Compensation

Management
Basic Introduction

Module 1 - Introduction To Compensation
A. Definition of Compensation
B. The Pay Model
C. Strategic Pay Policies

Module 2 - Strategic Perspectives in Compensation Management
A. Strategic Perspectives of Pay
B. Strategic Pay Decisions
C. Best Practices vs. Best Fit Options

Module 3 - Defining Internal Alignment
A. Definition of Internal Alignment
B. Internal Pay Structures
C. Strategic Choices In Internal Alignment Design
D. Which Internal Structure Fits Best?

Module 4 - Job Analysis

A. Why Perform Job Analysis?
B. Job Analysis Procedures
C. Job Analysis Data Collection Process
D. Job Descriptions

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Module 5 - Job Evaluation
A. Definition of Job Evaluation
B. Major Decisions In Job Evaluation
C. Job Evaluation Methods
D. Final Result – Pay Structure
Module 6 - Determining External Competitiveness
A. Definition of Competitiveness
B. Pay Policy Alternatives
C. Wage Surveys
D. Interpreting Survey Results
E. Pay Policy Line
F. Pay Grades
Module 7 - Employee Contributions: Pay For Performance (PFP)
A. Rewarding Desired Behaviors
B. Does Compensation Motivate Performance?
C. Designing PFP Plans
D. Merit Pay/Variable Pay
E. Individual vs. Group Incentives
F. Long Term Incentives
Module 8 - Pay and Performance Appraisals
A. Role of Performance Appraisal In Compensation
B. Common Errors In Performance Appraisal
C. Measuring Job Performance
D. Training Raters
E. Contextual Issues In Appraisal

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Module 9 - Benefits

A. Benefits Determination Process
B. Value of Benefits
C. Legally Required Benefits
D. Retirement, Medical , & Other Benefits

Module 10 - Legal & Administrative Issues in Compensation

A. Legal Issues
B. Pay Discrimination
C. Comparable Worth
D. Budgets and Administration

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Grading Structure
Grading

% of Final Grade

2 Quiz

30%

Case Analysis/Project

30%

Class Presentations

10%

Attendance

20%

Class Participation

10%

100%

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Purpose of Compensation
Ensure Equity

Contribution based
Remuneration

Attract talent

Institutionalized
Processes
Motivate &
Retain Staff

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Effective
Compensation

Administratively
Efficient

Legal
Compliance

Reward Valued
Behavior

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The Pay Model
CEO

Business Goals

Business
Strategy

Compensation
Philosophy/ activities
serve Business
Objectives

Business Strategy – This defines the direction in
which organization is going in relation to its
environment in order to achieve its objectives.
Compensation Philosophy – Consists of a set of
beliefs which underpin the reward/compensation
strategy of the organization and govern the reward
policies that determine how reward processes
operate
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The Pay Model

HR Head

CEO

Business Goals

Business
Strategy

Compensation
Strategy
Org.Structure

Compensation activities
serve Business
Objectives

Compensation strategy
is periodically
reevaluated and the
Non-Financial
Compensation plan
Rewards
periodically developed

Compensation
Plan

Compensation Strategy – defines the intentions of
the organization on reward policies, processes and
practices required to ensure that it has the skilled,
competent and well-motivated workforce it needs
to achieve its business goals
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The Pay Model
CEO

Business Goals

HR Head

Business
Strategy

Compensation
Strategy
Org.Structure

Compensation activities
serve Business
Objectives

Compensation strategy
is periodically
reevaluated and the
Non-Financial
Compensation plan
Rewards
periodically developed

Compensation
Plan

A strategic perspective on compensation
takes the position that how employees are
compensated can be a source of sustainable
competitive advantage

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The Pay Model

Employee

C & B/S M

HR Head

CEO

Business Goals

Business
Strategy

Compensation
Strategy
Org.Structure

Compensation activities
serve Business
Objectives

Compensation strategy
is periodically
reevaluated and the
Non-Financial
Compensation plan
Rewards
periodically developed

Compensation
Plan
Job Evaluation

Performance
Management

Market Surveys
Unit Inputs
Pay levels /
structures

Contribution
/outputs

Total
remuneration
Performance
linked Pay
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Equity

Individual Pay

Compensation
Manager, along with
team is responsible for
carrying out
compensation related
activities

External Equity

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Employment Relationship

TRANSACTIONAL – Emphasizing the Cash &
Benefit Forms

RELATIONAL – Emphasizing the “Family” /
culture / Bonding Aspects

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Low ----- High

TRANSACTIONAL

Employment Relationship
HIGH PAY – LOW
COMMITMENT
Hired Guns
(Lehman Brothers)
LOW PAY – LOW
COMMITMENT

Workers as commodity

HIGH PAY – HIGH
COMMITMENT
Cult Like (Microsoft)
LOW PAY – HIGH
COMMITMENT

Family (Starbucks)

RELATIONAL
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Low ----- High

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End of Part I – Module 1 & 2

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Definitions
 Job

- Consists of a group of tasks that
must be performed for an organization
to achieve its goals

 Position

- Collection of tasks and
responsibilities performed by one
person; there is a position for every
individual in an organization

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Job Analysis: A Basic H R M Tool
Tasks

Responsibilities

Duties

Human Resource
Planning
Recruitment
Selection
Training and
Development

Job
Descriptions

Job
Analysis

Performance Appraisal
Compensation and
Benefits

Job
Specifications

Safety and Health

Employee and Labor
Relations

Knowledge
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Skills

Abilities

Legal Considerations
Job Analysis for Teams
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Job Analysis
 The

systematic, formal study of the
duties and responsibilities that
comprise job content.

 The

process seeks to obtain important
and relevant information about the
nature and level of the work performed

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Job Description

A summary of the most important features of
a job, including the general nature of the
work performed (duties and responsibilities)
and level (i.e., skill, effort, responsibility and
working conditions) of the work performed.

Typically includes job specifications that
include employee characteristics required for
competent performance of the job.

Should describe and focus on the job itself
and not on any specific individual who might
do the job.

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Job Specification
A

section of the job description that
defines what worker characteristics
(i.e., the knowledge, skills and abilities)
are required to perform the job for it to
be carried out competently.

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Types Of Job Analysis Information
Considerable information is needed,
such as:
 Worker-oriented activities
 Machines, tools, equipment, and work
aids used
 Job-related tangibles and intangibles
 Work performance
 Job content
 Personal requirements for the job
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Types of Data Collected Through Job
Analysis
 Work

Activities – work activities and
processes; activity records (in film form,
for example); procedures used; personal
responsibility

 Worker-oriented

activities – human
behaviors, such as physical actions and
communicating on the job; elemental
motions for methods analysis; personal
job demands, such as energy
expenditure

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Types of Data Collected Through Job
Analysis
 Machines,

tools, equipment, and
work aids used

 Job-related

tangibles and
intangibles – knowledge dealt with or
applied (as in accounting); materials
processed; products made or services
performed

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Types of Data Collected Through Job
Analysis

Work performance – error analysis; work
standards; work measurements, such as
time taken for a task

Job context – work schedule; financial and
nonfinancial incentives; physical working
conditions; organizational and social
contexts

Personal requirements for the job –
personal attributes such as personality and
interests; education and training required;
work experience

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Job Evaluation
Methods

Job Evaluation

Four major methods used in job evaluation
and the advantages/ disadvantages of each



Job Ranking Method
Job Classification Method
Point Method
Factor Comparison Method

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Job Evaluation Methods
Comparison Method

Analysis Method
Entire Job

Job Against Scale

Job Against Job

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Job Factors

Classification

Point Method

Ranking

Factor
Comparison

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Ranking Method

Straight ranking

Alternation Ranking

Paired Comparison

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Ranking Method

Advantages
Simple

“Alternation” method
ranks “highest” then
“lowest,” then next
“highest,” then next
“lowest”
“Paired comparisons”
method picks highest out
of each pair



Disadvantages
Comparisons can be
problematic depending on
number and complexity of
jobs
May appear arbitrary to
employees
Can be legally challenged
Unreliable

Fast
Most commonly used

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Paired Comparison

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Classification Method

Advantages
Uses job
families/groups
instead of individual
jobs
May produce same
results as Point
Method, but is less
costly

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Disadvantages
Not useful when jobs
are very different
from each other
May be confusing to
employees about why
jobs are included in a
class

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Compensable Factors
Must be present in all jobs
 Factor must vary in degree
 Should not overlap in meaning
 All stakeholders’ viewpoints must be
reflected
 Should be demonstrable by the actual
work

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Factor Comparison

Compensable Factors used
Mental requirements,
 Physical requirements,
 Skill requirements,
 Responsibility, and
 Working conditions

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Factor Comparison Method
Analyze Jobs
 Select Key/Jobs
 Rank Key Jobs
 Distribute Wage Rates Across Factors
 Compare Vertical and Horizontal
Judgments.
 Construct the Job-Comparison Scale
 Use the Job-Comparison Scale to Evaluate
the Remainder of the Jobs

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Hay Profiling

Know How


problem solving

procedures and techniques
breadth of management skills
person-to-person skills
thinking environment
thinking challenge

Accountability


freedom to act
impact on results
magnitude

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Factor Comparison Method
Advantages


Customized to the
organization
Relatively easy to use
once it’s set up
Results in ranking of
jobs and a specific
rupee value for each
job, based on
allocating part of the
job’s total wage to
each factor

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Disadvantages
Using rupee values
may bias evaluators
by assigning more
money to a factor
than a job is worth
Hard to set up
Not easily explained to
employees

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Point Method


Advantages
Highly stable over
time
Perceived as valid by
users and employees
Likely to be reliable
among committee
that assesses the jobs
Provides good data to
prepare a response to
an appeal

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Disadvantages
Time, money, and
effort required to set
up
Relies heavily on key
(benchmark) jobs, so
if key jobs and correct
pay rates don’t exist,
the point method may
not be valid

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What is a Degree Level?



It is a scale that reflects differing quantity or
quality of the factor
It is used to differentiate jobs on the
factor
It is a definition that is clear and
unambiguous
It contains explicit language that spells out
the behaviors, skills, or performance
expectations for that factor at different
levels of the factor

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How Do You Develop Degrees?
from Otis and Leukart’s (1948) “Rules”
1.

Degrees should be selected so that each job falls at only one
level. Note:
1.
2.
3.

2.
3.

4.
5.

you can include some degrees that do not apply to the current
jobs if you feel there is too much of a jump between levels.
Another reason to create "empty" levels is if you think new jobs
will be created that will require that level in the factor.
The number of degrees selected should be no more than are
needed to differentiate adequately and fairly between all the
jobs being rated.

Each degree should be clearly defined in terms the workers
can understand.
Avoid the use of ambiguous terms, e.g., “strong skills,”
“excellent.”
Definitions of degrees should be written in objective terms.
In writing degree definitions, use examples as much as
possible.

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How Do You Assign Point Values
to the Entire System?
1.
2.
3.

4.

5.

The maximum number of points assigned is a fairly
arbitrary judgment (500-3000 is common)
The number must be large enough to allow sufficient
differentiation among the jobs to be evaluated.
If there is a very wide spread between the current
wages of the highest paid job and the lowest paid job,
the maximum number of points will need to be higher
If you choose more than one pay system, the number
of points or the actual factors themselves do not have
to be the same in each one.
SUGGESTION /THUMB RULE: Have no fewer than
1000 points and no more than 2000.

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How Do You Assign Point Values
to the Degree Levels?

First, determine the number of points for
each main factor (e.g., 2000 total points
for the system would result in 200 points
for a factor weighted at 10%). Then use…

The straight-line method, which simply
takes the maximum points for a given factor
and divides it by the number of degrees. Note:
this method assumes that the degrees should
be viewed as equidistant from each other

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Position:
Grade:

Engineering Manager
7

MAXIMUM
FACTOR
POINTS
250
250
500
500
250
250
125
125
125
125

FACTOR
Communication & Interpersonal Skills
Education & Training
Problem Solving & Decision Making
Responsibility & Accountability
Specialized Knowledge & Application
Supervision & Leadership
Internal Impact
External Impact
Planning & Organizing
Innovation

2500
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JE Points
250
250
400
500
200
250
125
75
125
90
2265

DEGREE
LEVEL

FACTOR
WEIGHTS
4
5
4
4
4
4
3
1
4
2

10%
10%
20%
20%
10%
10%
5%
5%
5%
5%
100%
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How Do You Assign Point Values
to the Degree Levels?

Or the accelerating method, where differences in
degrees are seen as greater as you move up in that
factor, and so the point differences reflect that jump,
e.g., 27, 80, 160, 267, 400

Or the decelerating method, where differences in
degrees are seen as smaller as you move up in that
factor, and so the point differences reflect it, e.g., 133,
240, 320, 373, 400

Remember…the highest level of a factor is always
assigned the full number of points allocated to that
factor, and the lowest level of a factor has to have some
points assigned to it, i.e., “0” points is not permitted!

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Anatomy of a Pay Structure
Pay Grades, elements,width

Factors Affecting Pay Structures
 Corporate

culture and value

 Management

Philosophy

 External

Economic Environment

 External

“Socio-political”

environment (Unions)
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Anatomy of a Pay structure

Pay Structure – consists of a series of
Pay Ranges, or “grades”, each with a
minimum and maximum pay rate

Pay Range - Has a minimum pay value,
maximum pay value and a “midpoint”

Midpoint of a range – represents the
competitive market value for the job or
group of jobs.

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Market Pricing

Comparing salaries w.r.t the market salaries
for the same role/s

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Range Spread
– Difference between maximum and
minimum pay value
- Usually expressed as a % of the diff. bet
the max and min divided by the minimum

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Anatomy of a Pay structure
Spread on either side of midpoint :
Midpoint – Minimum Maximum– Midpoint
Minimum
Midpoint
Midpoint = Max + Min
2

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75%

-75%

Minimum

Midpoint

200000

350000

Maximum
612500

Range Spread (Width) = 206 %
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Example – Use 50% Range Spread
Using A 50% Range Spread :
Maximum = Minimum*(1+Range Spread)
Midpoint = Max + Min
2

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Range Spread

Vary based on level and sophistication of
skills required for a given position

Entry level positions (skills that are quickly
mastered) have narrower pay ranges

Managerial positions will have broader pay
ranges

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Typical Range Spreads

20 – 25 % - Lower-level service, production

30 – 40 % - clerical, technical

40 – 50 % - professional, administrative,
middle management

These range spreads have reached 300% or
more with Broad banding
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Compa - Ratios

A Statistic that expresses the
relationship between base salary and
the midpoint, or between the midpoint
and the market average

Compa-Ratio = Base Salary
Midpoint
 Most companies strive to have the overall
workforce paid at or around a compa-ratio
of 100 %

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Compa - Ratios

Individual C-R vary according to
how long the individual has been in the
job
 Previous work experience
 Job performance

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Compa - Ratios
Person 1 Person 2 Person 3 Average

Base Salary 22500

25000 27500 25000 24500

Mkt Avg
Midpoint

25000 25000 25000 25000 25000

Base Salary
Midpoint

Compa-Ratio 90%
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Mkt Avg

100% 110% 100% 98%
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Market Saurveys

Standard vs. Custom
“Apples – to – Apples” comparison

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Range Penetration

Range Penetration =

Incumbent salary – Range Minimum
Range Maximum – Range Minimum

Refers to how far into the range a
particular individual’s salary has
penetrated
 It is a measure of penetration in the range

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Match Core
Jobs

Preparation

Review
Mercer’s
JobMatching
Guide

Review
all Job
Descripti
ons as
they
relate to
RB

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Match each
core job of RB
with the jobs
given in the
Mercer list.
Determine the
core level
using the
variations
from core
level table or
the
accompanying
decision tree
Establish All
Core levels

Match Add’l
Mercer Jobs

Match
remaining
roles in RB
with the
additional job
list provided
by Mercer.
Determine the
core level
using the
variations from
core level table
or the
accompanying
decision tree

Submit Data

Complete the
data input
sheet.

Instead of a
representative
position for
each job,
provide a min
of 5-10 job
holder data.

Submit the job
data sheet to
Mercer
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