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VI Semester HR specialisation Compensation management Chapter 3

Determining the salary structure- The wage mix Module 3 Determining the salary structure- The wage mix Designing compensation system, Internal and external equity in compensation, Compensation policy. Reference : Milkovich .G.T, Newman J.M, Ratnam.C.S.V Compensation , McGrawHill, 9th edition, pp 187-221 Salary structure Salary structure consists of the companys salary grades/ ranges and its salary level for a single job or group of jobs. Job evaluation is used to form a salary structure, into which jobs can be correctly graded based on the relative value of the job. Wage survey is also done before considering salary structure to ensure competitive pay. Major consideration for setting up salary structure 1. Specify the employers competitive compensation policy 2. Define the purpose of the survey 3. Select relevant market competitors 4. Design the survey 5. Interpret survey results and construct the market line 6.Construct a pay policy line that reflects external pay policy 7. Balance competitiveness with internal alignment through the use of ranges, flat rates and or bands to form wage structure (6 hrs)

1. Competitive pay policy :

Conventional pay policies are To lead, to meet or to follow the competition. Newer policies allow flexibility among employee groups & among pay forms for different employees. Competitiveness of pay will affect the compensation objectives of the company. Match policy :Most common policy is to match the competitor pay. This ensures that organisations labour cost equals competitors cost and has equal advantage as their competitors market`. Ex : Apache footwear company of Ch9ina Lead policy : has the ability to attract and retain the best talents in the industry. It also offsets less attractive features of the work. Ex : IBM, Merryl Lynch. On the flip side, labour cost increases there by increasing the cost of production. Lag policy : Paying below market rate. May hinder firms ability to attract talents. But if lagged pay is coupled with higher future profits as in stocks and shares ,Work life balance, Hot assignments, Desirable location etc, a company can sustain the lag policy Flexible policies : Policy may vary for different job families, may use different forms of pay. Varied proportion of pay mix.

Exhibit TOYOTA Vs GM

Define the purpose of the wage survey

Wage survey is the systematic process of collecting and making judgment about the compensation paid by the other employers. Purpose of wage survey could be : For adjusting the pay level in response to changing rates paid by competitors. To decide wage mix relative to that paid by competitors. To establish a wage structure. To analyse pay related problems. To estimate the labour cost of the competitors.

Wage survey
A survey is the systematic process of collecting and making judgments about the compensation paid by other employers Steps in conducting wage and salary surveys: 1. 2. 3. 4. 5. 6. select the jobs to be surveyed define the relevant markets select the firms to be surveyed determine the information to ask determine the data collection technique administer the survey

An employer conducts/participates in a survey for the following reasons its an opportunity to collect information to make judgments regarding compensation to adjust pay to changing external pay rates & recognize pay trends in marketplace to establish/develop or price an adequate pay structure to analyze personnel problems that may be pay related defending pay practices in a court of law to attempt to estimate the labor costs of product market competitors hiring and retaining competent employees promoting worker productivity

3. Select relevant market competitors Employers who compete in one or more of the following areas: 1. Same occupation/ skills

2.Employees within same geographic area 3. Same products/ services

4. Design the survey Who should be involved in survey design Survey consulting firms : Hay group, Gallup How many employers should be included 6-10 top performers National surveys include up to 100 companies. Which jobs should be included Benchmark jobs( stable job content, are common across different employers and include sizable amount of employees) Ex : Managerial group will include : VP, GM, Managers,PL What information should be collected Organisational data ( Assets , sales , cash flow, size of the company) Data on compensation system ( Wage mix ,benefits HR outcomes- ( Labour cost, Yield ratio, Turn over ratio) 5. Interpret survey results and construct the market line Check accuracy of job matches & check for anomalies, age of data) Conduct statistical anaysis of data Use of regression analysis to calculate the pay for jobs based on job evaluation points For each benchmark job, job evelauation point and rupee rate for the job are to be compared A market line links a companys benchmark jobs on the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical

axis. It summarizes the distribution of going rates paid by competitors in the market

Understanding Regression

Pay Policy Line

Determining Internal Job Structure

6. Construct a pay policy line that reflects external pay policy

Consider the alternative pay mix

Balance competitiveness with internal alignment Two parts of the total pay model merge Internally aligned structure - Horizontal axis External competitive data - Vertical axis Two aspects of pay structure Pay-policy line Pay ranges

Any match between an organisation job and survey job should be done based on the job content and not based on the job title.

Pay grades
Pay grades are jobs that are similar in their worth to the organization Grouping of jobs Each grade will have its own pay range: minimum, maximum & midpoint Midpoint represents a fully trained employee, performing satisfactorily

Pay Range within a Grade

Ranges establish the upper and lower pay limits for all jobs in each grade Midpoints correspond to competitive pay point Often represents base pay for a seasoned employee Generally those above midpoint are considered well paid by the market and should be strong performers to warrant additional increases Why Bother with Grades and Ranges? External pressures Differences in quality (KSAs) among individuals in external market Differences in productivity or value of quality Differences in mix of pay forms of competitors Internal pressures Recognize individual performance differences Meet employees expectations that their pay will increase over time Encourage employees to remain with organization Offer title growth and responsibility recognition

What Pay Grades Look Like

Practical Considerations
Midpoints: center of the range Range spread: width of each range Rise: difference between midpoints Target position: midpoint relative to market Should we pay high compared to everyone or pay average among top paying firms? Timing: target position date (lead/lag)

2 ways of making salary structure

1. Graded salary structure Sequence of salary grades and ranges with well defined minimum and maximum. Assumption is that , all the jobs in a grade are of same value. Hence it should be ensured that actual salary earned by the individual is based on performance and length of service. 2. Salary progression curve 2. Salary progression curve/ Maturity curve: Connects increase in salary to increase in maturity/ experience. Ideally suited for scientific / highly qualified jobs

Corporate compensation policy Should consider :

1.Community concerns : Price stability Improving standard of living of workers Generating employment

2. Companys plans of expansion and diversification, cost reduction etc 3. Employee concerns: Internal equity External equity Individual equity

Write a brief note on compensation policy as retention strategy for the company you have selected for doing your major project. Identify the wage mix of the company and represent it diagrammatically. Mention the kinds of fringe benefits given by the company. Submission date : March 1st 2012