human resources management - philippine association...

PACU Academic Management

Seminar Series 2013 - 2014

Human Resources Management:

Laws and Issues in Preparation for ASEAN 2015 and K-12

1

Wage and Salary Administration

Module One: Fundamental

Concepts and Principles

2

HR Framework

Attract

Retain Motivate

Wage and Salary Management

Managing the different types of pay and reward systems that individual employees receive representing payment for services rendered:

Direct Financial

Indirect Financial

Non-Financial

Compensation Management Framework

PMAP CHRM - Workshop - Compensation Management Framework.xlsx

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Direct Financial Compensation

Consists of the pay that a person receives in the form of:

Wages

Salaries

Allowances

Bonuses

Commissions

5

Indirect Financial Compensation

Consists of pay supplements that a person receives in the form of:

Statutory Benefits

Fringe Benefits

CBA Mandated Benefits

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Non-Financial Compensation

Consists of the satisfaction or fulfillment that a person receives from the job itself, or from the psychological and/or physical environment in which the person works.

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Principles of Compensation

Competitiveness

Solid market analyses

Identify benchmark jobs

Identify survey companies for data benchmarking

Match benchmark jobs

Analyze survey result

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Meritocracy

Based on effective delivery of performance:

Salary increases based on effective delivery of performance

Promotions based on merit

Other benefits and perks based on performance (Bonuses, Stock Options, etc)

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Internal Equity

Intelligent delivery of direct and indirect compensation programs:

Relative value of positions

Job grades and Broad Bands

Competencies

Job performance

Elimination of salary distortions

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Return on Investment

Value for money to drive business results:

Cost effective and responsive to employees’ needs

Higher level of productivity

Affordability

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Module Two: Designing the

Job Classification System

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Defines the relative worth of jobs in the organization.

Composed of “job grades/levels” which represent a grouping of jobs, which, although different as to the type of work done, are sufficiently equivalent in terms of level of skills demanded, level of difficulty, and amount of responsibility.

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Convenient groupings of rated jobs with each

group consisting of jobs approximately the

same relative worth for the purpose of

assigning pay rate (or rate range) to a group

of jobs rather than different rates to jobs

differing by some small increment.

Job grades, in effect, minimize the number of

applicable job rates, making the base

compensation structure relatively simple to

administer.

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The Job Classification System serves two primary purposes:

The first is to verify and document the value of internal equity as to the results of Job Evaluation by providing the hierarchy of jobs in the organization.

The second is to relate the classification system or hierarchy of jobs to labor market values, and through this linkage, establish salary structures.

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Job Structures

Job Categories

Rank-and-File

Professional/Technical

Supervisory

Managerial/Executive

Example of Job Structure

PMAP CCM - Example - Job Structure and Mapping.xlsx

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Job Categories

Rank-and-File

Those employees whose day-to-day duties and responsibilities are as follows:

Routine and transactional functions

Clerical in nature

Coordination works

Performs simple to moderate execution of work plans and programs, and technical specifications

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Job Categories


Those employees who perform any of the following:

They have broad technical expertise and have depth of know-how and experience in the field of specialized sciences, engineering and technology.

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Job Categories


Those employees who perform any of the following: (continuation)

By reason of their positions or nature of work, are required to assist or act in fiduciary (trust and confidence) manner to managerial employee and hence, are likewise privy to sensitive and highly confidential information.

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Job Categories

Professional/Technical They are officers or members of a

managerial staff, and they perform the following functions: Performance of work directly related to

management policies of their employer. Customarily and regularly exercise

discretion and independent judgment. Regularly and directly assist a proprietor

or a managerial employee, whose primary duty consists of the management of the establishment in which he is employed or subdivision thereof.

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Job Categories

Supervisory

Those employees who, in the interest of the employer, effectively recommends such managerial actions if the exercise of such authority is not merely routine or clerical in nature but requires the use of independent judgment and executes general supervision of work.

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Job Categories

Managerial

If they meet any of the following:

Their primary duty consists of the management of the establishment in which they are employed or of a department or subdivision thereof.

They customarily and regularly direct the work of two or more employees therein.

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Job Categories

Managerial

If they meet any of the following: (continuation)

They have the authority to hire or fire other employees of the lower rank, or their suggestions and recommendations as to the hiring and firing, and as to the promotion or any change of status of his employees are given particular weight.

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Job Structures

Example: Job Rating Process

PMAP CHRM - Example - Job Rating Process.xlsx

Example: Development of Job Structure

PMAP CHRM - Example - Development of Job Structure.xlsx

Example: Types of Job Structures

PMAP CHRM - Example - Types of Job Structures.xlsx

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Module Three:

Collecting and Analyzing Salary Market Data

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Salary Market Survey

Self and Jointly Conducted Survey – Conducted by an organization for its own purpose.

“Off-the-Shelf” Third Party Survey – Third party survey that are published and available off-the-shelf.

Example of “Off-the-Shelf” Total Rewards Survey

PMAP CHRM - Example - TRS General Industry.pdf

Customized Third Party Survey – Target approach in selecting survey comparators.

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Benchmark Jobs

Used to assess the competitive pay position of an organization.

By applying internal JE methods to non-benchmark jobs and comparing them to benchmark jobs, the over-all competitive pay position of the organization is gauged.

Do not assume that labor market, job descriptions, or the mix of salary, variable pay, etc., remain the same from year to year.

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Analyzing Salary Market Data

Average or Mean

Weighted Average

Salary Market Percentile

Low/Minimum

10th

25th

50th or Median

75th

90th

High/Maximum

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Average or Mean

The total sum of the data for a particular item divided by the number of individual observations.

Calculated by adding all occurrences of data, i.e., the salaries of benchmark jobs as reported by each survey participants, and dividing the result by the number of occurrences.

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Weighted Average

In a weighted average calculation, each occurrence of data, e.g., salary, is multiplied by a weighting factor, e.g., the number of incumbents in the position at each reporting company.

The results are added and then divided by the sum of that factor, e.g., the total number of incumbents reported.

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Weighted Average

In a weighted average calculation, each occurrence of data, e.g., salary, is multiplied by a weighting factor, e.g., the number of incumbents in the position at each reporting company.

The results are added and then divided by the sum of that factor, e.g., the total number of incumbents reported.

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Low

Represented by the lowest value used in a sample.

Together with the high value, extremes in the database reflect the absolute range in the sample.

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10th Percentile

Is the value in an array below which falls 10% of a sample.

Together with the 90th percentile, a range of data can be identified that eliminates extremes in the sample and reveals a more realistic dispersion of data.

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25th Percentile

The first quartile is the value in an array that falls at the first quarter or 25th percentile of a sample.

The figure below which 25% of the relevant data fall.

75% or three-fourths of the values in the sample are greater in magnitude than the first quartile value.

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50th Percentile (Median)

Is the value that is at the 50th percentile in an array of data with values that are rank ordered by magnitude.

The figure above and below which 50% of the relevant data fall.

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75th Percentile

Is the value in an array that falls at the third quarter or 75th percentile of a sample.

The figure below which 75% of the relevant data fall.

25% or one-fourth of the values in a sample are greater in magnitude than the third quartile value.

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90th Percentile

Is the value in an array below which falls 90% of a sample and above which falls 10% of the sample.

Together with the 90th percentile, a range of data can be identified that eliminates extremes in the sample and provides a more realistic dispersion of data.

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High

Represented by the highest value used in a sample.

Together with the low value, extremes in the database reflect the absolute range of data in the sample.

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Calculation of Percentiles

Percentiles can be identified by locating the desired position in an array of data points. The following formula is used:

J(N+1)/100

In this formula:

J – the rank of the desired percentile

N – the number of data points

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Example of Percentile Calculation

PMAP CHRM - Workshop - Calculation of Percentile - Compensation & Benefits Manager (Workshop Exercise).xlsx

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Compa-Ratio

Index of measurement to determine the competitiveness of a given salary with respect to its “Market Data Point” or MDP.

100% compa-ratio indicates that a given salary is competitive.

Formula: Present Salary/Desired MDP

Example of Compa-Ratio Calculation

PMAP CCM - Workshop - Calculation of Compa-Ratio (Workshop Exercise).xlsx

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Regression Analysis

Analyzes the relationship between two (linear regression) and more (multiple regression) variables.

Useful in making direct comparisons between job value, and salaries in the labor market.

Example of Regression Analysis Calculation

PMAP CHRM - Workshop - Regression Analysis Mercer Data (Workshop Reference).xlsx

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Maturity Curves

Relate base salary and/or total cash to seniority, or years in job.

Useful in evaluating the difference between novice and seasoned employees within a functional grouping of jobs with similar types of education and skill set requirements.

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Module Four:

Pay Philosophy

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Pay Philosophy

Statement of belief, which will drive the total organization in pursuing its over-all compensation direction.

It’s role is to link the compensation investment to the achievement of business goals by providing a framework for decision making at every stage of the salary management process.

Example of Pay Philosophy

PMAP CHRM - Example - Pay Philosophy.docx

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Organization’s Pay Position

In order to determine a realistic and achievable market position, it is important to identify how that position would translate into expenditures.

The first step is to determine the organization’s target market position and to define the labor market/s, from which it competes for its employees.

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Organization’s Pay Position

The second step is to determine the target market position in order to define the “competitive level” of the total compensation strategy.

Once identified, the target pay position is compared to the organization’s current position to determine whether or not the goal is readily achievable.

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Types of Salary Increases

Normal Distribution/Forced-Ranking Forced ranking refers to a practice of classifying the

entire employee pool into categories of performance levels. The typical distribution schedule in which this is done is 20% top performers, 70% adequate performers and 10% low performers.

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Forced-Ranking Policy

Performance Level

Performance Rating

Percent Distribution

5 Outstanding 10%

4 Above Average 20%

3 Standard Performance 65%

2 Below Standard 5%

1 Unsatisfactory

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Module Five: Designing the

Salary Grades and Structures

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Definition of Salary Structure

Management tool designed to be:

Internally equitable

Externally competitive

Cost effective and affordable

To support organization’s compensation philosophy and business strategies

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Number of Salary Structure

Generally, the smaller or more homogenous an organization, it’s more likely that a single structure will support the goals for both internal equity and competitive positioning in the labor market:

One salary structure for all positions

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Large and/or diverse organizations are more likely to have multiple salary structures with pay targets that are tailored to different labor markets and pay trends for various job families or classifications:

Blue Collar and White Collar

Unionized and Non-Unionized

Exempt and Non-Exempt

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One structure for each type of job classification:

Executive/Managerial

Supervisory


Sales

Clerical/Administrative

Geographically-based structures, to compete effectively for employees at specific operating sites.

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Types of Salary Structures


Single Rate

Step Rate

Salary Range

Combined Step Rate and Salary Range

Quartile

Broadband

Examples of Salary Structures

PMAP CHRM - Workshop - Types of Salary Structures (Workshop Reference).xlsx

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Types of Salary Structure

Single Rate

Consists of a single established rate for one job or group of jobs.

Easily understood and administered.

Inadequate in terms of recognizing differences in performance, knowledge, skill or effort.

More likely to be used with relatively simple and repetitive jobs.

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Step Rate

Consists of series of established rates for a job or group of jobs.

Incumbents (typically from production, maintenance or service jobs), “step up” from one rate to the next when they attain a predetermined level of skill, knowledge, time in job or a combination of criteria or predetermined competencies tied to each step.

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Step Rate (continuation)

Progress through the steps ceases, when a designated control point is reached, which is typically, the top step rate.

The highest step rate is often reserve for a limited number of incumbents to provide additional pay for reasons of performance, skill, knowledge, work leadership, special role, or seniority.

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Salary Range

Consists of series of salary guidelines with minimum and maximum values that represent the lowest and highest salaries.

Range midpoint or other designated control point represents the target for each range.

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Salary Range (continuation)

More complex to administer, than single or step rate salary structures.

Recognizes differences in experience, skill, knowledge and/or performance.

Offers more flexibility in terms of salary structure design.

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Structures that combine the elements of step rates and salary ranges.

Comprised of step rates on the lower side of the range, such as between minimum and midpoint or control point

Instead of additional steps, a salary range is used to administer pay beyond the control points.

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(continuation)

Instead of additional steps, a salary range is used to administer pay beyond the control points.

More advantageous when flexibility is needed to manage pay system than would normally be possible with a step rate system, particularly when performance differences need to be recognized.

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Combined Step Rate and Salary Range (continuation)

Also used as a way to prioritize increases for incumbents whose salaries are at the lower end of the range.

Particularly when, in spite of acceptable performance and time in job, low increase budgets and other circumstances have hampered pay progress towards the control point.

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Quartile Salary Structure

The salary structure is divided into four salary zones as follows:

First Quartile (0-25th Percentile of Range)

Second Quartile (26th -50th Percentile of Range)

Third Quartile (51th -75th Percentile of Range)

Fourth Quartile (76th -100th Percentile of Range)

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Broad Bands

Have far fewer grades and far wider range spreads than would be found in traditional salary structures.

While a variable range spread structure may have range spreads as high as 80%, broad bands are consistently wider at all grade levels, and typically have range spread as wide as 250% or more.

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Broad Bands (continuation)

Usually signals a significant change in both an organization culture and its approach to compensation:

Flattening or decrease in the number of hierarchical levels, particularly in the professional (exempt) and management ranks.

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Validation of Salary Structures

Evaluate the feasibility of implementing the proposed salary structure from cost and affordability perspectives.

PMAP CHRM - Workshop - Validation of Salary Structure.xlsx

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Module Six:

Managing the Salary Review Process

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Salary Management Process

A process for rewarding a combination of factors such as merit or performance, level of knowledge or competency, and over-all value to the organization.

A process for blending the difficult balance of internal equity and external competitiveness.

A process for managing salary controls and expenditures, including salary ranges, pay policy increases, budgets, pay relationships and differentials.

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Salary Management Process

The influence of equity, management control, legal compliance, and fiscal responsibility are the most difficult challenges of recognizing outstanding performance and managing retention.

Therefore, this is one of the most powerful tools of an organization in order to retain its best talents, in managing salary expectations, and communicating the salary rewards process.

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Structural/Salary Market Review Merit/Performance-Based

Promotional

Job Re-Evaluation to a New Job Grade

Skill/Knowledge-Based

Equity

General and Cost of Living Increase

Statutory

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Structural/Salary Market Review

As a result of implementing a salary market review, new salary structure or updating the current salary structure.

Salaries are reviewed and evaluated:

Pay Philosophy

Market Data Point

Performance Differentiation (Forced-Ranking)

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Structural/Salary Market Review

Green and red circle salaries are often subjected to special policies.

Generally, green circle salaries are accelerated to the minimum of the new salary structure.

Alternatively, red circle salaries may be frozen until the range maximum catches up or, an indication that the employee should move to the next higher job grade, or simply over staying in a particular level.

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Merit/Performance-Based

Earned by employees on the basis of individual performance over an established period of time, usually one year.

Associated with salary range structures that offer the flexibility to manage pay and grant increases that consider a combination of factors, including individual performance results, current position of salary in the range, and internal equity.

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Increases are based on performance levels, and it is advisable to manage the proportion of employees who receive ratings above standard.

Thus, budgetary guidelines may be exceeded and the meaning and value of performance-based increases could be negated.

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By combining the influences of performance, position in range and budgetary constraints, guidelines may be established to determine the size of merit pay increases to ensure that they are appropriate based on performance and position in range.

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One of the most commonly used practice is to divide the salary range into levels, usually quartiles, and to define corresponding performance in conjunction with objective performance appraisal procedures.

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Promotional Increase

Movement to a higher job grade accompanied by relatively more difficult duties and responsibilities. Generally, this is accompanied by salary increase.

Some organizations calculate a promotional increase based on the number of job grades between the new and old positions up to a maximum promotional increase.

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Promotional Increase

Others do their calculation based on the position of pre-promotion pay in the new range.

Should be sensitive to the relationship of the newly promoted employee’s pay to that of others in the same job grade.

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Job Re-Evaluation to a New Job Grade

Due to re-organization, multi-tasking, job design, job enrichment, rightsizing etc., some positions are likely to be upgraded.

Changes are more likely to occur in terms of salary opportunity and actual changes in pay.

Pay policy must clearly distinguish “Job Re-Evaluation” vis-à-vis “Promotion”.

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Skill/Knowledge-Based

Reward employees for acquiring new or enhanced job-related skills or competencies.

Associated with step rate structures, whereby the pay of each eligible employee advances to the next higher step based on the acquisition of new competencies.

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Equity Increase

To correct pay relationships between employees in the same job grade.

To correct salary distortions.

Statutory Increase

By virtue of statutory mandate, the “Minimum Wage Rate” is increased.

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General and Cost of Living Increase

Salary adjustment at an equal percent or amount due to increase in cost of living.

Designed to achieve the balance between purchasing cost of money and changes in the economic market.

Normally driven by Inflation Rate and Consumer Price Index.

Not based on performance.

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