Compensation

Compensation
 Compensation is the process of providing
adequate, equitable and fair remuneration
to the employees. It is what employees
receive in exchange for their contribution
to the organisation. It is a comprehensive
term which includes pay, incentives and
benefits offered to the employees.

Tuesday, March 9, 2010 2

 Purpose of Compensation

Contribution based Ensure Equity

Remuneration

Attract talent Effective Administratively

Compensation Efficient Legal
Institutionalized Compliance
Processes
Motivate &
Retain Staff Reward Valued
Behavior

Tuesday, March 9, 2010 3

 The Pay Model
Business Goals
Compensation
Compensation
Philosophy/
Philosophy/activities
activities
CEO

serve
Business serveBusiness
Business
Objectives
Strategy Objectives

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
Tuesday, March 9, 2010 4
 The Pay Model
Business Goals
Compensation
Compensation
activities
activitiesserve
serve
CEO

Business
Business BusinessObjectives
Objectives
Strategy

Compensation
Compensation Compensationstrategy
strategy
HR Head

is periodically
Strategy is periodically
reevaluated
reevaluatedand
Non-Financial andthe
the
Org.Structure Compensation plan
Rewards Compensation plan
periodically
periodicallydeveloped
developed
Compensation
Plan

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

Tuesday, March 9, 2010 5

 The Pay Model
Business Goals
Compensation
Compensation
activities
activitiesserve
serve
CEO

Business
Business BusinessObjectives
Objectives
Strategy

Compensation
Compensation Compensationstrategy
strategy
HR Head

is periodically
Strategy is periodically
reevaluated
reevaluatedand
Non-Financial andthe
the
Org.Structure Compensation plan
Rewards Compensation plan
periodically
periodicallydeveloped
developed
Compensation
Plan

 A strategic perspective on compensation

takes the position that how employees are
compensated can be a source of sustainable
competitive advantage

Tuesday, March 9, 2010 6

 The Pay Model
Business Goals
Compensation
Compensation
activities
activitiesserve
serve
CEO

Business
Business BusinessObjectives
Objectives
Strategy

Compensation
Compensation Compensationstrategy
strategy
HR Head

is periodically
Strategy is periodically
reevaluated
reevaluatedand
Non-Financial andthe
the
Org.Structure Compensation plan
Rewards Compensation plan
periodically
periodicallydeveloped
developed
Compensation
Plan
C & B/S M

Performance Job Evaluation Market Surveys

Management
Unit Inputs

Pay levels /
structures Compensation
Compensation
Contribution Manager,
Manager,along
alongwith
with
Employee

/outputs team
teamisisresponsible
responsibleforfor
Total carrying out
carrying out
compensation
remuneration compensationrelated
related
activities
activities
Performance
linked Pay
Individual Pay
Tuesday, March 9, 2010 Internal Equity External Equity 7
Employment Relationship
 TRANSACTIONAL – Emphasizing the Cash &
Benefit Forms

 RELATIONAL – Emphasizing the “Family” /

culture / Bonding Aspects

Tuesday, March 9, 2010 8

 Employment Relationship
HIGH PAY – LOW HIGH PAY – HIGH
COMMITMENT COMMITMENT
TRANSACTIONAL
Low ----- High

Hired Guns Cult Like (Microsoft)

(Lehman Brothers)
LOW PAY – LOW LOW PAY – HIGH
COMMITMENT COMMITMENT

Workers as commodity Family (Starbucks)

RELATIONAL
Tuesday, March 9, 2010 9

Low ----- High

 Job-Analysis and Evaluation

Tuesday, March 9, 2010 10

Definitions
 Job - Consists of a group of tasks that must be
performed for an organization to achieve its
goals

 Position - Collection of tasks and

responsibilities performed by one person; there
is a position for every individual in an
organization

Tuesday, March 9, 2010 11

Job Analysis: A Basic H R M
Tool
Human Resource
Tasks Responsibilities Duties Planning
Recruitment
Selection
Training and
Job
Development
Descriptions
Job Performance Appraisal
Analysis Compensation and
Job
Specifications Benefits
Safety and Health
Employee and Labor
Relations
Knowledge Skills Abilities Legal Considerations
Tuesday, March 9, 2010 Job Analysis for Teams
12
Job Analysis
 The systematic, formal study of the
duties and responsibilities that
comprise job content.

 The process seeks to obtain important

and relevant information about the
nature and level of the work performed

Tuesday, March 9, 2010 13

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.
Tuesday, March 9, 2010 14
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.

Tuesday, March 9, 2010 15

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

Tuesday, March 9, 2010 16

Types of Data Collected Through
Job Analysis
 Work Activities – work activities and
processes; activity records (in film form,
for example); procedures used; personal
responsibility

 Worker-oriented activities – human

behaviors, such as physical actions and
communicating on the job; elemental
motions for methods analysis; personal
job demands, such as energy expenditure

Tuesday, March 9, 2010 17

Types of Data Collected Through
Job Analysis

 Machines, tools, equipment, and

work aids used

 Job-related tangibles and

intangibles – knowledge dealt with or
applied (as in accounting); materials
processed; products made or services
performed

Tuesday, March 9, 2010 18

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

 Personal requirements for the job –

personal attributes such as personality and
interests; education and training required;
work experience

Tuesday, March 9, 2010 19

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

Tuesday, March 9, 2010 21

Job Evaluation Methods
Comparison Method Analysis Method
Entire Job Job Factors

Job Against Scale Classification Point Method

Factor
Job Against Job Ranking Comparison

Tuesday, March 9, 2010 22

Ranking Method
 Straight ranking

 Alternation Ranking

 Paired Comparison

Tuesday, March 9, 2010 23

Ranking Method
Advantages Disadvantages
 Simple  Comparisons can be
 “Alternation” method problematic depending on
ranks “highest” then number and complexity of
“lowest,” then next jobs
“highest,” then next  May appear arbitrary to
“lowest”
employees
 “Paired comparisons”
method picks highest out
 Can be legally challenged
of each pair  Unreliable
 Fast
 Most commonly used

Tuesday, March 9, 2010 24

Paired Comparison

Tuesday, March 9, 2010 25

Classification Method
Advantages Disadvantages
 Uses job  Not useful when jobs
families/groups are very different from
instead of individual each other
jobs  May be confusing to
 May produce same employees about why
results as Point jobs are included in a
Method, but is less class
costly

Tuesday, March 9, 2010 26

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

Tuesday, March 9, 2010 27

Factor Comparison
 Compensable Factors used

 Mental requirements,
 Physical requirements,
 Skill requirements,
 Responsibility, and
 Working conditions

Tuesday, March 9, 2010 28

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
Tuesday, March 9, 2010 29
Hay Profiling
 Know How
 procedures and techniques
 breadth of management skills
 person-to-person skills
 problem solving
 thinking environment
 thinking challenge
 Accountability
 freedom to act
 impact on results
 magnitude

Tuesday, March 9, 2010 30

Factor Comparison Method
Advantages Disadvantages
 Customized to the  Using rupee values
organization may bias evaluators
 Relatively easy to use by assigning more
once it’s set up money to a factor
 Results in ranking of than a job is worth
jobs and a specific  Hard to set up
rupee value for each  Not easily explained to
job, based on employees
allocating part of the
job’s total wage to
each factor

Tuesday, March 9, 2010 31

Point Method
Advantages Disadvantages
 Highly stable over  Time, money, and
time effort required to set
 Perceived as valid by up
users and employees  Relies heavily on key
 Likely to be reliable (benchmark) jobs, so
among committee that if key jobs and correct
assesses the jobs pay rates don’t exist,
the point method may
 Provides good data to
not be valid
prepare a response to
an appeal
Tuesday, March 9, 2010 32
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
Tuesday, March 9, 2010 33
How Do You Develop
Degrees?
from Otis and Leukart’s (1948) “Rules”

1. Degrees should be selected so that each job falls at only one

level. Note:
1. 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.
2. Another reason to create "empty" levels is if you think new jobs
will be created that will require that level in the factor.
3. The number of degrees selected should be no more than are
needed to differentiate adequately and fairly between all the
jobs being rated.
2. Each degree should be clearly defined in terms the workers
can understand.
3. Avoid the use of ambiguous terms, e.g., “strong skills,”
“excellent.”
4. Definitions of degrees should be written in objective terms.
5. In writing degree definitions, use examples as much as
possible.

Tuesday, March 9, 2010 34

Values to the Entire
System?
1. The maximum number of points assigned is a fairly
arbitrary judgment (500-3000 is common)
2. The number must be large enough to allow sufficient
differentiation among the jobs to be evaluated.
3. 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
4. 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.
5. SUGGESTION /THUMB RULE: Have no fewer than
1000 points and no more than 2000.

Tuesday, March 9, 2010 35

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

Tuesday, March 9, 2010 36

Position: Engineering Manager
Grade: 7

M AXIM UM
FACTOR DEGREE FACTOR
POINTS FACTOR JE Points LEVEL W EIGHTS

250 Com m unication & Interpersonal Skills 250 4 10%

250 Education & Training 250 5 10%
500 Problem Solving & Decision Making 400 4 20%
500 Responsibility & Accountability 500 4 20%
250 Specialized Knowledge & Application 200 4 10%
250 Supervision & Leadership 250 4 10%
125 Internal Im pact 125 3 5%
125 External Im pact 75 1 5%
125 Planning & Organizing 125 4 5%
125 Innovation 90 2 5%

2500 2265 100%

Tuesday, March 9, 2010 37

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

 Remember…the 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!

Tuesday, March 9, 2010 38

Anatomy of a Pay
Structure
Pay Grades, elements,width
Factors Affecting Pay
Structures
 Corporate culture and value
 Management Philosophy
 External Economic Environment
 External “Socio-political” environment
(Unions)

Tuesday, March 9, 2010 40

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.
Tuesday, March 9, 2010 41
 Market Pricing
 Comparing salaries w.r.t the market salaries
for the same role/s

Tuesday, March 9, 2010 42

 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

Tuesday, March 9, 2010 43

Anatomy of a Pay structure

Spread on either side of midpoint :

Midpoint – Minimum Maximum– Midpoint

Minimum Midpoint

Midpoint = Max + Min

2

Tuesday, March 9, 2010 44

 -
75
75
%
%

Minimum Midpoint Maximum

200000 350000 612500

Range Spread (Width) = 206 %

Tuesday, March 9, 2010 45

Example – Use 50% Range
Spread

Using A 50% Range Spread :

Maximum = Minimum*(1+Range Spread)

Midpoint = Max + Min

2

Tuesday, March 9, 2010 46

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

Tuesday, March 9, 2010 47

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

Tuesday, March 9, 2010 48

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 %
Tuesday, March 9, 2010 49
Compa - Ratios
 Individual C-R vary according to

 how long the individual has been in the

job
 Previous work experience
 Job performance

Tuesday, March 9, 2010 50

 Compa - Ratios
Person 1 Person 2 Person 3 Average
Base Salary 22500 25000 27500 25000 24500
Mkt Avg

Midpoint 25000 25000 25000 25000 25000

Base Mkt Avg
BaseSalary
Salary
Midpoint
Midpoint

Compa-Ratio 90%
Tuesday, March 9, 2010
100% 110% 100% 98% 51
 Market Saurveys

 Standard vs. Custom

 “Apples – to – Apples” comparison

Tuesday, March 9, 2010 52

Range Penetration
 Range Penetration =
 Incumbent salary – Range Minimum
Range Maximum – Range Minimum
 Refers to how far into the range a
particular individual’s salary has
penetrated
 It is a measure of penetration in the range

Tuesday, March 9, 2010 53

Preparatio Match Core Match Add’l Submit Data
n Jobs Mercer Jobs

 Match each
 Match  Complete the
 Review core job of RB remaining data input
Mercer’s with the jobs
Job- roles in RB sheet.
Matching given in the with the
Guide Mercer list.
additional job  Instead of a
list provided
 Determine the representative
 Review core level by Mercer.
all Job position for
Descripti using the each job,
ones as variations
from core
 Determine the provide a min
they level table or core level of 5-10 job
relate to the
RB using the holder data.
accompanying variations from
decision tree
core level table  Submit the job
or the
 Establish All data sheet to
Core levels accompanying Mercer
decision tree

Tuesday, March 9, 2010 *** Mercer Model*** 54

  THANKS

Tuesday, March 9, 2010 55