CompensationOutline of the Lecture

1: Outline of the Lecture2:Types of Reward Plans3:Process of establishing pay rates• Job Evaluation Methods4:Formulating Salary Sheets

Rewards Review

bonuses

piecework

commission

incentiveplans

merit payplans

cost of living increase

labor marketadjustment

profit sharing

protectionProgram

pay for timenot worked

services/perks

assignedparking space

preferredassignments

businesscards

ownsecretary

impressivetitle

participation indecision making

greater jobfreedom

moreresponsibility

opportunitiesfor growth

diversityof activities

Financial Non-financial

Extrinsic

Impliedmembership-based

Performancebased

Explicitmembership-based

Intrinsic

Types of Reward PlansIntrinsic versus Extrinsic Rewards Intrinsic rewards (personal satisfactions) come from the job itself, such as:

pride in one’s workfeelings of accomplishmentbeing part of a work team Extrinsic rewards come from a source outside the job, mainly by management:MoneyPromotionsBenefits

Types of Extrinsic RewardsFinancial versus Non-financial RewardsFinancial 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 RewardsPerformance-based versus Membership-BasedPerformance-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 Method2. 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 descriptionConsiderable judgment is required

Grade Descriptions for clerical and assistant work

Job Evaluation Method3. Point Method.1 Identify compensable factors e.g.

i) Nature of assignmentii) 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 (continuedNature 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 gradePlot the average pay rate for each pay gradeDraw a line through the points plotted, called wage lineFinally price the jobs. For this the wages along the wage line are target wages for the jobs in each pay gradeIf 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 ranges2. Correcting out-of line rates Pay Ranges3. 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