ESTABLISHING STRATEGIC

PAY PLANS
Human Resource Management

NADIR KHAN
Establishing pay plans, managers first need to understand some basic factors in determining pay rates.
Employee compensation includes payments like salary and wages, bonuses, profit sharing, overtime pay,
recognition rewards and sales commission, etc.

There are two components of compensation:

1. Direct financial payments – monetary benefits

a. Basic Pay
b. House Rent Allowance
c. Cost of living Allowance
d. Utility Allowance
e. Conveyance Allowance
f. Bonuses
g. Mobile phone Allowance
h. Fuel Reimbursement
i. Medical Reimbursement
j. Travelling Reimbursement
k. Club subscription
2. Indirect financial payments – non monetary benefits
a. Health / Medical Insurance
b. Group Life insurance
c. Interest free loan
d. Privileges and Sick leaves
e. Pension plans
f. Educational assistance
g. Company maintained cars and bikes including insurance

Job Evaluation Method

Employers use two basic approaches to setting pay rates:

1. Market based approaches

2. Job evaluation methods

1. Market based approaches

 Small firms like shops, super-store, simply using a market-based approach.

 Government fixed minimum wage rate applicable in all factories and industries.

2. Job evaluation methods

 It is the process of accessing the relative worth of the jobs in an organization.

 The job are evaluated on the basis of its content and the complexity involved in its operation and
position according to its position.
 Evaluating the worth of each job can be done using these methods;
i. Ranking
ii. Job classification
 iii. Point method
iv. Factor comparison

i. Ranking:

 Simplest job evaluation method ranks based on some overall factor like job difficulty.
 Several steps in the job ranking method;
o Obtain job information
o Select and group jobs
o Select compensable factors
o Rank jobs
o Combine ratings
 Table of job ranking to understand

Ranking Order Annual pay scale

Manager Rs. 1,200,000
Asst. Manager Rs. 600,000
Executive Rs. 450,000
Officer Rs. 300,000

ii. Job Classification:

 Number of classes or grades to describe group of jobs

 Compare job description with class description
 Class description reflect differences of job groups at various difficulty levels
 Class description that most closely agrees with job description determines job classification

iii. Point Method:

 It is quantitative technique, it involves

o Compensable factors, each having several degrees
o The degree to which each of these factors in present in the job
o Different number of points assigned to each degree of each factor
o Evaluation committee determines the degree to which each compensable factor and is
present in the job, it can calculate a total point value for the job by adding up the
corresponding points of each factor. The result is a quantitative point rating for each job.

iv. Factor comparison:

 A scientific method designed based on a factors rather than the role as a whole.
 Factor comparison breaks down a job into small number of key factors;
o Skills
o Effort
 o Knowledge
o Responsibilities
 To identify benchmark jobs, which are well-known positions than retain consistency.
 Each job is assigned a salary, which is further broken down for each factor.

A Market-Competitive Pay Plan

To simply price their jobs based on what others employers are paying – use a market-based approach.
However, employers also base plan their pay plans on job evaluation methods.

These evaluation assigns values to each job to help to produce a pay plan in which each job’s pay is
internally equitable, based on job’s value to the employer.

Managers must adjust pay rates to fit the market, according to survey of market and reports. In a market-
competitive pay plan a job’s compensation reflects the job’s value in the company, as well as what other
employers are paying for similar jobs in the marketplace.

The 16 steps in creating a market-competitive pay plan begin with choosing benchmark jobs:

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

Equity and its impact on pay rates

Equity theory states that if a person perceives an inequity, a tension or drive will develop in the person’s
mind and the person will be motivated to reduce or eliminate the tension and perceive inequity.

In compensation, managers should address four forms of equity:

1. External equity – Job’s pay rate compares in one company to the job’s pay rate in other
companies.
 2. Internal equity – Job’s pay rate compares to other jobs within the same company, e.g... Sales
manager compared pay rate to production manager pay rate.
3. Individual equity – Individual’s pay as compared with his or her coworkers are earning within
the same company. It is based on each person’s performance.
4. Procedural equity – processes and procedures used to make decisions regarding the allocation
of pay.

Managers are various means to address such equity issues:

 They use salary surveys (surveys of what other employers are paying) to monitor and maintain
external equity.
 They use job analysis and comparisons of each job (job evaluation) to maintain internal equity.
 They use performance appraisal and incentive pay to maintain individual equity.
 They use communications, grievance mechanism, and employee participation to help ensure that
employees view the pay process as procedurally fair.

Establishing pay rates

The process of establishing pay rates while ensuring equity, consisting of five steps:

1. Salary survey
2. Job evaluation
3. Pay grades
4. Wave curves
5. Pay rates

Pricing Managerial and Professional Jobs

Compensation plans for managers or professionals is similar in many respects to developing plans for any
employee. There are some big differences though;

 Managerial jobs are stress harder-to-quantify factors like judgement and problem solving skills.
Managerial pay typically consists of base-pay, short-term and long-term incentives and executive
benefits.
 Professional jobs based on their performance or what can they do on demands like working
conditions. Compensable factors to focus on problem solving, creativity, job scope and technical
knowledge and expertise. Firms use the point method and job classification.