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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
2 Quiz Case Analysis/Project Class Presentations Attendance Class Participation

% of Final Grade
30% 30% 10% 20% 10%

100%

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Purpose of Compensation
Contribution based Remuneration Ensure Equity

Attract talent

Effective Compensation

Institutionalized Processes
Motivate & Retain Staff

Administratively Efficient

Legal Compliance

Reward Valued Behavior

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The Pay Model


Business Goals Business Strategy Compensation Philosophy/ activities serve Business Objectives

CEO
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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


Business Goals

CEO

Business Strategy

Compensation activities serve Business Objectives

Compensation Strategy Org.Structure Compensation Plan

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

HR Head

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


Business Goals

CEO

Business Strategy

Compensation activities serve Business Objectives

Compensation Strategy Org.Structure Compensation Plan

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

HR Head

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


Business Goals

CEO

Business Strategy

Compensation activities serve Business Objectives

Compensation Strategy Org.Structure Compensation Plan Performance Management Job Evaluation Unit Inputs Pay levels / structures Total remuneration Performance linked Pay
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Compensation strategy is periodically reevaluated and the Non-Financial Compensation plan Rewards periodically developed

C & B/S M

HR Head

Market Surveys

Employee

Contribution /outputs

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

Internal Equity

Individual Pay

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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Employment Relationship
TRANSACTIONAL
Low ----- High
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 - Collection of tasks and responsibilities performed by one person; there is a position for every individual in an organization
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Position

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Job Analysis: A Basic H R M Tool


Tasks Responsibilities Duties
Human Resource Planning Recruitment Selection Training and Development Performance Appraisal Compensation and Benefits Safety and Health

Job Descriptions

Job Analysis

Job Specifications

Employee and Labor Relations

Knowledge
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Skills

Abilities

Legal Considerations Job Analysis for Teams 15

Job Analysis
The

systematic, formal study of the duties and responsibilities that comprise job content. process seeks to obtain important and relevant information about the nature and level of the work performed

The

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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
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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Worker-oriented

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Types of Data Collected Through Job Analysis


Machines,

tools, equipment, and work aids used tangibles and intangibles knowledge dealt with or applied (as in accounting); materials processed; products made or services performed
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Job-related

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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

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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 Classification Job Factors Point Method

Job Against Job

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

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

procedures and techniques breadth of management skills person-to-person skills thinking environment thinking challenge
freedom to act impact on results magnitude
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problem solving

Accountability

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Factor Comparison Method


Advantages

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

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

Disadvantages Time, money, and effort required to set up Relies heavily on key (benchmark) jobs, so if key jobs and correct pay rates dont 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 Leukarts (1948) Rules
1.

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

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.

2. 3.

4.
5.

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: MAXIMUM FACTOR POINTS 250 250 500 500 250 250 125 125 125 125 2500

Engineering Manager 7

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

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

DEGREE LEVEL 4 5 4 4 4 4 3 1 4 2

FACTOR WEIGHTS 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 Rememberthe 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 Philosophy

Management External External

Economic Environment
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 200000

Midpoint 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
Base Salary Midpoint

25000 25000 25000 25000 25000

Mkt Avg

Compa-Ratio 90%
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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 individuals salary has penetrated It is a measure of penetration in the range

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Preparation

Match Core Jobs

Match Addl Mercer Jobs

Submit Data

Review Mercers JobMatching Guide Review all Job Descripti ons as they relate to RB

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 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

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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