Compensation

Outline of the Lecture

1: Outline of the Lecture
2:Types of Reward Plans
3:Process of establishing pay rates
Job Evaluation Methods
4:Formulating Salary Sheets
Rewards Review


bonuses
piecework
commission
incentive
plans
merit pay
plans
cost of living
increase
labor market
adjustment
profit sharing
protection
Program
pay for time
not worked
services/
perks
assigned
parking space
preferred
assignments
business
cards
own
secretary
impressive
title
participation in
decision making
greater job
freedom
more
responsibility
opportunities
for growth
diversity
of activities
Financial Non-financial
Extrinsic
Implied
membership-based
Performance
based
Explicit
membership-based
Intrinsic
Types of Reward Plans
Intrinsic versus Extrinsic Rewards
Intrinsic rewards (personal satisfactions) come
from the job itself, such as:

pride in ones work
feelings of accomplishment
being part of a work team
Extrinsic rewards come from a source outside the job, mainly by
management:
Money
Promotions
Benefits

Types of Extrinsic Rewards
Financial versus Non-financial Rewards
Financial rewards:
wages
bonuses
profit sharing
pension plans
paid leaves
purchase discounts
Non-financial rewards:
make life on the job more attractive; employees vary greatly on
what types they like

Types of Financial Rewards
Performance-based versus Membership-Based
Performance-based rewards are tied to specific job
performance criteria
Bonuses (Individual or Group)
Piecework
Pay based on number of items processed by each individual worker in a
unit of time e.g. no. of cans per hour
Commissions
Pay plans normally designed for sales people. Pay is based on results
merit pay
Salary increase awarded by firm to an employee based on his/her
performance. Common method in the form of lump sum once a year

Membership-based rewards such as cost-of-living increases,
benefits, and salary increases are offered to all
employees

Membership Based Programs
Profit Sharing plans
Various incentive plans introduced by businesses that provide direct
or indirect payments to employees that depend on company's
profitability in addition to employees' regular salary and bonuses

Benefits
Membership based indirect financial rewards offered to attract and
keep employees
Protection Programs
Health insurance, Life Insurance, Disability Protection
Pay for time not worked
Also called supplemental pay benefits includes holidays,
vacations, funeral leave, personal days, sick leave, maternity
leave, sabbatical leave, unemployment insurance benefits
for laid-off or terminated employees
Services/Perks
Company cars, free refreshments, allowances

Process of Establishing Pay Rates

Step 1:Compensation Surveys
- Many industry and employee
associations conduct surveys
and make their results
available
- Data is broken down by
geographic area, industry and
occupation
- - Private consulting and
executive recruiting
companies publish data or
share information after the
organization obtains their
membership
1.Conduct a Salary Survey of what
other employers are paying for
comparable jobs
2. Conduct Job Evaluation
Helps determine worth of each job in your
organization
3. Group similar job into pay grades
4. Price each pay grade using wage
curves
Enter Text Here
5. Fine tune pay rates
Step 2:Job Evaluation Methods

1. Ranking Method/Ordering Method
Ranks each job relative to all other jobs, usually based on some
overall factor like job difficulty
Usual procedure is to rank jobs by department or in clusters (such
as clerical jobs, teaching staff etc)
Example give each rater a set of index cards, each containing a
brief description of the job. Then they rank these cards from
lowest to highest.


Advantages
Simplest to use
Appropriate for smaller
organizations
DISADVANTAGES
Tendency to rely to
heavily on guess work
No yardstick for
quantifying the value of
one job relative to other
Job Evaluation Method
2. Job Classification/Job Grading Method
Raters categorize jobs into groups. Groups are called classes if they
contain similar jobs, or grades if they contain jobs similar in difficulty
but otherwise different.
Choose compensable factors (e.g. difficulty/variety of work, supervision
exercised, experience etc)
Develop class/grade descriptions for each class/grade in terms of
amount or level of compensable factors in those jobs
Slot each job into its appropriate grade/class by comparing each job
description to the factors in each grade description

Advantages
Avoid having to price separately dozens or
hundreds of jobs
disadvantages
Difficult to write class or grade description
Considerable judgment is required
Grade Descriptions for clerical and assistant work

Job Evaluation Method
3. Point Method
.1 Identify compensable factors e.g.
i) Nature of assignment
ii) Responsibility
2. Against each factor identify number of levels or degrees and
number of points









Factors that are assigned more points will have greater weight in
the evaluation than will factors with fewer points.

Job Evaluation Method
. Point Method (continued)
3. Calculate points for each factor and each level






The actual number of points for each level of each factor will be computed by
dividing the number of points by the number of levels. [e.g. 80/3= 26.77,
26.77+26.77=53.3]

4. Enter job descriptions or task statements for each level of each factor. These
will be used to compare to the jobs to determine at which level a given job
matches the questionnaire. The level with the higher points should have a
description that is higher than a lower level.

Job Evaluation Method 3. Point Method (continued
Nature of Assignment


Job Responsibility
Job Responsibility
5. Compare jobs based on their job descriptions factor by factor to determine
the number of points that should be assigned to it.
6. Add up the points for all factors, arriving at a total point value for the job

50
25
53.3
26.7
7. Jobs with similar point totals are placed in similar pay grades
advantages
The value of the job is expressed in monetary terms.
Can be applied to a wide range of jobs.
Can be applied to newly created jobs.
disadvantages
The pay for each factor is based on judgments that are subjective.
The standard used for determining the pay for each factor may have built-in
biases that would affect certain groups of employees (females or minorities).


Step 3 Group similar jobs
All jobs that fall within two or three ranks
Classification automatically categorizes jobs into classes or grade
Point Method-job falling within a range of points
Step.4
Next step is to assign pay rates to your pay
grades.

Wage curve shows pay rates currently paid for
jobs in each pay grade, relative to the points or
ranks assigned to each job or grade by the job
evaluation
Find average pay for each pay grade
Plot the average pay rate for each pay grade
Draw a line through the points plotted, called
wage line
Finally price the jobs. For this the wages along
the wage line are target wages for the jobs in
each pay grade
If current rates being paid for any of the job
grades fall above or below the wage line, raises
or a pay freeze for that job may be in order.

1. Developing pay ranges
2. Correcting out-of line rates Pay Ranges
3. Correcting out-of line rate
Step 5:Fine-Tune Pay Rates
Pay rates on the wage curve are those now paid by the employer.

However, if pay rates are out of step with the market rates, choose
benchmark jobs within each pay grade, and price them via compensation
survey. These market basic pay rates are then on the wage curve. Slot in
your jobs and the pay rates around the benchmark jobs