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Establishing rewards and pay plans
Employee compensation refers to all forms of pay or rewards going to employees and arising from their employment.
How to allocate scarce compensation money among employees in ways that rewards and motivates good performance. Mercer’s (HR consulting firm) survey data reveals that there are growing concerns and challenges related to compensation.
The projections for 2012, in the 16th Annual India Salary Increase Survey
Salary increases in India are projected to be 11.9 per cent in 2012, according to global human resource consulting and outsourcing company Aon Hewitt., were marginally lower compared to the actual increase of 12.6 per cent in 2011.
Pay package increase projections (in %)
2010 Employee levels Top/Senior Management Middle Management Junior Manager/Sup/ Prof 11.1 11.2 11.1 2011 2012
General/Entry Staff Across Industries Overall
Pay package increase projections (in %) Industry wise
Industry Pharmaceutical 2010 NA 2011 13.2 2012 13.3
4 Automotive/Vehicle Manufacturing NA 14.4 12.4 High Tech/Information Technology 8.0 12.9 6 .FMCG/FMCD NA 13.9 12.0 11.
3 Telecommunication Services Financial Institutions NA 12.0 NA 11.Retail 11.7 10.0 7 .0 10.5 12.8 Energy (Oil/Gas/Coal/Power) Metals NA NA 14.9 11.8 IT Enabled Services (ITeS) NA 11.5 11.4 11.8 11.1 12.
8 .Mercer’s (HR consulting firm) survey data reveals that there are growing concerns and challenges related to compensation. It publishes an annual global compensation planning report for more than 40 countries.
9 . Senior executives in Indian companies should see an increase in base pay by 8. According to the 'Asia Executive Remuneration Snapshot Survey' by consulting firm Mercer. Indian firms will see more salaries linked to performance since economic conditions are uncertain. a marginal drop from last year's 8.3% in 2012. a lower increase in base pay is expected with salary tilting more towards long-term and short-term incentives. according to the survey. However. Going forward.4%.
Currently. 10 . in India around 58% of an executive's salary is fixed and 42% linked to variable pay. compared with companies in other Asian countries. which have 40% attributed to fixed pay and 60% dependent on variable pay.
equal or lower than the existing market trend? (Pay level decision) How closely the compensation plan is linked to the organization's overall strategic plan? Merit pay raises. 11 . To determine its stance of internal equity (relative worth). Whether to pay higher. To decide the level of pay secrecy.Strategic Choices How to pay employees with respect to competition. (Pay Structure Decision) Decide how to mix intrinsic (rewards from performing the job) & extrinsic rewards (outside the job). experience based or across-theboard raises.
Elitism: all have same plan or establish different plans. External Equity Pay to individual or group contributions Job vs. Decentralization made in central location or delegated to unit managers. Decide the ratio of fixed & variable pay. 12 . Open vs. Individual Pay Egalitarianism vs. Internal vs. Secret Pay Centralization vs.
Retirement woes Fringe benefits: ESOP’s Perks How to use powerful and highly effective tool for managing compensation. Fixed/ variable Pay How to implement incentives that motivate staff to achieve outstanding results. How to introduce competency/skill and market-based pay 13 .Importance of designing the compensation intelligently. How to develop a compensation policy that delivers the greatest value to the employee at the lowest cost to the company How to establish internally equitable and externally competitive grading and salary structures.
Compensation Policy Development Create philosophy to pay Analyze current practices vs desired objectives Relate internal policies to external market Establish guidelines for equality. deferred compensation and phantom 14 share plans. Paying for Performance Design annual bonus and incentives plans that motivate staff Shift from fixed salary increases to variable pay Create long-term reward plans . Paying for Position Develop an equitable grading structure Create a reference salary structure Leverage compensation costs with market survey information 2. Pay for Person Determine competency requirements and employee capabilities Pay individuals based on their competency match with the position Identify and pay market premium for competencies in short supply in the market 3. competitiveness and motivation 3 P’s of compensation Management 1. .stock options.
labor costs. employee attitudes Pay Structure Job evaluation Internal equity 15 .Equity Fairness Two types of employee social comparisons of pay are especially relevant in making pay-level and job structure decisions: Pay Structure Decision Area Pay Level Administrative Tool Market pay surveys Focus of Employee Pay Comparisons External equity Consequences of Equity Perceptions External employee movement. cooperation. employee attitudes Internal employee movement.
REWARD CLASSIFICATIONS Intrinsic .Extrinsic Financial-Nonfinancial Membership (company linked)Performance (individual linked) 16 .
INTRINSIC REWARDS Personal satisfaction from the job itself Consistent with own value system Decision making Freedom Control 17 .
INTRINSIC REWARDS Responsibility Interesting work Personal growth Diversity of activities 18 .
or membershipbased/direct or indirect 19 .EXTRINSIC REWARDS Beyond the work itself Come from management Financial and/or nonfinancial Financial may be performance.
EXTRINSIC FINANCIAL REWARDS Wages/Salaries Incentives:Bonuses Profit-sharing Fringe benefits: PF. mobile. Paid Vacations. mediclaim Perks: company car. furnished house. insurance. Purchase discounts 20 . gratuity.
EXTRINSIC NONFINANCIAL REWARDS Extras at the disposal of the company Do not affect the financial position of the employee Creative Varied 21 .
EXTRINSIC NONFINANCIAL REWARDS Office furnishings Lunch hours Parking spaces Work assignments. locations Business cards Secretary Titles 22 .
MEMBERSHIP-BASED REWARDS Most organizational rewards (explicit & implicit) Regardless of performance Examples Cost-of-living increases Benefits Salary due to labor market conditions 23 .
Classification of Rewards 24 .
retain Fair Legal 25 . motivate.COMPENSATION ADMINISTRATION GOALS Job evaluation based Cost-effective pay structure Attract.
Legal & Fair WHAT FACTORS DETERMINE PAY? Union Policy Equity 26 .
1936 Equal Remuneration Act. 1956 ESIC Act EPF. 1976 Companies Act. 1948 Payment of Wages Act. Gratuity Act 27 .Relevant Acts Minimum Wages Act.
COMPENSATION ADMINISTRATION LAWS Equal Remuneration Act 1976 Prevents discrimination Equal pay for equal work Women still earn only 75% of what male counterparts earn 28 .
express or implied." A typical remuneration package in the organized sector (for a time rate payment system) consists of a basic wage.) 29 . The dearness and the house rent allowances can be different in offices of the same company due to the cost of living in different cities. either in cash or in kind to a person employed in respect of employment or work done in such employment. if the terms of the contract of employment. and the house rent allowance. were fulfilled. (Acharya 1995. 7-8.Equal Remuneration Act 1976 The Equal Remuneration Act 1976 defines "remuneration" in section 2(g) as follows: "the basic wages or salary. dearness allowance (to compensate for inflation). and any additional emoluments whatsoever payable. other allowances.
Equity and Its Impact on Pay Rates Forms of Equity External Equity Internal Equity Individual Equity Procedural Equity 30 .
and Employees’ Participation 31 .Addressing Equity Issues Salary Surveys Methods to Address Equity Issues Job Analysis and Job Evaluation Performance Appraisal and Incentive Pay Communications. Grievance Mechanisms.
2 3 4 5 Group similar jobs into pay grades. Determine the worth of each job in your organization through job evaluation (to ensure internal equity).Establishing Pay Rates Steps in Establishing Pay Rates 1 Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). 32 . Price each pay grade by using wave curves. Fine-tune pay rates.
Establishing Pay Rates 1. data about employee benefits. The Salary Survey: determine prevailing wage rates. Using internet to get information: Salary.opm.asp 2. Price each pay grade through wage curve: shows the relationship between the value of the job & the avg. wage paid for it. 33 . Group similar jobs into pay grades. Fine tune pay rates: pay levels in each grade.gov/Employment_and_Benefits/index.com. 5.com. wageweb. http://www. Job Evaluation 3. Price benchmark jobs in the organisation. 4.
Job ranking indicates value to organization Higher value jobs should be paid more Skills and performance levels of individuals are additional issues 34 .JOB EVALUATION A systematic comparison done in order to determine relative worth of one job relative to another.
JOB EVALUATION CRITERIA Present in all jobs Present in varying degrees Measurable Compensable factors 35 .
Job Evaluation: Identifying Compensable Factors Responsibility Working Conditions 36 .COMPENSABLE FACTORS Use 3 to 5 May be subdivided Skills Effort Step 2.
METHODS OF JOB EVALUATION Ranking/Ordering Job classification/Grading Point rating Factor comparison 37 .
good for small companies 38 .Ranking/Ordering Method No attempt to identify compensable factors Rank order jobs from most important to least No distance identification Simple.
500 34.500 25. Cook 6.Ranking Order 1.500 31. Nurse’s aide 7. Bookkeeper 4.000 28.000 2.500 39 . Orderly 42. Office manager Annual Pay Scale $43.000 32. Chief nurse 3. Nurse 5.
and machinists Jobs are classed by the amount or level of compensable factors they contain. Classes contain similar jobs. welders. Mechanics.CLASSIFICATION METHOD Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes. 40 . electricians. Administrative assistants Grades are jobs similar in difficulty but otherwise different.
50-7.50-13.00 / hr $12.25 / hr 41 .00 / hr PAY GRADE 3 GRADE 2 $7.50-32.00 / hr $7.00 / hr GRADE 1 $6.50-9.GRADE 6 GRADE 5 GRADE 4 Chef Manager Assistant Manager Office Manager General Cook Server Cashier Dishwasher JOBS $21.50-22.00 / hr $8.00-8.
Calculating a total point value for the job by adding up the corresponding points for each factor.POINT METHOD A quantitative technique that involves: Identifying the degree to which each compensable factor is present in the job. 42 . Awarding points for each degree of each factor.
Exhibit 2: Excerpts from a Point Method 43 .
44 . then adding up these ranking to arrive at an overall numerical rating for each job given.Factor comparison method A widely used method of ranking jobs according to variety of skills and difficulty factors.
4. 45 . Price Each Pay Grade—Wage Curve Shows the pay rates paid for jobs in each pay grade. 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. relative to the points or rankings assigned to each job or grade by the job evaluation. Price Each Pay grade using WAGE Curves Step 4.
Exhibit 3: A Wage Curve 46 .
THE WAGE STRUCTURE After drawing wage curve Develop wage structure • See Exhibit 11-5 47 .
Exhibit 4: A Sample Wage Structure 48 .
six pay grades can be consolidated into two broad bands. of job evaluation points included in a grade. Thus it breeds flexibility. Pay levels/ranges in terms of grade width are established.g. Total no. Each of which contains a relatively wide range of jobs & salary levels. e. Broadbanding consolidates salary grades & ranges into a few wide levels or bands.Broadbanding Establishing grades makes the task easier. Minimum & maximum salary one can earn in a grade. 49 .
A Sample Banding 50 .
A no. 2. Several skill levels. of bands & how many points they will include. cultural change. of jobs are included in each band. Dow Jones implemented it with downsizing restructuring. Example: IBM. renewal. Broadbanding is used with strategic initiatives. increase in skills to get raises 5. Assign each band a salary range: wide & overlap 3. Decide no.Broadbanding Steps of broadbanding: 1. 51 . 4.
Skill-Based Compensation Range. 52 . depth & types of skills Individual incentives Merit pay Piecework plans Commissions Time saving bonuses Group incentives AND….
Incentives Individual incentives Merit pay Piecework plans Commissions Time saving bonuses Group incentives AND…. Plant-wide incentives Scanlon Plan IMPROSHARE Cost reduction Profit sharing Gain sharing 53 .
PAYING FOR PERFORMANCE More than time on the job Piecework Lump sum bonuses 54 .
PAYING FOR PERFORMANCE Performance>>>> rewards Motivation Popular Not added to base Control of individual or group 55 .
EXECUTIVE PAY Salaries Supplements Deferred compensation Hiring bonus Stock options Employee stock ownership plan AND…. 56 .
EXECUTIVE PAY Perquisites Cars Country clubs Consulting fees Retirement supplements Expense accounts 57 .
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