Rs.14500-18700/and above

Rs.525/(Rs.500/+ Rs.25/-)_

Rs. 5 lakhs


Medical Facilities
S.No. EMPLOYEE 1. Group D 2. Group C 3. Grp B & Grp A (upto STS) 4 A.C. 5.    

Grp  A  JAG  and  above

GROUPELIGIBILITY  General Ward Semi-Pvt Ward             Pvt.Ward(non  A.C.) Pvt.Ward  with  Deluxe room with  AC.

CMD & Board Directors (Full Time)

Hotel Accommodation
Pay Range Entitlement A.I, A Cities & expensive localities Rs. Five Hotel actual 3500 3000 2200 Three 1650 550 400 300 175 Star on B.I Cities & expensive localities Rs. If No Star actual 1750 1500 1100 825 400 300 250 125 Other localitie s If Rs. No Star actual 900 750 550 410 300 250 200 100

CMD/Director of Board

Five Star

Officers in HAG Officers in SAG Officers in JAG Officers in STS

Four star Four star Three star 75% star of

Sr.SDE/SDE / Sr.AO/AO and equivalents JTO and equivalents having starting Rs. 8570/- in IDA Pay Scale Rs. 5860/- To Rs. 8569/- in IDA Pay Scale Below Rs. 5860/- in IDA Pay Scale

Regulation of Pension Amount Pension amounts regulated on the basis as undera. Qualifying service - Service rendered while on duty. b. Pay regulation. c. Average emolument- average of the emoluments drawn during the last ten month of service.

Retirement Gratuity: One fourth of emoluments ( Last pay + DA) on the date of retirement for each completed six monthly period of qualifying service subject to a maximum of 16.5 times the emoluments on retirement or completion of 5 year qualifying service.

Death Gratuity: Death Gratuity is granted when a Govt. servant dies while in service according to the following ratesLength of Service Less than one year One year or more, but less than 5 years 5 year or more, but less than 20 years 20 year or more Death Gratuity payable to family 2 times of Emoluments.

6 times of Emoluments.

12 times of Emoluments. Half of emoluments for every completed six-monthly period of qualifying service subject to a maximum of 33 times 46 emoluments of Rs. 3.5 lakhs whichever is less.

General provident fund
GPF final payment will be made when the subscriber1.  Retires from service/permitted to retire or declared by a competent Medical Authority to be unfit for further services. 2. Proceeds on leave preparatory to retirement . 3. Quits service. 4. Is dismissed /removed from services.


The Wage Curve
• Wage Curve
– A curve in a scattergram representing the relationship between relative worth of jobs and wage rates.

• Pay Grades
– Groups of jobs within a particular class that are paid the same rate.

• Rate Ranges
– A range of rates for each pay grade that may be the same for each grade or proportionately greater for each successive grade.

Freehand Wage Curve

Figure 9.7


Single Rate Structure

Figure 9.8


Wage Structure with Increasing Rate Ranges
Figure 9.9 Presentation Slide 9–5


The Wage Curve (cont’d)
• Competence-based Pay, (also skill-based pay or knowledge-based pay) – Compensation for the different skills or increased knowledge employees possess rather than for the job they hold in a designated job category. • Red Circle Rates – Payment rates above the maximum of the pay range. • Broadbanding – Collapses many traditional salary grades into a few wide salary bands.

Government Regulation of Compensation
Payment of wages Act 1936 All employees to be paid before 7th of month. To avoid exploitation. Variable dearness allowance revives wages every 2 years with Cost of living index. Stipulates minimum level of payment for sustenance. Bonus is profit sharing at a rate of 8.33%. All the employees of service sector, educational institutions and manufacturing units are covered in the act.

Minimum wages Act 1948

Payment of bonus Act 1965


Significant Compensation Issues
• Equal Pay for Comparable Worth – The concept that male and female jobs that are dissimilar, but equal in terms of value or worth to the employer, should be paid the same. • Wage-Rate Compression – Compression of pay differentials between job classes, particularly the pay differentials between hourly workers and their managers. • Low-wage Budgets – Current wage budgets reflect the general trend toward tight compensation cost controls.

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