Employee compensation refers to all forms of pay going to employees and arising from their employment.

It has
two main components,
● direct financial payments (wages, salaries, incentives, commissions, and bonuses)
● Supplemented financial compensation (stock options, hiring bonuses-compensate for the deferred
compensation lost when leaving a former company)
● indirect financial payments (financial benefits like employer-paid insurance and vacations).
● In turn, there are two basic ways to make direct financial payments to employees: base them on
increments of time or on performance.

BASIC FACTORS IN DETERMINING PAY RATES

1. Legal Considerations in Compensation

2. Union Influences on Compensation Decisions
3. Competitive Strategy, Corporate Policies, and Compensation
The compensation plan should advance the firm’s strategic aims–management should produce an
aligned reward strategy.

Developing an Aligned Reward Strategy Questions to ask:

1. What must our company do (for instance in terms of improving customer service), to be successful
in fulfilling its mission or achieving its desired competitive position?
2. What are the employee behaviours or actions necessary to successfully implement this competitive
strategy?
3. What compensation programs should we use to reinforce those behaviours? What should be the
purpose of each program in reinforcing each desired behaviour?
4. What measurable requirements should each compensation program meet to be deemed successful
in fulfilling it’s purpose?
5. How well do our current compensation programs match these requirements?

EQUITY & ITS IMPACT ON PAY RATES

Equity Theory of Motivation postulates that people are strongly motivated to maintain a balance between what
they perceive as their inputs or contributions, and their rewards.

With respect to compensation, managers should address four forms of equity: external, internal, individual, and
procedural.

● External equity refers to how a job’s pay rate in one company compares to another job’s pay in
other companies.
● Internal equity refers to how fair the job’s pay rate is when compared to other jobs within the same
company.
● Individual equity refers to the fairness of an individual’s pay as compared with what his or her
coworkers are earning for the same or very similar jobs within the company, based on each
individual’s performance.
● Procedural equity refers to the “perceived fairness of the processes and procedures used to make
decisions regarding the allocation of pay.

Addressing Equity Issues Managers use salary surveys to monitor and maintain external equity. They use job
analysis and job evaluation comparisons of each job to maintain internal equity. They use performance appraisal
and incentive pay to maintain internal equity. And they use communications, grievance mechanisms, and
employee’s participation in developing the company’s pay plan to help ensure that employees view the pay
process as transparent and procedurally fair.

ESTABLISHING (TRADITIONAL) PAY RATES

The process of establishing pay rates while ensuring external, internal, and procedural equity consists of five
steps:

1. Conduct a salary survey of what other employers are paying for comparable jobs.
2. Determine the worth of each job in your organisation through job evaluation.
3. Group similar jobs into pay grades.
4. Fine-tune pay rates.

Step 1. The Salary Survey

It’s difficult to set pay rates if you don’t know what others are paying, so salary surveys–surveys of what others
are paying–play a big role in pricing jobs. Salary surveys can be formal or informal. Informal phone or Internet
surveys are good for checking specific issues. Some large employers can afford to send out their own formal
surveys to collect compensation information from other employers.

Using the Internet to Do Compensation Surveys Some Pay Data Web Sites:

Step 2. Job Evaluation

Job evaluation aims to determine a job’s relative worth. The basic principle of job evaluation is this: Jobs that
require greater qualifications, more responsibilities, and more complex job duties should receive more pay than
jobs with lesser requirements.

Compensable Factors skills, effort, responsibility, and working conditions. Firms emphasise three factors:
know-how, problem solving, and accountability. Walmart bases its wage structure on knowledge, problem-solving
skills, and accountability requirements.

Preparing for the Job Evaluation The main steps include identifying the need for the program, getting
cooperation, and then choosing an evaluation committee.

Job Evaluation Methods:

1. Ranking There are several steps in the job ranking method.

a. Obtain job information.
b. Select and group jobs.
c. Select compensable factors.
d. Rank jobs.
e. Combine ratings.
2. Job Classification Job classification (or job grading) is a simple, widely used method in which raters
categorise jobs into groups; all the jobs in each group are of roughly the same value for pay purposes.
The most popular procedure is to choose compensable factors and then develop class or grade
descriptions for each class or grade in terms of the amount or level of the compensable factor(s) in
those jobs.
3. Point Method The point method is a quantitative technique. It involves identifying several compensable
factors, each having several degrees, as well as the degree to which each of these factors is present in
the job.
4. Factor Comparison is a refinement of the ranking method.
5. Computerised Job Evaluations have two main components: a structured questionnaire, and use
statistical models.

Step 3. Group Similar Jobs into Pay Grades

A pay grade consists of jobs of approximately equal difficulty or importance as established by job evaluation.

Step 4. Price Each Pay Grade–Wage Curves

The wage curve shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings
assigned to each job or grade by the job evaluation.

Here is how to price jobs with a wage curve. First, find the average pay for each pay grade, since each of the pay
grades consists of several jobs. Next, plot the average pay rates for each pay grade. Then fit a line, called a
wage curve, through the points just plotted. Finally, price the jobs.

Step 5. Fine-Tune Pay Rates

Fine-tuning involves (1) developing pay ranges and (2) correcting out-of-line rates.

1. Developing Pay Ranges Pay ranges often appear as vertical boxes within each grade, showing
minimum, maximum, and midpoint pay rates for that grade.
2. Correcting Out-of-Line Rates

COMPETENCY-BASED PAY

Introduction

An increasing number of compensation experts and employers are moving away from assigning pay rates to jobs
based on the jobs’ numerically rated, intrinsic duties.

What is Competency-Based Pay?

In brief, competency-based pay means the company pays for the employee’s range, depth, and types of skills
and knowledge, rather than for the job title he or she holds. Two basic types of pay programs: pay for knowledge
or skilled pay.

In sum, probaly the biggest difference between traditional and competency-based pay is this:

● Traditional job evaluation-based pay plans tie the worker’s pay to the worth of the job based on the
job description–pay here is more job oriented.
● Competence-based pay ties the worker’s pay to his or her competencies–pay is more person
oriented.Employees here are paid based on what they know or can do–even if, at the moment, they
don’t have to do it.

Why Use Competency-Based Pay?

The main reason is that traditional pay plans may actually backfire if a high-performance work system is your
goal. The whole thrust of these systems is to encourage employees to work in a self-motivated way.

Competency-Based Pay in Practice

In practice, any skill/competency/knowledge-based pay program generally contains five main elements, which
are listed as follows:

1. A system for defining specific required skills.

2. A process for tying the person’s pay to his or her skill level.
3. A training system that lets employees acquire the skills.
4. A formal skills competency testing system.
5. A work design that lets employees move among jobs to permit work assignment flexibility.

General Mills Example four clusters of jobs: mixing, filling, packaging, and materials.

The Bottom Line on Competency-Based Pay

Competency-based pay has detractors. Some note that competency-based pay “ignores the cost implications of
paying [employees] for knowledge, skills and behaviours even if they are not used.”