Designing & Pricing Pay Plans

Compensation Management
UNIT 2
DESIGNING & PRICING PAY PLANS
# Introduction
Once a right candidate is placed on a right job, the person needs to be duly
compensated for the job he/she performs. In the pursuit of equal payment, there should be
established a consistent and systematic relationship among base compensation rates for all the
jobs within the organizations. The process of such establishment is termed „job evaluation‟.
Different jobs in an organization need to be valued to ascertain their relative worth so that
jobs are compensated accordingly and an equitable wage and salary structure is designed in
the organization. This is necessary for sustaining cordial relations within and between
employees and employer. Hence, there is a need for appreciation of intricacies of the job
evaluation in the modern organizations. This lesson, as a first steps, dedicated to discuss the
various fundamental aspects of job evolution.
# Concept and related terminologies of job evaluation
In the area of job evaluation study, a certain amount of technical terminology is used
in order to facilitate communication. It is therefore desirable to list and understand allied
terms in the job evaluation, as well as some terms that are related to and often confused with
job evaluation (Exhibit. 1.1).
Position: A position is a group of tasks assigned to one individual. There are as many
positions in a firm as there are personnel.
Job: Edwin B.Flippo describes job as a group of positions that are similar as to kind and
level of work. In some instances only one position may be involved, simply because no other
similar position exists. For example, in the typical firm the position of human resource
manager also constitute a job since there is only one human resource manager in the
organizing.
Job Analysis: It is the process of studying and collecting information relating to the
operations and responsibilities of a specific job. The immediate products of this analysis are
job descriptions and job specifications.
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Motion study: This also involves study of the job. Motions study is one of the ways of
studying job. It is a process of analyzing a job to find the easiest, most effective, and most
economical method of doing it. As such, motion study is a part of the job design function.
Job description: It is an organized, factual statement of the duties and responsibilities of a

specific job. In brief, it should tell what is to be done, how it is to be done, and why. It is a
standard of function, in that it defines the appropriate and authorized content of a job.
Job specification: It is a statement of the minimum acceptable human qualities necessary to

perform a job properly. It is a standard of personnel and designates the qualities required for
acceptable performance.
Evaluation: Wigley explains evaluation as a data reduction process that involves the
collection of large amounts of data which are analyzed and synthesized into an overall
judgment of worth or merit. The implication here is that the judgment of worth can be
supported by the data. In her review, Foxon found similar definitions referring to judgments
of value or worth.
Job Evaluation: It is a systematic and orderly process of determining the worth of a job in
relation to other jobs. The objective of this process is to determine the correct rate of pay. It is
therefore not the same as job analysis. Rather it follows the job analysis process, which
provides the basic data to be evaluated.
In simple worlds, job evaluation is the rating of jobs in an organization. This is the
process establishing the value or worth of jobs in a job hierarchy and compares the relative
intrinsic value or worth of jobs within an organization. Some renounced definitions of job
evaluation are described below.
# Definition of Job Evaluation
• The I.L.O. defines job evaluation as “an attempt to determine and compare demands
which the normal performance of a particular job makes on normal workers without taking
into account the individual abilities or performance of the workers concerned.”
• The Bureau of Labour Statistics, U.S.A., says that “job evaluation is the evaluation
or rating of jobs to determine. Their position in the job hierarchy. The evaluation may be
achieved through the assignment of points or the use of some other systematic method for
essential job requirements, such as skills, experience and responsibility.”
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• In the words of the Netherlands Committee of Experts on Job Evaluation, “job

evaluation is a method which helps to establish a justified rank order of jobs as a whole being
a foundation for the setting of wages. Job evaluation is the only one of the starting r
establishing the relative differentiation of base wage rates.”
• Kimball and Kimball define job evaluation as “an effort to determine the relative
every job in a plant to determine what the far basic wage for such a job should be.
• According to Wendell French, “job evaluation is a process of determining the worth

of the various jobs within the organization, so that differential wages may to jobs of different
worth.” The relative worth of a job means value produced factors as responsibilities skill,
effort and working conditions.
We may define job evaluation as.
A process of analyzing and describing positions, g them and determining their

relative value by comparing the duties of different s in terms of their different
responsibilities and other requirements.
It is the quantitative measurement of relative job worth for the purpose of

establishing Consistent wage rate differentials by objective means. It measures the
differences between job differences between job requirements, the objective being the
setting of pay for wage administration purposes. It does not set the price of a job; it merely
fixes its relative worth.
It presents an effort to determine the relative value of every job in a plant, and to
determine what the fair wage for such a job should be. It is not evaluating the merit of the
worker who is the work. It rates the job and not the qualities of the individual worker on
which is the task of employee rating.
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# Objectives of job evaluation
The objectives of job evaluation, to put in a more systematic manner are to:
1. Establish a standard procedure for determining the relative worth of each job in an
organization;
2. Ensure equitable wage for a job and reasonable wage differentials between
different jobs in a hierarchical organization;
3. Determine the rate of pay for each job which is fair and equitable with relation to
other jobs in the plant, community or industry;
4. Eliminate wage inequalities;
5. Use as a basis for fixing incentives and different bonus plans;
6. Promote a fair and accurate consideration of all employees for advancement and
transfer;
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7. Provide information for work organization, employees‟ selection, placement,

training and other similar purposes;
8. Provide a benchmark for making career planning for the employees in the
organization and;
9. Ensure that like wages are paid to all qualified employees for like work.
# Principles of job evaluation
The job evaluation has certain principles. These principles are supposed to be kept in
the mind of the job evaluators. These principles are not only directives of proper job
evaluation but also provide clarity in the process of evaluation. According to Kress, these
principles are:
1. Rate the job and the jobber. Each element should be rated on the basis of what the
job itself requires;
2. The elements selected for rating purposes should be easily explainable in terms and
a few in numbers as will cover the necessary requisites for every job without any
overlapping;
3. The elements should be clearly defined and properly selected;
4. Any job rating plan must be sold to foremen and employees. The success in selling
it will depend on a clear-cut explanation and illustration of the plan;
5. Foreman should participate in the rating of jobs in their own departments;
6. Maxim mum co-operation can be obtained from employees when they themselves
have an opportunity to discuss job ratings and;
7. Too many occupational wages should not be established. It would be unwise to

adopt an occupational wage for each total of point values.
# Job Evaluation Process
Job Evaluation is a technique to rank jobs in an organization on the basis of the duties
and responsibilities assigned to the job. The job evaluation process results in a job being
assigned to a pay grade. The pay grade is associated with a pay range that is defined by a
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minimum and a maximum pay rate. A model of job evaluation process with the following
steps is presented bellow (Exhibit 1.5).
• Step One -Job Description –
The position supervisor assigns duties and writes the job description. If there is an
incumbent employee, s/he reviews it, and they both sign it. Instructions and additional
assistance are available from Human Resources, if needed. The job description is a snapshot
of the job as it presently exists, reflecting the current duties and responsibilities of the job
and/or the incumbent.
• Step Two – Approval –
The vice president reviews job descriptions and, if s/he concurs, approves the
responsibilities, requirements, and depart-mental organization contained within a job
description presented for new evaluation, and signs it. If the vice president does not concur
with the contents of the description, it is returned to the supervisor for changes.
• Step Three – Review-
Human Resources review the job description as submitted with the supervisor prior to
evaluation by the Job Evaluation Committee (Step 4). Human Resources help ensure that
there is consistency and equity in the job descriptions and titles by editing them for clarity
and format. If the Human Resources Office makes changes, the job description is returned to
the supervisor and vice president for signature prior to being presented to the Job Evaluation
Committee (Step 4).
• Step Four – Evaluation –
The Job Evaluation Committee (JEC) is a multi-member committee, the members of

which are appointed by the Staff Salary Administration Committee (SSAC), representing
employees throughout organization. JEC ensures equity among jobs through the use of
established, consistent criteria for evaluation and prevents escalation of the job evaluation
grades by validating changes in job content presented for review. Members of JEC receive in-
depth training on job evaluation and utilize a consistently applied point system for the
evaluations.
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• Step Five – Confirmation –
SSAC confirms all job evaluations and titles recommended by JEC. This committee is
com-posed of the SLCC Vice Presidents, the human resources director, and other relevant co-
opted experts. After confirmation of the evaluation job description, SSAC advises the
supervisor of the results of the evaluation and the title. The supervisor then advises the
employee of the results of the job evaluation.
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# Methods of Job Evolutions
There are four basic methods of job evaluation currently in use which are
grouped into two categories:
1. Non-quantitative Methods:
a) Ranking Method of job evaluation
This is simplest form of job evaluation method. The method involves ranking each job
relative to all other jobs, usually based on some overall factor like „job difficulty‟. Each job
as a whole is compared with other and this comparison of jobs goes on until all the jobs have
been evaluated and ranked. All jobs are ranked in the order of their importance from the
simplest to the hardest or from the highest the lowest. The importance of order of job is
judged in terms of duties, responsibilities sand demands on the job holder. The following
steps are involved in ranking jobs.
1. Obtain job information - The first step is job analysis. Job descriptions for each job are
prepared and these are the basis on which the ranking s are made. The job ranking method
usually ranks jobs according to „the whole job‟ rather than a number of compensable factors.
2. Select raters and jobs to be rated - Ranking all the jobs, at a time, is usually not possible.
The more usual procedure involves ranking jobs by department or in „clusters‟ i.e. factory
workers, clerical workers and so on. This eliminates the need for having to compare directly,
say, factory jobs and clerical jobs.
3. Select Compensable factors – In the ranking method, it is common to use just one factor,
for instance job difficulty, and to rank jobs on the basis of „the whole job‟. Regardless of the
number of factors you choose, it is advisable to carefully explain the definition of the
factor(s) to the evaluators so that they evaluate the jobs consistently.
4. Rank jobs - Next, the jobs are ranked. The simplest way to do this involves giving each
rater a set of index cards, each of which contains a brief descript of a job. These cards are
then ranked from lowest to highest.
5. Combine Rating - It is usually to have several raters rank the jobs independently. Finally,
divide all the ranked jobs into appropriate groups or classifications by considering the
common features of jobs such as similar duties, skills, or knowledge required. All the jobs
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within a particular group or classification receive the same wage or range of raters. Then,
once this is accomplished, the rating committee can simply average the ranking.
The ranking of jobs in an Academic Institution, based on Ranking Method, may be like this:
The application of the Ranking Method involves the following procedure:
1. Analyze and describe jobs, bringing out those aspects which are to be used for
purpose of job comparison.
2. Identify bench-mark jobs (10 to 20 jobs, which include all major departments and
functions). The jobs may be the most and least important jobs, a job midway between the two
extremes, and others at the higher or lower intermediate points.
3. Rank all jobs in the organization around the bench-mark jobs until all jobs are
placed in their rank order of importance.
4. Finally, divide all the ranked jobs into appropriate groups or classifications by
considering the common features of jobs such as similar duties, skills or training
requirements. All the jobs within a particular group or classification receive the same wage or
range of rates.
Ranking method is appropriate for small-size organizations where jobs are simple and
few. It is also suitable for evaluating managerial jobs wherein job contents cannot be
measured in quantitative terms. Ranking method being simple one can be used in the initial
stages of job evaluation in an organization.
Merits:
Ranking method has the following merits:
1. It is the simplest method.
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2. It is quite economical to put it into effect.
3. It is less time consuming and involves little paper work.
Demerits:
The method suffers from the following demerits:
1. The main demerit of the ranking method is that there are no definite standards of
judgment and also there is no way of measuring the differences between jobs.
2. It suffers from its sheer unmanageability when there are a large number of jobs
b) Grading Method or Job Classification:
• Grading method is also known as ‘classification method’. This method of job

evaluation was made popular by the U.S. Civil Service Commission. Under this method, job
grades or classes are established by an authorized body or committee appointed for this
purpose. A job grade is defined as a group of different jobs of similar difficulty or requiring
similar skills to perform them. Job grades are determined on the basis of information derived
from job analysis.
• The grades or classes are created by identifying some common denominator such as
skills, knowledge and responsibilities. The example of job grades may include, depending on
the type of jobs the organization offers, skilled, unskilled, account clerk, clerk-cum-typist,
steno typist, office superintendent, laboratory assistant and so on.
• There are several ways to categorize jobs. One is to draw up „class description‟ and
place jobs into classes based on their correspondence to these descriptions. Another is to
draw up a set of classifying rules for each class and then categorise the jobs according to
these rules. The usual procedure is to choose compensable factors and then develop class or
grade descriptions that describe each class in terms of amount or level of compensable
factor(s) in jobs.
Such factors are:
1. Difficultly and variety of work,
2. Supervision received and exercised,
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3. Judgment exercised,
4. Originality required,
5. Nature and purpose of interpersonal work relationships,
6. Responsibility,
7. Experience and,
8. Knowledge required
The following five steps are generally involved in the process of job classification.
1. Prepare job description for basic information about he job
2. Prepare job grading description for identification of different levels of jobs. Each
grade level must be distinct from the grade level adjacent to it. After establishing the grade
level, each job is assigned to an appropriate grade level on the basis of the complexity of
duties, non-supervisory responsibilities and supervisory responsibilities
3. Select grades and key jobs about 10 to 20 jobs, which include all the major
departments and functions and cover all the grades
4. Grade the key jobs. Key jobs are assigned to an appropriate grade level and their
relationship to each other studied.
5. Classify all the jobs on the basis of grade definitions. All the jobs in the same grade
receive the same wage or range of rate. For instance, menials may be put into one class;
clerks in another; junior officers in a higher class; and the tope executives in the top class.
The exhibit 2.2.
Gives us the gradation of five classes clerks designed by a title label and different
values of each job on the basis of respective job duties and responsibilities.
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Merits:
The main merits of grading method of job evaluation are:
1. This method is easy to understand and simple to operate.
2. It is economical and, therefore, suitable for small organizations.
3. The grouping of jobs into classifications makes pay determination problems easy to
administer.
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4. This method is useful for Government jobs.
Demerits:
- The job classification method also has some disadvantages. The major demerits of the
method are:
1. The method suffers form personal bias of the committee members.
2. It cannot deal with complex jobs which will not fit neatly into one grade.
3. This method is rarely used in industries.
4. It is difficult to know how much of a job’s rank is influenced by the man on the job.
5. The system is rather rigid and unsuitable for a large organization or for very varied work.
2. Quantitative Methods:
Quantitative methods divide jobs into component parts and require absolute or
relative value judgments about how much of a component part a particular job requires. The
two most popular types of quantitative systems are the point rating and factor comparison
methods.
a) Points Rating:
This is most widely used system of job evaluation. The method evaluates the
compensable factors of each job. It involves a more detailed, quantitative and analytical
approach to the measurement of job work.
Under this method jobs are broke down based on various identifiable factors such as
skill, effort, training, knowledge, hazards, and responsibilities and so on. Thereafter, points
are allocated to each of these factors. Weights are given to factors depending on their
importance to perform the job. Points so allocated to various factors of a job are then
summed. Then, the jobs with similar total of points are placed in similar pay grades. The sum
of points gives an index of the relative significance of the jobs that are rated
This system requires six steps and is usually implemented by a job evaluation
committee or by an individual analysis.
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1. Determine critical factors – The points rating method includes the following job factors for
allocation of points:
a) Safety of other;
b) Equipment of materials;
c) Assisting trainees;
d) Production or service quality
2. Determine the levels of factors – Since, the amount of responsibility or other factors may
vary from job t job, the point rating method rates several levels associated with each factor.
These levels help analysts reward different degrees of responsibility, skill, and other critical
factors.
3. Allocate points to sub-factors - With the factors listed down one side and the levels placed
across the top, the result is a point method matrix. Starting with highest level, the job
evaluation committee subjectively assigns the maximum possible points to each sub-factor.
The allocation allows the committee to give very precise weights to each element of the job.
4. Allocate points to levels – Once the total points for each job element are assigned under
highest level, analysts allocate points across each row to reflect the importance of the
different levels.
5. Develop points manually – Analysts then develop a point manual. Ti contains a written
explanation of each job element. It also defines what is expected for the various levels of
each sub-factor. These information is needed to assign jobs to their appropriate levels.
6. Apply the point system – When the point matrix and manual are ready, the relative value of
each job can be determined. This process is subjective. It requires specialists to compare job
descriptions with the point manual for each sub-factor. The match between the job
description and the point manual statement reveals the level and points for each sub-factor of
every job. The points for each sub-factor are added to find the total number of points for the
job. After the total points for each job are known, the jobs re ranked.
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Merits:
The method has the following merits:
1. It is the most comprehensive and accurate method of job evaluation.
2. Prejudice and human judgment are minimized, i.e. the system cannot be easily
manipulated.
3. Being the systematic method, workers of the organization favors this method.
4. The scales developed in this method can be used for long time.
5. Jobs can be easily placed in distinct categories.
Demerits:
The drawbacks of the method are:
1. It is both time-consuming and expensive method.
2. It is difficult to understand for an average worker.
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3. A lot of clerical work is involved in recording rating scales.
4. It is not suitable for managerial jobs wherein the work content is not measurable in
quantitative terms.
b) Factor Comparison Method:
This method is a combination of both ranking and point methods in the sense that it
rates jobs by comparing them and makes analysis by breaking jobs into compensable factors.
This system is usually used to evaluate white collar, professional and managerial positions.
The mechanism for evaluating jobs under this method involves the following steps:
1. Determine the compnesible factors – Analysts must first decide which factors are common
and important in a broad range of jobs. The critical factors like responsibility, skill, mental
efforts, physical effort and working conditions are most commonly used. Some organizations
use different factors for managerial, professional, sales, and other types of jobs.
2. Determine key jobs – Key jobs are those that are commonly found throughout the
organization and are common in the employer‟s market. Common jobs re sleeted because it
is easier to discover the market rate for them. Ideally, these benchmark jobs should be
accepted by employee as key jobs and should encompass a wide variety of critical factors to
be evaluated. Typically, 10-25 key jobs are selected by the committee.
3. Allocation present wages for key jobs – The job evaluation committee then allocates a part
of each key job‟s current wage rate to each critical factor. The proportion wage assigned to
each of the different compensable factors depends on the importance of the factor. The base
rate agreed upon by the company.
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4. Place key jobs on a factor comparison chart – Once the wage rates are assigned to the
compensable factors of each key job, this information is transferred to a factor comparison
chart. Key job titles re placed in the factor columns according to the rate of wages assigned to
the job for each critical factor.
5. Evaluate other jobs – The titles of key jobs in each column of the factor comparison chart
serve as benchmarks; other non-key jobs are then evaluated by fitting them in the rate scale
under each factor column.
Merits:
This method enjoys the following merits:
1. It is more objective method of job evaluation.
2. The method is flexible as there is no upper limit on the rating of a factor.
3. It is fairly easy method to explain to employees.
4. The use of limited number of factors (usually five) ensures less chances of
overlapping and over-weighting of factors.
5. It facilitates determining the relative worth of different jobs.
Demerits:
The method, however, suffers from the following drawbacks:
1. It is expensive and time-consuming method.
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2. Using the same five factors for evaluating jobs may not always be appropriate
because jobs differ across and within organizations.
3. It is difficult to understand and operate.
Now, all the four methods are summarized as follows:
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# Advantages of job evaluation
According to the International Labour Organization, job evaluation offers the

following advantages:
1. Job evaluation being a logical process and objective technique helps in developing
a equitable and consistent wage and salary structure based on the relative worth of jobs in an
organization.
2. By eliminating wage differentials within the organization, job evaluation helps in

minimizing conflict between labour unions and management and, in turn, helps in promoting
harmonious relations between them.
3. Job evaluation simplifies wage administration by establishing uniformity in wage

rates.
4. It provides a logical basis for wage negotiations and collective bargaining.
5. In the case new jobs, job evaluation facilitates spotting them into the existing wage
and salary structure.
6. In the modern times of mechanization, performance depends much on the machines

than on the worker himself/herself. In such cases, job evaluation provides the realistic basis
for determination of wages.
7. The information generated by job evaluation may also be used for improvement of
selection, transfer and promotion procedures on the basis of comparative job requirements.
8. Job evaluation rates the job, mot the workers. Organizations have large number of
jobs with specializations. It is job evaluation here again which helps in rating all these jobs
and determining the wages and salary and also removing ambiguity in them.
# Limitations/Drawbacks of job evaluation
In spite of many advantages, job evaluation suffers from the following

drawbacks/limitations
1. Job evaluation is susceptible because of human error and subjective judgment. .

While there is no standard list of factors to be considered for job evaluation, there are some
factors that cannot be measured accurately.
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2. There is a variation between wages fixated through job evaluation and market
forces. Say Kerr and Fisher, the jobs which tend to rate high as compared with the market are
those of junior, nurse and typist, while craft rtes are relatively low. Weaker groups are better
served by an evaluation plan then by the market, the former places the emphasis not on force
but on equity.
3. When job evaluation is applied for the first time in an organization, it creates
doubts in the minds of workers whose jobs are evaluated and trade unions that it may do
away with collective bargaining for fixing wage rates.
4. Job evaluation methods being lacking in scientific basis are often looked upon as
suspicious about the efficacy of methods of job evaluation.
5. Job evaluation is a time-consuming process requiring specialized technical

personnel to undertake it and, thus, is likely to be costly also.
6. Job evaluation is not found suitable for establishing the relative worth of the
managerial jobs which are skill-oriented. But, these skills cannot be measured in quantitative
terms.
7. Given the changes in job contents and work conditions, frequent evaluation of jobs
is essential. This is not always so easy and simple.
8. Job evaluation leads to frequent and substantial changes in wage and salary
structures. This, in turn, creates financial burden on organization.
# Essentials of a successful job evaluation programme
We have seen that each method of job evaluation is a mixed blessing with advantages
and disadvantages. So to say, no method is completely fool proof. In such case, organization
may try to adopt a job evaluation method blending all merits of different methods of job
evaluation. The following few suggestions may help in conducting a successful job
evaluation programme.
1. Before launching a job evaluation programme certain issues need to be decided

well in advance: employees to be covered, job evaluators – internal or external, consultation
of employees and existence of suitable atmosphere for launching of job evaluation
programme.
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2. An accurate and comprehensive job analysis, job description and job specification
should be done.
3. The management’s aim in relation to the job evaluation programme should be made
clear to all those concerned. There should not be any hidden agenda.
4. All the relevant internal and external factors should be taken into account before
arriving at the final shape of the programme.
5. The supervisors should have the complete and concrete knowledge of the
programme. They should be in the position to explain the programme to their people and also
how it works.
6. The details of the administration of the plan should be made simple to avoid
employee’s doubts, fears and apprehensions about the plan.
7. Efforts should be made to provide maximum transparency in preparation and

implementation of the programme. One ways to ensure it is encouraging employees‟
participation in the programme.
8. Every stage of programme should be given wide publicity through employee

publications, notice boards, departmental meetings and even letters to employees’ homes.
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Notes by Prof Sunny Mahadev Bagane Page 49

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# 16 STEPS IN CREATING A MARKET-COMPETITIVE PAY PLAN
1. Choose Benchmark Jobs
2. Select Compensable Factors
3. Assign Weights to Compensable Factors
4. Convert Percentages to Points for Each Factor
5. Define Each Factor’s Degrees
6. Determine for Each Factor Its Factor Degrees’ Points
7. Review Job Descriptions and Job Specifications 8. Evaluate the Jobs
9. Draw the Current (Internal) Wage Curve
10. Conduct a Market Analysis: Salary Surveys
11. Draw the Market (External) Wage Curve
12. Compare and Adjust Current and Market Wage Rates for Jobs
13. Develop Pay Grades 14. Establish Rate Ranges
15. Address Remaining Jobs
16. Correct Out-of-Line Rates
1. Choose Benchmark Jobs
Particularly when an employer has dozens or hundreds of different jobs, it’s

impractical and unnecessary to evaluate each of them separately. Therefore, the first step in
the point method is to select benchmark jobs. Benchmark jobs are representative of the jobs
the employer needs to evaluate. Like “accounting clerk” they should be common among
employers (thus making it easier to survey what competitors are paying for similar jobs).
2. Select Compensable Factors
The choice of compensable factors depends on tradition (as noted, the Equal Pay Act
of 1963 uses four compensable factors: skill, effort, responsibility, and working conditions),
and on strategic and practical considerations.
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For example, if your firm’s competitive advantage is quality, you might substitute
“responsibility for quality” for working conditions, or simply add it as a fifth factor.
Similarly, using “working conditions” makes little practical sense for evaluating executive
jobs.
The employer should carefully define each factor. This is to ensure that the evaluation
committee members will each apply the factors with consistency.
Here we can see one such definition, in this case for the factor job complexity. The
human resource specialist often draws up the definitions.
Factor Definition: What Is Job Complexity? Job complexity generally refers to the
amount of judgment, initiative, ingenuity, and complex data analysis that doing the job
requires. To what extent does the person doing this job confront unfamiliar problems, deal
with complex decisions, and have to exercise discretion?
3. Assign Weights to Compensable Factors
Having selected compensable factors, the next step is to determine the relative
importance (or weighting) of each factor (for instance, how much more important is “skill”
than “effort”?).
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This is important because for each cluster of jobs some factors are bound to be more
important than others are. Thus, for executive jobs the “mental requirements” factor would
carry far more weight than would “physical requirements.” To assign weights, we assume we
have a total 100 percentage points to allocate for each job. Then (as an illustration), assign
percentage weights of 60% for the factor job complexity, 30% for effort, and 10% for
working conditions.
4. Convert Percentages to Points for Each Factor
Next, we want to convert the percentage weights assigned to each compensable factor
into point values for each factor (this is, after all, the point method). It is traditional to assume
we are working with a total of l, 000 points (although one could use some other figure).
To convert percentages to points for each compensable factor:

multiply the percentage weight for each compensable factor (from the previous step) by
1,000.
This will tell you the maximum number of points for each compensable factor. Doing
so in this case would translate into 1,000 × 0.60 = 600 possible points for job complexity,
1,000 × 0.30 = 300 points for effort, and 1,000 × 0.10 = 100 points for
working conditions.
5. Define Each Factor’s Degrees
Next, split each factor into degrees, and define (write degree definitions for) each
degree so that raters may judge the amount or degree of a factor existing in a job.
Thus, for a compensable factor such as “job complexity” you might choose to have
five degrees, ranging from “here the job is routine” to “uses independent judgment.” (Our
definitions for each degree are shown in the previous table under “Job Complexity Degree
Definitions: What to look for in the Job.”)
The number of degrees usually does not exceed five or six, and the actual number
depends mostly on judgment. Thus, if all employees work either in a quiet, air-conditioned
office or in a noisy, hot factory, then two degrees would probably suffice for the factor
“working conditions.” You need not have the same number of degrees for each factor, and
you should limit degrees to the number necessary to distinguish among jobs.
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6. Determine for Each Factor Its Factor Degrees’ Points
The evaluation committee must be able to determine the number of points each job is
worth. To do this, the committee must be able to examine each job and (from each factor’s
degree definitions) determine what degree of each compensable factor that job has. For them
to do this, we must first assign points to each degree of each compensable factor.
For example, in our illustration, we have five possible degrees of job complexity, and
the job complexity compensable factor is worth up to 600 points maximum. In our case, we
simply decide that the first degree level of job complexity is worth 120 (or one-fifth of 600)
points, the second degree level is worth 240 points, the third degree level is worth 360 points,
the fourth degree level is worth 480 points, and the fifth degree is worth the maximum 600
points . Do this for each factor
7. Review Job Descriptions and Job Specifications
The heart of job evaluation involves determining the amount or degree to which the
job contains the selected compensable factors such as effort, job complexity, and working
conditions.
The team conducting the job evaluation will frequently do so by first reviewing each
job’s job description and job specification. it is through the job analysis that the manager
identifies the job’s duties and responsibilities and writes the job description and job
specification.
Ideally therefore, the job analyst included in the job description and specification
information about the compensable factors (such as job complexity) around which the
employer plans to build its compensation plan.
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8. Evaluate the Jobs
Steps 1–7 provide us with the information (for instance, on points and degrees) based
on which we can evaluate the jobs.
The committee has now gathered the job descriptions and job specifications for the
benchmark jobs they will focus on. Then, from their review of each job description and job
specification, the committee determines the degree to which each compensable factor is
present in each job.
Thus for, say, a job of master mechanic, the team might conclude (after studying the
job description and job specification) that the master mechanic’s job deserves the third degree
level of job complexity points, the first degree level of effort, and the first degree level of
working conditions.
Knowing the job complexity, effort, and working conditions degrees for each job, and
knowing the number of points we previously assigned to each degree of each compensable
factor, we can now determine how many job complexity, effort, and working conditions
points each benchmark job should contain.
(We know the degree level for each factor for each job, so we merely check the
corresponding points that we previously assigned to each of these degrees.)
Finally, we add up these degree points for each job to determine each job’s total
number of points. The master mechanic job gets 360 + 60 + 20 = 440 points from the
previous table. This enables us to list a hierarchy of jobs, based upon each job’s points.
We can soon turn to assigning wage rates to each job (step 9). But first, we should
define market-competitive pay plan and wage curve.
What should the pay rate be for each job? Of course, jobs with more points should
command higher pay. The question is what pay rate to use.
Our company’s current, “internal” pay rates? Or pay rates based on what the
“external” market is paying?
We have 2 definitions you must know before continue :
 market-competitive pay system :
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A pay system in which the employer’s actual pay rates are competitive with those in
the relevant labor market.
With a market-competitive pay system, the employer’s actual pay rates are
competitive with those in the relevant labor market, as well as equitable internally.
Put simply, the basic approach is to compare what the employer is currently paying
for each job (“internal pay”) with what the market is paying for the same or similar job
(“external pay”), and then to combine this information to produce a market-competitive pay
system.
 wage curve
Shows the relationship between the value of the job and the average wage paid for
this job.
Wage curves play a central role in assigning wage rates to jobs. The wage curve
typically shows the pay rates paid for jobs, relative to the points or rankings assigned to each
job by the job evaluation.
Plotting Wage Curve
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For example. Note that it shows pay rates for jobs on the vertical axis, and point
values for these jobs along the horizontal axis. The purpose of the wage curve is to show the
relationships between
(1) the value of the job (expressed in points) as determined by one of the job
evaluation methods and
(2) the pay rates for the job. (We’ll see that many employers may combine jobs into
classes or grades.
Here the wage curve would show the relationship between average pay rates for each
grade, and each grade’s average point value.) The pay rates on the wage curve are
traditionally those now paid by the employer.
However, if there is reason to believe the current pay rates are out of step with the
market rates for these jobs, the employer will have to adjust them. One way to do this is to
compare a wage curve that shows the jobs’ current wage rates relative to the jobs’ points,
with a second curve that shows market wage rates relative to points. We do this as follows.
9. Draw the Current (Internal) Wage Curve
First, to study how each job’s points relates to its current pay rate, we start by drawing
an internal wage curve. Plotting each job’s points and the wage rate the employer is now
paying for each job (or wage rates, if there are several for each job) produces a scatter plot as
in the following left curve
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We now draw a wage curve (on the right) through these plots that shows how point
values relate to current wage rates. We can draw this wage line by just estimating a line that
best fits the plotted points (by minimizing the distances between the plots and the curve). Or
we can use regression, a statistical technique. Using the latter will produce a current/ internal
wage curve that best fits the plotted points
10. Conduct a Market Analysis: Salary Surveys
Next, we must compile the information needed to draw an external wage curve for our
jobs, based on what other employers are paying for similar jobs.
Salary survey
A survey aimed at determining prevailing wage rates. A good salary survey provides
specific wage rates for specific jobs. Formal written questionnaire surveys are the most
comprehensive, but telephone surveys and newspaper ads are also sources of information.
Surveys of what others are paying—play a big role in pricing jobs. Employers use
salary surveys in three ways.
First, they use survey data to price benchmark jobs. Benchmark jobs are the anchor
jobs around which they slot their other jobs, based on each job’s relative worth to the firm.
Second, employers typically price 20% or more of their positions directly in the
marketplace (rather than relative to the firm’s benchmark jobs), based on a survey of what
comparable firms are paying for comparable jobs. (Google might do this for jobs like systems
engineer, whose salaries fluctuate widely and often.)
Third, surveys also collect data on benefits like insurance, sick leave, and vacations
for decisions regarding employee benefits.
Salary surveys can be formal or informal. Informal phone or Internet surveys are good
for checking specific issues, such as when a bank wants to confirm the salary at which to
advertise a newly open teller’s job, or whether some banks are really paying tellers an
incentive.
Some large employers can afford to send out their own formal surveys to collect
compensation information from other employers. These ask about things like number of
employees, overtime policies, starting salaries, and paid vacations.
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Many employers use surveys published by consulting firms, professional associations,

or government agencies. For example, the U.S. Department of Labor’s Bureau of Labor
Statistics’ (BLS) National Compensation Survey (NCS) provides comprehensive reports of
occupational earnings, compensation cost trends, and benefits (www.bls.gov/bls/wages.htm).
Private consulting and/or executive recruiting companies like Hay & Associates,
Towers Watson Global Data Services, and Aon/Hewitt (www.aon.com) publish data covering
compensation for top and middle management and members of boards of directors.
Professional organizations like the Society for Human Resource Management and the
Financial Executives Institute publish surveys of compensation practices among members of
their associations.
Using the Internet to do Compensation Surveys Internet-Based
An option makes it easy for anyone to access published compensation survey

information. Many of these sites, such as Salary.com, provide national salary levels for jobs
that the site then arithmetically adjusts to each locale based on cost-of-living formulas. To get
a real-time picture of what employers in your area are actually paying for, say, accounting
clerks, it’s useful to access the online Internet sites of one or two of your local newspapers.
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For example, the South Florida Sun-Sentinel (and many papers) uses a site called
Careerbuilder.com. It lists just about all the job opportunities listed in the newspaper by
category and, in many instances, their wage rates (www.careerbuilder.com)
11. Draw the Market (External) Wage Curve
The current/internal wage curve from step 9 is helpful. For example showing, as it
does, how a job’s current pay rate compares with its points helps the employer identify jobs
for which pay rates are currently too high or too low, relative to other jobs in the company.
(For example, if a job’s current wage rate is well above the internal wage curve, it suggests
that the present wage rate for that job is inequitably high, given the number of points we’ve
assigned to that job.)
What the current (internal) wage curve does not reveal is whether our pay rates are
too high, too low, or just right relative to what other firms are paying. For this, we need to
draw a market or external wage curve.
To draw the market/external wage curve, we produce a scatter plot and wage curve as
in the following
However, instead of using our firm’s current wage rates, we use market wage rates
(obtained from salary surveys). The market/external wage curve thereby compares our jobs’
points with market pay rates for our jobs
12. Compare and Adjust Current and Market Wage Rates for Jobs
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How different are the market rates other employers are paying for our jobs and the
current rates we are now paying for our jobs? To determine this, we combine both the
current/internal and market/external wage curves on one graph, as in this curve.
The market wage curve might be higher than our current wage curve (suggesting that
our current pay rates may be too low), or below our current wage curve (suggesting that our
current wage rates might be too high). Or perhaps market wage rates are higher for some of
our jobs and lower for others.
Based on comparing the current/internal wage curve and market/external wage

curve, we must decide whether to adjust the current pay rates for our jobs, and if so how.
This calls for a policy decision by management. Strategic considerations influence

this decision. Do our strategic aspirations suggest we should pay more, the same, or less than
competitors?
For example, we might decide to move our current internal wage curve up (and
thereby give everyone a raise), or down (and thereby perhaps withhold pay increases for
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some time), or adjust the slope of the internal wage curve to increase what we pay for some
jobs and decrease what we pay for others.
In any case, the wage curve we end up with (the orange line in the following curve)
should now be equitable internally (in terms of the point value of each job) and equitable
externally (in terms of what other firms are paying)
13. Develop Pay Grades
Employers typically group similar jobs (in terms of points) into grades for pay
purposes. Then, instead of having to deal with hundreds of job rates, you might only have to
focus on, say, pay rates for 10 or 12 pay grades.
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For example, Serco, a services firm which operates a London, England, light railway
system, set up pay grades after ranking jobs using a system based on knowledge,
management complexity, and the job’s magnitude and impact on the organization.
A pay (or wage) grade
Is composed of jobs of approximately equal difficulty or importance as determined by

job evaluation. If you used the point method of job evaluation, the pay grade consists of jobs
falling within a range of points.
If the ranking method was used, the grade consists of a specific number of ranks. If
you use the classification system, then your jobs are already categorized into classes (or
grades).
Determining The Number Of Pay Grades
It is standard to establish grades of equal point spread. (In other words, each grade
might include all those jobs falling between 50 and 100 points, 100 and 150 points, 150 and
200 points, etc.) Since each grade is the same width, the main issue involves determining how
many grades to have. There doesn’t seem to be any optimal number, although 10 to 16 grades
for a given job cluster (shop jobs, clerical jobs, etc.) seems to be common. You need more
pay grades if there are, say, 1,000 jobs to be graded than if there are only 100.
14. Establish Rate Ranges
Most employers do not pay just one rate for all jobs in a particular pay grade. For
example, GE Medical won’t want to pay all its accounting clerks, from beginners to long
tenure, at the same rate, even though they may all be in the same pay grade.
Instead, employers develop vertical pay (or “rate”) ranges for each of the horizontal
pay grades (or pay classes).
These pay (or rate) ranges often appear as vertical boxes within each grade, showing
minimum, maximum, and midpoint pay rates for that grade, as in the previous wage structure
above. Specialists call this graph a wage structure.
A wage structure above graphically depicts the range of pay rates—in this case, per
hour—paid for each pay grade.) Alternatively, you may depict the pay range for each class or
grade as steps in a following table.
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It easier to attract experienced, higher-paid employees into a pay grade at the top of
the range, since the starting salary for the pay grade’s lowest step may be too low to attract
them. Pay ranges also let companies provide for performance differences between employees
within the same grade or between those with different seniorities.
Compensation experts sometimes use compa ratios. The compa ratio equals an
employee’s pay rate divided by the pay range midpoint for his or her pay grade. A compa
ratio of 1 means the employee is being paid exactly at the pay range midpoint.
If the compa ratio is above 1 then the person’s pay rate exceeds the midpoint pay for
the job. If it is below then the pay rate is less than the midpoint. The compa ratio can help
reveal how many jobs in each pay grade are paid above and below competitive market pay
rates.
15. Address Remaining Jobs
To this point, we have focused our job evaluation on a limited number of benchmark
jobs, as is traditional. We now want to add our remaining jobs to the wage structure.
We can do this in two ways. We can evaluate each of the remaining jobs using the
same process we just went through. Or we can simply slot the remaining jobs into the wage
structure where we feel they belong, without formally evaluating and assigning points to
these jobs.
Jobs similar enough to our benchmark jobs we can easily slot into the wage structure.
Jobs we’re not sure about should undergo the same job evaluation process; we assign points
to them and precisely slot them into the wage structure.
16. Correct Out-of-Line Rates
Finally, the wage rate the firm is now paying for a particular job may fall well off the
wage curve or well outside the rate range for its grade, as illustrated in this curve.
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This means that the average pay for that job is currently too high or too low, relative
to other jobs in the firm. For underpaid jobs, the solution is clear:
Raise the wages of underpaid employees to the minimum of the rate range for their
pay grade. Current pay rates falling above the rate range are a different story. These are “red
circle,” “flagged,” or “overrates.” There are several ways to cope with this problem.
One is to freeze the rate paid to these employees until general salary increases bring
the other jobs into line.
A second option is to transfer or promote the employees involved to jobs for which
you can legitimately pay them their current pay rates.
The third option is to freeze the rate for 6 months, during which time you try to
transfer or promote the overpaid employees. If you cannot, then cut the rate you pay these
employees to the maximum in the pay range for their pay grade.
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# Pricing Managerial and Professional jobs
Developing compensation plans for managers or professionals is similar in many

respects to developing plans for any employee.
The basic aim is the same: to attract, motivate, and retain good employees. And job
evaluation is about as applicable to managerial and professional jobs (below the top executive
levels) as to production and clerical ones.
There are some big differences though. Managerial jobs tend to stress harder to-
quantify factors like judgment and problem solving more than do production and clerical
jobs.
There is also more emphasis on paying managers and professionals based on their
performance or on what they can do, rather than on static job demands like working
conditions. And one must compete in the marketplace for executives who sometimes have
rock star pay.
So, job evaluation, although still important for management jobs, usually plays a
secondary role to issues like bonuses, incentives, market rates, and benefits.
a) What Determines Executive Pay?
The traditional wisdom is that company size and performance significantly affect top
managers’ salaries. Yet early studies showed that these explained only about 30% of CEO
pay: “In reality, CEO pay is set by the board taking into account a variety of factors such as
the business strategy, corporate trends, and most importantly where they want to be in a short
and long term.”
One study concluded that three main factors:
 Job complexity (span of control, the number of functional divisions over which the
executive has direct responsibility, and management level)
 The employer’s ability to pay (total profit and rate of return)
 The executive’s human capital (educational level, field of study, work experience),
accounted for about two-thirds of executive compensation variance.
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In practice, CEOs exercise influence over their boards of directors, so their pay
sometimes doesn’t reflect strictly arms-length negotiations.
Many employers do use job evaluation for pricing managerial jobs (at least, below the
top jobs). The basic approach is to classify executive and management positions into grades,
each with a salary range.
As with no managerial jobs, one alternative is to rank the executive and management
positions in relation to each other, then group into classes those of similar value.
However, firms also use the job classification and point methods, with compensable
factors like position scope, complexity, and difficulty. As with any jobs, job analysis, salary
surveys, and the fine-tuning of salary levels around wage curves play roles.
b) Compensating Executives
Compensation for a company’s top executives usually consists of four main elements.
Base pay includes the person’s fixed salary as well as, often, guaranteed bonuses such as
“10% of pay at the end of the fourth fiscal quarter, regardless of whether the company makes
a profit.”
Short-term incentives are usually cash or stock bonuses for achieving short-term
goals, such as year-to-year sales revenue increases.
Long-term incentives aim to encourage the executive to take actions that drive up the
value of the company’s stock and include things like stock options; these generally give the
executive the right to purchase stock at a specific price for a specific period.
Finally, executive benefits and perks include things such as supplemental executive
retirement pension plans. With so many complicated elements, employers must also be alert
to the tax and securities law implications of their executive compensation decisions
Salary is traditionally the cornerstone of executive compensation. On it, employers

layer benefits, incentives, and perquisites—all normally conferred in proportion to base pay.
Procter & Gamble Co.’s CEO was paid $15.2 million recently, including a base salary
of $1.6 million, a cash-based bonus of $2.4 million, stock options valued at $4.4 million,
stock awards of $6.45 million, plus perks such as air travel.
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Top executive compensation packages can be whoppers. The CEO of Oracle earned
just over $96 million in one recent year, and the CEO of Walt Disney Corporation $37.1
million.91 But overpaid as many critics may think they are, one expert says CEOs with the
highest 20% of compensation produced stock returns 60% greater than those of other firms in
their industries.
Executive compensation emphasizes performance (we will discuss it later) more than
do other employees’ pay plans, since organizational results reflect executives’ contributions
more directly than those of lower-echelon employees.
Indeed, boards are boosting the emphasis on performance-based pay. The big issue
here is identifying the appropriate performance measures. Typical short-term measures
include revenue growth and operating profit margin. Long-term measures include rate of
return above some predetermined base.
c) Compensating Professional Employees
In compensating professionals, employers should first ensure that the person is

actually a “professional” under the law.
However, calling someone a professional doesn’t make him or her one. In addition to
earning at least $455 per week, the person’s main duty must “be the performance of work
requiring advanced knowledge,” and “the advanced knowledge must be customarily acquired
by a prolonged course of specialized intellectual instruction.”
One company hired a high school graduate as an exempt “product design specialist
II,” earning $62,000 per year. The job required 12 years of relevant experience, but no
particular education. The court ruled the job was non-exempt.
Beyond that, compensating professional employees like engineers presents unique

problems. Analytical jobs emphasize compensable factors such as creativity and problem
solving, ones not easily compared or measured.
Furthermore, how do you measure performance? For example, the success of an

engineer’s design depends on how the firm develops and markets it. Employers can use job
evaluation for professional jobs.
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Compensable factors here tend to focus on problem solving, creativity, job scope, and
technical knowledge and expertise. Firms use the point method and job classification.
In practice, firms rarely rely on just job evaluation for pricing professional jobs.
Factors like creativity (as noted) are hard to measure, and non-pay issues often influence
professionals’ job decisions.
For example, a few years ago Google raised its employees’ salaries by 10% in the
face of defections by even their highest-paid professionals, such as the head of its Chrome OS
team, to Facebook.
Many of these Google professionals, although well paid by most standards, still felt
underpaid. Some moved to jobs they hoped would have more challenges. Others may have
sought younger firms with new stock options.
Most employers therefore emphasize a market-pricing approach for these jobs. They
price professional jobs in the marketplace as best they can, to establish the values for
benchmark jobs.
Then they slot these benchmark jobs and their other professional jobs into a salary
structure. Each professional discipline (such as engineer) usually ends up having four to six
grade levels, each with a broad salary range. This helps employers remain competitive when
bidding for professionals who literally have global employment possibilities.
# Competency-based pay definition
According to competency based pay, an employee is paid for the skills and knowledge
he possesses and not according to the job or position he is currently holding. Competency
based pay structure motivates employees as the employee feels he is being paid for the worth
he/she has. The entire structure of the company revolves around this then. The motivated
employees rise and get promoted. The employees are not paid by the virtue of their position
but competency, hence competency based pay.
a) Importance of competency based pay
When businesses become flatter eliminating non-value adding activities, competency-

based pay may complement the move by assigning value to an employee’s work in terms of
the competencies that enable the staff member to perform effectively in his role. It rewards
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employees by better compensation and benefits for the skills, knowledge and behaviors
important for personal performance and organizational success and not just for the activities
they perform.
Competency based pay encourages better performance and facilitates lateral career
development. It is suitable in organizations where there is an over-emphasis on outputs, fit
with a performance appraisal is required, cultural change towards greater flexibility is sought.
A compensation based on an employee's performance is also appreciated by an employee.
b) Advantages of competency based pay
There are many pros of competency based pay. Some of its advantages are:
1. It helps motivate employees to perform better and contribute to the company
2. Since the employees get rewarded for something they feel they deserve, they become
loyal to the company
3. Competency based pay helps push employees beyond their comfort zone as they feel
they can earn more based on their competencies
4. Subordinates can also earn more as compared to seniors based on their competency
levels
c) Disadvantages of competency based pay
On the contrary to the benefits, there are certain cons for competency based pay.
Some disadvantages are:
1. Sometimes competition within the organization can lead to a disjoint in a team, which
affects overall output
2. In some cases, competency based pay can lead to favouritism towards a particular
employee
Hence, this concludes the definition of Competency Based Pay along with its overview.
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# Broad Banding
Broad banding is defined as a method for evaluation and construction of job grading
structure or typical salary band of an organization that falls between by spot salaries against
numerous job grades or bands, Broad banding is to establish what is required to pay for a
specific positions and incumbents within the existing positions.
Broad banding is the expression useful when an organization with extremely wide
salary bands, much more surrounding compared against the traditional salary structures.
While a typical salary band has around 40 percent variation in compensation between its
minimum and maximum, for broad banding this would characteristically have about 100
percent difference
Broad banding has been successfully implemented in large, hierarchical organizations

which attempted to flatten their organizations and remove levels of management.
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For example, organizations that had eight levels of management could eliminate four
levels, widen the salary ranges of the remaining four levels, and simply slot each manager
into one of those ranges.
With broad banding, a manager can more easily encourage his/her employees to
broaden their skills and abilities. This is valuable to organizations because employees with
broad skills and abilities are critical for the success in a total quality/continuous improvement
environment. In contrast, the jobs in traditional organizations are narrow and specialized. In
order for employees to advance in pay and responsibility, they have to further develop their
specialized skill. Thus a bias exists against the broadening of skills.
The advantages of Broad Banding are as follows:-
1. It Streamlines hierarchy structure within the organization, this helps during a change
in the organizational structure
2. It promotes and facilitates Internal Movement within the organization and is
considered to put forward other attributes of a position, other than the pay grade
which is already disclosed
3. Gives more transparency and added trust in management
The disadvantages of Broad Banding are as follows:-
1. There is absolutely no awareness of external market rates as the traditional salary

bands cannot be compare against broad banding
2. Promotions, Broad banding leads to lack of promotions within the organization as
there are fewer salary bands leads to fewer opportunities to climb the organizational
ladder.
# Cafeteria-style or flexible compensation
Cafeteria-style or flexible compensation is based on the idea that only the individual
employee knows what package of rewards would best suit personal needs.
Employees choose their own "blend" of rewards which may be both more satisfying
and less expensive. As such, employees who hate risk could opt for more base pay and less
incentive pay. Tradeoffs between pay and benefits could also be selected.
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Cafeteria-style compensation is based on the notion of different rewards having

different dollar costs associated with them. The key ingredient is careful cost analysis to
make sure the dollar cost of the package an employee selects meets employer budgetary
limits
a) Cafeteria Plan Selections
Cafeteria plan selections include insurance options, such as contributions to health

savings accounts, or group term life insurance and disability insurance. Other popular
selections include retirement plan contributions, adoption assistance plans, flexible spending
accounts and cash benefits. Flexible plan selections allow employees to tailor a cafeteria plan
to their specific needs.
For example, the best selection for an employee reaching retirement might be to make
contributions to his or her 401(k) plan, while an employee with a large family may be better
suited to a health plan that has broad coverage.
b) Cafeteria Plan Contributions
Employees must estimate how much money they are going to contribute to their
cafeteria plan before the tax year begins. The elected amount of money is divided by the
number of payroll periods and deducted from each paycheck for the duration of the plan;
allocated money not spent by the employee is forfeited.
For instance, if John allocates $2,000 for medical expenses but only spends $1,500, he
forfeits $500. Employees that exceed their allocated spending amount, pay a partial premium
to their employer. For example, if an Emma spends $1,000 over her allocated contribution,
she pays a portion of that amount herself.
c) Cafeteria Plan Limitations
The individualized setup of cafeteria plans makes them more complex and time-
consuming to administer. Employers must maintain constant communication with each
employee about changes in the cost of benefits, their coverage and their use of benefits.
Employees changing circumstances may result in continual administration. This can partly be
rectified by only allowing staff to change their benefits periodically.
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For example, a company might only allow employees to change their cafeteria plan
benefits once a year. If an employee uses the full benefit of their plan and leaves the company
before they have paid their yearly contribution, the employer incurs a loss.
# Wage Differentials
Wage differentials are a necessary concomitant of the wage system in modern

industrial organization. They are directly related to the economic resources of a country,
including manpower, growth of national; income the pace of economic development. An
economic and social welfare activity depends on a large major on such wage differentials.
Wage differentials reflect differences in physical and mental abilities of workers, in
productivity and efficiency of management and in consumer preferences. The word
differential means relating to, or showing a difference, or making use of a specific difference
or distinction. Wage differential is an element of location selection that is a wage scale
reflecting the average schedule of workers’ pay in an area that takes into account the
performance of related tasks or services. Wages differ in different employments or
occupations, industries and localities, and between persons in the same employment or grade.
One therefore comes across the terms as occupational wage differentials, inter-industry, inter-
firm, inter-area or geo graphical differentials and personal differentials.
i. Occupational Differentials
These indicate that since different occupations require different qualifications,

different wages of skill and carry different degrees of responsibility, wages are usually fixed
on the basis of the differences in occupations and various degrees of skills.
The basis functions of such differentials are:
(a) To induce workers to undertake “more demanding,” “more agreeable or

dangerous” jobs, or those involving “a great chance of unemployment, or wide uncertainty of
earnings.”
(b) To provide an incentive to young person to incur the costs of training and
education and encourage workers to develop skills in anticipation of higher earnings in
future.
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(c) To perform a social function by way of determining the social status of workers. In
countries adopting a course of planned economic development, skill differentials play an
important role in manpower and employment programs, for they considerably help in
bringing about an adequate supply of labour with skills corresponding to the requirements of
product plans.
Inter-occupational differentials may comprise skilled, unskilled and manual wage

differentials; non-manual and manual (white and blue-collar); and general skill differentials.
Occupational wage differentials generally follow the changes in the relative supplies of
labour to various occupations.
ii. Inter-firm Differentials
Inter-firm differentials reflect the relative wage levels of workers in different plants in
the same area and occupation. The main causes of inter firm wage differentials are:
(a) Difference in the quality of labour employed by different firms;
(b)Imperfections in the labour market; and
(c) Differences in the efficiency of equipment, supervision and other non-labour

factors.
Differences in technological advance, managerial efficiency, financial capacity, age

and size of the firm, relative advantages and disadvantages of supply of raw materials, power
and availability of transport facilities - these also account for considerable disparities in inter-
firm wage rates. Lack of coordination among adjudication authorities, too, is responsible for
such anomalies.
iii. Inter-area or Regional Differentials
Such differentials arise when workers in the same industry and the same occupational
group, but living in different geographical areas, are paid different wages. Regional wage
differentials may be conceived in two senses. In the first sense, they are merely a part of
inter-industry differentials in a particular region.
The industry mix varies from one area to another, and for this reason alone, the
general average of wages would be expected to vary. In the second sense, they may represent
real geographical differentials, resulting in the payment of different rates for the same type of
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work. In both cases, regional differentials affect the supply of manpower for various plants in
different regions.
Such differentials are the result of living and working conditions, such as
unsatisfactory or irksome climate, isolation, sub-standard housing, disparities in the cost of
living and the availability of manpower. In some cases, regional differentials are also used to
encourage planned mobility of labour.
iv. Inter-industry Differentials:
These differentials arise when workers in the same occupation and the same area but
in different industries are paid different wages. Inter-industry differentials reflect skill
differentials. The industries paying higher wages have mostly been industries with a large
number of skilled workers, while those paying less, have been industries with a large
proportion of unskilled and semi-skilled workers.
Other factors influencing inter-industry differentials are the extent of unionization, the
structure of product markets, the ability to pay, labour-capital ratio, and the stage of
development of an industry.
v. Personal Wage Differentials:
These arise because of differences in the personal characteristics (age or sex) of

workers who work in the same plant and the same occupation. “Equal pay for equal work”
has been recommended by the I.L.O. Convention (No. 100), as also by Industrial Courts,
Labour Tribunals, the Minimum Wages Committee and the Fair Wage Committee. But in
practice this principle has not been fully implemented because in occupations, which involve
strenuous muscular work, women workers, if employed, are paid less than men workers.
Lack of organization among women employees, less mobility among them, their lower
subsistence and their weak constitution are other reasons which bring them lower wages than
their male counterparts receive.
vi. Sector Differentials:
Wage differential between agricultural sector and industrial sector is generally a

characteristics of underdeveloped countries like India. The main reasons for such sectoral
differences in wage rates are the nature of the workers groups whether they are an organized
group or an un organized group. And the level of economic development of the sector.
Page 77
Agricultural labour in India belongs to the unorganized sector of the economy.

Agricultural workers are not able to better their living conditions as organized effort is
lacking among them where as workers in the industrial sectors have their own unions to fight
for them. Unlike industrial sector no industry cum region principle is followed while fixing
wages in the agricultural sector. It is the strength of the industrial unions that gives them a
higher level of wages as compared with their counter parts in the agricultural sector.
# COMPONENTS OF PAY STRUCTURES IN INDIA
1) Basic Salary + Dearness allowance
The Basic component is the primary component and the core of the salary structure.
It is usually the largest component of the CTC making up for 40-45% of the total CTC. The
basic plays an important role in defining the salary as other components like Provident Fund,
Gratuity and ESIC are dependent on it.
Dearness Allowance (DA) was introduced as part of the salary as a means to reduce
the burden of inflation on salaried employees. This amount is usually set to about 5% of the
total CTC and like the Basic component it also has an effect on PF, ESIC etc.
You should keep the following in mind while setting the amounts for Basic and DA:
1. If it’s too high, it will increase the tax liability of the employee since this component
is fully taxable. It also affects the liability of the employer since higher contributions
would be required for PF, ESIC etc.
2. If it’s too low, then you may not be able to meet the minimum wage norms set by the
respective state government. Since minimum wages are updated regularly, you would
run the risk of falling below the recommended wage limit.
2) House Rent Allowance (HRA)
The House Rent Allowance, as the name suggests is a component that employees can
leverage if they are living in rented accommodations. The amount that you can claim as tax
deduction under HRA cannot be more than 50% of your basic in a metro or 40% of your
basic in a non-metro. Hence, depending on where your workplace is located, this salary
component will usually be set at 40% or 50% of the basic salary.
Page 78
1. When Should Employee declare the amount to get Tax benefit

At the beginning of new financial year along with your other tax saving plans
(like LIC,PPF, Loan , etc), before 25th April’ 2018 employees need to declare their
details with their employer for FY 2018-2019
2. When should Employee submit actual proof to HR
Usually by the end of the financial year employees need to submit their tax
saving documents with their concern HR. Resigned Employee : At the time of Exit
employee should ensure to provide their actual tax saving proofs to concern HR
before the FnF settlement gets finalised or else excess tax will be recovered from the
settlement amount.
3) Leave travel allowance (LTA)
Leave travel allowance (LTA) remunerates employees for their travel within the
country. This component is widely used by employers due to the tax benefits associated with
it. An employee can claim tax benefits for the fare expenses paid for his/her family when
they take a holiday. However, there are restrictions to what you can claim as tax benefits:
1. Only fare expenses are covered: Only the travel fare expenses can be claimed. Stay
and food on your trip aren’t covered.
2. Travel must be within India: If you travel to a foreign country, the expenses aren’t
tax deductible. Only travel within the country is covered.
3. What counts as family: Immediate family that are mainly dependant on the
employee are covered under LTA.

At the beginning of new financial year along with your other tax saving plans (like
LIC,PPF, Loan , etc), before 25th April’ 2018 employees need to declare their details
under ‘Tax Declaration’ tab enter the Tax Saving Plans for FY 2018-2019.
Usually by the end of the financial year employees need to submit their tax
saving documents with their concern HR.
Page 79
Resigned Employee: At the time of Exit employee should ensure to provide

their actual tax saving proofs to concern HR before the FnF settlement gets finalised
or else excess tax will be recovered from the settlement amount.
4) Conveyance Allowance
Note: With the introduction of standard deduction, exemption on Conveyance

allowance has been removed effective April 2018 onwards. Employees don’t need to collect
or submit any Conveyance proof.
5) Medical Allowance
Note: With the introduction of standard deduction, exemption on Medical allowance

has been removed effective April 2018 onwards. Employees don’t need to collect or submit
any Medical proof.
6) Child Education Allowance
This component is paid out towards tuition fees of employees’ children and is tax
deductible up to Rs. 100 every month for a maximum of two children. Hence, this amount is
usually set to not more than Rs. 2,400 a year for an employee.
Provide the count of children to your concern HR, for availing tax benefit on
Education Allowance.
Usually by 15th January’ 2019 employees need to submit their tax saving
documents with their concern HR.
Resigned Employee : At the time of Exit employee should ensure to provide their
actual tax saving proofs to concern HR before the FnF settlement gets finalised or else excess
tax will be recovered from the settlement amount.
7) Special Allowance
Special allowance is the balancing component of the salary structure. It is usually

used by organization as the leftover of the CTC when the rest of the components have been
Page 80
paid out. This component is fully taxable and is also taken into account for the calculation of
Provident Fund.
Deductions
Deductions are elements of the salary that are part of the CTC but are deducted from
the in-hand salary that employees receive. Let’s take a deeper look at some of the most
common salary deductions and what they mean.
1) Provident Fund
Provident Fund (PF) is calculated at 12% of Basic + DA + Special Allowance. The

employer and the employee both make an equal contribution of 12% each. This is applicable
to companies who have 20 or more employees on their payroll. If an employee’s Basic +
DA + Special Allowance are less than Rs. 15,000 then it is mandatory for Provident Fund to
be deducted. Other employees can opt out by filling form 11 or can choose to have PF
deducted on the ceiling of Rs. 15,000 which would be Rs. 1,800 monthly.
2) Employees State Insurance Corporation (ESIC)
Deductions towards ESIC are mandatory for employees whose gross salary is not
more than Rs. 21,000. It is only applicable in companies where there are 20 or more
employees within the Rs.21,000 gross salary bracket. Employees have to make a
contribution of 1.75% of the gross salary and employers have to make a contribution of
4.75% of the gross salary.
3) Professional Tax
Professional tax is the tax levied by Governments of certain states on salaried

employees. The states where professional tax is applicable are Karnataka, Bihar, West
Bengal, Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu, Gujarat, Assam,
Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya Pradesh, and Sikkim.
The amount of profession Tax that is deducted varies from state to state where they
are applicable.
Page 81
4) Labour Welfare Fund
Labour Welfare Fund, as the name suggests, is a contribution made by salaried

employees for the benefit of the labour class. This contribution is applicable in the states of
Karnataka, West Bengal, Maharashtra, Andhra Pradesh, Kerala, Goa, Delhi, Punjab, and
Haryana & Madhya Pradesh.
The contribution amount varies from state to state and is relatively small. The
employer and the employee both make contributions and the employer pays approximately
twice the employee contribution. The payments are made semi-annually in the months of
June and December.
Like Professional Tax, Labour Welfare Fund contributions also vary from state to
state where they are applicable.
Page 82
Note: The salary structures is updated effective FY 2018-2019.
Component Tax Deduction Is PF Is ESIC Part of Minimum Amount

Applicable? Applicable Gratuity
Basic Fully Taxable Yes: Yes Yes As per Minimum Wages
DA Fully Taxable Yes Yes Yes As per Minimum Wages
Medical Fully Taxable No Yes No None

effective April
2018
Conveyance Fully Taxable No Yes No None

effective April
2018
HRA Tax Exemption No Yes No Varies Depending on the

subject to the state
minimum of
the following 3
conditions
1) Actual HRA
2) 50% of
Basic + DA if
Metro or 40%
of Basic + DA
if non metro
3) Total Rent –
10% of Basic
LTA As per actuals No Yes No None

of the fare
expenses on
leave travel
Children Rs. 100 No Yes No None

Education monthly for
Allowance each child up
to 2 children
Children Hostel Rs. 300 No Yes No None

Allowance monthly per
Page 83
child for up to
2 children
Mobile & Actual No No No None

Telephone expenses
Reimbursement incurred on
one mobile
phone and one
landline
Car Maintenance Rs. 1800/- p.m. No No No None

in case Cubic
Capacity of
engine is 1.6
litres or else
Rs. 2400 p.m.
Driver Salary Actuals of No No No None

driver’s salary
up to Rs. 900
monthly
Books & Actual No No No None

Periodicals expenses
Special Fully Taxable No Yes No None
Page 84
Deductions, when applied to the CTC give you the actual take-home salary that an
employee gets. Here are some of the most common deductions:
Deductions How is it calculated? Whom does it apply to?
Companies that have more than 20 or

Employer and Employee each
Provident more employees. It is mandatory for
contribute Contribution 12%
Fund employees whose Basic+DA + Special is
of Basic + DA + Special
less than Rs. 15,000 a month
Employer Contribution is If a company has 20 or more employees

4.75% of Gross Salary; who have a gross salary of less than Rs.
ESIC
Employee Contribution is 21,000 a month, then it is applicable to
1.75% of Gross Salary all those employees
Professional
Varies from state to state All employees of applicable states
Tax
Labour All employees of applicable states, that

Varies from state to state
Welfare Fund might depend on designation
Page 85
What’s the ideal salary structure?
So what’s the best way to draft salary structures? To answer this, we’ve put together
a table of the common components that make up a salary. We’ve also added recommended
amounts to each component that should assist you in drafting an ideal salary structure.
Component Recommendation
Basic 40-50% of CTC
DA 5% of CTC
HRA 50% of Basic + DA if metro and 40% if non-metro
Conveyance Rs. 1,600 a month
Medical Rs. 1250 a month
No real benchmark, can even be used as a plug,

LTA
but if not can set as 10% of Basic
ESIC (Employer Contribution) 4.75% of Gross Salary
ESIC (Employee Contribution) 1.75% of Gross Salary
Special Usually used as a balancing component
Provident Fund (Employer)* 12% of Basic + DA
Provident Fund (Employee) 12% of Basic + DA
Professional Tax As per state wise slabs
Labour Welfare Fund As per state wise slabs
֍֍֍֍֍
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Compensation Management

DESIGNING & PRICING PAY PLANS

# Concept and related terminologies of job evaluation

Job description: It is an organized, factual statement of the duties and responsibilities of a

Job specification: It is a statement of the minimum acceptable human qualities necessary to

# Definition of Job Evaluation

• In the words of the Netherlands Committee of Experts on Job Evaluation, “job

• According to Wendell French, “job evaluation is a process of determining the worth

We may define job evaluation as.

A process of analyzing and describing positions, g them and determining their

It is the quantitative measurement of relative job worth for the purpose of

# Objectives of job evaluation

4. Eliminate wage inequalities;

5. Use as a basis for fixing incentives and different bonus plans;

7. Provide information for work organization, employees‟ selection, placement,

# Principles of job evaluation

3. The elements should be clearly defined and properly selected;

5. Foreman should participate in the rating of jobs in their own departments;

7. Too many occupational wages should not be established. It would be unwise to

# Job Evaluation Process

• Step One -Job Description –

• Step Two – Approval –

• Step Three – Review-

• Step Four – Evaluation –

The Job Evaluation Committee (JEC) is a multi-member committee, the members of

• Step Five – Confirmation –

# Methods of Job Evolutions

a) Ranking Method of job evaluation

The application of the Ranking Method involves the following procedure:

Ranking method has the following merits:

1. It is the simplest method.

2. It is quite economical to put it into effect.

3. It is less time consuming and involves little paper work.

The method suffers from the following demerits:

b) Grading Method or Job Classification:

• Grading method is also known as ‘classification method’. This method of job

Such factors are:

1. Difficultly and variety of work,

2. Supervision received and exercised,

5. Nature and purpose of interpersonal work relationships,

1. Prepare job description for basic information about he job

The exhibit 2.2.

The main merits of grading method of job evaluation are:

1. This method is easy to understand and simple to operate.

2. It is economical and, therefore, suitable for small organizations.

4. This method is useful for Government jobs.

1. The method suffers form personal bias of the committee members.

3. This method is rarely used in industries.

d) Production or service quality

The method has the following merits:

1. It is the most comprehensive and accurate method of job evaluation.

5. Jobs can be easily placed in distinct categories.

The drawbacks of the method are:

1. It is both time-consuming and expensive method.

2. It is difficult to understand for an average worker.

3. A lot of clerical work is involved in recording rating scales.

b) Factor Comparison Method:

This method enjoys the following merits:

1. It is more objective method of job evaluation.

2. The method is flexible as there is no upper limit on the rating of a factor.

3. It is fairly easy method to explain to employees.

5. It facilitates determining the relative worth of different jobs.

The method, however, suffers from the following drawbacks:

1. It is expensive and time-consuming method.

Designing & Pricing Pay Plans

Designing & Pricing Pay Plans