compensation strategies and practices (session 8)
TRANSCRIPT
Compensation Strategiesand Practices
Objectives of an Effective Compensation System:
- Legal compliance with all appropriate laws and regulations- Cost effectiveness for the organization- Internal, external, and individual equity for employees- Performance enhancement for the organization
Compensation Systems
Nature of Compensation
Types of Rewards
IntrinsicIntangible, psychological and social effects of compensation
ExtrinsicTangible, monetary and nonmonetary effects of compensation
Components of A Compensation Program
Direct Compensation
Compensation Type
Base Pay The basic monetary compensation that an employee receives, usually as a wage or salary.
Wages Payments calculated on the amount of time worked.
Salary Consistent payments made each period regardless of the number of hours worked in the period.
Variable Pay Compensation linked to individual, team, or organizational performance.
Benefit An indirect reward given to an employee or group of employees as a part of organizational membership.
Typical Division of HR Responsibilities: Compensation
Continuum of Compensation Philosophies
Compensation Approaches
Decisions About Compensation Levels
Compensation Strategies
Above-Market Paying for higher qualified, more productive workers.
Middle-Market Attempting to balance of employer costs and need to attract and retain employees.
Below-Market Paying all that the firm can afford Taking advantage of the abundant supply of potential employees in a loose labor market.
Individual vs. Team Rewards
Distribute variable rewards at the team levelDistribute variable rewards at the team levelDistribute variable rewards at the team levelDistribute variable rewards at the team level
Make system simple and understandable.Make system simple and understandable.Make system simple and understandable.Make system simple and understandable.
Using Team-Based Reward SystemsUsing Team-Based Reward SystemsUsing Team-Based Reward SystemsUsing Team-Based Reward Systems
Use skill-based pay for the base.Use skill-based pay for the base.Use skill-based pay for the base.Use skill-based pay for the base.
Use variable pay based on business entity performanceUse variable pay based on business entity performanceUse variable pay based on business entity performanceUse variable pay based on business entity performance
Maintain a high degree of employee involvementMaintain a high degree of employee involvementMaintain a high degree of employee involvementMaintain a high degree of employee involvement
Perceptions of Pay Fairness
Equity The perceived fairness between what a person does (inputs) and what the person receives (outcomes).
Procedural Justice The perceived fairness of the process and procedures use to make decisions about employees
Distributive Justice The perceived fairness in the distribution of outcomes.
Pay Openness The degree of openness or secrecy that an organization allows regarding its pay system.
External Equity The perception that the organization provides employees with compensation that comparable to the compensation of employees with similar jobs in other organizations.
Compensation Administration Process
Compensation Administration Process
Job Evaluation
Job EvaluationThe systematic determination of the
relative worth of jobs within an organization.
Benchmark JobA job found in many organizations and
performed by several individuals who have similar duties that are relatively stable and require similar KSAs.
Job Evaluation Techniques1. Two general typesa.Market-based evaluationsb. Job-content evaluations
2.Market-based evaluations a. Use market data to determine differences in job worthb. Allow companies to assign pay rates that are neither too low nor too
high relative to the marketc. Compensation professionals use compensation surveys to
determine the prevailing pay rates in the relevant job markets
3.Job-content evaluations a. Emphasize the company’s internal value system to establish a
hierarchy of internal job worth based on each job’s role in the company strategy
b. Compensation professionals review preliminary structures for consistency with market pay rates on a representative sample of jobs (benchmark jobs)
c. Must balance external market considerations with internal consistency objectives
Job Evaluation
FactorFactorComparisonComparison
FactorFactorComparisonComparison
RankingRankingRankingRanking ClassificationClassificationClassificationClassification
PointPointMethodMethod
PointPointMethodMethod
Job Job Evaluation Evaluation MethodsMethods
Job Job Evaluation Evaluation MethodsMethods
Ranking MethodSimplest methodRaters examine description of
each jobJobs arranged in order according
to valueMust first conduct job analysis
and write job description
Classification MethodDefine number of classes or grades to
describe group of jobsDescription of each class of job is writtenCompare job description with class
descriptionClass descriptions reflect differences of job
groups at various difficulty levelsEach job is put into a grade according to the
class description it best matchesClass description that most closely agrees
with job description determines job classification
The point methodA quantitative method that assigns numerical values to
compensable factors which are summed up to indicate the overall value of the job
The relative worth of the job is established by the magnitude of its overall numeric value
Factor Comparison Method
A quantitative and complicated methodCombination of ranking and pin point
methodDetermine benchmark job in an organizationSelect compensable factorsRank all benchmark job factors by factorsAssign monitory value to each factor by
comparing jobs to market rates for benchmark
Evaluate all other jobs in the organization by comparing with the benchmark jobs
Pay Surveys A pay survey is a collection of data on compensation rates for
workers performing similar jobs in other organizations. An employer may use surveys conducted by other
organizations, or it may decide to conduct its own survey.
USING PREPARED PAY SURVEYS When using surveys from other sources, it is important to use
them properly. Some questions to be addressed before using a survey are: Participants: Is the survey a realistic sample of those employers
with whom the organization competes for employees? Broad-based: Is the survey balanced so that organizations of
varying sizes, industries, and locales are included? Timeliness: How current is the data (determined by the date
when the survey was conducted)? Methodology: How established is the survey, and how qualified
are those who conducted it? Job matches: Does it contain job summaries so that appropriate
matches to organization job descriptions can be made?
Developing Pay Surveys
Select Employers with Comparable JobsSelect Employers with Comparable JobsSelect Employers with Comparable JobsSelect Employers with Comparable Jobs
Determine Jobs to be SurveyedDetermine Jobs to be SurveyedDetermine Jobs to be SurveyedDetermine Jobs to be Surveyed
Decide What Information Is NeededDecide What Information Is NeededDecide What Information Is NeededDecide What Information Is Needed
Conduct SurveyConduct SurveyConduct SurveyConduct Survey
Pay StructuresPay Structures
Market LineThe line on a graph showing the relationship between the job value, as determined by job evaluation points, and pay survey rates.
Common Pay StructuresHourly and salariedOffice, plant, technical, professional, managerialClerical, information technology, professional, supervisory, management, and executive
Establishing Pay Structures
Establishing Pay Structures
Pay Structures (cont’d)
Pay GradesA grouping of individual jobs having approximately the same job worth.
BroadbandingThe practice of using fewer pay grades having broader pay ranges that in traditional systems.
Benefits- Encourages horizontal movement of employees- Is consistent with trend towards flatter organizations- Creates a more flexible organization- Encourages competency development- Emphasizes career development
Traditional Pay Structure vs. Broadbanding
Pay Scattergram
Example of Pay Grades and Pay Ranges
Example of Pay Grades and Pay Ranges
Pay Rate IssuesRates Out of Range
◦ Red-Circled Employees An incumbent (current jobholder) who is
paid above the range set for the job.◦ Green-Circled Employees
An incumbent who is paid below the range set for the job.
Pay Compression◦ A situation in which pay differences among
individuals with different levels of experience and performance in the organization becomes small.
Issues Involving Pay IncreasesSeniority
◦ Time spent in an organization or on a particular job.
◦ Used to determine eligibility for organizational rewards and benefits.
Maturity Curve◦ A curve that depicts the relationship
between experience and pay rates.◦ Assumption is that as experience increases,
proficiency and performance increase.
Issues Involving Pay IncreasesCost-of-Living Adjustments (COLA)
◦ A percentage increase in wages that allows employees to maintain the same real wages in a period of economic inflation.
◦ Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index).
Lump-Sum Increases (LSI)◦ A one-time payment of all or part of a yearly
pay increase.◦ Lump-sum payments do not increase base
wages
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