MM ZC441: Human

Resource
Management
BITS Pilani Lecture-7 Total PPT: 43 – Date –7/9/16 Swati Alok
Hyderabad Campus
 BITS Pilani
Hyderabad Campus

Chapters to be Covered

Chapter- 11: Managing Basic Remuneration

 Chapter 11

Managing Basic Remuneration

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 Learning objectives

1. Identify the different components of remuneration

2. How to designing pay structure

3. How to maintain internal, external and individual equity

4. Explain design through a example

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Compensation: An Overview
Compensation - Total of all rewards provided
employees in return for services, typically
consists of salary and wages
Direct financial compensation - Pay received in
form of wages, salaries, bonuses, and
commissions
Indirect financial compensation (benefits) - All
financial rewards not included in direct
compensation
Nonfinancial compensation - Satisfaction person
receives from job itself or from psychological
and/or physical environment in which person
works

© 2008 by Prentice Hall9-5

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Components of Employee Remuneration
Environment

Remuneration

Financial Non-financial

Job Context
Fringe Benefits Perquisites
Challenging job
PF Company car
Hourly and Responsibilities
Incentives Gratuity Club membership
Monthly rated Recognition
Individual plans Medical Care Paid holidays
Wages Growth prospects
Group plans Accident Relief Furnished house
Salaries Supervision
Health and Group Stock option
Working conditions
Insurance, etc. Schemes, etc.
Job sharing, etc.

Direct Indirect

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Equity Theory
Motivation theory that people assess their performance and
attitudes by comparing both their contribution to work
and benefits they derive from it to contributions and
benefits of comparison others whom they select—and
who in reality may or may not be like them

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Equity in Financial
Compensation
External equity - Employees are paid comparably to workers
who perform similar jobs in other firms. In order to
maintain external equity, organizations go for market
survey.
Internal equity - Employees are paid according to relative
value of jobs within same organization. In order to
maintain internal equity, organizations go for job
evaluation.
Individual equity- in internal equity a relationship is drawn
between jobs but in individual equity, individual
employees doing same job are compared in order to
maintain individual equity, organizations use pay ranges
for compensating employees.

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Influencing Factors of Remuneration

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 Factors Influencing
Employee Remuneration
• External Factors
• Internal Factors

Labor Market Business Strategy (rapid

– Demand & Supply of labour growth>>pay higher, )
– Going Rate of pay
– Productivity
Job Evaluation and
Performance Appraisal
Cost of Living (wage differentials
Labor Unions among jobs, pay
Labor Laws increase )
The Employee
Society (performance,
Economy seniority, experience &
potential)

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Remuneration Plans & Business
Strategy
Market Position &
Business Strategy Remuneration Strategy Blend Of Remuneration
Maturity

High cash with above average

Rapid growth to incentive for individual
Investing to grow Stimulate entrepreneurship
maturity performance. Modest
benefits.

Average cash with moderate

Manage earnings & protect Normal growth to incentives on individual, unit,
Reward management skills
markets maturity or corporate performance.
Standard benefits.

Below-average cash with

Harvest earnings – reinvest No real growth or
Stress on cost control small incentive tied to cost
elsewhere decline
control. Standard benefits.

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Designing A Pay Structure

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Step 1: Job Analysis

Job analysis is the process of studying jobs in an

organization. The outcome of this process is a job
description that includes the job title, a summary of the
job tasks, a list of the essential tasks and responsibilities,
and a description of the work context. Also included are
the knowledge, skills and abilities needed to perform the
job
Benchmark job: A job that is used to anchor the
employer’s pay scale and around which other jobs are
arranged in order of relative worth.

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Step 2: Job Evaluation

Job evaluation is the process of judging the relative worth of jobs

in an organization. The outcome of job evaluation is the
development of an internal structure or hierarchical ranking of
jobs. Job-based evaluation is used more often than person-
based evaluation, and so the former will be the focus in this
case. There are three methods of job-based evaluation:
• the point method (which is the most commonly used);
• ranking;
• classification.
Job evaluation helps to ensure that pay is internally aligned and
perceived to be fair by employees
Compensable factor
– A fundamental, compensable element of a job, such as skills, effort, responsibility, and
working conditions.

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Step 3: Pay Policy Identification

Pay policy identification is the process of determining

whether the organization wants to lead, lag or meet the
market in compensation. The pay policy or strategy will
likely influence employee attraction and retention. Pay
policies can vary across job families (i.e., groups of
similar jobs) and job levels if the top management feels
that different strategies can be effective in different
areas of the organization.

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Step 4: Pay Survey Analysis

Pay survey analysis is the process of analyzing

compensation data gathered from other employers in a
survey of the relevant labor market. Gathering external
pay data (e.g., base pay, bonuses, stock options and
benefits) is essential to keep the organization’s
compensation externally competitive within its industry.
Employee attraction and retention can be improved by
maintaining externally aligned pay structures

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Step 5: Pay Structure Creation

Pay structure creation is the final step, in which the internal

structure (Step 2) is merged with the external market pay
rates (Step
4) in a simple regression to develop a market pay line.
Depending on whether the organization wants to lead,
lag or meet the
market, the market pay line can be adjusted up or down. To
complete the pay structure, pay grades and pay ranges
are develop

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Pay Structure Creation

Wage curve - Fitting of plotted points to create smooth

progression between pay grades
Pay ranges - Minimum and maximum pay rate with enough
variance between to allow for significant pay difference

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Example to explain
how to design a pay
structure

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Step -1 : Job analysis : Identify benchmark job for establishing
pay rate

Benchmark jobs (jobs that are common and consistent across a wide range of
employers) will be the focus of this exercise because they will be used to
design the pay structure.

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Job analysis for benchmark
jobs - example

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Job evaluation through point
method
Next, the compensable factors, degrees and weights of
each factor must be determined.
With input from the job evaluation committee and your
knowledge of the organization’s mission and work
content, three common compensable factors are
selected: skill, responsibility and effort, each having
two specific sub-factors. For example, the compensable
factor of skill is comprised of education level and the
degree of technical skills.

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Job evaluation through point
method
You recommend weighting the skill compensable factor
at 50 percent because the organization is very
knowledge-intensive and depends heavily on its human
capital.
Responsibility is weighted 30 percent because each job
has the potential to affect other jobs,
Effort is assigned 20 percent because problem solving
and task complexity are integral across jobs in the
organization

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BITS Pilani, Hyderabad Campus
BITS Pilani, Hyderabad Campus
Point method (job evaluation) for
other benchmark jobs
Benchmark jobs Point values

Desk receptionist 120

Administrative assistant 145

Payroll assistant 175

Operation analyst 215

Benefit manager 245

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Step 3-Pay Policy Identification
After determining the job evaluation points for the
remaining benchmark positions, you meet with the
president, the head of corporate HR in Indianapolis and
the director of regional operations in Chattanooga to
discuss a pay level strategy for each job family. One
decision resulting from these meetings is that your
organization will pay 3 percent above the market in
base pay for the HR, operations and office support job
families. The group realizes that this lead pay policy will
help meet the firm’s customer-focus business strategy by
attracting and retaining high-potential employees without
incurring labor costs too far above their competitors

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Step -3 Pay Policy Identification
Top management also decides to match the market in
benefits to contain benefit costs (e.g., health care costs).
After analyzing web-based data about benefits offered in
your industry by smaller organizations (retrieved from
BenefitsLink, SHRM, and Employee Benefits Research
Institute) you discern that on average, employee benefits
costs are approximately 25 percent of total
compensation. Once the pay structure is finalized, you
will set benefits at a similar ratio of total compensation to
achieve a matching benefits policy.

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Step 4: Pay Survey Analysis

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Pay Survey Analysis: continued

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Calculate weighted means

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Pay survey data

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Step 5: Pay Structure Creation

The next task is to conduct a simple regression using

Microsoft Excel to create a market pay line. Enter the job
evaluation points (as X) and weighted average base pay
rates (as Y) for each benchmark job and generate the
regression results.
Identify the slope and y-intercept and write the equation for
the market pay line
Y =the predicted base pay
M =the slope of the line
x=the job evaluation points
B =the y-intercept

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Regression analysis in
excel -example

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Regression analysis in excel –
example (continued)

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Point method (job evaluation) for
other benchmark jobs
Benchmark jobs Point values

Desk receptionist 120

Administrative assistant 145

Payroll assistant 175

Operation analyst 215

Benefit manager 245

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Step 5: Pay Structure Creation

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Because your company wants to lead in base pay by 3 percent, adjust the
predicted pay rates to determine the base pay rate you will offer for each
benchmark job

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Create pay grades for the pay
structure

Pay grades - Grouping of similar jobs to simplify pricing jobs

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BITS Pilani, Hyderabad Campus
Pay range

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Summary

• To maintain internal equity – we go for job evaluation

• To maintain external equity- we go for market survey
• To maintain individual equity- we go for pay range
• Understand how to design pay structure & steps involved
in designing it…..

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