1. Jayendra Rimal

2. Introduction: Compensation Compensation refers to all forms of financial returns and tangible benefits that employees receive as part of an employment relationship. The challenge is to create and maintain effective compensation programmes, considering the cost constraints, requiring greater professional expertise, organizational understanding, creativity and vision. Some trends are (i) diversity of compensation strategies and practices (ii) significant rise in pay inequity and (iii) being used to communicate major changes and realignment As a result, compensation programmes are in a state of transition with organizations experimenting. Compensation = Cash compensation (base pay and performance based) + Fringe compensation (legal and discretionary) 23 June 2016 Jayendra Rimal 2

3. Overview An effective compensation system typically has the following characteristics: It enables an organization to attract and retain qualified and competent employees. It motivates employees’ performance, fosters a feeling of equity and provides direction to their efforts. It supports, communicates and reinforces an organization’s culture, values and competitive strategy. Its cost structure reflects the organization’s ability to pay. It complies with government regulation. 23 June 2016 Jayendra Rimal 3

4. Traditional Approaches to Compensation Internal Equity - The focus is only in the organization. This uses job evaluation to create internal equity. Job evaluation is the process of assessing the value of each job in relation to other jobs in an organization. It focuses on the duties and responsibilities assigned to a job. The stages in job evaluation are:(i) job analysis (ii) rating the job and (iii) reviewing the job evaluation results Methods are job ranking, job classification and point factor 23 June 2016 Jayendra Rimal 4

5. Traditional Approaches to Compensation External equity: This involves identifying the compensation provided by other organizations for jobs similar to the one under consideration. If the pay is externally equitable, it is said to be competitive. A salary survey is usually done to collect the information. The survey is conducted or information is bought from existing surveys. Some approaches: Market pricing – Job evaluation is not done and organization gets information from the market to set the pay. Benchmarking – These are well known jobs that are strategically important and structured in such a way that one would expect to find them in the market. 23 June 2016 Jayendra Rimal 5

6. Developing the Pay Some options that are used to determine pay: Single rate structure – Same work, same pay Tenure based structure – Time in a job Combination structure – Utilizing both approaches Productivity based structure Base pay with incentive Although there are critics to the traditional approach, it conveys a sense of orderliness, rationality, fairness and objectivity to the process of ranking job value within an organization. 23 June 2016 Jayendra Rimal 6

7. Current Trends Broadbanding – This involves consolidating existing pay grades and ranges into fewer wider bands. Pay for knowledge, Competencies or Skills – Employees are paid on the basis of a degree they hold ( specific technical knowledge) or an inventory of knowledge and/or skills that they possess. This is often translated into improved employee performance leading to superior organizational effectiveness. Team Pay Plans – Teams require a different compensation approach than from individuals. But teams have to be permanent, work is inter-dependant and team shares responsibility for decision regarding the work. 23 June 2016 Jayendra Rimal 7

8. Pay for Performance This generally refers to the relationship of pay to the assessed performance of employees. Controlling labor costs and increasing productivity through clear linkages between pay and performance is a key HRM aim of competitive advantage. This is normally applicable to higher level executive employees in the form of stock options, cash payments, percentage increase in base pay and non-cash prizes Trying to establish a strong connection between pay and strategic goals. PFP systems can (and clearly do) work and they are important for attracting and keeping top talent. In the context of Nepal? 23 June 2016 Jayendra Rimal 8

9. Determinants of Effective PFP Systems 1. Worker values outcome (money, prizes). 2. Outcome is valued relative to other rewards. 3. Desired performance must be measurable. 4. Worker must be able to control rate of output or quality. 5. Worker must be capable of increasing output or quality. 6. Worker must believe that capability to increase exists. 7. Worker must believe that increased output will result in receiving a reward. 8. Size of reward must be sufficient to stimulate increased effort. 9. Performance measures must be compatible with strategic goals for short and long term. 23 June 2016 Jayendra Rimal 9

10. Different Forms of PFP Individual PFP plans: Merit pay plans – performance measured on rating done by supervisors Incentive plans – based on countable results and these tangible results are used for setting the PFP Sales incentive plans – commission on sales Group incentive plans: Profit sharing – share in (increased) profits Gain sharing – divides a portion of cost reduction or productivity increase Employee stock options – distribution of stocks based on performance like return on equity Company level PFP: Managerial and executive incentive pay: linked to net income, return on investment etc 23 June 2016 Jayendra Rimal 10

11. Reasons for Failure of PFP Systems 1. Poor perceived connection between performance and pay. 2. The level of performance-based pay is too low relative to base pay. The cost of more highly motivating programs may be prohibitive. 3. Lack of objective, countable results for most jobs, requiring the use of performance ratings. 4. Faulty performance appraisal systems, with poor cooperation from managers, leniency bias in the appraisal and resistance to change. 5. Union resistance to such systems and to change in general. 6. Poor connection between PFP outcomes and corporate performance measures. 23 June 2016 Jayendra Rimal 11

12. Strategic Positions for Pay Systems 1. Pay the person – Consider the individual market value (internal and external). Measure knowledge, skills and other competencies of individuals against the market. 2. Pay for performance needs to translate business strategy into measures that can be used as reward systems. The organization should use any one or a combination of PFP plans. 3. Individual the reward system – Avoid one size fits all. Individualize the system to fit the characteristics of the person the organization wants to attract or retain. 23 June 2016 Jayendra Rimal 12

13. Any Questions? 23 June 2016 Jayendra Rimal 13 Thank you !