Emerging Issues and Trends

UNIT 19 COMPARATIVE INTERNATIONAL

COMPENSATION
Objectives

After going through this unit, you should be able to:

• understand approaches in designing compensation,
• map out various alternative system of compensation, and
• appreciate merits and demerits of competency based and performance based
compensation systems.
Structure
19.1 Introduction
19.2 Emerging Trends
19.3 Limitations of the Job Related Compensation
19.4 Paradox of Performance Related Compensation
19.5 Compentency Based Compensation
19.6 Summary
19.7 Further Readings

19.1 INTRODUCTION
The traditional approach to the design of compensation package involves four basic
components: the basic pay, some mechanism of compensation for loss of purchasing
power of money, incentive for putting effort beyond the norm and fringe benefits.
The basic pay for any position is determined based on its relative value in the
hierarchy of jobs within the organization. The loss of earning power of money due to
inflation is compensated either by linking this component with the cost of living
index or by periodic adjustment of basic pay to reflect the change in the purchasing
power. The third component of compensation package is linked to some measure of
productivity depending on job characteristics. Fringe benefits are incidental expenses
connected with the position, which are normally in the nature of reimbursement. The
inter se relativity within the family of jobs is maintained by creating explicit linkages
between basic pay and other components of compensation.
The traditional approach to compensation worked well with stable organizations and
clearly defined job descriptions for various positions in the hierarchy. However the
rapid and fundamental changes in the business environment in which today is
organizations operate are making the traditional approach inappropriate in aligning
compensation with the aspiration of people and needs of the organizations. Under the
impact of environmental pressures, organizations world over are radically changing
themselves. Organizations are becoming flatter, less rigid, team based and
networked. The traditional concept of job is diapering as organizations try to adapt
themselves to the instability of the environment. Organizations are no longer satisfied
with their employees doing what is prescribed for them in their job descriptions.
Employees are expected to be entrepreneurial and innovative beyond the confines of
their job descriptions. The very concept of explicit and implicit work contract is
undergoing a fundamental change. Employers can no longer pretend or promise
lifetime employment. What at most can be promised is the employability.
All these changes impose on organizations a need to rethink fundamentally the
processes and philosophy of management of human resources. There is a definite
need to create a right alignment between the compensation package and the emerging
realities of business in terms of employers and employees expectations. This unit is
designed to bring out some trends, which either are on the horizon or are actually
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being adopted by progressive
 Comparative International
organization world over. The emphasis is deliberately on comparison of traditional Composition
versus the emerging approaches and not on comparative levels of international
compensation.

19.2 EMERGING TRENDS

Alternative systems of compensation are gradually emerging in response to new
demands of a radically different business environment. New approaches are based on
the premise that the compensation system should be aligned to other human resources
management processes. A well-designed and implemented system should reward the
right kind of results and the right kind of behaviors. Employers are rethinking their
position based on three fundamental questions:
1. Should the pay for performance be delivered as base salary or a periodic
incentive?
2. Should pay for performance be based on individual or team results or a
combination of both?
3. Should the pay for performance be focussed on the job or the person performing
the job?
These basic questions throw up a range of approaches for designing compensation
packages:
A. Job Content Related Compensation
The most traditional and still the most prevalent approach is to link the annual
increment ' to the performance. The basic pay is a job specific range, which is wide
enough to accommodate all levels of performance. The binding restriction is that the
basic salary including cumulative annual increments remains within the prescribed
job-specific range.
B. Performance Related Compensation
An advance on the traditional approach has emerged in the form of combination of
job specific basic pay, performance based annual increment and periodic incentive
linked to individual or group performance. In this approach, the variable component
of compensation based on individual or group performance is becoming more
significant. The attempt here is to keep a significant part of the compensation
package as a variable cost linked to performance and limit the fixed component
represented by basic pay. The system allows the risk of business to be shared with
employees.
C. Competency Related Compensation
The most recent development in the field of compensation has been to link basic pay
to the job holder competencies and not to the worth of the job or the performance of
the employee against some quantitative targets. The approach is based on the premise
that the possession of competencies that is critical to the strategic needs of the
employer are a significant predictor of superior performance. This approach changes
the focus from the compensation being retrospective to having a strong prospective
component. In this approach, compensation is used to reinforce acquisition and
demonstration of competencies in the performance of work that leads to the
achievement of strategically significant results.

19.3 LIMITATIONS OF THE JOB RELATED

CMPENSATION
Globalization of business and technological revolution lithe two forces that are
fundamentally changing the work place-have forced the organizations to tear down
the hierarchies, do away with functional specializationis and organize all activities
according to entire business processes that cut across traditional departments and
functions. These developments have replaced the job by a role that has much vaguer
boundaries and require much greater depth and breadth of skills and abilities. Since
jobs are disappearing in the work place, the traditional approach to compensation is 13
becoming irrelevant and in
Emerging Issues and Trends
a way dysfunctional. It is becoming difficult to identity the precise boundaries of the
job an employee is assigned. What can, at best, be identified is the role he is likely to
play personally do. His contribution to the business process then becomes a measure
of his value to the organization the more an organization The more an organization
moves towards flattening of hierarchies , process orientation and customer focus ,
more will be the irrelevance of the traditional system as an instrument of motivation

19.4 PARADOX OF PERFORMANCE RELATED

COMPENSATION
Performance related compensation has been extensively tried in the United Kingdom.
The experience has been mixed. There has been overwhelming skepticism about its
effects on performance, yet it is being adopted by an increasing number of both
public and private organizations. It is estimated that at least two-third organizations
in UX have individual-based performance-related compensation. The experience
appears to suggest that the expected benefits were not realized in practice. Firstly, the
performance- related compensation did not motivate even those with high
performance ratings. Secondly, there was little evidence to suggest that it helped to
retain high performers and no evidence that poor performers left the organizations.
Thirdly, employees were negative or broadly neutral about its impact on changing the
culture. Finally, employees were unclear as to whether performance related
compensation schemes rewarded on a fair basis. These criticisms appear to support
the view that the financial rewards fail to motivate employees unless there are clear
linkages between the effort and performance on the one hand and between
performance and reward on the other. These linkages tend to weaken when
boundaries of jobs are ambiguous and job complexity is high These are precisely the
conditions that prevail when hierarchies are delayered, individual jobs are replaced
by broadly defined roles in the team work environment and work is organized on the
basis of processes rather than specialized functions. These types of performance
related compensation packages are becoming increasingly more ineffective as the
organization try to cope with the unstable and unpredictable changes in the business
environment.

19.5 COMPETENCY BASED COMPENSATION

As pointed out earlier, the competency-based compensation system is based on the
premise that the possession of appropriate competencies is highly correlated with
superior performance. Acquisition and demonstration of competencies relevant to the
role assigned to the employee can therefore be taken as a surrogate measure of
performance for the purpose of compensation. There are three building blocks of the
system:
The concept of Competencies
In order to understand the conceptual underpinning of this system, it would be
necessary to understand the definition of competency; The Hay/McBer definition
describes a competency as a characteristic of an individual that has been shown to
drive superior job performance. The competencies manifest themselves as a complex
of knowledge, skills and personal traits that together drive superior performance. In
other words, competencies describe what makes people effective in a given role.
While the knowledge and skill components of the competencies are clearly visible,
the personal attributes like self-image, traits and motives are hidden components and
are difficult to understand and influence.
The language of competency provides a common framework and vocabulary for
describing people, jobs and systems that 'bring people into roles, reward them and
pass them on to the next-role. A competency is also a definition of role excellence
since it is based on behaviors associated with superior performance. Competency
defines what kind of behaviors can and should be used to satisfy objectives most
effectively. For individual employee, it means an understanding not only of what
essential objectives are to be achieved but also of what skills, knowledge and
behaviors are needed to achieve these objectives.
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 Comparative International
It also snakes it clear that while knowledge and skills are necessary for top Composition
performance, they are not sufficient to guarantee it. The underlying competencies
often suggest behaviors that lead to longer-term success and ensure that key
objectives are achieved.

Concept of Career Stages

Career stages or competency levels define the broad complex of knowledge, shills
and personal attributes that an employee is expected to acquire and demonstrates he
grows in his career. There are normally four stages or levels:

Stage #1: Stage of Dependency

• Willingly accepts supervision
• Demonstrates competence on a portion of a larger project
• Competent at detailed and routine tasks
• Shows directed creativity and initiative
• Able to perform well under time /budget pressure
• Learns `how' of doing things
Stage#2: Stage of Independence
• Assumes responsibility for definable projects
• Relies less on supervision, works independently and produces significant results
• Develops credibility and a reputation
• Increases his technical competence and ability
• Builds an internal network
• Develops as an innovator
Stage #3: Stage of contribution through other
• Stimulates others through ideas and knowledge
• Involves himself as a mentor or idea leader in developing others
• Increases in technical breadth
• Represents the organization effectively to clients and external bodies
• Builds a strong internal and external network communicates significance of
external developments
• Leader in team performance
Stage # 4: Stage of leadership through vision
• Provides global technical direction to the organization
• Influences decisions and participates in securing resources .
• Represents the organization on critical strategic issues.
• Sponsors technology initiatives
• Champions significant technology and product
Broad Pay Bands

The base pay structure that best serves a system of compensation based on
competencies comprises a few broad bands. Each band has a sufficient range to
accommodate pay steps from entry to a level where the employee acquires and
demonstrates competencies necessary for his promotion to the next band. Bands are
fewer in number than traditional pay grades. There are two aspects of the linkages
between competency levels and pay bands that deserve attention. 15
Emerging Issues and Trends
Firstly, movements between levels are totally dependent on the jobholder acquiring
the necessary competencies and do not depend upon the availability of vacancies.
Therefore, jobholders progress from one level to another over time as soon as they
have demonstrated the necessary competencies. It is therefore possible for an entire
team of people to start at the lowest level and steadily progress to reach the highest
levels`
Secondly, there is an upper, limit to progression based on demonstrated
competencies. At some stage, structure becomes necessary and then further
progression becomes dependent on the availability of vacancies. At what stage does
this contingency arise depends on the nature of operations.
This kind of structure has significant implications for controlling wage and salary
costs. As each level of competency carries its own pay levels and progression is not
constrained by vacancies, there is a real risk of paying for inputs only without a
strong linkage to the output. This problem is minimized by judicious selection of
criterion for defining competencies. To be effective, the competency model must be:
• Based on competencies that really drive superior performance;
• Clear about the requirements to move to the next level so that there is real
improvement in performance;
• Based upon the competencies that reflect the real needs of the organization.
360 Degree Feed Back
The fourth building block of competency-based compensation system is 360-degree
feedback. Instead of confining the feedback to the immediate superior, data a-elating
to the demonstration of task critical competencies is also gathered from peers, fellow
team members, subordinates and internal and external customers. Summaries of this
data are made available to. the individual employee and his manager. Individuals
have a far richer and credible information on how others see them and their
contribution to the organization. Managers are also in stronger position to coach and
develop their direct reports.
Creating Linkages between Achievement and Reward
Method of establishing linkages between the four building blocks of competency
based compensation system is a two step process described in the following sections.
Evaluating Contribution
In competency-related model of compensation, the contribution of the employee is
evaluated in terms of the level of competencies demonstrated during the assessment
period. This. Evaluation is done by explicitly expressing the achievement or the level
of attainment on each competency and then aggregating across the entire set of
competencies critical to the attainment of key or strategic business objective. If the
competencies in the concerned set differ widely in importance, specified weightage is
applied to each competency and then weighted aggregate is calculated. A typical
matrix used for this purpose is shown in figure 1.

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 Comparative International
Aggregate score can then be either expressed as .a percentage of the highest Composition
competency. level of the relevant set or an absolute value. Assessment of
achievement on individual competency is made using a table, which gives a clear
definition of each level of achievement. An example is given in figure 2 in respect of
influencing skill as a constituent of the relevant set.
Levels of Achievement
Level l Level 2 Level 3 Level 4
Under some Independently Communicates Uses communication
supervision and or maintains excellent effectively across skills and personal
guidance effectively communication with functional boundaries credibility to shape
uses written and all appropriate to add value to the long term technical
verbal parties. Has strong business and gain direction and other
communications. technical credibility support for significant business
Reports findings and within the group. recommendations. decisions.
recommends Uses well written Uses strong verbal and Credibility within
immediate to short reports and written skills to bring SBU and /or
term action for self persuasive verbal about technical company has been
and direct contacts.- skills to convince decisions that affect established by a
others to adopt both his function and history of
recommendations. multifunctional efforts. recommendations
that resulted in
significant
contribution to
business.

Involves clear written and verbal communications, understanding of other is

viewpoints and demonstrated business practical understanding in packaging ideas.
This competency
is built on personal reputation and internal selling skills necessary to influence
decision-makers and drive projects important to the business.
Linking Basic Pay to Achievement
In the traditional approach, evaluating the job in terms of factors like skill,
responsibility, effort and working conditions arrives at the differentials in pay for
different jobs, which constitutes the job content. In the competency based model
where job is replaced by a loosely defined role in a team based environment, the
differentials are calculated for each employee on the basis of acquired and
demonstrated competencies assessed in the manner identified in this section. These
differentials are then organized in to career stages or competency levels that are
linked to broad pay bands.
The linkage between the competency levels and pay bands is shown in figure 3.

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Emerging Issues and Trends
Traditional Vs Competency-based Model
The total reward strategy required for the competency-based workplace to function
effectively is quite different from what is appropriate for traditional workplace. The
differences are illustrated in the following table
Table: Traditional vs. Competency Based System
Reward component Traditional System Competency-based System

Basic pay Based on internal job Based on competency levels

evaluation and external demonstrated by the employee
market survey comparisons
Basic Pay Progression Represents one more year of Represents greater width and
service. depth an employee adds to his
value to the core business
processes.
Variable Pay Privilege of membership of Share of the employee as a
the group. partner in the success of the
business.
Total cash compensation What an employee is entitled Amount he has 'actually
to under contact of earned through contribution.
appointment.
Benefits Company decides as a Employeeis share for
matter of policy. undertaking risk and
accountability as a business
collaborates.
Quality of Work Life Does what an employee is Employee is empowered to
told. His labor is important make decisions and use his
and not his ideas. mind and involvement.
Career Opportunity Job for life for loyalty. Employee and the employer
are mutually responsible for
career. Employer offers
opportunity as business
demands and employee has to
keep his competencies in line
with demand.
Total Rewards Based on entitlements per Share of success as a business
the contact. partner.

The competency-based compensation is becoming common in knowledge and service

based organizations although other traditional industries are also adopting this model
if extensive use of IT and business process reengineering has been incorporated in
their operations. The use of this model is not culture specific and hence is being
adopted even in newly industrialized countries.
Appropriateness of Competency-based Compensation
Although competency-based compensation is becoming common in developed
economies of the west, it is more appropriate where the following conditions exist.
• Uncertain environment where the results are not within the control of the
employee
• Qualitative and process jobs where competency behaviors such as well
organized and helpful are important for delivering customer satisfaction.
• Self-managed teams where individual results are less important than
contribution to the group process.
• Developmental jobs where jobs are designed to grow.
• Changing organizations where employee is potential to contribute to the
organization in future may be more important than his past performance.
Balanced Total Performance-based Compensation
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The competency-based model of compensation will certainly benefit many organizations if
 Comparative International
the system is designed keeping the approach outlined in part 22.6 in mind. It is Composition
however , riskey if it neglects the output side of the equation. Fro some employees
out based incentives are a positive motivation for superior performance despite some
criticism outlined earlier .Some organization are therefore adopting a balanced total
performance model , which integrates competency –based model with output
parameters . Figure 2 shows how performance in terms of output and competence are
balanced in the total performance

In aline job of low complexity, achievement of job results may. be of weighted 90.%
and demonstration of competencies only 10%. At the other end of the spectrum, for
example, in a customer service role, competence may be w6glilal 100 per cent. In
mixed modes, achievement of performance. is quantified and past oriented while
competency-based review is qualitative and is future oriented. In this model, the
competency review is used for employee. development and career planning.

19.6 SUMMARY
The title of this unit envisages a comparison of the approaches, which are being
adopted across the globe in response to the emerging character of business
environment. It is a reality that organizations are changing in fundamental ways and
this phenomenon is not confined to any particular part of the world or a group of
countries based on some criterion of classification. The systems emerging in North
America will continue to evolve and get refined based on experience. The general
direction set will however continue to influence the thinking on the subject all over
the world. The globalization of business will also ensure that the new approaches
being tried elsewhere will also affect thinking in North America. There is enough
evidence to support the view that these changes address the basic concerns of people
employed in the organizations and organizations themselves and will have cross-
cultural validity. Even if each national or regional culture has some specificity with
reference to these developments, they will respond to these approaches in their own
unique way around the basic premises implied in the new approaches. The basic
theme of this unit is that the concern underlying the evolving philosophy and
practices of human resources, of which compensation is a part, are universal and will
have to be adopted all over the globe. Some time lag will however be inevitable
depending upon the intensity of environmental change and the uniqueness of the
national or regional culture.

19.7 FURTHER READINGS

Franklin Hartle Transforming the Performance Management Process Kogan Page Ltd
London.

Gene W. Walton, Dramatically New HR Systems for Todayis Realities:How well do

they translate across cultures? APFHRM n95-Conference.

Derek Pritchard, Relating Pay to Performance.

Edward Lawler and Susan Cohen, Designing Pay Systems for Teams,ACA Journal
Autumn 1992.
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