Human Resource

Management
Course No. HRM 609
AtanuPart-Wage
Gupta& Salary administration
Adjunct Faculty
MBA program, East Delta University
 Contents
 Employee compensation
 Compensation Policy Issues
 Establishing Pay Rates
 Job Evaluation Methods
 Pricing Managerial and Professional Jobs
 Competency Based Pay
 Types of Incentive Plans
 Individual Incentive Plans
 Short-Term Incentives for Managers And Executives
 Long-Term Incentives for Managers And Executives
 Determining Pay Rates
 Employee compensation
 All forms of pay or rewards going
to employees and arising from
their employment. It has two
main components:-
Direct financial payments
Pay in the form of wages,
salaries, incentives, commissions,
and bonuses.
Indirect financial payments
Pay in the form of financial
benefits such as insurance.
Components of a Compensation System
 Nature of Compensation
 Results from employment with the organization.
 Includes all forms of financial returns and tangible services &
benefits employees receive as a part of employment relationship:
INTRINSIC EXTRINSIC
•Achievements
•Formal Recognition
•Fringe Benefits
•Feelings of Accomplishment
•Incentive payments
•Informal Recognition
•Pay
•Job Satisfaction
•Promotion
•Personal Growth
•Work Environment
•Status
Wage: Compensation Policy Issues
Wages represents hourly rates of pay.
Salary:
Salary refers to the monthly rate of pay, irrespective of the number
of hours put in by an employee.
Incentives:
Also called “PAYMENTS BY RESULT” incentives are paid in addition
to wages and salaries. It depends upon productivity, sales, profit or
cost reduction efforts.
1.Individual incentive scheme. 2. Group incentive scheme.
Fringe Benefits:
These include such employee benefits as provident fund, gratuity,
medical care, hospitalization, group insurance, etc.
Non-monetary Benefits: Challenging job responsibilities,
recognition, Flextime etc.
Total Rewards
Factors Influencing Employee
Remuneration
Strategic
Responsibility Performance
Relevance

Company
Qualification Market
Success

Cost of Living Civil Status Tenure

Establishing Pay Rates
 Establishing Pay Rates
 Step 1. The salary survey
 Aimed at determining prevailing wage
rates.
 Salary Surveys are tools used to
determine the median or average
compensation paid to employees in one
or more jobs. Compensation data,
collected from several employers, is
analyzed to develop an understanding of
the amount of compensation paid.

But before…..you Need to do:

Benchmark job: A job that is used to anchor the
employer’s pay scale and around which other jobs are
arranged in order of relative worth.
 Establishing Pay Rates (cont’d)
 Step 2. Job evaluation
 A systematic comparison done in order to
determine the worth of one job relative to
another.
 Compensable factor of Job evaluation:
 A fundamental, compensable element of a job, such as

skills, effort, responsibility, and working conditions.

 Job Evaluation Methods

Job Ranking method involves putting all jobs in an organization in rank order of
importance based upon their contributions towards the achievement of an organization's
goals.
Classification Jobs are classified into an existing grade/category structure or hierarchy.
Each level in the grade/category structure has a description and associated job titles.
Factor Comparison A set of compensable factors are identified as determining the worth
of jobs. Typically the number of compensable factors is small (4 or 5). Examples of
compensable factors are: Skill ,Responsibilities ,Effort, Working Conditions

Point Method A set of compensable factors are identified as determining the worth of
jobs. Typically the compensable factors include the major categories of: Skill
,Responsibilities ,Effort, Working Conditions . The point method is an extension of the
factor comparison method. For example, these factors can then be further defined as :
 Skill : 1. Experience 2. Education 3. Ability
 Effort : 1. Physical 2. Mental
Compensable factors-Hay System

Functional Expertise 8
Knowledge Managerial Skills 7
Human Relation 3

Environment 8
Problem Solving
Challenge 5

Freedom to Act 8
Accountability
Impact on end Results 4
 Establishing Pay Rates (cont’d)
 Step 3. Group Similar Jobs into
Pay Grades
 A pay grade is comprised of jobs of
approximately equal difficulty or importance
as established by job evaluation.
 Point method: the pay grade consists of
jobs falling within a range of points.
 Ranking method: the grade consists of
all jobs that fall within two or three
ranks.
 Classification method: automatically
categorizes jobs into classes or grades.
 Establishing Pay Rates (cont’d)
 Step 4. Price Each Pay Grade
— 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.
 Shows the relationships between the value of
the job as determined by one of the job
evaluation methods and the current average
pay rates for your grades.
 Establishing Pay Rates (cont’d)
 Step 5. Fine-tune pay rates
 Developing pay ranges
 Flexibility in meeting external job market rates
 Easier for employees to move into higher pay
grades
 Allows for rewarding performance differences and
seniority
 Correcting out-of-line rates
 Raising underpaid jobs to the minimum of the rate
range for their pay grade.
 Freezing rates or cutting pay rates for overpaid
(“red circle”) jobs to maximum in the pay range for
their pay grade.
 Pricing Managerial and Professional Jobs
 Compensating managers
 Base pay: fixed salary, guaranteed bonuses.
 Short-term incentives: cash or stock bonuses
 Long-term incentives: stock options
 The right to purchase stock at a specific price for a
specific period
 Excellent retention tool
 Executive benefits and perks: retirement
plans, life insurance, and health insurance
without a deductible or coinsurance.
Competency Based Pay
Competency based pay is
where the company pays for the
employee’s range, depth, and
types of skills and knowledge,
rather than for the job title he
or she holds.

Competence based pay programs generally contain four

main components:
1. A system that defines specific skills, and a process for
typing the person’s pay to his or her skills.
2. A training system that lets employees seeks and acquire
skills
3. A formal competency testing system
4. A work design that lets employees move among jobs to
permit work assignment flexibility
 Other Compensation Trends
 Broadbanding:
 The practice of using fewer pay grades having broader
pay ranges that in traditional systems.
 Benefits
 Encourages horizontal movement of employees
 Is consistent with trend towards flatter
organizations
 Creates a more flexible organization
 Encourages competency development
 Emphasizes career development
Broadbanding:
Example of
Pay Grades
and Pay
Ranges
Individual Pay
 Rates Out of Range
 Red-Circled Employees
 An incumbent (current jobholder) who is paid
above the range set for the job.
 Green-Circled Employees
 An incumbent who is paid below the range set for
the job.
 Pay Compression
 A situation in which pay differences among
individuals with different levels of experience
and performance in the organization
becomes small.
 Individual Incentive Plans
 Piecework Plans
 The worker is paid a sum (called a piece rate) for each unit he or she
produces.
 Straight piecework: A fixed sum is paid for each unit the worker
produces under an established piece rate standard. An incentive may
be paid for exceeding the piece rate standard.
 Standard hour plan: The worker gets a premium equal to the
percent by which his or her work performance exceeds the
established standard.
 Merit pay
 A permanent cumulative salary increase the firm awards to an individual
employee based on his or her individual performance.
 Merit pay options
 Annual lump-sum merit raises that do not make the raise part of an
employee’s base salary.
 Merit awards tied to both individual and organizational performance.
 Incentives for Salespeople
 Salary plan
 Straight salaries

 Best for: prospecting (finding new clients), account

servicing, training customer’s sales force, or participating

in national and local trade shows.
 Commission plan
 Pay is only a percentage of sales

 Keeps sales costs proportionate to sales revenues.

 May cause a neglect of non selling duties.

 Can create wide variation in salesperson’s income.

 Likelihood of sales success may linked to external factors

rather than to salesperson’s performance.

 Can increase turnover of salespeople.
Organizationwide Variable Pay Plans
 Profit-sharing plans
 Cash plans

 Employees receive cash shares of the firm’s profits at

regular intervals.
 Deferred profit-sharing plans

 A predetermined portion of company profits is placed in

each employee’s account under a trustee’s supervision.
 Employee stock ownership plan (ESOP)
 A corporation annually contributes its own stock—or cash
(with a limit of 15% of compensation) to be used to purchase
the stock—to a trust established for the employees.
 The trust holds the stock in individual employee accounts
and distributes it to employees upon separation from the
firm if the employee has worked long enough to earn
ownership of the stock.
 Short-Term Incentives for Managers
And Executives
 Annual bonus
 Plans that are designed to motivate short-
term performance of managers and are tied
to company profitability.
 Eligibility basis: job level, base salary, and impact
on profitability
 Fund size basis : nondeductible formula (net
income) or deductible formula (profitability)
 Individual awards: personal
performance/contribution
 Long-Term Incentives for
Managers And Executives
 Stock option
 The right to purchase a specific number of shares of
company stock at a specific price during a specific period of
time.
 Nonqualified stock option
 Most popular
 Indexed option
 Exercise price fluctuates with the performance of a
market index
 Premium priced option
 Exercise price is higher than the stock’s closing price
Perceptions of Pay Fairness
The
The perceived
perceived fairness
fairness between
between what
what aa person
person
Equity
Equity does
does (inputs)
(inputs) and
and what
what the
the person
person receives
receives
(outcomes).
(outcomes).

Employee
Employee compensation
compensation viewed
viewed as
as equitable
equitable
External
External in
in relation
relation to
to the
the compensation
compensation of
of employees
employees
Equity
Equity performing
performing similar
similar jobs
jobs in
in other
other
organizations.
organizations.

Employees
Employees receive
receive compensation
compensation in in relation
relation to
to the
the
Internal
Internal knowledge,
knowledge, skills,
skills, and
and abilities
abilities they
they use
use in
in their
their
Equity
Equity jobs
jobs as well as their responsibilities and
as well as their responsibilities and
accomplishments..
accomplishments
Determining Pay Increases
 Seniority
 Time spent in an organization or on a particular job that is
used to determine eligibility for organizational rewards and
benefits.
 Cost-of-Living Adjustments (COLA)
 A percentage increase in wages to maintain real wages in a
period of economic inflation.
 Adjustments are tied to changes in an economic measure
(e.g., the Consumer Price Index).
 Lump-Sum Increases (LSI)
 A one-time payment of all or part of a yearly pay increase
that does not increase base wages.