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Lecture 9.1

DEVELOPING COMPENSATION PLANS

BTEC Higher National DiplomaHuman Resource Management

Jeeshan Mirza

Topic Overview1. HRM Strategy & Analysis

2. Job Analysis

3. Personnel Planning & Recruiting

4. Selecting Employees

5. Training & Developing Employees

6. Performance Management & Appraisal

7. Managing Employee Retention, Engagement, and Careers

8. Developing Compensation Plans

9. Pay For Performance & Employee Benefits

10. Ethics, Employee Relations, Fair Treatment At Work

11. Working With Unions/Improving Occupational Safety, Health, and Risk Management

Overview• Total Rewards• Compensation Systems Design Issues• Development of Base Pay System • Determining Pay Increases

Total RewardsNature of Total Rewards & Compensation

Total Rewards

Compensation▷ Employee compensation-all forms of pay going to

employees and arising from their employment

▷ Two main components

Direct Financial Payments-Wages, salaries, incentives, commissions, and bonuses

Indirect Financial Payments- Employer-paid insurance and vacation

Total Rewards▷ Total Rewards- Radically different approach to

compensating employee

▷ Going beyond basic salary; all monetary and nonmonetary rewards, intrinsic rewards

▷ Provided by company to attract, motivate, and retain employees

▷ Linking organizational objectives and strategies to compensation

Total Rewards▷ Individuals encouraged to work in manner

benefitting company and stakeholders

▷ Balance interests and costs of the employers with needs and expectations of employees

▷ Deciding on salary is difficult process

▷ Employee payroll, benefits represent large portion of operating costs; battle for talent

Total Rewards

Emerging Trends▷ Incentives are increasingly a component of every

pay package

▷ Non financial rewards-personal recognition growing as supplements to financial rewards

▷ Total rewards-in addition traditional compensation components

Recognition, challenging jobs, telecommuting programs, health, well-being programs, training, career development.

Total Rewards

Source: Mathis

Total Rewards

Source: Armstrong

The Elements of Total Rewards

Total Rewards

Types Of Compensation▷ Direct compensation- wages, salaries, incentives,

commissions, and bonuses

▷ Indirect compensation- financial benefits such as insurance

▷ Non monetary rewards/benefits- training, recognition, career planning

Total Rewards

Source: Mathis

Total RewardsBase Pay

▷ Basic compensation that an employee receives, usually as a wage or salary

▷ Often referred to as basic salary

Wage refers to hourly payment calculated based on time worked; part time employees

Salary is same payment, regardless to number of hours worked

Total RewardsVariable Pay

▷ Compensation linked directly to individual, team, or organizational performance

Bonuses and incentive program payments

Executives often receive longer-term rewards such as stock options

Total RewardsBenefit

▷ Indirect reward given to an employee or group of employees

▷ As part of membership in the organization

▷ Often regardless of performance

Health insurance, vacation pay, or a retirement pension

Total Rewards

Andrea- Sales Executive

LKR 50,000 Per Month

Base Pay

LKR 10-50,000 Every Quarter As Target Bonus

Variable Pay

Health Insurance

Benefit, Regardless Of Performance

Training Program, Sales Person of The Quarter

Non Monetary Rewards

Total Rewards

Responsibility

Who decides on compensation of employees?

Compensation System Design Issues

Issues To Keep In Mind When Designing Compensation

When designing compensation system

of a company, there are various factors to

keep in mind


1. Compensation Fairness & Equity



▷ Perceived fairness of what person does (inputs) and what person receives (outcomes)-equity

▷ Individuals judge equity in compensation by comparing

Input (Effort and Performance) Vs

Effort and performance of others and against the outcomes (the rewards received)



The Equity Theory of Motivation-

▷ People are motivated to maintain balance between contributions and rewards

▷ When inequity is perceived, a tension will develop in the person’s mind

▷ Arises both-underpaying and overpaying



External equity-

▷ How a job’s pay rate in a company compares to other companies

Internal equity-

▷ How fair a particular job’s pay rate is compared to other jobs within the same company



Individual equity-

▷ Fairness of individual’s pay VS coworkers for similar jobs within company

Procedural equity-

▷ Perceived fairness of processes and procedures used to decide the allocation of pay


2. Entitlement Or Performance

Source: Mathis


2. Entitlement Or PerformanceEntitlement Philosophy-

▷ Assumes individuals who have worked another year are entitled to pay increases

▷ With little regard for performance differences


2. Entitlement Or PerformanceEntitlement Philosophy-

Traditional organizations, government, semi government,

Automatic increases to their employees every year-cost of living raises

Without any regard for performance, fails to reflect operating results

Develops a culture of entitlement, get without performing


2. Entitlement Or PerformancePerformance Philosophy-

▷ Requires that compensation changes reflect performance differences

Does not guarantee increased compensation for completing another year of organizational service

Structures pay and incentives to reflect performance differences among employees


2. Entitlement Or PerformancePerformance Philosophy-

High performance employees maintain/advance their compensation levels more than marginal performers

Bonuses and incentives are based on individual, group, and/or organizational performance

Reduces turnover and increase employee commitment, motivation, and retention


3. Market Competitiveness & Compensation

▷ How well company pays in comparison to others in the market

Compensation Strategy

Meet The Market

Lag The Market

Lead The Market



Meet the Market Strategy-

▷ Balance employer cost pressures

▷ And need to attract, retain employees

▷ Providing mid-level compensation scales



Lag the Market Strategy

▷ Paying below market levels

▷ Such employers always look to minimize cost

▷ Abundance of workers available for the skill set

▷ Walmart, McDonalds



Lead the Market Strategy

▷ Aggressive approach; higher cost approach

▷ Enabling company to attract and retain workers with required capabilities

▷ Be more selective when hiring



Lead the Market Strategy

▷ Organizations often look for ways to increase the productivity of employees

▷ Facebook (25% Above), Microsoft (20%+), Salesforce.com (19%+), Google (18%+)


4. Individual Vs Team Rewards

▷ Organizations shifting to using work teams

▷ Teamwork, collaboration very important

▷ For base pay, employers compensate individuals

On the basis of competencies, experience, and other job factors

▷ Then organizations use team incentive rewards on top of base pay


5. Heavy Base Pay Or Performance Driven

▷ Some organizations use heavy base pay

▷ Conventional practice in Sri Lanka

▷ Challenging to evaluate performance

▷ In some sales, business development jobs, performance driven pay is used

▷ Variable pay-incentives, commission

Sundar Pichai, CEO Google

2016 Compensation: 199.7 Million USD 2016 Salary: 650,000 USD


Compensation Or Pay Policy A Company’s Compensation Or Pay Policy May Include The Following-Driven By Strategy:

▷ Compensation Philosophy? Entitlement Or Performance?

▷ Meet the market? Lag? Lead?

▷ Individual or team?

▷ Heavy Base Pay Vs Performance Driven?

Class DiscussionSuggest compensation policy for an ambitious startup IT Company


Legal Constraints On Pay

▷ National minimum wage of workers act

Plantation Sector

Industrial Sector

Service Sector


Legal Constraints On Pay

▷ Overtime payment

▷ Payment for working on holidays, Poya Day

▷ Training and travel part of working hours

▷ Time off is practiced by some companies

Development Of A Base Pay System

Process of Building a Base Pay System


▷ Employers use two basic approaches to setting pay rates

Job Evaluation Method

Market Based Approach

▷ Smaller firms use market based approach

▷ Job evaluation method is systematic and complex


Valuing Jobs Job Evaluation

▷ Formal and systematic comparison of jobs

▷ To determine the worth of one job relative to another

Internal method that results in a wage or salary structure or hierarchy

Using point method, ranking method, classification method


Valuing Jobs Job Evaluation

Jobs that require greater qualifications, more responsibilities, and more complex job duties

Should receive more pay

Degree to which factors are required in a job-know-how, problem-solving ability, and accountability


Valuing Jobs Market Pricing-

▷ Use of market pay data to identify the relative value of jobs

▷ Based on what other employers pay for similar jobs

Identify the relative value of jobs based on what other employers pay for similar jobs



Market pay data for jobs good “matches” with the employer’s jobs, geographic considerations, company strategies and philosophies

Ties organizational pay levels to market, without being distorted by “internal” job evaluation

More objective compensation system



Pay survey data are limited or may not be gathered in methodologically sound ways

Responsibilities of a specific job in a company may be somewhat different

Determining Pay IncreasesHow Pay Increments Are Done

Determining Pay Increases

Performance Based IncrementsTargeting High Performers

▷ Provides the top performing employees with significantly higher pay raises

▷ Hewitt Associates Survey

Average raises for the best performers in 1 year were 9.9%, satisfactory performers got 3.6%, and low performers got 0% to 1.3%


Performance Based IncrementsTargeting High Performers

▷ Rewarding and retaining the critical high-performing individuals

▷ For average performing employees, increases aligned with labor market adjustments

▷ Lower performers given little increments


Standardized Pay Increases▷ Seniority

▷ Time spent in an organization or on a particular job

▷ Seniority can be used as the basis for pay increases

▷ Many employers have policies-employed for a length of time before eligible for pay increases


Standardized Pay IncreasesCost-of-Living Adjustments

▷ Common pay-raise practice is the use of cost-of-living adjustment (COLA)

▷ Tied to changes in the Consumer Price Index (CPI) or some other general economic measure

Pay Increases?Can it improve performance?

Thanks!Any questions?

You can find me at:@[email protected]

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