SYED ALI RIZWAN

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MID TERM EXAM

Question 2:

Seniority and Longevity Pay:

This pay system reward the employees with the time to time additions to the base pay according to the
length of the time they are providing service for the organization. This system assumes that the
employees becomes more valuable to the company with time and another reason is that they think that
the employees will leave as soon as they don’t see any progress to their pay with time.

Government organizations in Pakistan mostly rely on this pay system. This pay system has some
advantages over other pay systems. This system is easy to administer since it requires easy formulas and
are formula driven and includes very little variations time to time. There would be no concept of
favoritism in this pay system because every employee is treated the same way. This pay system
develops loyalty in the employees towards the organization, they will treat it as their own. Employee
turnover will be minimum. This pay system produces a workforce of highly experienced employees who
have performed the same job over years.

A company prefers those for work who have experience in a similar field for years. Having seniority
means highly experienced which means working security for the employees.

The employees in seniority pay plan thinks that they are being treated fairly because the pay increases
according to a standard instead of judgement of supervisors.

Question 3

As the owner of the business i will select person focused pay plan.
A manufacturing sector faces rapid changes in technologies and innovations. So the company has to stay
up to date and ready for the future required skills, competencies and knowledge so that it can survive in
the market. Person focused pay is based on rewarding employees for the future.
The reason that I will go for the person focused pay plan is the technological innovation. The changing
technologies demand a variety of new job skills from employees. So rewarding our employees for
gaining and acquiring these new skills and competencies will help my company meet the market
demand. And this will employees to continue the process of learning new skills.

Person focused pay system focuses on paying according to the job related competencies, knowledge
and skills that the employees acquire.

Person focused pay system can provide job enrichment and job security to the workers. Job enrichment
makes the employees more motivated and it creates an exciting work environment. This will also
increase flexibility of employees.

Person focused pay plans help companies in designing motivating jobs with regard to autonomy and skill
variety.
Person focused programs lead to increase in employee motivation, commitment and improved job
satisfaction. As the person focused programs make the employees very flexible so these plans provide
better job security to the employees.

Question 4:
Incentive Pay:

Incentive pay or variable pay rewards employees for partially or completely attaining a predetermined
work objective. Incentive or variable pay is defined as compensation, other than base wages or salaries
that fluctuates according to employees’ attainment of some standard, such as a pre established formula,
individual or group goals, or company earnings.

Advantages of incentive pay plans or programs

• Focused on key performance targets that produce employee and organizational gain

• Variable cost of payouts are linked to the achievement of competitively important results

• Directly relating payouts to achieving operating performance objectives

• Used to distribute success among those responsible for producing that success

Incentive pay is typically a financial reward but as an employer you can also offer non-financial
incentives, often called casual incentives. This could be things like gifts or dinners that the employer has
already paid for. It could also involve giving employees the option to buy shares in a company.

Traditional Pay System:

In traditional pay plans, employees receive compensation based on a fixed hourly pay rate or annual
salary. Some companies use incentive pay programs that replace all or a portion of base pay in order to
control payroll expenditures and to link pay to performance.
1. Most merit raises perceived as little more than cost of living increases due to low levels
2. Sets pay level in a narrow band with regular increase.
3. Increase meant for promotion, merit
4. Less distinction between merit and cost of living increase
5. Most merit raises perceived as little more than cost of living increases due to low levels

Bases for traditional pay system:

• Based on cost of living and labor market

• Base wage or salary
• Evenly distributed between employees
• Correlated with seniority
• Based on individual performance daily, weekly or monthly

Advantages:

• Guaranteed promotion and benefits

• Job security perception of a fair treat
• Facilitate of the administration of the pay program
• Avoid perceptions of favoritism
• It suits some cultures which doesn’t accept younger’s in power.

Contrast between traditional and incentive pay plans:

 A traditional pay includes the normal annual or monthly salary which increases periodically on
the basis of seniority or on the merit bases.
 Organizations use incentive pay programs in order to reward individual employees or teams or
whole company based on their performance.
 Traditional pay plans is output based while the incentive pay plans is performance based.
 Incentive pay is a one time payment. Employees receive the combination of the base pay and
the incentive pay where the base pay is the greater portion of the compensation. More
employees nowadays are getting incentive pay than before because companies are focusing on
controlling the costs and motivate employees consistently to show excellent performance.
 In the present, most of the companies are using a mix of traditional and incentive pay programs.
 If employees do want more pay and nothing about the plan serves to reduce its importance to
them.
 Desired rewards result from good performance is more likely to appear where the competitive
nature of the plan is minimized
 In some incentive plans, good performance is likely to result in social acceptance, esteem,
respect, and feelings of achievement. If a person feels that he or she benefits from another’s
good performance and it becomes the norm of the group to perform well, then the possibilities
of good performance are increased.
 The belief that negative consequences will result from good performance is quite possible under
incentive pay plans. It has been shown that employees can believe that rates will be cut if they
 produce too much and that social rejection by peers, working themselves out of a job, or even
getting fired if they fail to meet the standard can be anticipated.
 employees must believe that good performance will lead to more pay.Incentive pay plans do
foster the belief that good performance leads to more pay. This belief is based in part on the
employee’s confidence that the measurements do reflect his or her performance

Question 5
The challenges faced by compensation professionals are as follows:

1. External competition:
There’s a huge competition in the world today between different organizations and every
business is ready to pay the top salary to get the cream of the best talent. Companies need to
attract and retain that talent. For that reason the company must establish a compensation
package that’s better than other companies that are lying in the same industry and same
location.
Even if you are constrained by budget, you have to innovate your compensation system in such
a way that it doesn’t affect your budget in serious way. For example, attractive vacation time
offs, child care facility etc.

2. Internal equity:
Wage gap is a big issue in businesses and even in government. It is estimated that it would take
202 years to close the wage gap. It is very hard for the compensation management to close that
gaps between the wages. Every talent has a different price to the business. This give rise to
wage gap.

3. Executive compensation:
When it comes to decide the salaries of senior executives , many different shades of the
compensation management come into play. This is very important for the public companies
because they need to reveal the salaries of their top employees which may affect the
shareholders and the general public.
The packages has to be attractive enough to attract new talents and also must be acceptable.

4. Closing thoughts:
The compensation system or strategy should be aligned and connected with the overall business
strategies, goals and financial data so that we can get the whole picture of its effectiveness. If
there is any mistake in aligning those strategies, it causes a quarrel between the employees and
the management. A proper planning can help overcome this challenge.
Right tools and gadgets can help to move form manual work and transactions to automatic and
focus on what is important. Management should focus on motivating the employees and work
to build a great culture and environment in the business.

5. Gaps in employees expectations:

 There’s always a conflict between the expectations of employees of the pay and what they get
paid by the organization. And the hr is stuck in between. The employees usually don’t focus on
the entire compensation package. They focus on the net pay.
We can fill this gap by giving statements in order to clearly communicate the value of the entire
compensation.

6. Lack of digitization:
Lack of digitization affects the compensation management. It takes a lot of time from design to
implementation and then communicating it. This whole process requires a lot of data, formulas
and sheets on excel. This challenge can be solved by using softwares like comport. They save
time and is comfortable. It makes smarter designs and engage compensation plans for the
workforce. Softwares can be bring up to 90% efficiency in the compensation management.

Question 1:
Business strategy and compensation strategy are commonly recognized as important strategic issues in
an organization over the past decades. Collectively, they play a crucial role in determining organization’s
performance and economic success, hence the correlation and interaction between the two is gaining
more attention among companies and researchers. Literature states that an optimal alignment between
business strategy and compensation strategy facilitates organization to secure its competitive
advantages in specific market place.

A comprehensive compensation strategy provides guiding principles for administering your

organization’s total rewards programs. The strategy defines and outlines the purpose and objective
behind each program. Questions you need to answer can include:

• Base pay: how will you pay your employees relative to competitors? What market percentile should
you target?

• Incentive pay: what incentive programs will you offer? What will the mix between base and incentive
pay look like? How will employees earn incentives?

• Benefits: what is the purpose of each of your benefits programs, and how will your offerings compare
with others?

• Paid time off: what is your organization’s approach to work-life balance and how does your paid time
off (PTO) program support that approach?

For the base pay component above, a compensation strategy example might read:

“When employees are fully proficient in their position and are meeting expectations in some areas and
exceeding expectations in others, their compensation should be consistent with the 75th percentile of
the defined competitive market.”

A total rewards strategy example should be viewed in context with the plan it supports. Your pay,
benefits, career growth, and talent development strategies should work together to form a strategic
total rewards approach that supports your business goals.