Compensation Strategies and Practices

Compensation Systems
Objectives of an Effective Compensation System: - Legal compliance with all appropriate laws and regulations - Cost effectiveness for the organization - Internal, external, and individual equity for employees - Performance enhancement for the organization

Nature of Compensation
Types of Rewards

Intrinsic
Intangible, psychological and social effects of compensation

Extrinsic
Tangible, monetary and nonmonetary effects of compensation

Components of A Compensation Program

Direct Compensation
Compensation Type
Base Pay The basic monetary compensation that an employee receives, usually as a wage or salary. Payments calculated on the amount of time worked. Consistent payments made each period regardless of the number of hours worked in the period. Compensation linked to individual, team, or organizational performance. An indirect reward given to an employee or group of employees as a part of organizational membership.

Wages Salary

Variable Pay Benefit

Typical Division of HR Responsibilities: Compensation

Continuum of Compensation Philosophies

Compensation Approaches

Decisions About Compensation Levels

Compensation Strategies
Above-Market Middle-Market Below-Market Paying for higher qualified, more productive workers. Attempting to balance of employer costs and need to attract and retain employees. Paying all that the firm can afford Taking advantage of the abundant supply of potential employees in a loose labor market.

Individual vs. Team Rewards

Using Team-Based Reward Systems
Use skill-based pay for the base.

Make system simple and understandable.

Use variable pay based on business entity performance

Distribute variable rewards at the team level

Maintain a high degree of employee involvement

Perceptions of Pay Fairness

Equity The perceived fairness between what a person does (inputs) and what the person receives (outcomes). The perceived fairness of the process and procedures use to make decisions about employees The perceived fairness in the distribution of outcomes. The degree of openness or secrecy that an organization allows regarding its pay system. The perception that the organization provides employees with compensation that comparable to the compensation of employees with similar jobs in other organizations.

Procedural Justice

Distributive Justice Pay Openness External Equity

Compensation Administration Process

Job Evaluation
Job Evaluation The systematic determination of the relative worth of jobs within an organization. Benchmark Job A job found in many organizations and performed by several individuals who have similar duties that are relatively stable and require similar KSAs.

Job Evaluation Techniques

1. Two general types

a. Market-based evaluations b. Job-content evaluations 2. Market-based evaluations

a. Use market data to determine differences in job worth b. Allow companies to assign pay rates that are neither too low nor too high relative to the market c. Compensation professionals use compensation surveys to determine the prevailing pay rates in the relevant job markets

3. Job-content evaluations
a. Emphasize the companys internal value system to establish a hierarchy of internal job worth based on each jobs role in the company strategy b. Compensation professionals review preliminary structures for consistency with market pay rates on a representative sample of jobs (benchmark jobs) c. Must balance external market considerations with internal

Job Evaluation

Ranking

Classification

Job Evaluation Methods

Factor Comparison Point Method

Ranking Method
Simplest method Raters examine description of each job Jobs arranged in order according to value Must first conduct job analysis and write job description

Classification Method
Define number of classes or grades to describe group of jobs Description of each class of job is written Compare job description with class description Class descriptions reflect differences of job groups at various difficulty levels Each job is put into a grade according to the class description it best matches Class description that most closely agrees with job description determines job classification

The point method

A quantitative method that assigns numerical values to compensable factors which are summed up to indicate the overall value of the job The relative worth of the job is established by the magnitude of its overall numeric value

Factor Comparison Method

A quantitative and complicated method Combination of ranking and pin point method Determine benchmark job in an organization Select compensable factors Rank all benchmark job factors by factors Assign monitory value to each factor by comparing jobs to market rates for benchmark Evaluate all other jobs in the organization by comparing with the benchmark jobs

Pay Surveys
A pay survey is a collection of data on compensation rates for workers performing similar jobs in other organizations. An employer may use surveys conducted by other organizations, or it may decide to conduct its own survey.

USING PREPARED PAY SURVEYS When using surveys from other sources, it is important to use them properly. Some questions to be addressed before using a survey are: Participants: Is the survey a realistic sample of those employers with whom the organization competes for employees? Broad-based: Is the survey balanced so that organizations of varying sizes, industries, and locales are included? Timeliness: How current is the data (determined by the date when the survey was conducted)? Methodology: How established is the survey, and how qualified are those who conducted it? Job matches: Does it contain job summaries so that appropriate matches to organization job descriptions can be made?

Developing Pay Surveys

Select Employers with Comparable Jobs

Determine Jobs to be Surveyed

Decide What Information Is Needed

Conduct Survey

Pay Structures
Market Line The line on a graph showing the relationship between the job value, as determined by job evaluation points, and pay survey rates. Common Pay Structures Hourly and salaried Office, plant, technical, professional, managerial Clerical, information technology, professional, supervisory, management, and executive

Establishin g Pay Structures

Pay Structures (contd) Pay Grades

A grouping of individual jobs having approximately the same job worth.

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

Traditional Pay Structure vs. Broadbanding

Pay Scattergram

Example of Pay Grades and Pay Ranges

Pay Rate Issues

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.

Issues Involving Pay Increases

Seniority
Time spent in an organization or on a particular job. Used to determine eligibility for organizational rewards and benefits.

Maturity Curve
A curve that depicts the relationship between experience and pay rates. Assumption is that as experience increases, proficiency and performance increase.

Issues Involving Pay Increases

Cost-of-Living Adjustments (COLA) A percentage increase in wages that allows employees to maintain the same 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. Lump-sum payments do not increase base wages

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