DPHRM U6 - Reward Management - English - V1

Chartered
Qualification in
Human Resource
Management
Level : Diploma in Professional HRM
Unit Code : DPHRM - U6
Session : Reward Management

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Chartered Institute
Chartered of Personnel
Institute of PersonnelManagement Sri Lanka (Inc.)
Management in Sri Lanka
www.cipmlk.org
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Chartered Institute of Personnel Management Sri Lanka
Unit Title Reward Management
Level Diploma in Professional HRM
Competency HRM and Administrative Expertise
Unit Code DPHRM/U6
Unit Review Date 12th July 2021
Purpose and aim of the unit
This unit provides students the guiding principles of Reward Philosophy, Reward Management, Reward
System and Total Rewards. The unit deals with strategies, policies and processes required to ensure just
and equitable pay systems in organizations. The unit also describes the operation of a rewards strategy,
the composition of a rewards system, knowledge of recognition schemes and employee benefits. Broadly
the unit covers the areas of intrinsic and extrinsic rewards.
Learning Outcomes
On the completion of this unit students will;

 Define the concept and principles of Reward Management
 Understand the objectives of Reward Management
 Understand the philosophy and strategy of the Reward Management.
 Understand the link between the rewards and performance
 Understand the concept of total rewards, recognition schemes and employee benefits
Assessment modes
 Closed Book Examination.
Guided Learning Hours
The guided learning hours for this unit would be 18 with an additional 120 hours of self-managed learning
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Contents
01. Reward Management ...................................................................................................................... 4
02. Market Pricing .............................................................................................................................. 14
03. Job Evaluation............................................................................................................................... 22
04. Grade and Pay Structures .............................................................................................................. 41
05. Contingent Pay .............................................................................................................................. 53
06. Strategic Reward Systems............................................................................................................. 66
List of Figures
Figure 1. Total Reward .............................................................................................................................. 5

Figure 2. Components of a Total Reward .................................................................................................. 5
Figure 3. Base Pay Management ............................................................................................................. 19
Figure 4. Establishing Base Pay Rates ..................................................................................................... 21
Figure 5. Elements of Job Evaluation ...................................................................................................... 24
Figure 6. Job Ranking .............................................................................................................................. 26
Figure 7. Job Classification (or Job Grading) Method Examples 02 ....................................................... 28
Figure 8. Salary vs evaluated points ........................................................................................................ 31
Figure 9. Plotting a Wage Curve.............................................................................................................. 39
Figure 10. Salary Fixing using Wage Curve ............................................................................................ 40
Figure 11. Grade & Pay Structure............................................................................................................ 42
Figure 12. Narrow Graded (Traditional) Pay Structures ......................................................................... 46
Figure 13. Broad Banded Pay Structures ................................................................................................. 47
Figure 14. Comparison of Narrow – graded, broad-graded and broad –banded structures ..................... 48
Figure 15. Job Family Pay Structures ...................................................................................................... 49
Figure 16. The “line of sight” criterion .................................................................................................... 54
Figure 17. Monitoring Internal & External Relativities........................................................................... 71
List of Table
Table 1. Advantages and Disadvantages of Market Pricing Data Sources .............................................. 15
Table 2. Pay Model .................................................................................................................................. 19
Table 3. Techniques or Methods of Job Evaluation ................................................................................ 25
Table 4. Examples: Ranking of Jobs – Accounts Department................................................................. 26

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Table 5. Job Classification (or Job Grading) Method Examples 01 ........................................................ 28
Table 6. An example of Factor Comparison Method .............................................................................. 33
Table 7. Job Evaluation Form .................................................................................................................. 34
Table 8. Examples of Point Evaluation Plan ........................................................................................... 35
Table 9. Examples of Definitions of Degrees .......................................................................................... 36
Table 10. The Process of Establishing Pay rates ..................................................................................... 44
Table 11. Narrow Graded (Traditional) Pay Structures ........................................................................... 45
Table 12. Broad Graded Pay Structures ................................................................................................... 46
Table 13. Job Family Pay Structure ......................................................................................................... 49
Table 14. Advantages & Disadvantages of each Pay Structure ............................................................... 51
Table 15. Pay Structures - Criteria for choice.......................................................................................... 52
Table 16. Main differences between Incentives and Contingent pay ...................................................... 54
Table 17. A Pay Matrix ............................................................................................................................ 57
Table 18. Analysis of current pay practice compared to market data ...................................................... 71

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01. Reward Management
Introduction:
Employee reward is all about how employees are rewarded in an Organisation. Salary/Wage (Pay),
Variable Pay (Incentives, Contingent Pay) and Benefits (Perks) are the major components of a Total
Reward (Total Compensation) policy and also are the major factors in the economic and social life of
any working community. Every employer’s single most important obligation towards an employee is to
pay him/her these, which we call as the total reward. The fulfilment of this duty incur most employers
biggest expense of their business. Pay and related costs make up a significant portion of costs of running
a major business & sometimes it accounts to about 60% of the total expenditure. Employers therefore
pay critical emphasis on managing and administration of rewards in their organizations.
An employee reward system consists of an organisation’s integrated policies, processes and practices for
rewarding its employees in accordance with their
 Skills and competencies
 Contribution
 Market worth
 In accordance with their value to the organization and thus help the organization to achieve its
strategic goals.
In a very challenging work environment as what we are experiencing today, employee productivity and
contribution is becoming paramount importance to any organization. Hence, organizations provide
various forms of Financial and Non-Financial Rewards in order to obtain optimum contribution from
their employees and these payments and other benefits encourage & motivate the employees for better
and enhanced performance levels.
Pay packages and other incentives/benefits motivate and help the organization to make the employees
more productive, more enthusiastic and to discharge their duties and responsibilities leading to
economical and superior results or output. Reward has a direct effect on motivation of an employee and
in turn is related to performance as follows.
P = f (E x M x A)
P=Performance
E= Environment (work)
M= Motivation
A= Ability (skills, knowledge, attitudes)

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Definition of Reward Management
Reward management is concerned with the formulation and implementation of strategies and policies,
which are to reward employees fairly, equitably and consistently in accordance with their value to the
organization and thus help the organization to achieve its strategic goals. It deals with the design,
implementation and maintenance of reward systems (reward processes, practices and procedures) that
are geared to the improvement of organizational, team and individual performance.
In other words, Rewards Management is a systematic approach to providing monetary (financial,
compensation, remuneration) and non-monetary (non-financial) benefits to employees in exchange for
work performed.
It is the process of managing financial returns and tangible services and benefits employees receive as a
part of an employment relationship.
Total Reward
Financial Non-Financial
 Base pay (Salary/Wage)  Recognition

 Variable pay – Incentives, Contingent Pay  Opportunities
 Benefits  Praise
 Achievement
 Responsibility
 Personal growth
 Good work environment
Figure 1. Total Reward
Components of a Total Reward
A total reward consists of a combination of financial and non-financial rewards.
Figure 2. Components of a Total Reward

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Elements of Total Employee Reward and their Inter-Relationship
Total rewards are the combination of financial and non-financial rewards made available to employees.
The various aspects of reward, namely base pay, contingent pay, employee benefits and non-financial
rewards, which include intrinsic rewards from the work itself, are linked together and treated as an
integrated and coherent whole.
The concept of total rewards describes an approach to reward management that emphasizes the need to
consider all aspects of the work experience of value to employees, not just a few such as pay and
employee benefits. It aims to blend the financial and non-financial elements of reward into a cohesive
whole
Elements of a Total Employee Reward will be based on:
 Financial Rewards
 Base pay / fixed pay
 Variable pay - Contingent pay/ Incentives
 Benefits
 Non-financial Rewards
 Recognition
 Praise
 Achievement
 Responsibility
 Personal growth
 Meaningful work
 Autonomy
 Opportunity to use and develop skills
 Quality of working life
 Work/Life Balance
Financial Rewards (Transactional Rewards)

Financial rewards consist of job-based pay, which provides pay related to the value of the job, and person-
based pay, which provides rewards that recognize the individual’s contribution. They also include
employee benefits and pensions and financial recognition schemes.
a) Base pay / fixed pay

Base (or basic) pay is the level of pay (the fixed salary or wage) that constitutes the rate for the job. It
may provide the platform for determining additional payments related to performance, competence or
skill. It may also govern statutory contribution such as EPF, ETF, Gratuity etc.

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b) Variable pay – Incentives/Contingent Pay
Additional financial rewards may be provided that are related to performance, competence, contribution,
skill and/or experience. These are referred to as ‘variable pay’ and can be given by way of Incentives
(Short term) and Contingent Pay (Long Term). The main types of variable pay are:
 Performance related pay – in which increases in base pay or cash bonuses are determined by
performance assessment and ratings (also known as merit pay)
 Competence-related pay – which varies according to the level of competence achieved by the
individual
 Contribution-related pay – which relates pay to both outputs (performance) and inputs
(competence)
 Skill-based pay (sometimes called Knowledge-based pay) – which varies according to the level of
skill the individual achieves
 Service-related pay – which increases by fixed increments on a scale or pay spine depending on
service in the job; there may sometimes be scope for varying the rate of progress up the scale
according to performance
 Bonuses – rewards for successful performance which are paid as cash (lump) sums related to the
results obtained by individuals, teams or the organization
 Incentives – payments linked with the achievement of previously set targets which are designed to
motivate people to achieve higher levels of performance; the targets are usually quantified in such
terms as output or sales
 Commission – a special form of incentive in which some employees like sales representatives are
paid on the basis of a percentage of the sales value they generate
c) Benefits
Employee benefits, also known as indirect pay and the payments are made under the Management
discretion;
 Transport facilities
 Insurance schemes
 Meals and Recreation

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 Mobile / Internet connection
 Uniforms
 Retirement benefits
 Medical facilities: employee and family
 Paid holidays
 Vehicles or fuel claim benefits
 Flexi working hours
Non – Financial Rewards (Relational Rewards)
Non-financial rewards are those arising from the work itself and the work environment. and focus on the
needs people have to varying degrees for recognition, achievement, personal growth and acceptable
working conditions. They include the non-financial recognition of achievements, the design of fulfilling
jobs, giving people the scope to develop their skills and careers and offering a work environment that
provides a high quality of working life and an appropriate relationship between work and private life
(work–life balance).
Non-financial rewards can be extrinsic, such as praise or recognition, or intrinsic, associated with job
challenge and interest and feelings that the work is worthwhile. Non-financial rewards include any
rewards which focus on the need people perceive to varying degrees for;
1. Recognition
Recognition means acknowledgment and appreciation of work done by employees. Appreciation or

praise satisfies one’s esteem needs and serves as an effective non-financial incentive. Declaring the best
performer of the week/month, displaying their names on a notice board, giving them a token of
appreciation, having company wide recognition platforms (reward points, award ceremonies) are some
such examples.
2. Job Enrichment
Job enrichment is adding contents to a job, leading to increased responsibility, scope and challenge in its
performance. When the job is interesting it serves as a source of motivation.
3. Career advancement opportunities
Most of the employee’s desire growth in an organization and when they get that as an appreciation of
their work they are motivated to work better. In line with that, it is very important for an organization to
have an appropriate skills development plan as well. The research shows that the employees of new
generations are keener on advancement opportunities than monetary rewards.
4. Challenging work

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Dynamic workers do not prefer routine jobs. They are always ready to accept challenging assignments
which can be brought through job redesigning, job enlargement, job enrichment and mentoring. So, it’s
important to understand the capabilities of every individual and assign work accordingly.
5. Status
Status refers to the position in the organizational hierarchy. With that, the level of authority,
responsibility, recognition as well as perks will determine the status of an employee. Status satisfies the
esteem and psychological needs of an individual which in turn motivates him to work hard.
Strategic Aim of Reward Management

To develop and implement the reward policies, processes and practices required to support the
achievement of the organization‘s goals by helping to ensure that it has skilled, competent, well-
motivated and committed people it needs.
The philosophy underpinning the strategy is that people should be rewarded for the value they create.
Therefore, the above main aim is achieved by:
 Rewarding employees according to what the organization values and wants to pay for
 Rewarding employees for the value they create
 Rewarding employees for the right behaviours and outcomes
 Developing a Performance culture
 Motivating people to obtain their commitment and engagement
 Attracting and retaining high quality people
 Developing a positive employment relationship
 Operating fairly
 Applying equitably
 Functioning consistently
 Operating transparently
Reward Philosophy
The reward philosophy of the organization represents its beliefs about how people should be rewarded.
Reward philosophies can be expressed as guiding principles that define the approach an organization
takes to dealing with rewards. They are the basis for reward policies and provide guidelines for the actions
contained in the reward strategy. The reward philosophy can be communicated to employees so that they
understand the background to the reward policies and practices that affect them
Guiding Principles of Reward Management
Guiding principles are often agreed by top management with advice from company reward specialists or
external consultants. But they will be more acceptable if members of the organization are involved in

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their definition. Guiding principles can then be communicated to everyone to increase understanding of
what underpins reward policies and practices. However, employees will suspend their judgement of the
principles until they experience how they are applied. What matters to them is not the philosophy itself
but the pay practices emanating from it and the messages about the employment ‘deal’ that they get as a
consequence. It is the reality that is important, not the rhetoric
Reward guiding principles are concerned with matters such as:
 operating the reward system justly, fairly, equitably and transparently in the interests of all
stakeholders
 developing reward policies and practices that support the achievement of business goals
 rewarding people according to their contribution
 recognizing the value of everyone who is making an effective contribution, not just the exceptional
performers
 creating an attractive employee value proposition
 providing rewards that attract and retain people and enlist their engagement
 helping to develop a high-performance culture
 maintaining competitive and equitable rates of pay
 allowing a reasonable degree of flexibility in the operation of reward processes and in the choice of
benefits by employees
 devolving more responsibility for reward decisions to line managers
Reward Strategy
Reward strategy provides the impetus for reward system design and operation in order to achieve three
major objectives: performance, competitiveness and fairness. It aims to provide answers to two basic
questions:
1) What do we need to do about our reward practices to ensure that they are fit for purpose?
2) How do we intend to do it? It is a declaration of intent that defines what the organization wants to do
in the future to develop and implement reward policies, practices and processes that will further the
achievement of its business goals and meet the needs of its stakeholders.
The aim is to provide a sense of purpose and direction and a basis for developing reward policies,
practices and processes. The strategy is based on an understanding of the needs of the organization
and its employees and how they can best be satisfied.
A Sound Reward system attempts to do the following:

 Attract – competent employees
 Retain – them in the organization
 Inspire – employees to do their best
 Reward – everyone according to merit and accomplishment

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What do Employees expect from a Reward System?
Employees expect the following minimum conditions from an effective reward system:
 Purchasing power – it determines the standards of living
 Feel fair – a strong feeling of being fair
 Right – the employer to share profits / Gain
 Relatives – is it reasonable in relation to other jobs? Internal and external equity
 Recognition – whether contribution is being recognized
 Composition – direct earnings, incentives, and performance related pay, OT, medical and other
payment, super annular benefits
What do Employers expect from a Reward System?

Employers expect the following minimum conditions from an effective reward system:
 Prestige – Level organization wishes to be
 Competitive – Sufficiently competitive
 Control – organizing the compensation to facilitate the control of operation
 Motivation and performance – To motivate employees for higher performance
 Right Cost – absolute cost for payment
Factors Affecting the Determination of a Reward System:
 Demand and Supply of Workers – Labour market conditions
The demand and supply of workers in the labour market affects wage rates. If the labour is in short
supply, the workers shall be paid well and vice versa.
 Bargaining Power of Trade unions
Remuneration also depend to a larger extent on the relative bargaining power of the trade unions or
workers and employers. When the bargaining power is high for the unions, they demand better reward
conditions.
 Cost of Living
Progressive employers do not leave the wages to be determined by the blind forces of demand and
supply. They take due notice of the cost of living for the workers at that place and try to fix the wages
as to ensure a decent living wage to the workers.
 Condition of the Product in the Market place

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The wage level will be influenced by the degree of competitions prevailing in the market for the
product of the industry. If the competition and rivalry is high in the market place, the attractiveness
of the rewards will be better.
 Comparative Wages (External Equity)
Wage rates must be consistent with the wages paid by other firms in the same industry.
 Capacity to pay
Wage rates are influenced by the ability of industry or firm to pay its workers.
 Productivity of Labour
Productivity is considered to be the main basis of determination of remuneration. In firms where

productivity of labour is high, higher wages are paid as compared to other jobs which do not require
the same degree of skill, responsibility or risk.
 Job Requirements
A worker is compensated according to the job requirements.
 Government Policy on minimum wages/salaries
Since the bargaining power of the workers is not enough to ensure fair wages in all industries, the
government has to intervene in regulating wage/salary rates to guarantee minimum wage/salary rates,
in order to cover the essentials of a decent living.
 Goodwill of the Company
A few employers want to establish themselves as good employer in the society and fix higher wages
for their workers. It attracts qualified employees.
Why is Reward Management Important?
1. Helps to attract and retain the top talent
Once a potential employee has been attracted, a vital factor in recruiting that employee would be how the
organization positions the rewards as part of the employment deal. According to Mark Quinn, a
consultant at Mercer, ‘when people move organizations without knowing how their life is going to be the
pay would be the risk-mitigation point’.
Once they are recruited the next challenge would be to ensure that they will happily remain in the
organization contributing to the results. Since employees are motivated by different factors, it is important
to structure an attractive reward strategy.
2. Helps to Improve productivity

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When employees know that their hard work will be appreciated and they are in a healthy competition
with their colleagues, they are more likely to produce quality work.
By having a clear reward system in place employees will be clear about the part that they have to play in
achieving organizational objectives as they will be rewarded when they reach certain targets. Therefore,
a reward system is mutually beneficial to the employee and the organization. Further it will encourage
employees to be at work, reducing the absenteeism as well.
3. Better EVP and Organizational reputation
Employee Value Proposition (EVP) is a set of values offered to an employee by an employer. Reward is
a big part of it.
Reputation of a company influences many aspects of a business. One such field of influence is on clients.
A bad employer will find it difficult to convince a client to trust them if they know the company’s own
employees don’t. Thus, rewards management can be a key mode to engage employees which will lead to
a positive reputation.
4. Improve loyalty
Loyal employees are the ones who are dedicated to the success of their organization believing that being
a part of that organization is in their best interest.
When a proper reward system is in place the employees feel valued by the organization. That will ensure
a meaningful bond between the employer and the employee, increasing the employee’s loyalty to the
organization.
5. Morale will be lifted
Having a reward system in place providing different types of rewards to employees will boost their
morale. By communicating the focus of the organization and how they can contribute through setting and
meeting individual objectives will encourage them to perform. By the employees’ morale being boosted,
the morale of the entire organization will be increased.
6. Increased teamwork
The employees will have to work together as a part of a team to achieve their objectives in return for
rewards. That will increase the efficiency of the organization while creating a happier workplace in a
competitive environment. This is another imperative reason why rewards systems are important for a
business.
Significance of Fairness, Equity, Consistency & Transparency in Reward

Management:
Fairness:

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Fairness means that reward management processes should operate justly in accordance with what is due
to them – their value to the organization. Fairness means that reward management processes operate in
accordance with the principles of distributive and procedural justice. The concept of fairness was
formulated by Jaques (1961) as the ‘felt-fair’ principle. This states that pay systems will be fair if they
are felt to be fair.
Distributive justice refers to how rewards are distributed. People will feel that they have been treated
justly (fairly) in this respect if they believe that rewards have been distributed in accordance with the
value of their contribution, that they receive what was promised to them and that they get what they need.
Procedural justice refers to the ways in which managerial decisions are made and HR procedures are put
into practice.
Equity:
Equity is achieved when people are rewarded appropriately in relation to others within the organization.
Equitable reward processes ensure that relativities between jobs are measured as objectively as possible
and that equal pay is provided for work of equal value.
Consistency:
A consistent approach to the provision of rewards means that decisions on pay should not vary arbitrarily
and without due cause between different people or at different times. They should not deviate irrationally
from what would be generally regarded as fair and equitable.
Transparency:
Transparency means that people understand how reward processes operate and how they are affected by
them. The reasons for pay decisions should be explained to them at the time they are made. Employees
should have a voice in the development of reward policies and practices and should have the rights to be
given explanations of decisions and to comment on how they are made.
02. Market Pricing

Introduction:
Market pricing attempts to establish the market rate for jobs, but the notion of a market rate is a more
elusive concept than it seems. There is no such thing as a definitive market rate for any job, even when
comparing identically sized organizations in the same industry and location.
What is Market Pricing?

Market pricing is a method used by organizations to price their jobs to the market rate for jobs thus
establishing “external equity” in reward management.
The Purpose of making Market Comparisons

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Market comparisons aim to compare external relativities. Ie:
1) The rates and benefits provided for equivalent jobs in other organizations (market rates) with
those provided within the organization
2) The rates at which pay is increasing in other organizations (going rates) in order to provide
guidance on pay reviews.
The data from market comparisons help organizations to:

 Decide on starting rates
 Design and modify salary structures
 Determine acceptable rates of salary progression in pay structures
 Review pay, incentives, bonuses and other forms of performance related pay
 Decide on the types and levels of benefits to be provided
 Assess the level of increases required to salary levels generally and to the salary levels of
individual employees
 Identify special cases where market rates have to be paid irrespective of the evaluated position of
the job in the grade hierarchy
Market Pricing – Sources of information
The main sources of reward information can be obtained from:
 General published surveys and market information from specialist electronic database providers
 Specialized survey companies
 Organization surveys/projects done by own
 Salary information and survey clubs – ie a group of organizations that regularly exchange
information
 Published data in specialist or other journals, newspapers and web sites
 Analysis of job advertisements
 Other market intelligence
Advantages and Disadvantages of Market Pricing Data Sources:

Table 1. Advantages and Disadvantages of Market Pricing Data Sources
Source of Advantages Disadvantages

Information
1) Published  Wide coverage  Quickly out of date
market Data  Readily available  Risk of imprecise job matching
Sources  Continuity allows trend  Not specific enough
analysis over time

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2) Published  Deal with particular  Job matching not entirely precise
Specialist categories in depth  Can quickly become out of date
surveys  Quality of job matching better  Only deal with particular sectors
than general surveys
 More sensitive to measuring
key trends & hot topics
3) Club Surveys  More precise company and  Sample size may be too small
job matching  Relies on goodwill of participants
 Can provide more detail on to conduct survey
pay structure & benefits
4) Company or  More precise company and  Time & trouble
“Do-it-yourself’ job matching  Problem of building a large enough
surveys  Control of participants sample
 Control of analysis concepts
 Acquisition of previously
unavailable information
5) Published data  Readily accessible  Not necessarily comprehensive
in Journals  Good background data  Job matching imprecise
6) Analysis of Job  Readily accessible  Job matching very imprecise

Advertisements  Highly visible indications of  Salary data can be misleading
market rates & trends
 Up to date
7) Other Market  Good background  Imprecise

Intelligence
Equity & Its impact on Pay Rates
The equity theory of motivation postulates that people are motivated to maintain a balance between what
they perceive as their contributions and their rewards. Equity theory says that if a person perceives an
inequity, a tension or drive will develop that motivated him or her to reduce the tension and perceived
inequity.
In compensation, one can address external, internal and individual equity
 External Equity: Refers to how a job’s pay rate in one company compares to the job’s pay rate
in other companies. This is established through Market Pricing Method through a Salary Survey.

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 Internal Equity: Refers to how fair the job’s pay rate is when compared to other jobs within the
same company (for instance, is the sales manager’s pay fair, when compared to what the
production manager earns?) This is established through job analysis/ job evaluation
 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
person’s performance. This is established through performance appraisal and incentive pay
schemes.
Use of Market Pricing

Market pricing is the process of making decisions on pay structures and individual rates of pay and
obtaining information on market rates (market rate analysis).
Market pricing informs decisions on base rates of pay, ie, the amount of pay that constitutes the basic
rate for the job or the person. The aim is to ensure that the rates are competitive. It helps to develop the
pay structure – the pay ranges attached to grades. Information on market rates may lead to the introduction
of market supplements for individual jobs or the creation of separate pay structures (market groups) to
cater for particular market rate pressures.
It is referred to as ‘extreme market pricing’ when market rates are the sole means of deciding on internal
rates of pay and relativities, and conventional job evaluation is not used. An organization that adopts this
method is said to be ‘market-driven’. Market pricing may be associated with formal job evaluation, which
establishes internal relativities and the grade structure.
This method can be very misleading if is used alone to decide the salaries of any organization. Because
this method tries to understand the importance of a particular job to that particular industry and compare
them accordingly. The characteristics of this method:
 Often used by smaller organizations as it is quick, cheap and quite effective

 Does not assess relative internal work, only criteria are the labour market conditions
 Influenced by the pay levels set by other employees
 Difficult- jobs are not the same in all organizations
 Does not consider economic conditions and other variables when comparing the organizations
Acceptability of Market Pricing

The translation of salary market data into competitive salary levels for individuals, or into an acceptable
company salary structure, is a process based on judgement and compromise. The aim is to extract a
derived market rate based on informed and effective estimates of the reliability of data. It means striking
a reasonable balance between the competing merits of the different sources used. This is essentially an
intuitive process.

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The acceptability of either form of market pricing is dependent on the availability of robust market data
and, when looking at external rates, the quality of the job-to- job matching process, ie comparing like
with like. Since no two companies are the same, in order to ensure that the matching process of base
pays are accurate as possible, have to ensure that at least the following 4 conditions are maintained.
Market comparisons are most valid when “like is compared with like”.
1. The comparing companies should be in the same industry.

2. They should be of similar size
3. They should have similar market share
4. They should be located in similar geographical conditions
Steps in Market Pricing
 Identify and define the jobs for which market rate data is required. These are benchmark jobs that are
representative of different levels and occupations and can be compared with similar jobs. In
conducting the survey, the aim will be to ‘match’ these jobs as closely as possible with jobs elsewhere.
 Identify the sources of information. These can include published surveys conducted by a pay
consultancy or research organization, government salary surveys, surveys conducted specially by the
organization (formal or informal), ‘pay clubs’ (groups of employers who exchange pay information)
and advertisements
 Collect, analyze and interpret the information
 Apply the information in line with a policy decision on market stance – the pay levels required to be
competitive and affordable. + or - 20% of an Employer's jobs are usually priced directly in market
place based on a formal or informal surveys
Base Pay Management

Base pay is the amount of pay that constitutes the rate for the job or the person. Base pay management
uses the information from market pricing and job evaluation to design and operate grade and pay
structures. When both the market pricing and job evaluation results are matched, the accuracy and the
acceptability of the rate for the job will be more and realistic.

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Figure 3. Base Pay Management
Pay Model
Table 2. Pay Model
Concepts Compensation techniques Compensation objects

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Foundation of Mechanics of compensation Desired objects
pay system management
Internal equity Job analysis, Job evaluation Facilitate organization

performance
External equity Salary surveys Control labour costs
Employee equity Job evaluation, Merit rating Influence employees work

attitudes & behaviours.
(Attract, Retain, Motivate)
Comply with regulation
Establishing Base Pay Rates

Organizations normally go through the following steps before establishing base pay rates for different
jobs in their respective organizations.
STEP 01 - Conduct a Salary Survey (Market Pricing)
A survey aimed at determining prevailing wage rates in the industry for similar jobs. A good Salary
Survey provides specific wage rates for specific jobs and establishes External Equity.
STEP 02 - Determine worth of each jobs in the organization (Job Evaluation)
This is done by conducting a Job Evaluation, using analytical or non-analytical techniques. This will give
a hierarchy of the jobs according to importance/worth of each job to the organization. This will establish
Internal Equity in the organization.
STEP 03 - Group similar jobs into pay grades
Once the Job Evaluation is done, the next task is to assign pay rates to each job; however, it will usually
required to first group jobs into pay grades. A pay grade comprised of jobs of approximately equal
difficulty.
STEP 04 - Price each pay grade (Grade-Wage Curves)
Using a wage curve to help assign pay rates to each pay grade (or each job). It shows relationships
between the value of the job and average wage paid for the job.

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STEP 05 – Fine Tune Pay rates

Fine-tuning involves developing pay ranges and correcting out-of-line rates. (correcting salary
anomalies)
Establishing Base Pay Rates
Figure 4. Establishing Base Pay Rates

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Job Evaluation
Introduction:
Employers use two basic approaches to setting Pay Rates: Market based approaches and Job evaluation
methods. Many firms, particularly smaller ones, simply use a market-based approach, using salary
surveys, to determine what others in the relevant labor markets are paying for particular jobs. Then use
these figures to price their own jobs. Job evaluation methods involve assigning values to each of the
company’s jobs. This process helps produce a pay plan in which each job’s pay is equitable based on
what other employers are paying for these jobs and based on each job’s value to the employer.
Definition – Job Evaluation
Job Evaluation is a systematic comparison done in order to determine the worth of one job relative
to another. Is a system of comparing different jobs to provide a basis for a grading and pay structure?
It establishes the size (how big is the job) and value (the contribution a person has made) of jobs in an
organization. Therefore, job evaluation is a process of determining the worth of each job to be performed,
ranking and grading each job with respective requirement of skill, knowledge, responsibility…etc.; for
fixing wage or reward payable to the jobholder.
The basic principle is: Jobs that require greater qualifications, more responsibilities & more complex
job duties should be paid more than jobs with lesser requirements. The basic procedure is to compare the
jobs in relation to one another – for example, in terms of required effort, responsibility & skills. Suppose
you know (based on your salary survey) how to price key benchmark jobs, and then use job evaluation
to determine the relative worth of all the other jobs in your firm relative to these key jobs. You are then
well on your way to being able to price all the jobs in your organization equitably.
Why are we doing Job Evaluation?

In short, it is done to attract and keep the best employees by paying each and every employee according
to their real worth and thereby minimizing salary anomalies.
 To gather job information. To gather data and information relating to job descriptions, job
specifications and employee specifications of various jobs in an organization.
 To fix up responsibilities. To compare the duties, responsibilities and demands of a job with that of
other jobs
 To determine the hierarchy and place of various jobs in an organization
 To determine the ranks or grades of various jobs
 To establish relativities between jobs

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 To use these job grades for salary administration.

To ensure fair and equitable wages on the basis of relative worth or value of jobs. In other words,
equal wages are fixed to the jobs of equal worth or value
 To provide a basis for career progression and for rotation programs
Pre-Requisites for Systematic approach to Job Evaluation:
Any Job Evaluation must be: Objective, Fair and Consistent. In order to be like that, the following points
have to be considered for an effective Job Evaluation.
 Availability of clear and accurate job descriptions and job specifications of various jobs
 A clear decision regarding what group of jobs are considered by a single evaluation.
 Selling the idea of job evaluation to all participants in the organisation.
 Using a panel to evaluate jobs
 Must evaluate the jobs, not the job holder
Job Evaluation panel:

Job evaluation is done by a panel of people in order to minimize the biases and prejudices. The main two
reasons for doing so:
1) The panel should include several people who are familiar with the jobs in question, and representing
most of the departments, each of whom may have a different perspective regarding the nature of the
jobs.
2) If the panel is composed at least partly of employees, the panel approach can help ensure greater
employee acceptance of the job evaluation results.
So, the composition of the committee is important. The panel usually consists of about 4- 5 people, most
of whom are employees. Management has the right to serve on such panels, but employees may view this
with suspicion. However, an HR specialist can usually be justified on the grounds that he or she has a
more impartial outlook than line managers and can provide expert assistance.
Elements of Job Evaluation

The diagram explains the various elements of job evaluation and their inter-relationships
Job Analysis
The Process of obtaining
Job factors
Job Description Job Specification

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Figure 5. Elements of Job Evaluation
Steps in Establishing Pay Rates:
The process of establishing pay rates, consists of five steps.
 Step 1: The Salary Survey

 Step 2: Job Evaluation
 Step 3: Group similar jobs into pay Grades

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 Step 4: Price each pay Grade (Grade-Wage Curves)
 Step 5: Fine-Tune pay rates
Step 2: Job Evaluation

Job Evaluation is a systematic comparison done in order to determine the worth of one job relative to
another. Is a system of comparing different jobs to provide a basis for a grading and pay structure?
Techniques or Methods of Job Evaluation:

Table 3. Techniques or Methods of Job Evaluation
(A) Non-Analytical Job Evaluation (B) Analytical Job Evaluation

Techniques Techniques
Ranking Method Point Rating method
Job classification (or Job Grading) Factor Comparison System

Method
A. Non-Analytical Techniques:
Non-analytical job evaluation schemes enable whole jobs to be compared in order to place them in a
grade or a rank order – they are not analyzed by reference to their elements or factors.
1) Ranking Method:
This is the simplest and administratively the easiest technique. This method ranks each job relative to all
other jobs, usually based on some overall factors like “job difficulty”, “responsibility”, “effort” & “the
degree of importance of the job to the organization” and rank all the jobs from the most important to the
least important. The evaluator has to appraise and rank the jobs but not the incumbents.
Exercise: Using job ranking method, rank the following jobs in this small organization (A cigarette
distributing company - 9 posts) from the most important to the least important using factors like job
difficulty, responsibility, physical and mental effort and the degree of importance of the job to the
organization. They are: Cashier, Peon, Office Assistant, Manager, Bicycle Salesman, Assistant Manager,
Office Cleaner (Janitor), Office Salesman and Clerk. Rank these jobs from the most important to the least
important.
They can operate on a job-to-job basis in which a job is compared with another job to decide whether it
should be valued more, less, or the same (ranking and ‘internal benchmarking’ processes).

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Figure 6. Job Ranking
Ranking Method – Examples: Ranking of Jobs – Accounts Department
Table 4. Examples: Ranking of Jobs – Accounts Department
Rank Designation Monthly Salary

1 Accountant Rs. 120,000/=
2 Asst. Accountant Rs. 70,000/=
3 Accounts Clerk Rs. 40,000/=
4 Accounts Assistant Rs. 27,000/=
5 Typist Rs. 23,000/=
6 Peon Rs. 17,500/=
Merits: Ranking method’s merits are:
 This method is very simple, quick and cheaper in terms of time and money
 This method is very suitable for small units
 It is also useful for evaluating top executives in big organizations
 It is a powerful instrument for job evaluation.
Drawbacks: Derive more from how it’s used than from the method itself.

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 A tendency to rely too heavily on “guesstimates”
 Subject to bias
 Ranking provide no yardstick for quantifying the value of one job relative to another
2) Job Classification (or Job Grading) Method:

Is a simple, widely used method in which raters categorize jobs into groups; all the jobs in each group
are of roughly the same value for pay purposes. The groups are called classes if they contain similar jobs,
or grades if they contain jobs that are similar in difficulty but otherwise different (i.e.-dissimilar jobs but
with similar difficulty).
Under this method, jobs at different levels in the organizational hierarchy are divided into various grades,
with a clear-cut definition of each grade. Grades are formulated on the basis of nature of tasks,
requirements of skill, knowledge, and responsibilities & authority of various jobs. There are several steps
in the mechanism of this method.
Here, judgements are made by comparing a whole job with a defined hierarchy of job grades (job
classification) – this involves matching a job description to a grade description.
• Decide initially the number of pay grades to be set up

• Identify those jobs (the benchmarks) which everyone can agree as most representative of each grade
• Define class or grade descriptions for each grade in terms of amount or level of job factors in the
jobs. E.g.: How much independent judgment, skill, physical effort ….
• Prepare grade descriptions for all other jobs, taking these benchmarks jobs into consideration
• Compare all jobs with benchmarks jobs and on the basis of the comparison, slot each into the grade,
which they seem most, clearly belong to.
Merits: Job Classification method’s merits are:

 It automatically groups the employer’s jobs into classes
 This method is simple to operate & easily understood
 New jobs can easily be fitted into the grading structure
 Widely used in the state sector
Drawbacks: Job Classification method’s drawbacks are:

 It is difficult to write the class or grade descriptions
 Considerable judgment is required to apply them
 Some jobs may fall into two or three categories
 Subjective judgment

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Example 1:
Table 5. Job Classification (or Job Grading) Method Examples 01
Class Rank Employees
Office Manager, Deputy Offices Manager,

1 Executives
Office Superintendent etc.
Purchasing Assistant, Cashier, Receipts

2 Skilled Workers
Clerk etc.
3 Semiskilled Workers Steno typists, Machine - Operators etc.
4 Less Skilled Workers File Clerks, Office boys etc.
Example 2:
Managing Director
Grade VI General Manager-I General Manager-II General Manager-II
Grade V Marketing Brand Production Human Resource

Manager Manager Manager Manager
Grade IV Asst. Marketing Asst. Marketing Deputy HR Deputy HR

Manager Manager Manager Manager
Grade III Asst. HR Manager Asst. HR Manager
Grade II HR Officer HR Officer
Grade I HR Assistants HR Assistants
Figure 7. Job Classification (or Job Grading) Method Examples 02

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B. Analytical Techniques or Methods:

Analytical job evaluation is based on a process of breaking down whole jobs into a number of defined
elements or factors and then comparing them factor by factor, either with a graduated scale of points
attached to a set of factors, or with grade or role profiles analyzed under the same factor headings.
1) Point Rating Method:

This was one of the earliest approaches for evaluating jobs based on quantitative values.
Point-factor schemes are the most common forms of analytical job evaluation. This method is analytical
in the sense that jobs are broken into components for purposes of comparison. It is quantitative as each
component of the job is assigned a numerical value.
It involves identifying
a. Several compensable factors, each having several degrees as well
(Compensable factor: A fundamental, compensable element of a job, such as skills, effort, responsibility
and working conditions.)
b. The degree to which each of these factors are present in the job.
A different number of points are usually assigned for each degree of each factor. So once you determine
the degree to which each factor is present in the job, you need only to add up the corresponding number
of points for each factor and arrive at an overall point value for the job.
The main steps are:
1) Step 1: Determine clusters of jobs to be evaluated

Because jobs vary widely by department, you usually will not use one point-rating plan for all jobs in the
organization. Therefore, the first step is usually to cluster jobs, for example, into sales jobs, clerical jobs,
shop jobs, factory jobs… Then the committee will generally develop a point plan for one group or cluster
at a time.
2) Step 2: Collect Job Information

This means performing a job analysis & writing JDs and JSs.
3) Step 3: Select Compensable factors

Here, select compensable factors, like skills, responsibility, physical requirements or job conditions. Each
cluster of jobs may require its own compensable factors.
Selecting and defining those factors which are related to all jobs and are considered to be most critical in
determining the relative degrees of difficulty & responsibility between jobs. The following factors may
be considered for this purpose. These factors (Skill, Mental & Physical Effort, Responsibility & Working
conditions) are called Compensable Factors.

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a) Skill:
Education, training, judgment, analysis, mental complexity, mental dexterity, Adaptability…etc.
b) Effort:
Physical demand, visual effort, concentration, mental effort, alertness…. etc.
c) Responsibility:
For preventing monetary loss, machines, materials, safety policy etc.
d) Job Conditions:
Working conditions, hazards etc.
4) Step 4: Define Compensable Factors
Next, carefully define each compensable factor. This is done to ensure that the evaluation committee
members will apply the factors with consistency. Appendix 3 shows the compensable factors & factor
degrees (described in step 5)
5) Step 5: Define Factor Degrees

Define each of several degrees for each factor so that raters may judge the amount or degree of a factor
existing in a job. The number of degrees usually does not exceed 5 or 6. You need not have the same
number of degrees for each factor.
6) Step 6: Determine relative Values of factors

The next step is to decide how much weight (or how many total points) to assign to each factor. This is
important because for each cluster of jobs some factors are bound to be more important than others. Thus,
for executives the “mental requirements” factor would carry far more weight than would “physical
requirements”. The opposite might be true of factory jobs.
Example: Mechanism of points rating method Cluster: Sales Department
Job Factors Weights

1) Mental Requirements 30
2) Physical Requirement 10
3) Skill Requirement 15
4) Experience 15
5) Complexity of Duties/Responsibilities 10
6) Contact with others 20
-------
Total 100
=====
7) Step 7: Assign point values to Factors & Degrees
In step 6, total weights were developed for each factor in percentage terms. Now assign points to each
factor as in Appendix 2. For e.g., suppose it is decided to use a total no. of 600 points in the point plan,
Because the factor “skill requirement” had a weight of 15%, it would be assigned a total of 15% x 600 =
90 points.

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Thus, it was decided to assign 90 points to the “skill requirement” factor. This automatically means that
the highest degree for the skill requirement factor would also carry 90. Then assign points to the other
degrees for these factors, usually in equal amounts from the lowest to the highest degree. Do this for each
factor as in Appendix 2.
8) Step 8: Rate the jobs
Actual evaluation starts with rating of the jobs. Each job based on its JD & JS is evaluated, factor by
factor to determine the number of points that should be assigned to it. First, committee members
determine the degree (first degree, second degree and so on) (Appendix 3) to each factor is present in the
job. Then they know the corresponding points (Appendix 2) that were previously assigned to each of
these degrees (in step 7).
Finally, the separate factor scores are then added together to give a total score, which indicates the relative
value of each job and can be used to place the jobs in rank order, or plot them (salary vs evaluated points)
or allocate them into grades in a graded pay structure that have been defined in terms of job evaluation
points.
120,000
100,000
80,000
60,000
40,000
20,000
0
0 100 200 300 400 500 600 700
Figure 8. Salary vs evaluated points
Developing Pay Ranges

Most employers do not pay just one rate for all jobs in a particular pay grade. For eg, a company won’t
want to pay all its accounting clerks, from beginners to long tenure, at the same rates. Instead employers
develop vertical pay (or rate) ranges for each horizontal pay grade. These pay ranges may appear as
vertical boxes within each grade, showing maximum, minimum and midpoint pay rates for that grade, as
in appendix 5.
Step 3: Group similar jobs into Pay Grades

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Once it has used job evaluation to determine the relative worth of each job, the committee can turn to the
task of assigning pay rates to each job; however, it will usually want to first group jobs into pay grades.
A pay grade is comprised of jobs of approximately equal difficulty. (Appendix 5)
Step 4: Price each Pay Grade – Wage Curves

The next step is to assign pay rates to your pay grades. You’ll typically use a wage curve to help assign
pay rates to each pay grade (or to each job)
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. Appendix 4 presents an example. The
purpose of the wage curve is to show the relationships between (1) the value of the job as determined by
one of the job evaluation methods and (2) the current average pay rates for your grades. (Appendix 5)
If the current rates being paid for any of your jobs or grades fall well above or below the wage line, raises
(boiling) or a pay freeze for that job may be in order. Your next step, then, is to fine – tune your pay rates.
Step 5: Fine – tune pay rates

Fine – tuning involves developing pay ranges and correcting out – of – line rates; or in other words
correcting salary anomalies. This can be achieved by “Freezing” and “Boiling”.
Advantages: of Point Method

 A quantitative technique that is easily explained to and used by employees
 Gives quite acceptable result
Disadvantages: of Point Method

 Difficult to developed
 But ready-made plans, increases its usage
2) Factor Comparison System:
It has many variations and appears to be the most accurate, the most complex and also a quite widely
used job evaluation methods.
This is a person-to-person system of merit rating to job evaluation. Factor comparison method entails
deciding which jobs have more of the chosen compensable factors. The method is actually a refinement
of the ranking method. With the ranking method, you generally look at each job as an entity and rank the
jobs on some overall factor like job difficulty. With the factor comparison method, you rank each job
several times- once for each of several compensable factors.
For example, you might first rank jobs in terms of the compensable factor “skill”. Then rank them
according to their “mental requirements” and so forth. Then combine the rankings for each job into an
overall numerical rating for the job. The pricing of all jobs is based upon the prices established on the
key jobs.

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The factor comparison thus incorporates a job-to-job type of rating. This too is a widely used method.
 Advantages of Factor Comparison Method
 It is an accurate, systematic, quantifiable method
 Jobs are compared to other jobs to determine a relative value
 A fairly easy job evaluation system to explain to employees.
 Disadvantages of Factor Comparison Method
 Complexity is probably the most serious disadvantage (how to build one)
 Five factors which are used for all organizations are quite outdated & for all jobs in an
organization may not always be appropriate.
Table 6. An example of Factor Comparison Method
Key Job Daily Physical Factors Skill Responsibility Working

Wage Rate Effort Mental Conditions
Effort
Electrician 60 11(3) 14(1) 15(2) 12(1) 8(2)
Fitter 50 14(1) 10(2) 9(2) 8(2) 9(1)
Welder 40 12(2) 7(3) 8(3) 7(3) 6(3)
Cleaner 30 9(4) 6(4) 4(5) 6(4) 5(4)
Labourer 25 8(5) 4(5) 6(4) 3(5) 4(5)
Suppose the job of a painter is found to be similar to electrician in skill (15), fitter in mental effort (10),
welder in physical effort (12), cleaner in responsibility (6) and labourer in working conditions (4). The
wage rate for this job would be (15+10+12+6+4) is 47.
Computerized Job Evaluations

Using quantitative job evaluation methods such as the point of factor comparison planes can be time –
consuming. CAJE – Computer Aided Job Evaluation – can streamline this process. CAJE can simplify
job analysis, help keep JDs up to date, increase evaluation objectivity, reduce the time spent in committee
meetings, and ease the burden of system maintenance. CAJE includes electronic data entry, computerized
checking of compensable factor questionnaire responses, and automated output of job evaluations and of
a variety of compensation reports.
CAJE allow the computer program to price job more or less automatically, by assigning points or factor
comparison rankings to things like no of employees reporting to the positions, prices of benchmark jobs,
current pay, and current pay midpoints.
Benefits of Job Evaluation:
 Link pay with the requirements of the job

 Systematic procedure for determining the relative worth of jobs
 Outcome is an equitable pay structure
 Employees and unions are also an active part in the job evaluation process
 Helps in evaluation of new jobs
 Points out possibilities of more appropriate use of the organization’s labor force

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Why Job Evaluation is an Ongoing Process?
Because;
 Jobs change
 Organizations and structures changes
 Staff expectations changes
Table 7. Job Evaluation Form
Appendix I:
Job Evaluation Form
Job Description Ref: 132

Job Title: Drill Operator Department: Machine shop
Sex: Male Date : 20/08/2008
Assessor: M. R. Perera
Max Notes Points
Mental Effort: (20)

Dealing with situations 10 05
Concentration 10 07
Skill: (45)
Training Time 15 10
Dexterity 10 08
Complexity 10 08
Basic Knowledge 10 06
Responsibility: (18)
For cash 04 01
Intermediate & Finished products 04 03
Control over costs 04 03
For tools 03 03
For records etc. 03 01
Physical Requirement: (05) 05 04
Working Conditions: (12)

Working environment 08 06
Hazards 04 02
Maximum Grand Total 100 67
JOB CLASSIFICATION
Grade A B C D E F
Points Possible up to 50 51 to 60 61 to 70 71 to 80 81 to 90 91 to 100

Points Awarded 67
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Appendix 2
EXAMPLE OF POINT EVALUATION PLAN
Table 8. Examples of Point Evaluation Plan
Degrees and Points

Factor
Factors
Number 1st 2nd 3rd 4th 5th 6th
1 Mental Requirement 15 30 45 60 75 90
2 Physical Requirement 10 20 30 40 50 60
3 Skill Requirement 15 30 45 60 75 90
4 Experience and Knowledge 15 30 45 60 75 90
5 Education Acquired 15 30 45 60 75 90
6 Responsibility – Tools etc. 04 08 12 16 20 24
Responsibility –
7 04 08 12 16 20 24
Finished/Intermediate Products
8 Responsibility – Records etc. 04 08 12 16 20 24
9 Responsibility – Cash, Accounts etc. 04 08 12 16 20 24
10 Working conditions – Environment 10 20 30 40 50 60
11 Working conditions – Hazards 04 08 12 16 20 24
Total Weighted Points 100 200 300 400 500 600

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Appendix 3
Examples of Definitions of Degrees

Table 9. Examples of Definitions of Degrees
Factor Degree Definition

1 Very eliminatory type of job – No reasoning - Detailed instructions –
No deviation
2 Simple job – Little reasoning – General supervision
3 Complex job Some reasoning and imagination – General supervision
Requirements
4 Complex job with little supervision – Reasoning , Minor decision taking

Difficult job – Minimum supervision – Decision taking – Disparate
1. Mental
5
attention needed
6 Extremely difficult job – Entails reasoning , Memory, Imagination
decision taking
1 Light effort – Job sedentary in nature

2 Light lifting , Walking , Stair climbing (Sporadic)
Requirements
3 Lifting of medium weight – Repetitive – Some walking – Stair climbing

2. Physical
etc.
4 Heavy effort – Carrying - Lifting etc.
5 Repetitive heavy effort ladder climbing etc.
6 Extremely arduous and continuous effort – Digging, Docking etc.
1 No special skill required – (Labouring job)

2 Limited skill and manual dexterity required - (Semi skilled)
3 Simple skill required with minimum muscular co-ordination (Process
Operator)
4 Complex requiring general degree of muscular co-ordination
Requirement
(Tradesman)
5 Difficult job requirement high degree of muscular co-ordination
(instrument Maker)
3. Skill
6 Extremely high skill required, Highly complex and difficult job (Tool
maker)
1 Under one month

Knowledge
4.Experien
2 Over one month but less than three months

3 Over three months but less than six months
and
4 Over six months but less than two years

ce
5 Over two years but less than four years

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6 Over four years
1 Ability to read and write

5. Education
2 To have reached Eighth standard

Acquired
3 To have obtained “O/L”

4 To have obtained “A/L” or technical equivalent
5 To have obtained a Diploma level
6 To have obtained Degree or equivalent Professional Qualification
Factor Degree Definition

1 Damage to tools etc. in probable mishap not likely to exceed Rs.
1,000.00
2 - do - Rs.
5,000.00
3 - do - Rs.
10,000.00
4 - do - Rs.
6. Responsibility
for Tools etc.
20,000.00
5 - do - Rs.
50,000.00
6 - do - Rs.
50,000.00
1 Damage likely to be negligible

and intermediate Products
2 - do - under Rs.
7. Responsibility Finished
2,000.00
3 - do - “ Rs.
5,000.00
4 - do - “ Rs.
20,000.00
5 - do - “ Rs.
50,000.00
6 - do - over Rs.
50,000.00
1 No responsibility
2 Preparation of only simple records
8.Responsibility
3 Preparation of simple records & reports

for Records
4 Preparation of simple record & reports involving personal prior

investigation
5 Preparation of complex records & reports
etc.
6 Preparation of highly complex reports & confidential records
Likely to involve company in loss not exceeding Rs.

ibili
oun
9.R
etc.
ons
esp
acc
cas
1
for
ty
h,
ts
2,500/=.

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“ “ “ “ “ Rs.
2
5,000/=
“ “ “ “ “ Rs.
3
10,000/=
“ “ “ “ “ Rs.
4
25,000/=
“ “ “ “ “ Rs.
5
50,000/=
“ “ “ “ exceeding Rs.
6
50,000/=
1 Excellent
(environment)
2 Occasionally gives rise to rather unpleasant conditions

conditions
10. Working
3 Continually gives rise to rather unpleasant conditions

4 Occasionally gives rise to rather poor conditions
5 Continually gives rise to rather unpleasant conditions
6 Continually gives rise to disagreeable conditions
1 No hazards
conditions
(Hazards)
2 Health hazards nil. Accidents likely to be of very minor nature

11. Working
3 Health hazards & accidents likely to be of minor in nature

4 Health hazards & accidents might involve lost time up to 3 days
5 Health hazards & accidents might involve lost time over 3 days
6 Health hazards & accidents might induce complete incapacitation.

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Appendix 4
Plotting a Wage Curve (Wage Line)
35000
30000
25000
Monthly Salary Rs.
20000
15000
10000
5000
0
0 100 200 300 400 500 600
Evaluated Points
Figure 9. Plotting a Wage Curve
Notes:
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Appendix 5
Salary Fixing using Wage Curve
Salary Grades
25000
20000
Monthly Salary Rs.
15000
Y-Values
10000
5000
0
25000 0 100 200 300 400 500
Range of Evaluated Points
20000 Figure 10. Salary Fixing using Wage Curve

Monthly Salary Rs.
15000
10000
5000
0
0 100 200 300 400 500
Range of Evaluated Points

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03. Grade and Pay Structures

Introduction:
The aims of compensation management and pay are to attract, retain and motivate staff: traditionally,
salaries were thought to be what attracted individuals to an organisation, benefits helped to keep them
there and bonus and incentive schemes motivated them in their work.
A company's pay structure is the method of administering its pay philosophy. The two leading types of
pay structures are the internal equity method (using Job Evaluation), which uses a tightly constructed
grid to ensure that each job is compensated according to the jobs above and below it in a hierarchy, and
market pricing (using Salary Surveys), where each job in an organization is tied to the prevailing
market rate.
Pay structures provide a framework for managing pay. A pay structure is a collection of pay grades or
pay ranges. Pay structures, also known as salary structures, set out the different levels of pay for jobs,
or groups of jobs (Pay Grades), by reference to:
 Their relative internal value as determined by job evaluation,

 External relativities as established by market rate surveys
 Except in the case of “Spot Rates”, provides scope for pay progression in accordance with
performance, skill, competence, contribution or service.

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Figure 11. Grade & Pay Structure
Purpose of Grade & Pay Structures:
Grade and Pay structures provide the framework for base pay management as a means of implementing
an organization's pay policies. They enable the organization to determine where jobs should be placed in
a hierarchy, define pay levels and the scope for pay progression, and provide the basis upon which
relativities can be managed, equal pay achieved and the processes of monitoring and controlling the
implementation of pay policies can take place.
Grade and pay structures also enable organizations to communicate the career and pay opportunities
available to employees.
Grade Structures:
A grade structure consists of a sequence or hierarchy of grades, bands or levels into which groups of
jobs that are broadly comparable in size are placed. There may be a single structure defined by the number
of grades or bands it contains.
Pay Structures:

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A Pay Structure is a collection of pay rates or pay ranges, sometimes known as Salary Structures.
A pay structure consists of pay ranges, brackets or scales that are attached to each grade, band or level
in a grade structure. Pay structures are defined by the number of grades they contain and, especially in
narrow- or broad-graded structures, the span or width of the pay ranges attached to each grade.
'Span' is the scope that the grade provides for pay progression and is usually measured as the difference
between the lowest and the highest point in the range expressed as a percentage of the lowest point. Thus
a range of Rs20,000 to Rs30,000 would have a span of 50 per cent.
Therefore, Pay structures provide a framework for valuing jobs and understanding how they relate to
others within the organisation and to the external labour market.
Pay structures are used to help organizations:
 Maintain pay levels that are competitive with the external labor market
 Maintain internal pay relationships among jobs
 Recognize and reward differences in level of responsibility, skill, and performance, and manage pay
expenditures
Structure setting and adjustment provides a systematic way to manage pay structures.
Why do Organizations need Pay Structures?

A pay structure provides a framework for the implementation of reward strategies and policies within an
organisation and also designed to achieve several key objectives:
 To align reward strategy with the business strategy of the organisation, such as encouraging high
performance levels
 To bring order and clarity to an organisation and its employees in managing pay increases and career
progression
 Establish a logically-designed framework within which equitable, fair and consistent reward policies
can be implemented
 Determine levels of pay for jobs and people
 Basis for the effective management of relativities
 Help monitor and control the implementation of pay practices
 Communicate the pay opportunities available to employees

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Criteria for Effectiveness of any Pay Structure:

Grade and Pay structures should:
 Provide a logical, equitable, consistent and transparent framework

 The pay levels should be reasonably in line with the prevailing labour market
 Have equal pay for equal work
 Be able to recognize differences in ability & contribution
 Every employee should be informed of his own position in the wage structure
 Have simplified pay levels
The Process of Establishing Pay rates:
Consists of five steps.
 Conduct a salary survey

 Conduct a Job Evaluation
 Group similar jobs into pay grades
 Price each pay grade by using wage curves
 Fine-tune pay rates
Table 10. The Process of Establishing Pay rates
Stage Activity Description

1 Conduct a Salary Survey A survey aimed at determining prevailing pay rates and
specific pay rates for specific jobs in the market
2 Job evaluation Determine worth of each jobs – Internal Equity
3 Group similar jobs into A pay grade comprised of jobs of approximately of equal
pay grades difficulty
4 Wage Curves A Wage curve shows relationships between the value of the
job and average wage paid for the job
5 Fine and Tune Pay Rates A series of steps or levels within a pay grade usually based on
seniority and correcting out of line rates.
Formal Pay structures:

A pay structure consists of an organizations salary bands or ranges and its salary levels for individual
jobs or group of jobs (grades)
Rationale for Pay structures:

Grade and Pay structures are needed to provide:

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 A logical, equitable, consistent and transparent framework

 Levels of pay for jobs and people
 An organized way of pay management
 Simplified pay levels
 A control in the growth in pay costs
 Ensure that range maxima are not exceeded
 A method of linking pay and other rewards to structure and career path
 A rational basis for allocation of benefits
(e.g. mobile phone, company car….)
Types of Pay structures:
a) Narrow Graded Pay structures (Traditional)

b) Broad Graded Pay Structures
c) Broad Banded Pay structures
d) Job family Structures
e) Pay spines
f) Spot rates
a) Narrow Graded (Traditional) Pay Structures

This approach comprises a large number of grades – typically 10 or more – with jobs of broadly
equivalent worth slotted into each of grades. It allows for high levels of clarity in a hierarchical grading
system. Progression is frequently by means of service increments. However, because the grades are
very narrow, most employees reach the top of the pay range for their pay grade fairly quickly- potentially
leading to demands for upgrading and grade drift (jobs being ranked more highly than justified)
 Most typical type in the public sector

 Jobs of similar value are slotted
 The most generally accepted pay range for professional and managerial positions is plus or minus
20 per cent from the midpoint.
 Sets the minimum and maximum scheduled amounts paid for a job at a particular job size
Table 11. Narrow Graded (Traditional) Pay Structures
Grad
1 2 3 4 5 6 7 8 9 10 11
e
10,00 15,00 20,00 25,00 30,00 35,00 40,00 45,00 50,00 55,00 60,00
Min
0 0 0 0 0 0 0 0 0 0 0
25,00 30,00 35,00 40,00 45,00 50,00 55,00 60,00 65,00 70,00 75,00
Max
0 0 0 0 0 0 0 0 0 0 0

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Salary
Grade
Figure 12. Narrow Graded (Traditional) Pay Structures
b) Broad Graded Pay Structures

These structures make use of fewer grades than narrow-graded structures – perhaps six to nine. They
can help counter the problem of ‘grade drift’ as there is greater scope for individual employees to progress
further along a pay grade- thus averting the need for upgrading in many cases.
Table 12. Broad Graded Pay Structures
Grade 1 2 3 4 5 6
Min 10,000 20,000 30,000 40,000 50,000 60,000
Max 25,000 35,000 45,000 55,000 65,000 75,000
Pay can progress within the grades in a narrow or broad-graded structure on the basis of merit or time
served in the grade.
c) Broad Banded Pay Structures

Broad-banded structures in theory allow more flexibility, but they often contain pay zones that provide
an indication of the extent to which the pay of individuals in a particular role, or cluster of roles, can vary
around what is known as an ‘anchor point’ – the rate for a fully competent person in a role that is aligned
to market rates.
 Broad banding - The clustering of numerous individual pays grades into a few broad pay bands.

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 An attractive pay system for organisations wanting to restructure
and flatten, redefine career paths and encourage personal growth through lateral job movement – it
can support both the new strategy and culture.
Broadbanded Pay Structures
Rs56,000 Max Rs56,000
Rs48,000
Rs43,000
Rs40,000
5
Rs35,000
4 Min Rs30,000
Rs30,000
3
Traditional Pay Structure Broadbanding
Figure 13. Broad Banded Pay Structures
From Narrow Grade to Broad Banded Pay Structure
 Pay is managed more flexibly

 Band widths are much greater
 Not many bands in the structure (5 to 6)
 Boundaries defined by job evaluation
 Roles placed on bands by a combination of job evaluation and market rate analysis
 Identifies generic roles as benchmarks
 More scope for ‘career development pays’
 Lesser emphasis on promotions
 Lateral moves encouraged as a developmental measure
The Aims of Broad banded Pay Structures
 To achieve more flexibility in pay management

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 To fit the pay structure to a de-layered organization
 Emphasis on horizontal processes
 Create a strong relationship between pay and contribution
 De-emphasize the status based nature of rewards
 People rewarded for lateral development
Comparison of Narrow – graded, broad-graded and broad –banded structures
Figure 14. Comparison of Narrow – graded, broad-graded and broad –banded structures
d) Job Family Pay Structures

In a job family structure, each job family would have its own grade and pay structures. This would take
into account the different market rates between different job families.
In a job family pay structure, the level or grade structures may differ in order to reflect the special
characteristics of the roles. This may result in unequal pay for work of equal value between different job
families, or in other words internal equity is violated.

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Job Family Structures

Level 1
Level 2
Operations Level 1
Level 3
Level 1 Level 2
HR
IT
Level 2 Level 3
Level 1
Level 3 Finance
Level 2
Level 3
Figure 15. Job Family Pay Structures
This system groups jobs within similar occupations or functions together, usually with around six to
eight levels – similar to the number of grades found in broad-graded pay structures. There are separate
pay structures for different families (for example, one for sales staff, one for IT staff and so on). This
approach may be helpful where there is strong competition for certain occupations such as IT staff, as it
can facilitate the payment of higher salary levels for particularly occupational groups.
 Caters for separate groups or families of jobs

 Consists of roles in a function
 Differentiated by level of responsibility, skill or competence
 Used in situations where some occupations need distinct treatment from the reward and career
development points of view
 Employees become aware of the career opportunities in one’s own job family as well as others
 Popular in organizations with a high proportion of professional and knowledge workers
 May be set up for market groups
 Job families may however create barriers to lateral development
Table 13. Job Family Pay Structure
Salas Finance HR IT
Grade
Min Max Min Max Min Max Min Max
1 10,000 25,000 15,000 40,000 20,000 50,000 30,000 60,000
2 20,000 35,000 25,000 60,000 30,000 70,000 50,000 80,000
3 30,000 45,000 35,000 80,000 40,000 90,000 70,000 100,000
4 40,000 55,000 45,000 100,000 50,000 110,000 90,000 120,000
5 50,000 65,000 55,000 120,000 60,000 130,000 110,000 140,000

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6 60,000 75,000 65,000 140,000 70,000 150,000 130,000 160,000
e) Pay spines Pay Structures

Another form of pay structure is a pay spine (found mainly in the public and voluntary sectors) consisting
of a number of pay points that mark progression on the basis of time served.
These take the form of long grading structures based on a series of incremental points, which usually
allow for service-related pay progression. These systems allow for a high degree of control and
certainty.
 Consists of a series of incremental points extending from the lowest to the highest paid jobs
 A pay spine increment may be standardized at, say, 3% from top to the bottom
 Progression of the spine is based on service in the post, usually at one increment per year
 If performance related pay is introduced, individuals can be given accelerated increments
 Jobs may be placed at fixed points on the spine
 Ranges for different job grades may also be superimposed on it
 Being replaced with broad banding or family structure
 Simply define a separate pay range for each job
 Rates for jobs and relativities between them are governed by market rates
 Relativities determined by job evaluation
f) Spot Rates/Individual Pay rates

Some organizations, especially smaller ones, do not have a formal graded structure and rely entirely on
‘spot rates’, i.e. the rates for jobs do not define any scope for the progression of base pay in the form of
a pay range or salary bracket, although bonuses may be provided on top of the base rate.
Under these arrangements, there is a single hourly or weekly pay rate or a single annual salary attached
to each job, or possibly to each person, in an organization. In a nut shell, there is only one job to a grade.
Spot rates are often to be found among lower-skilled occupations where there is a need for a simple
“rate for the job”. Spot salaries often also occur at the other end of the scale for more senior
positions, such as senior managers or directors, where the remuneration package need to be
designed to attract or retain a specific individual. Spot rates are relatively common in small firms.
There is no fixed method or pattern. Just go the assumption – What is the market rate for this particular
job?
 Simply define a separate pay range for each job

 Rates for jobs and relativities between them are governed by market rates
 Market driven
 Relativities determined by job evaluation

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Advantages & Disadvantages of each Pay Structure
Table 14. Advantages & Disadvantages of each Pay Structure
Structure Advantages Disadvantages

 The wage relationships are  Becomes very inflexible
shown clearly because of so many layers
Graded Pay  Easy to control the wages  Difficult to go between
Structure  Easy to understand & make various grades
others understand  Not suitable for
organizations which has less
layers
 Pay is managed more  Less emphasis on

flexibly promotions
Broad Banded  Gives opportunities for  Difficult to make others
Structure lateral/horizontal progression understand the system
 Can arrange monetary  Opens up more expectations
incentives for special of income for employees
competencies
 Encourages professional  Create barriers to lateral

Job Family career progression development
Structure  Pay is different for different  Difficult to have a balance
levels of occupations between internal pay
structures between families
 Pay increments are known &  No additional effort as pay

standardized progressions are known
Pay Spines  Easy to administer  Increments are based only
 Ranges for different job on the service in the post
grades may be superimposed  Does not reinforce team
on it work
Selecting a Structure:
Understanding the organization -
Before selecting any new type of pay structure or modifying an existing structure, you must have a clear
understanding of the organization, its people and the current pay arrangements.

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Selecting a Structure - Some questions to be considered
 What are the strengths and weaknesses of the current pay arrangements in terms of rewards policies,
the pay structure, methods of rewarding staff for performance, competence, skill or contribution,
performance management processes, and employee benefits packages?
 How would a new or revised structure meet the needs of the business as defined in the business
strategy?
 What are the characteristics of the organization? E.g. type of business, its culture, the organization
structure and the type of people employed
 How might any pay structure developments support organizational or cultural change and reinforce
other HR interventions?
 How ready is the organization?
 What issues will have to be addressed?
Pay Structures - Criteria for choice
The criteria for choice between the main types of grade and pay structures are set out in the following
table.
Table 15. Pay Structures - Criteria for choice
Type of Structure Criteria for choice: the structure may be considered more
appropriate when:
Narrow - graded  The organization is large and bureaucratic with well-defined and
extended hierarchies;
 Pay progression is expected to occur in small but relevantly
frequent steps;
 The culture is one in which much significance is attached to
status as indicated by grading’s;
 Some but not too much scope for pay progression is wanted.
Broad - graded  It is believed that if there is a relatively limited number of grades

it will be possible to define and therefore differentiate them more
accurately as an aid to better precision when grading jobs;
 An existing narrow-graded structure is the main cause of grade
drift;
 It is considered that pay progression through grades can be
related to contribution and that it is possible to introduce
effective control mechanisms.
Broad - banded  Greater flexibility in pay determination and management is

required;
 It is believed that job evaluation should no longer drive grading
decisions;
 The focus is on rewarding people for lateral development;

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 The organization has been delayered.
Job family  There are distinct market groups that need to be rewarded
differently;
 The range of responsibility and the basis upon which levels exist
vary between families;
 It is believed that career paths need to be defied in terms of
competence requirements.
Pay spine  This is the traditional approach on public or voluntary sector

organizations and it fits the culture;
 It is believed to be impossible to measure different levels of
contribution fairly and consistently;
 Ease of administration is an important consideration.
04. Contingent Pay

Introduction:
Payments in addition to the base rate can be related to performance, competence, contribution, skill or
service. These are sometimes referred to as “variable pay”, but this has acquired the special meaning of
payments in the form of cash bonuses which are not consolidated into basic pay. Normally, contingent
pay refers to various forms of additional financial rewards an employee gets related to performance,
competence, contribution, skill or service.
Contingent Pay defined:

Contingent pay consists of payments related to individual performance, contribution, competence or
skill or to team or organizational performance. Therefore, it consists planning and managing schemes
that provide for pay progression related to performance, contribution, competence, skill or length of
service or to team or organizational performance.
A distinction can be made between performance (what a person achieves) and contribution (the impact
made by that person on the performance of the team and the organization). The level of contribution
will depend on the competence, skill and motivation of individuals, the opportunities they have to
demonstrate their competence and the use of the guidance and the leadership they receive.
Objectives and Features of Contingent Pay:
The broad objective of contingent pays (Performance related Pay, Pay-at-Risk) is to provide bonuses,
salary increments and rewards to enhance organizational performance through improved individual or
group performance.

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Today, the growing emphasis on such performance based compensation is propelled by competitive
reasons such as cutting costs, restructuring & boosting performance & rooted in the trend towards
quality improvement teams & employee commitment programs.
Criteria for Contingent Pay as a motivator:
The “line of sight” criterion
The “line of sight” criterion, as originated by Ed Lawler, sums up the key requirement of any contingent
pay scheme, especially one related to performance. This is that individuals and teams should have a clear
line of sight between what they do and what they will get for doing it. A line of sight model adapted from
Lawler is shown below.
Effort Performance Results Measures Pay-out
Figure 16. The “line of sight” criterion
The line of sight concept expresses the essence of expectancy theory; that motivation only takes place
when people expect that they will get worthwhile rewards for their effort and contribution.
The Distinction between Incentives & Contingent pay:

Incentives aim to motivate people to achieve their objectives, improve their performance or enhance
their competence or skills by focusing on specific targets and priorities. “you will get this if you do
that”. Eg: shop floor payment by result schemes, sales representatives’ commission scheme. Financial
incentives are designed to provide direct motivation.
Contingent Pay (or financial Rewards) provide a tangible form of recognition and can therefore serve
as indirect motivators (eg: achievement bonus, a salary increment or a team based pay) as long as people
expect that further achievements will provide worthwhile rewards. Rewards are retrospective. “You have
achieved this; therefore, we will pay you that”. The achievement may be defined by results or
outcomes or it may refer to the level of competence attained. Eg: Performance Related Pay (PRP).
Also, it can be in the form of prospective “We will pay you more now because we believe you have
reached a level of competence that will produce high levels of performance in the future.” Eg:
Contribution related pay
Main differences between Incentives and Contingent pay
Table 16. Main differences between Incentives and Contingent pay
Incentives Contingent Pay

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Un-consolidated cash payments Consolidated increases to the base pay or
a lump sum amount
A temporary payment given mainly for A permanent payment. The employee is
short-term performance; that do not rewarded for his performance over a long
involve a permanent pay increase in time (eg 1 year) by having his basic
salary salary increased permanently or giving a
spot bonus
Characteristics of Contingent Pay:
Contingent pay related to performance, competence, contribution, skill or service is a means of valuing
people in financial terms according to their contribution. It provides an answer to the two fundamental
reward management questions:
I. What do we value?
II. What are we prepared to pay for?
Advantages and Disadvantages of Contingent Compensation:

For
 It helps to motivate staff by forms of recognition and acceptance
 Retention of potential employees / workers
 It delivers the message that performance, competence, contribution and skill are important
 It provides a means of defining and agreeing performance and competence expectations
 Enhanced staff commitment and dedication
Against
 The extent to which contingent pay schemes motivate is questionable
 The sustained motivation ability of money is questionable
 If the scheme is unfair, inadequate or badly managed, then the demotivated people will be more than
the motivated
 If the measure of compensation is not properly designed, it could lead to staff demotivation
 It could also cause strained relationships especially if there are contingent workers working within
the team
 Productivity levels could drop, if there is no continuity of the operation of the Contingent
Compensation scheme
Types of Contingent Pay:

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The main types of contingent pay are as follows.
1. Individual Contingent Pay

2. Group (Team) Contingent Pay
1) Individual Contingent Pay
Contingent pay is any form of financial reward that is added to the base pay or paid as a cash bonus and
is related to (contingent upon) individual performance, contribution, competence or skill or service.
Individual contingent pay is sometimes called merit pay and this covers pay related to performance,
competence, contribution (performance plus competence) or skill. When payments are related to service
it is known as service-related pay
Contingent pay may be consolidated (added) in base pay, or as cash lump-sum bonuses (which is called
variable pay). It is sometimes referred to as “pay at risk”, which has to be re-earned, as distinct from
consolidated pay, which is usually regarded as continuing as long as the person remains in the job and
performs satisfactorily.
Advantages of Individual Contingent Pay

 The employee is in business for himself (work more, get more)
 There is high level of employee effort, high production and lowered cost per piece
 Employee can’t pass the buck for his inefficiency
 A precise analysis of each employee’s performance is gained
 More accurate & consistent production standards are demanded
Most popular forms of Individual Contingent Pay are:
a) Pay Related to Performance (PRP)

b) Pay Related to Competence
c) Pay Related to Contribution
d) Pay Related to Skills
a) Performance-Related Pay (PRP)
While performance-related pay (PRP) is the most popular individual contingent pay scheme it is also
controversial, largely because, especially in its early days, it was introduced and managed badly and the
high expectations of its impact on performance and its ability to change cultures were not fulfilled.
Individuals receive financial rewards in the form of increases to basic pay or cash bonuses, which are
linked to an assessment of performance, usually in relation to agreed objectives. In a PRP scheme,
scope is provided for consolidated pay progression within pay brackets attached to grades or levels in a
graded or job family structure or zones in a broad-banded structure. Such increases are permanent.

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Table 17. A Pay Matrix
Percentage pay increase according to performance rating and

position in pay range (compa -ratio) Position in pay range
Rating Position in Pay range

80-90% 91-100% 101-110% 111-120%
Excellent 12% 10% 8% 6%
Very Effective 10% 8% 6% 4%
Effective 6% 4% 3% 0
Developing 4% 3% 0 0
Ineligible 0 0 0 0
A formula in the shape of a pay matrix as illustrated in the above figure is often used to decide on the
size of increases. This indicates the percentage increase payable for different performance ratings
according to the position of the individual's pay in the pay range. It is sometimes referred to as an
individual 'compa-ratio' (short for comparison ratio) and expresses pay as a percentage of the mid-point
in a range. A compa-ratio of 100 per cent means that the salary would be at the mid-point.
Pay progression in a graded structure is typically planned to decelerate through the grade for two reasons.
First, it is argued in line with learning curve theory that pay increases should be higher during the earlier
period in a job when learning is at its highest rate. Second, it may be assumed that the central or reference
point in a grade represents the market value of fully competent people. Depending on the pay policy of
the organization, this may be at or higher than the median. Especially in the latter case, it may be believed
that employees should progress quite quickly to that level but, because beyond it they are already being
paid well, their pay need not increase so rapidly. This notion is reasonable but it can be difficult to explain
to people why they get smaller percentage increases when they are performing well at the upper end of
their scale.
Alternatively, or additionally, high levels of performance or special achievements may be rewarded by

cash bonuses that are not consolidated and have to be re-earned. Individuals may be eligible for such
bonuses when they have reached the top of the pay bracket for their grade, or when they are assessed as
being fully competent, having completely progressed along their learning curve. The rate of pay for
someone who reaches the required level of competence can be aligned to market rates according to the
organization's pay policy.
Arguments for Performance Related Pay

The most powerful argument in favour of performance-related pay is that those who contribute more
should be paid more. It can be claimed that it is right and proper to recognize achievement with a financial
and therefore tangible reward. This is in accordance with the principle of distributive justice, which, while

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it states that rewards should be provided equitably, does not require them to be equal, except when the
value of contribution is equal. The financial rewards provided by PRP can also be used to highlight key
performance areas to indicate the behaviours that are valued and generally to emphasize the importance
of high performance.
Arguments against Performance Related Pay

The case for using performance-related pay rests on three assumptions:
 that it acts as an incentive and thus motivates people to improve their performance
 that individual differences in performance can be accurately and fairly measured
 that pay differences can be fairly related to performance differences and can be seen to be related
These assumptions are difficult to justify. The effectiveness of PRP as an incentive is highly questionable.
As normally operated it fails to meet the requirements of expectancy theory in three critical ways: 1)
people are too often unclear about what they have to do to get a pay increase, i.e. there is no ‘line of sight'
between the effort and the reward; 2) people do not necessarily expect that they will get a reward; and 3)
they do not expect that the reward will be worthwhile. PRP schemes also fail to meet the criterion that
the reward should follow as closely as possible the accomplishment that generated it, in that it is usually
made annually.
Fair measurement is hard in any situation where outcomes cannot be quantified, and this is the most
typical situation. Relating pay fairly to performance can be subject to partiality or prejudice. The success
of PRP largely depends on the line managers who make pay recommendations, and they are not
necessarily equipped with the information, skills or the powers of judgement required to do so fairly and
consistently.
Moreover, they usually rely on potentially subjective and inaccurate ratings. As Murphy and Cleveland
(1995) concluded following their extensive review of performance appraisal: 'It is surprisingly difficult
to determine whether or not performance ratings provide valid and accurate indications of individuals'
performance."
Daniel Pinks seven deadly sins of PRP:

• They can extinguish intrinsic motivation
• They can diminish performance
• They can crush creativity
• They can crowd out good behaviour
• They can encourage cheating, shortcuts and unethical behaviour
• They can become addictive
• They can foster short-term thinking
b) Pay Related to Competence

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People receive financial rewards in the shape of increases to their base pay by reference to the level of
competence they demonstrate in carrying out their roles. It is a method of paying people for the
ability to perform now and in the future.
Competency based pay schemes have increased in popularity in recent years. A direct link is created
between the acquisition, improvement and effective use of skills and competencies and the individual's
pay.
Competency and skills-based schemes measure inputs, ie what the individual is bringing to the job,
unlike traditional performance based schemes which measure outputs. Competency may be generally
defined as the ability of an individual to apply knowledge and skills and the behaviors necessary to
perform the job well.
As in the case of PRP, scope is provided for consolidated pay progression within pay brackets attached
to grades.
As Brown and Armstrong comment, “Increasingly, organizations are finding that success depends on a
competent workforce. Paying for competence means that an organization is looking forward., not back.”
Pay based on competence avoids the over emphasis in PRP schemes on quantitative and often unrealistic
targets. It is attractive because it rewards people for what they are capable of doing, not for results over
which they might have little control.
Competency based systems have become more wide-spread because many organisations already use
competencies in recruitment and in performance appraisal for non-pay purposes, such as development
and training. It goes along with the increasing tendency for pay to be linked to the abilities of the
individual rather than a single set rate for the job.
Competency based pay is often used in conjunction with an existing individual performance related pay
scheme and will reward on the basis of not only what the individual has done, but how they have achieved
their targets. Examples of competencies may include leadership skill, or team-working ability.
Competency-related pay fits well with an overall organisational philosophy of continuous improvement.
However, competency related pay raises two questions.
1. What are we paying for? Are we are paying for competencies, i.e. how people behave or
competencies, i.e. to perform well? what people have to know and be able to do.
2. Are we paying for the possession of competence or the use of competence? Clearly, it must be
the latter. But we can only assess the effective use of competence by reference to performance.
Both competency-based and skills-based pay have similar advantages and disadvantages:
Advantages of Competence related pay:

 increased skill and flexibility in the workforce
 reduction in traditional demarcations

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 increased efficiency
 tangible benefits for workers in return for changes in working practice.
Disadvantages of Competence related pay:

 payroll costs will increase as workers gain higher rewards for increased skills
 increased training costs (time and expenses)
 employers may be paying for skills/competencies rarely used
 queuing for training - if people cannot be released, then there might be resentment and questions of
fairness
 can de-motivate once workers reach a ceiling of their training opportunities or there are no higher
grade positions available when they have completed their training
 highly trained workers will be more marketable and may be 'poached' or tempted to leave.
c) Contribution-Related Pay
Contribution-related pay is a process for making pay decisions that are based on assessments of both the
outcomes of the work carried out by individuals and the levels of competence and competency that have
influenced these outcomes.ie- Contribution-related pay rewards people for both their performance
(outcomes) and their competence (Inputs).
Pay awards can be made as consolidated pay increases but in some schemes there is also scope for cash
bonuses.
Contribution captures the full scope of what people do, the level of skill and competence they apply and
the results they achieve, which all contribute to the organization achieving the long term goals.
Contribution pay works by applying the mixed model of performance management: assessing inputs and
outputs and coming to a conclusion on the level of pay for people in their roles and their work; both to
the organization and in the market; considering both past performance and their future potential.
However, Contribution-related pay decisions still ultimately depend on the judgement of line managers
and Contribution-related pay will only work if line managers are capable of making sound judgments
and are willing to spend time in doing so.
d) Skill-Based Pay
Skill-based pay provides employees with a direct link between their pay progression and the skills they
have acquired and can use effectively. It focusses on what skills the business wants to pay for what
employees must do to demonstrate them. It is therefore, people based rather than job based approach to
pay. Rewards are related to the employee’s ability to apply a wider range or a higher level of skills to
different jobs or tasks.
A skill may be defined broadly as a learned ability that improves with practice in time. For Skill-based
pay purposes the skills must be relevant to the work. Skill-based pay is also known as know ledged

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based pay, but the terms are used interchangeably, being regarded loosely as the understanding of how
to do a job or certain tasks.
Skill-based pay also rests on workers gaining new and improved skills - often in a manufacturing
environment. Reward is given for skills that can be used in other jobs in the same job band, encouraging
multi-skilling and increased flexibility. Workers may also be allowed to develop the skills of a higher job
band. Skills may be based on National Vocational Qualifications or internal evaluation and accreditation.
Both competency-based and skills-based pay have similar advantages and disadvantages:
e) Service Related Pay

Service related pay provides fixed increments, which are usually paid annually to people on the basis of
continued service in either a job or in a grade in a pay spine structure. Increments may be withheld for
incapable performance (although this is rare) and some structures have a “merit bar”, which limits
increments unless a defined level of ‘merit’ has been achieved.
This is the traditional form of contingent pay and is still common in public and education, voluntary
sectors although it has largely been abandoned in the private sector.
Arguments for Service-related pay:
 Perceive it as being fair – everyone is treated equally

 It is felt that linking pay to time in the job rather than performance or competence avoids the bias
judgments that manager is prone to make
 Some people believe that the principle of rewarding people for loyalty through continued service is a
good one
Arguments against Service-related pay:
 It is inequitable as better contributors also served from the same spoon

 It does not encourage good performance; indeed, it rewards poor performance equally
 It is based on the assumption that performance improves with experience but this is not automatically
the case
 It can be expensive – everyone may drift to the top of the scale, especially in times of low staff
turnover, but the cost of their pay is not justified by the added value they provide
2) Group (Team) Contingent pay

Group contingent pay programs are like individual contingent plans but give pay over and above base
salary to all team members when the group or team collectively meets a specified standard for
performance, productivity or other work related behavior.

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A plan in which a production standard is set for a specific work group, and its members are paid incentives
if the group exceeds the production standards. There are several ways to implement team or group
incentive plans. One is to set work standard for each member of the group and maintain count of the
output of each member. Members are then paid based on one of three formulas:
 All members receive the pay earned by the highest producer.
 All members receive pay earned by the lowest producer.
 All members receive payment equal to the average pay earned by the group.
There are several reasons to use team contingent plans. Sometimes several jobs are interrelated, as they
are project teams. Here one worker’s performance reflects not only on his or her own effort but that of
co-workers as well.
Advantages of Group Contingent Pay

 Demands, increased cooperation between employees
 Simplifies payroll calculations
 Permits greater incentive coverage at less cost
 Improves the level of quality
 Reduce and levels the work-in-progress inventory
 Develop leaders & spots potential supervisors
 Speeds up training time
 Reduces absenteeism & tardiness
A group contingent plan’s main disadvantage is that each worker’s rewards are no longer based on his or
her own efforts.
A) Team-based pay
While team-based pay has been around for some time - in the shape of departmental or group bonus
systems - it has taken on more importance with the increased interest in team working. Team-based
rewards are payments or other forms of non-financial reward provided to members of a defined team,
which are linked to the performance of that team.
Typically, team-based rewards are shared among the members of teams in accordance with a published
formula or on an ad hoc basis for exceptional achievements.
There are two main approaches to team-based rewards.
1. To create an incentive and a clear definition of performance, by identifying targets in advance and
offering a sum of money for achieving them.

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2. To reward teams retrospectively for good work done under agreed criteria, in what is effectively a
recognition scheme.
The aim of team-based pay is to strengthen the team through payments - building a coherent, mutually
supportive group of people with a high level of involvement. The team achievements are recognized and
rewarded. Peer group pressure can also be helpful in raising the performance of the whole team.
As with any other pay system, involvement of the workers who will be affected is crucial in the design
of the scheme. They must be involved particularly in the way objectives are set, how performance is
measured, and the basis on which team rewards are distributed. Team based pay has both advantages and
disadvantages:
Advantages:
 it can encourage team working and co-operation between workers

 team goals can clearly be integrated with organisational objectives
 it encourages less effective performers and acts as an incentive for the whole team to improve
 it may help in developing self-management within the team
 it enhances flexibility of working and encourages multi-skilling
 enhance flexible working within teams and encourage multiskilling
Disadvantages:
 it can take time for teams to become well-defined and work together effectively
 individuals may feel their personal self-worth is diminished
 Peer pressure could be oppressive and lead to conformity rather than creativity. Pressure on
individuals perceived to be under-contributing or not 'fitting in' can degenerate into bullying and/or
harassment
 inter-team competition may become dysfunctional for the organisation as a whole
 once effective the team could prove difficult to change or break-up in response to changing processes,
markets or competitive pressures
 each team should have equality of earnings opportunity or inter-team movement will be restricted
 introducing a new member to a team may be problematic, if the team perceive that their earnings
could be affected by a less skilled operator
 reduced flexibility because individuals in high performing teams are often reluctant to move to other
teams
B) Pay for Company Performance
There are three types of group contingent pay schemes depending on the formal business performance of
the whole company.
B.1) Plant or company based pay (Profits Sharing)

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Profit sharing is a plan under which an employer pays to eligible employees, as an addition to their normal
remuneration, additional sums in the form of cash or shares in the company related to the profits of the
business. The amount shared is determined either by an established formula, which may be published, or
entirely at the discretion of management. Profit sharing schemes are generally extended to all employees
of the company.
A plan whereby employees share in the company’s profits. Plant or company based performance pay
schemes are based on larger groups than teams, for instance, divisional, plant or the whole organisation.
They may well use the same factors as team-based or individual performance schemes, or perhaps total
sales within a set period, or comparative reductions in labour costs.
The most common forms of plant or company based payment systems tend to be based on overall profits
(profit sharing), or alternatively on schemes that owe more to the improvements within the direct control
of the workforce, such as added value or similar types of gainsharing systems. Overall profitability in an
organisation is subject to factors outside the workforce's control, such as depreciation, economic changes,
taxation, as well as the productivity improvements of individuals and therefore may not reflect real
efficiency gains by the workforce.
Plant/company based pay schemes are generally most effective in organisations where the workforce can
clearly see the results of their efforts. They are successful where communications and employment
relations are good and where the performance measurement is not subject to major changes arising from
external causes.
There are advantages and disadvantages to profit sharing pay schemes:
Advantages:
 they can encourage wider co-operation within the plant, with workers being more aware of their
contribution to the total effort of the organization
 encourage employees to identify themselves more closely with the company by developing a common
concern for its progress
 they provide a more obvious and direct link with the organisation and its ability to pay
 they may encourage greater flexibility in ways of working to increase efficiency and productivity.
 It demonstrates in practical terms the goodwill of the company towards its employees
 It encourages better cooperation between management and employees
Disadvantages:
 the direct incentive value of such schemes tends to be relatively weak, as the link between daily work
and bonus may seem quite remote, especially if the payments are quarterly or annually
 bonus payments may come to be seen as part of normal pay
 added-value schemes may involve complex financial information and may be difficult to understand.
B.2) Gain sharing

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Gain sharing can best be defined as ‘a commitment to employee involvement that ties additional pay to
improvements in workplace performance’. The primary components of a successful gain sharing plan
are:
1) A formula to keep track of gains

2) A link between the formula and process improvement initiatives
3) Effective communications of how employee-generated improvements are creating gains
Gain sharing is a form of added-value pay scheme linking workers' pay to the achievement of
organizational goals by rewarding performance above a pre-determined target. This may be in the form
of a share in the profits generated by sales, or on measures of customer satisfaction, but is almost always
led by measures of productivity, performance and quality.
Gain sharing schemes have to be based on factors that are in the workers' control. Gain sharing should
be part of a long-term strategy to improve communications, staff involvement and teamwork. The goal is
not to work harder, but more effectively. It may be used as a replacement for bonus/piecework schemes,
where quality is sometimes lost to quantity.
All workers and management who have any involvement in the product of the organization should be
included in any gain share plan. In this way their support is encouraged so that they can feel a direct
responsibility for the plan's success. Performance measures and results should be made available and
everyone encouraged offering suggestions for improvements. Open communications and exchange of
information are crucial.
Most Common types of gain sharing schemes are:
* Scanlon plan: this formula measures labour costs as a proportion of total sales and sets a standard ratio
which will trigger some distribution of savings to a pre-established formula. This is an incentive plan
developed in 1937 by Joseph Scanlon & designed to encourage cooperation, involvement, and sharing of
benefits.
The Scanlon plan assumes that employees should share directly in any extra profits resulting from their
cost-cutting suggestions. If a suggestion is implemented and successful, all employees usually share in
75% of the savings.
* Others are: Material Utilization schemes, Quality performance schemes, Time saved schemes,
Multi-factor schemes.
B.3) Employee Stock Ownership Plan (ESOP)
Share incentive schemes involve the provision of shares to employees - either by giving them direct or
allowing them to be bought. The aim is to encourage staff involvement in the company's performance
and therefore improve motivation and commitment.
The stock option is perhaps the most popular long – term incentive. A stock option is the right to purchase
a specific number of shares of company stock at a specific price during a period of time, the executive

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thus hopes to profit by exercising his or her option to buy the shares in the future but at today’s price.
The assumption is that the price of the stock will go up, rather than go down or stay the same.
Unfortunately, this depends partly on considerations outside the executive’s control, such as general
economic conditions. Stock price is, of course, affected by the firm’s profitability and growth, and to the
extent the executives can affect these factors the stock option can be an incentive. However, in survey it
was found that over half the executives saw little or no relationship between their performance and the
value of their stock options.
Essentials needed for any Contingent Pay to work:

 There should be a direct relationship between employee skill, effort and output
 Simple enough to calculate the pay
 There should be no limit on incentive earnings
 Support of the management
 The scheme should be self- financed
 Should not incorporate any ‘discretionary’ rules
 Targets should be realistic
 Targets should be reviewed regularly
 Contingent scheme should be simple as possible
 Written instructions covering policies and procedures
 Generous enough to motivate to exert additional effort
 Payments should be made ASAP.
Why Contingent Pay may ‘not work’?
 Bad Management practices (Eg: Ambiguous instructions)

 Contingent pay do not alter the attitudes that underlie our behavior
 Rewards do not create a lasting commitment
 Incentives as a substitute
 Money is not a motivator most of the time
 Rewards punish (Manipulative) – 2 sides of the same coin
 Can rupture relationships
 Can unduly restrict performance
 Can discourage risk taking
05. Strategic Reward Systems

Introduction:
Strategic Reward management is the process of looking ahead at what an organization needs to do about
its reward policies and practices in the middle or relatively distant future. It is concerned with the broader
business issues the organization is facing and the general directions in which reward management must
go to provide help in dealing with these issues in order to achieve longer-term business goals.

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Strategic Reward management is therefore visionary management, concerned with creating and
conceptualizing ideas of what the organization should be doing about valuing and rewarding its people.
The foundation of Strategic Reward management is an understanding of the needs of the organization
and its employees and how they can best be satisfied.
Therefore, Strategic Reward management is about the development and implementation of reward
strategies and the guiding principles that underpin them.
Definition of Strategic Reward management:

Strategic Reward management is clarifying what the organization wants to do in the longer term to
develop and implement reward policies, practices and processes that will further the achievement of its
business goals.
The Purpose of Reward Strategy:
The aim of reward strategy is to support the corporate and HR strategies and align reward policies and
processes to organizational and individual needs. It provides a sense of purpose and direction and a
framework for reward planning.
There are four powerful arguments for developing reward policies:
1) You must have some idea where you are going or how do you know how to get there and how do you
know that you have arrived
2) Pay costs in most organizations are by far the largest item of expense (up to 60%), so doesn’t it make
sense to think about how they should be managed and invested in the longer run?
3) There can be a positive relationship between rewards and performance, so shouldn’t we think about
how we can strengthen that link?
4) There is a strong link between reward strategy and other HR strategies and processes so that they are
coherent and mutually supportive?
Aims of Strategic Reward:
The overall objective of strategic reward is to develop and implement the reward policies, processes and
practices required to support the achievement of the organization’s business goals and meet the needs of
its stakeholders. The specific aims are;
 Create total reward processes that are based on believes about what the organization values and
wants to achieve
 Reward people for the value that they create
 Support the development of a performance culture
 Align reward practices with both business goals and employee values and needs
 Reward the right things to convey the right message about what is important in terms of expected
behaviors and outcomes

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 Facilitate the attraction and retention of the skilled and competent people the organization needs,
thus aiding the process of talent management and ‘winning the war for talent’
 Help in the process of motivating people and achieving high levels of engagement, positive
discretionary behavior and commitment to the organization
 Develop a positive employment relationship and psychological contract
Reward Management Procedures:

Reward management procedures are required to achieve and monitor the implementation
of reward management policies and to budget for and payroll costs.
The procedures will be concerned with:
 Monitoring the implementation of pay policies concerning the pay structure and internal and
external relativities
 Conducting pay reviews
 Dealing with specific procedures for fixing pay on appointment or promotion
 Dealing with salary anomalies
 Controlling payroll costs
 Controlling the implementation of pay policies and budgets
Features of Reward strategy:
Reward strategy is an undertaking about what is going to be done in the future. It is concerned with the
direction the organization should follow in developing the right mix and levels of financial and non-
financial rewards to support the business strategy. It will set out:
1) The underpinning principles (the reward philosophy)
2) The intentions – this is what we propose to do
3) A rationale - this is why we intend to do it
4) A plan – this is how we propose to do it
Reward Strategy and Business Strategy:

One of the defining features of strategic reward is that reward strategy should have aligned to ‘fit” the
business strategy and goals. One of the keys to competitive advantage is the ability to differentiate what
the business supplies to its customers from what is supplies by its competitors. Such differentiation can
be achieved by having HR and Reward strategies that ensure that;
1) The firm has a higher quality people than its competitors

2) The unique intellectual capital possessed by the business is developed and nurtured
3) A culture is created that encourages commitment, engagement and continuous development

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Benefits of a Total Reward approach
 Greater Impact - the combined effect of transactional (financial) and relational (non-financial)
rewards will make a deeper and long lasting impact on the motivation and commitment of people
 Enhancing the employment relationship - Total reward approach will appeal more to and engage
individuals
 Flexibility to meet individual needs - Rewards can be tailored to a particular challenge &
circumstances
 Recruitment and retention - Employee can be presented with the total of the value of the
employment package
 Reduced cost – It can produce low cost solutions, although the cost savings shouldn’t be the main
aim of total rewards
 Enhanced profitability - Direct links can be forged between employee motivation and product /
service quality
 Winning the war for talent - The organization can become an ‘employer of choice’ and a ‘great
place to work’ thus attracting and retaining the talented people it needs
Controlling Rewards
All reward strategies are different, just as all organizations are different. Of course, similar aspects of
reward will be covered in the strategies of different organizations but they will be treated differently in
accordance with variations between organizations in their contexts, business strategies and cultures. But
the reality of reward strategy is that it is not such a clear-cut process as some believe. It evolves, it changes
and it has sometimes to be reactive rather than proactive
.
Rewards can be controlled as per the company’s wishes by playing around with the Base pay or pay
structures, Variable pay (incentives and contingent pay) and the Benefits they offer.
Additionally, or alternatively, reward strategy may set out a list of specific intentions
dealing with particular aspects of reward management, for example:
● the development of a ‘total reward’ system

● the introduction of performance pay by way of incentives
● replacement of an existing contingent pay scheme
● the introduction of a new grade and pay structure
● the replacement of a decayed job evaluation scheme

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● the introduction of a formal recognition scheme
● the development of a flexible benefits system
● the conduct of equal pay reviews with the objective of ensuring that work of equal
value is paid equally.
Compa-Ratio Analysis:
A compa-ratio analysis (short for comparative ratio) measures the relationship in a graded pay structure
between actual and policy rates of pay as a percentage.
The policy value used is the reference point in the grade structure which represents the target rate for a
fully competent individual in any job in the grade. This reference point is aligned to market rates in
accordance with the organization’s market stance policy. The reference point may be at the mid–point in
a symmetrical range (say 100% in a 80-120% range), or top of the scale in an incremental pay structure.
Reference points need not necessarily be placed at the mid-point; organizations are increasingly
positioning them at other points in the range.
Compa-ratios provide a short hand way of answering the question: ‘How high or low, is an organization
paying its employees relative to its policies on pay levels? Compa-ratios are calculated as follows.
Actual rate of pay

Compa-ratio = ----------------------------------- X 100
Reference point rate of pay
A compa-ratio 100% means that actual and policy pay are the same; less than 100% means that pay is
below the reference point and greater than 100% means that pay exceeds the reference point.
Monitoring Internal & External Relativities:
To determine how different are the market rates for our jobs and the current rates we are paying, we need
to combine both the internal/external wage curves on one graph

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Figure 17. Monitoring Internal & External Relativities
After comparing, companies must decide whether to adjust the current pay rates and if so, how. As an
example the company might decide to move our current internal wage curve up or down or adjust the
slope of the internal wage curve for some jobs.
Table 18. Analysis of current pay practice compared to market data
Analysis of current pay practice compared to market data
Job Salary Market Data

Current Salary as % of
Job Size Curren (Rs)
Grade (JE t Upper Lower Upper
Title Poin Salary Lower
Quartil Median Quarti Quartil Median
ts) (Rs) Quartile
e le e
Accts
1 144 85% 93% 109%
Asst 18,000 20,900 19,300 16,500
2 233 100% 111% 124%
Admin. 26,000 25,900 23,400 21,000
Fin.
3 406 98% 101% 112%
Mana. 34,000 34,800 33,600 30,400
4 994 82% 89% 92%
Mgt Acct 73,000 73,500 67,100 65,100
Pay Reviews:
Pay reviews are a major means of implementing the organization’s reward policies for improving
performances and ensuring the continued motivation and retention of employees. They are also the
manifestation of employees of these reward policies.

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It is important, therefore, that the way in which reviews are conducted and the outcome for employees
reflect these policies and the organization’s culture. So far as employees are concerned, the review
should, within reason. Meet the expectations the organization has created among them as to how they
will be rewarded in relation to their performance and contribution. However, the extent to which this can
be achieved in practice may be limited by budgetary constraints on the amount of money available for
pay increases, which will ultimately be derived from the business performance of the organization, or, in
the public sector, government guidelines on pay increases. The review policy and practice will also be
affected if pay is negotiated with trade unions.
When planning and conducting a pay review; consideration should be given to the need to:
 Provide general “across-the-board increases’ in response to market trends, increases in the cost
of living or negotiated pay settlements
 Conduct a review of the pay structure to reflect the need to respond to external pay market forces
or to change differentials
 Provide individuals with performance-related pay increases
 Deal with increases in market rates affecting particular occupations or job families
 To rectify any salary anomalies (if any)
The conduct of pay reviews can make a major impact, not only on motivation and commitment, but also
on the perceptions of employees about the fairness of the whole process of reward management.
General Pay reviews:
General reviews take place when an across-the-board increase is given to employees in response to
general market rate movements, increases in the cost of living or union negotiations. The review may
take place at the same time as individual reviews, in which case employees would be informed of the
elements of their pay rise attributable either to the general increase and /or to their performance, assuming
that three is a PRP scheme.
Many organizations, however, have reacted against cost-of-living reviews on the ground that the main
priority is to keep their competitive position and this means responding to market rate increases.
Individual Pay reviews:
Individual reviews determine contribution or performance-related pay increases or special achievement

or sustain good performance bonuses if they are allowed as additions or alternatives to bae pay rate
increases. They also take into account the position to which performance pay progression has brought
individuals in their pay ranges or curves-this may influence the size of the performance award or decision
to give a lump sum bonus rather than a pay increase.
Controlling Payroll Costs:

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Pay review budgets for managers set out the overall increase in their payroll that they are allowed to
recommend for their departments to cover the cost of competence and/or performance-related awards.
This is the basic control mechanism and managers should be required to keep strictly within their budgets
and own the financial consequences of so doing.
Control over the implementation of pay policies generally and payroll costs in particular will be easier if
it is based on:
 A clearly defined understood pay structure
 Clearly defined pay review guidelines and budgets
 Well-defined procedures for grading jobs and fixing rates of pay
 Clear statements of the degree of authority mangers have at each level to decide on rates of pay
and increases
 A personnel (HR) function which is capable of monitoring the implementation of pay policies
and providing the information and guidance mangers require and has the authority and resources
 A systematic process for monitoring the implementation of pay policies costs against budgets
Also, have to be concerned about the following three control mechanisms as well.
1) Control of Grade Drift – the tendency of people to be upgraded without a justifiable increase in
their job size
2) Line Managers to take the ownership- Line managers should be empowered in making decisions
regarding pay packages as well
3) Pay review documentation (History and current)) – Line managers should have updated
individual pay details (spreadsheet) together with the budgeted figures.
 Name, job title and present salary of job holder
 Details of last pay increase- amount, date and reason
 Performance rating
 Proposed increase – amount and percentage
Strategic Rewards for Special Groups:
 Rewards for Managers and Executives
Most employers award their managers and executives a bonus or incentive because of the role managers
play in determining divisional and corporate profitability. One survey found, for instance, that about 90%
of large companies pay managers and executives annual bonuses (short term incentive). Normally,
bonuses will be paid as a combination of organizational and individual performance.
Similarly, long – term incentive plans are encouraged (like stock options), which are intended to motivate
and reward management for the corporation’s long – term growth and prosperity.
Today, sometimes the trend in compensation of managers is more towards performance based pay. As a
result, the importance of base salary is reduced while boosting the emphasis on incentives. Sometimes,
the incentive portion is more than 50% of a typical base salary.
 Rewards for Top Managers (Top Management)

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Long term incentives are intended to motivate and reward top management for the firm’s long – term
growth and prosperity, and to inject a long term perspective into the executive decisions. If only short -
term criteria were used, a manager could, for instance, increase profitability by reducing plant
maintenance, this tactic might, of course, catch up with the company over 2 or3 years. Long term
incentives also are intended to encourage executives to stay with the company by giving them the
opportunity to accumulate capital (like company stock) based on the firm’s long – term success.
 Rewards for Sales People
Sales compensation plans typically rely heavily on incentives (sales commissions). However, some sales
people get straight salaries (Job involves prospecting (finding new clients), account servicing, training
customer’s sales force, or participating in national and local trade shows) and most receive a combination
of salary and commissions/incentives.
Commission/Incentive plans are

 Pay is percentage of sales results
 Keeps sales costs proportionate to sales revenues
 Can create wide variation in sales person’s income
 Likelihood of sales success may be linked to external factors rather than to sales person’s
performance
 Can increase the turnover of sales people
Reward Management in the Sri-Lankan Context

The Majority of companies in Sri-Lanka are small and Medium Scale family owned and managed
businesses. Accordingly, the majority of these companies do not have salary structures. The graded
salary structure is the one, which is most commonly used in Sri-Lanka. The Graded salary structure is
not very flexible. Hence many of these small and medium scale companies prefer to use spot rates
(Negotiation of Salaries) in the recruitment of their staff.
In Sri-Lanka for the lower to Middle level jobs in an organization, generally the number of persons
seeking employment is much greater than the number of jobs on offer. Hence, the bargaining power of
the selected candidate is less.
For the Majority of Jobs in Sri-Lanka, when we analyze a salary package of an employee the percentage
of the fixed component of Salary is high and the Variable component is low. This is the opposite in the
western countries.

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References
Armstrong, Michael & Murlis, Helen, Reward Management, 01st Edition, 2005
Armstrong, Michael, Handbook of Human Resource Management, 11th Edition, 2010
Armstrong, Michael, Armstrong’s Job Evaluation Handbook, 1st Edition, 2018
Dessler, Gary – Human Resource Management, 15th Edition, 2017
Henderson I., Richard, Compensation Management in a Knowledge-Based World, 9th Edition, 2006
Other sources;
https://employeebenefits.co.uk/issues/october-2015/what-role-does-reward-play-in-a-talent-
management-strategy/
https://www.worldatwork.org/total-rewards-model/
https://smallbusiness.chron.com/components-comprehensive-total-rewards-motivation-system-
36942.html
https://www.slideshare.net/1022222/basic-factors-to-determining-pay-rates
http://www.sagepub.com
https://mohamed-sabry.com/blog/how-to-create-a-market-competitive-pay-plan/

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Chartered

Level : Diploma in Professional HRM

Unit Code : DPHRM - U6

Session : Reward Management

Purpose and aim of the unit

On the completion of this unit students will;

 Closed Book Examination.

Guided Learning Hours

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02. Market Pricing .............................................................................................................................. 14

03. Job Evaluation............................................................................................................................... 22

04. Grade and Pay Structures .............................................................................................................. 41

05. Contingent Pay .............................................................................................................................. 53

06. Strategic Reward Systems............................................................................................................. 66

Figure 1. Total Reward .............................................................................................................................. 5

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 Base pay (Salary/Wage)  Recognition

Components of a Total Reward

A total reward consists of a combination of financial and non-financial rewards.

Figure 2. Components of a Total Reward

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Elements of Total Employee Reward and their Inter-Relationship

Elements of a Total Employee Reward will be based on:

Financial Rewards (Transactional Rewards)

a) Base pay / fixed pay

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b) Variable pay – Incentives/Contingent Pay

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Non – Financial Rewards (Relational Rewards)

Recognition means acknowledgment and appreciation of work done by employees. Appreciation or

3. Career advancement opportunities

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Strategic Aim of Reward Management

Guiding Principles of Reward Management

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Reward guiding principles are concerned with matters such as:

A Sound Reward system attempts to do the following:

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What do Employers expect from a Reward System?

Factors Affecting the Determination of a Reward System:

 Demand and Supply of Workers – Labour market conditions

 Bargaining Power of Trade unions

 Condition of the Product in the Market place

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 Comparative Wages (External Equity)

Productivity is considered to be the main basis of determination of remuneration. In firms where

A worker is compensated according to the job requirements.

 Government Policy on minimum wages/salaries

 Goodwill of the Company

Why is Reward Management Important?

1. Helps to attract and retain the top talent

2. Helps to Improve productivity

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3. Better EVP and Organizational reputation

5. Morale will be lifted

Significance of Fairness, Equity, Consistency & Transparency in Reward

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02. Market Pricing

What is Market Pricing?

The Purpose of making Market Comparisons

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