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1 Mohan Madgulkar-Compensation Management/2006 Compensation Management Mohan Madgulkar

2 Mohan Madgulkar-Compensation Management/2006 Introduction to Compensation and rewards management

3 Mohan Madgulkar-Compensation Management/2006 Compensation Cash and non-cash rewards employees receive in exchange for their work Effective compensation management –Employees more likely to be satisfied and motivated Compensation perceived to be inappropriate –Performance, motivation and satisfaction may decline dramatically –Employee turnover may occur –Dissatisfaction with absolute or relative pay

4 Mohan Madgulkar-Compensation Management/2006 Total Reward Financial rewards Base pay Variable pay Share owner- ship Benefits Total remuneration Non- financial rewards Recognition Skills Development Current opportunities Quality of working life Total Reward

5 Mohan Madgulkar-Compensation Management/2006 Reward management defined Reward management is concerned with the formulation and implementation of strategies and policies the purposes of which are to reward people fairly, equitably and consistently in accordance with their value to the organisation and to help the organisation to achieve its strategic goals

6 Mohan Madgulkar-Compensation Management/2006 Objectives of Compensation Effective Compensation Legalcompliance Administrativeefficiency Controlcosts Retainemployees Acquirepersonnel Ensureequity Rewardbehaviour

7 Mohan Madgulkar-Compensation Management/2006 Pay & Organizational Strategy Areas that impact pay systems Attract & retain Identifying valued rewards Motivatingdevelopment Relating to performance Settinggoals Consequences Motivatingperformance

8 Mohan Madgulkar-Compensation Management/2006 The concept Wages and salaries constitute the greatest single cost of doing business. Establishing equitable and competitive pay structure is important from attracting point of view. the organization can also hold out the possibility of varying compensation, the payment of which is dependant on specific behavior. Supplementary pay plans ( fringe benefits ) can retain the employees in the organization on a long term basis

9 Mohan Madgulkar-Compensation Management/2006 The concept Development, implementation, maintenance, communication and evaluation of reward processes Assessment of relative job values, the design and management of pay structures, performance management, paying for performance, competence or skills, the provision of employee benefits and pensions, management of reward procedures

10 Mohan Madgulkar-Compensation Management/2006 Aims of Compensation and reward management Support the achievement of organizations strategic and short term objectives Support culture management and change Drive and support desired behavior Encourage value added performance Promote continuous development Compete in employment market Motivate all members of the organization Promote teamwork Promote flexibility Provide value for money Achieve fairness and equity

11 Mohan Madgulkar-Compensation Management/2006 The Reward Management Context The cultural environment –Values ( what is believed to be important ) –Norms ( accepted way of behavior ) –Management style ( how managers manage their staff ) The organizational structure Employee relations Technology Operational processes and working methods Management practices as a function of business strategy, culture, technology and operations Employment practices External environment

12 Mohan Madgulkar-Compensation Management/2006 Significant factors affecting compensation policy Supply and demand Labor unions Ability to pay Productivity Cost of living Government

13 Mohan Madgulkar-Compensation Management/2006 Statutory minimum wage – Wage determined in accordance with the provisions of the Minimum Wages Act, 1948 Minimum Wage Living Wage

14 Mohan Madgulkar-Compensation Management/2006 Compensation issues Wage and salary levels Wage and salary structures Individual wage determination Incentive payments Fringe benefits Compensation of mangers and professionals Control

15 Mohan Madgulkar-Compensation Management/2006 Strategic compensation policies

16 Mohan Madgulkar-Compensation Management/2006 Compensation strategy defined The deliberate utilization of the pay system as an essential integrating mechanism through which the efforts of various sub-units and individuals are directed towards the achievement of an organizations strategic objectives The business strategy in particular, serve as a critical guide in designing organizations systems, because it specifies what the company wants to achieve, how it wants to behave, and the kind of performance and performance levels it must demonstrate to be effective. The strategy should strongly influence an organizations design and management style, both of which should drive the design of reward system. These reward systems in turn, help to drive performance by influencing important individual and organizational behavior.

17 Mohan Madgulkar-Compensation Management/2006 Compensation strategies & corporate goals The compensation strategy will be mainly concerned with the direction the organization should follow in developing the right mix and levels of financial and non financial rewards in order to support the business strategy It should be backed up by a realistic action plan.

18 Mohan Madgulkar-Compensation Management/2006 How reward strategy contributes to the achievement of corporate goals? Provides for the integration of reward policies and processes with key strategies for growth and improved performance Underpins the organizations values, especially those concerned with innovation, teamwork,flexibility, customer service and quality Fits the culture and management style of the organization as it is or as it is planned to be. Drives and supports desired behaviors at all levels by indicating to employees what type of behavior will be rewarded, how this will take place and how their expectations will be satisfied. Provides the competitive edge required to attract and retain the level of skills the organization needs Enables the organization to obtain value for money from its reward practices

19 Mohan Madgulkar-Compensation Management/2006 Characteristics of reward strategy The demand of the business strategy including cost constraints How performance can be driven by influencing important individual and organizational behaviors Helping to achieve culture changes Meeting objectives for ensuring the organization gets and keeps high quality employees Aligning organizational core competence and individual competence Underpinning organizational change Development of competitive pay structure Ensuring that reward policies are used to convey messages about the expectations and values of the organization Achieving the right balance between reward for individuals, team and organizational performance Evolving total reward processes which incorporate the best mix of financial rewards and employee benefits Achieving the flexibility required when administering rewards processes within fast changing organizations in highly competitive or turbulent environments Fitting reward processes to the individuals needs and expectations of employees

20 Mohan Madgulkar-Compensation Management/2006 Pay and motivation Maslow Herzberg Mclelland Adams Vroom Pay is a flexible reward which can satisfy a number of needs Primarily a hygiene factor For high achieving individuals pay a form of feedback; for high affiliation, group targets can motivate; high power, pay confirms status Pay is one of the most important yardsticks; based on individual assessment, work effort may be altered accordingly If individual believes that improved performance will lead to more pay, higher levels of motivation will result; if extra effort required to attract more pay (expectancy) individual can make a decision whether or not to work harder.

21 Mohan Madgulkar-Compensation Management/2006 Pay has a strong impact on the employees standard of living, it is a status symbol and important in comparisons to others Employer: –Critical in attaining strategic goals Impact on employee attitudes and behaviours Significant organisational cost Areas of compensation decisions –Pay Structure –Pay Level –Job Structure –Pay policies

22 Mohan Madgulkar-Compensation Management/2006 Compensation Challenges CompensationChallenges Prevailing wage rates Unionpower Productivity Governmentconstraints Wage & salary policies

23 Mohan Madgulkar-Compensation Management/2006 Changing Compensation Systems TraditionalModernEntitlement-baseincreasesPerformance-drivengains Pay = 100% base salary Variable component added Few incentive/bonus plans, restricted to executives Many kinds of plans, extended throughout the organization

24 Mohan Madgulkar-Compensation Management/2006 Compensation Management Phase I Job Analysis Identify and study jobs Position descriptions Job descriptions Job standards

25 Mohan Madgulkar-Compensation Management/2006 Compensation Management Determine relative worth or value of jobs Provides for internal equity Job evaluation methods: Job ranking Job grading Point system Phase I Job Analysis Phase II Job Evaluation

26 Mohan Madgulkar-Compensation Management/2006 Compensation Management Discover what other employers are paying for specific key jobs Provides for external equity Sources of data: HRDC Consultants Canada HR Centres Associations Self-conducted surveys Phase I Job Analysis Phase II Job Evaluation Phase III Salary Surveys

27 Mohan Madgulkar-Compensation Management/2006 Compensation Management Establishing the pay level for each job Combines job evaluation ranking, survey wage rates, and other considerations e.g. organizations pay policy Wage-trend line developed Grouping the different pay levels into a structure that can be managed Job classes and rate ranges Phase I Job Analysis Phase II Job Evaluation Phase III Salary Surveys Phase IV Pricing Jobs Match

28 Mohan Madgulkar-Compensation Management/2006 Job Evaluation

29 Mohan Madgulkar-Compensation Management/2006 Some conceptual clarity What is a job ? –Collection of tasks, duties, responsibilities which are regarded as a regular assignment of an employee What is a job design ? –It is the deliberate attempt to structure the technical and social aspects of work. It comprises of both organizing the components of the tasks to be done and the interaction patterns among the workgroup members in order to get the job done. What is a job description? –Clear, concise and understandable description of each job. It describes n sufficient details each of the main duties and responsibilities and indicates the extent of directions received and supervision given What is job specification? –Statement of minimum acceptable human qualities necessary to perform a job properly

30 Mohan Madgulkar-Compensation Management/2006 Job analysis The process of collecting, analyzing and setting out information about jobs in order to provide the basis for a job description or role definition and the data for job evaluation, performance management and other HR management purposes Detailed and systematic study of information related to the operations and responsibilities of a particular job. Anatomy of the job

31 Mohan Madgulkar-Compensation Management/2006 Points covered in Job analysis What is the job title To whom is the position responsible to ? Who is responsible to the position What is the purpose of the job? What is the position expected to do? To achieve the purpose, what are the main areas of responsibility?What you have to do and why. Dimensions of job in terms of output Hoe does the job fit in with other jobs in the department or elsewhere in the company Flexibility requirements in terms of having to carry out a range of different tasks How work is allocated and how it is reviewed and approved Decision making authority Contacts with others- inside or outside the company, equipment, tools used Other features like traveling, unsocial hours or unusual physical conditions Knowledge and skills required to do the work

32 Mohan Madgulkar-Compensation Management/2006 Job Analysis in Practice Job analysis gets the facts about a job from the job holder, the job holders manager and the job holders team mates. These facts can be obtained by interviews or by asking the job holders and / or their managers to write information about the jobs in a structured format.It is essential to provide guidance on how the analysis should be carried out and expressed on paper. Alternatively questionnaires can also be used – either universal questionnaires or those designed for job families

33 Mohan Madgulkar-Compensation Management/2006 Role analysis Role analysis covers the collection of information about the job contents and job demands as in job analysis,but goes beyond these details to look at the part people play in carrying out their roles rather than the tasks they carry out. It is concerned not only with the job content, but also the broader aspects of behavior expected of role holders in achieving the overall purpose of their roles

34 Mohan Madgulkar-Compensation Management/2006 What is job evaluation? Job evaluation can be defined as a systematic procedure designed to aid in establishing pay differentials among jobs… Job Evaluation is a systematic process for ranking jobs logically and fairly by comparing job against job or against a pre-determined scale to determine the relative size of jobs in an organisation. A systematic process or set of techniques used to assess the relative worth of jobs within the organisation (Wright, 2004:46)

35 Mohan Madgulkar-Compensation Management/2006 Job evaluation The purpose of job evaluation is to –Provide a rational basis for the design and maintenance of an equitable pay structure –Help in the management of existing relativities –Enable consistent decisions to be made on grading and rates of pay –Establish the extent to which there is comparable worth between jobs

36 Mohan Madgulkar-Compensation Management/2006 Job evaluation A comparative process A judgmental process An analytical process A structured process

37 Mohan Madgulkar-Compensation Management/2006 Job evaluation relearned Job evaluation should reinforce critical behaviors that the the organization needs to demonstrate for overall effectiveness. Traditional job evaluation systems however focus on characteristics representative of organizations of the past

38 Mohan Madgulkar-Compensation Management/2006 A new paradigm Todays business environment Traditional JEJE requirements for todays organizations Role based. Employees required to do what is needed rather that what is prescribed and to manage themselves Flatter organizational structures, little vertical advancements, need for employees to gain broader perspective Self managed teams More knowledge workers Job based. Work is valued based on narrow job descriptions which are defined and strict boundaries of authority and accountability are delineated Communicate values of hierarchy and bureaucracy by driving empire building behavior, rewarding vertical, rather than horizontal growth. Employees may be reluctant to accept new positions when the new job has fewer points Focus on individual contribution Measure task size Flexible enough to evaluate job contents and or role content. The system should communicate and encourage required new behaviors Encourage employees to gain broader organizational perspective through lateral moves Ability to rank teams Measure intangible processes

39 Mohan Madgulkar-Compensation Management/2006 JE – basic methodology Benchmark jobs –For internal assessment and external matching Job evaluation factors –Characteristics common to the range of jobs Job and role analysis Job evaluation process Develop a pay structure

40 Mohan Madgulkar-Compensation Management/2006 Meeting the Needs Non- Analytical Basis of Comparison Job-job Simple ranking Internal benchmarking Paired comparison Market pricing Factor comparison Job-scaleClassificationPoint Factor Rating

41 Mohan Madgulkar-Compensation Management/2006 Non-analytical job evaluation – job ranking Steps –Analyse and describe jobs –Identify key or benchmark jobs –Rank all other jobs around these –Divide ranked jobs into grades Advantages –Quick and cheap Disadvantages –Does not measure differences between jobs, not acceptable in determining equal worth in an equal value case

42 Mohan Madgulkar-Compensation Management/2006 Job classification Steps –Decide on number and characteristics of grades –Compare whole job with grade definition and allot jobs to grades Advantages –Easy, cheap, easily understood Disadvantages –Cannot cope with complex jobs or borderline cases –Not acceptable in equal value cases

43 Mohan Madgulkar-Compensation Management/2006 Analytical JE – point factor schemes Break down jobs into factors such as knowledge, skill, responsibility, dealing with people, working conditions Give each factor a range of points or percentage weighting Maximum points for each factor are divided between levels or degrees for that factor Select and analyse benchmark jobs Allocate points to each job under each factor Add together points to give a total score which represents job size Design grade structure Analyse, evaluate and grade non-benchmark jobs Price job grades

44 Mohan Madgulkar-Compensation Management/2006 Point-Factor Plans The most commonly used type of job evaluation method Make the criteria for comparisons explicit, unlike ranking and classification The criteria for classification (the compensable factors) are related to the strategy of the business; they are the factors valued by or of high worth to the firm

45 Mohan Madgulkar-Compensation Management/2006 Point-Factor Plans Point factor plans all include three elements: –Compensable factors are defined –Degrees or level of each factor are given numerical rankings –Factors weighted as to their relative value to the organization Job worth is measured by the total number of points The steps to follow: –Job analysis –Determine compensable factors –Scale the factors –Weight the factors –Communications and documentation –Apply the plan Compensable Factors Characteristics in the work that the organization values, that help it pursue its strategy and achieve its objectives

46 Mohan Madgulkar-Compensation Management/2006 Selecting and Weighting Compensable Factors These should be: –Based on the work performed –Based on the strategy and values of the organization –Acceptable and considered to be fair by all concerned parties As a result, compensable factors should be developed by each organization, rather than using an off-the-shelf plan Basic group of compensable factors: –Skill –Effort –Responsibility –Working conditions Weighting compensable factors

47 Mohan Madgulkar-Compensation Management/2006 Point-Factor: Pro and Con Point-factor systems orderly, rational, and make criteria for evaluating jobs explicit Time consuming to set up (and they do need to be periodically updated), but very simple to add new jobs Job evaluations may still be affected by what the evaluator already knows or believes the market value of the job to be

48 Mohan Madgulkar-Compensation Management/2006 Example factor plan Levels/ factors Knowledge and skills Responsibility Decision making Complexity Contacts

49 Mohan Madgulkar-Compensation Management/2006 Issues in the selection of factors Factors express the values of the organisation Factors influence the extent to which the scheme constitutes a fair basis for assessing relative values Consider the whole range of jobs in choosing factors Avoid double counting

50 Mohan Madgulkar-Compensation Management/2006 Hay Guide Chart-Profile Method © Officially known as the Hay Guide Chart-Profile Method of Job Evaluation©, this system utilizes three factors to arrive at a jobs evaluation. The jobs content is the sole basis for the job evaluation. The Hay method of job evaluation is generally understood to be a point plan, although Hay itself does not define the guide chart-profile method as a variation of the point method. The Hay guide charts have been in existence since 1951 and have been used in over 5,000 different organizations worldwide.

51 Mohan Madgulkar-Compensation Management/2006 How are jobs evaluated using the Hay System? Job description questionnaires are completed and signed by the jobholder, the supervisor, and other managerial staff who have responsibility for the position. The job description questionnaire is given to each member of the job evaluation committee for his/her initial evaluation. The committee meets with the jobholder and supervisor to explore questions and clarify content. The committee members then compare their individual evaluations and resolve differences that might exist.

52 Mohan Madgulkar-Compensation Management/2006 The Hay Methodology Background Most widely used method for total job populations Adopted by a large number and range of organisations Manageable and coherent number of factors used Successfully used for a huge range of jobs Relies on simple job descriptions and contextual information Methodology combined with process aids equal value Manageable process in relation to resources required Facilitates: –external pay comparison –pay structure development –analysis of organizational and career structures

53 Mohan Madgulkar-Compensation Management/2006 The Underlying Principle of the Hay Methodology

54 Mohan Madgulkar-Compensation Management/2006 Elements of Job Size Technical Know-How Planning and Organising Communicating and Influencing Freedom to Act Area of Impact Nature of Impact Thinking Environment Thinking Challenge PROBLEM SOLVING KNOW-HOW ACCOUNTABILITY }

55 Mohan Madgulkar-Compensation Management/2006 Hay System Factors KNOW-HOW –The sum total of every kind of skill, however acquired, needed for acceptable job performance. –This sum total which comprises the overall fund of knowledge has three dimensions – the requirements for: Practical procedures, specialized techniques, and learned disciplines. Active, practicing skills in the area of human relationships. Know-how of integrating and harmonizing the diversified functions involved in managerial situations (operating, supporting, and administrative). This know-how may be exercised consultatively as well as executively and involves in some combination the areas of organizing, planning, executing, controlling, and evaluating.

56 Mohan Madgulkar-Compensation Management/2006 Hay System Factors PROBLEM SOLVING –The original self starting thinking required by the job for analyzing, evaluating, creating, reasoning, arriving at and making conclusions. To the extent that thinking is circumscribed by standards, covered by precedents, or referred to others, problem solving is diminished and the emphasis correspondingly is on know-how. Problem solving has two dimensions: –The environment in which the thinking takes place. –The challenge presented by the thinking to be done.

57 Mohan Madgulkar-Compensation Management/2006 Hay System Factors ACCOUNTABILITY The answerability for an action and for the consequences thereof. It is the measured effect of the job on end results. It has three dimensions in the following order of importance: –Freedom to Act – the degree of personal or procedural control and guidance the jobholder has. –Job Impact on End Results – ranges from direct to indirect impact on end results by auxiliary, contributory, shared, or primary effects. –Magnitude – indicated by the general dynamic dollar size or accountability area(s) most clearly affected by the job.

58 Mohan Madgulkar-Compensation Management/2006 A guide chart is used for each of the three factors containing descriptive scales for each element and a numbering pattern based on a 15 % step difference, which is an important building block in making comparisons between jobs. Job size is the sum of the results from the three factors. In addition, an explicit judgment is made about the balance between the factors in each job – the profile – which provides a valuable consistency check.

59 Mohan Madgulkar-Compensation Management/2006 The Hay Methodology Checks and Balances Profiles – how do the elements fit together Step differences – internal relativities Sorethumbing – common sense Panel process – challenge perceptions Focus on jobs – not people or performance

60 Mohan Madgulkar-Compensation Management/2006 Compensation structure

61 Mohan Madgulkar-Compensation Management/2006 A pay structure provides framework within which an organization defines the different levels of pay for jobs or groups of jobs on the basis of their relative internal value and of external relatives.

62 Mohan Madgulkar-Compensation Management/2006 Criteria for pay structures Be appropriate to the characteristics and need of the organization Flexible in response to market rates and skill shortages Facilitate operational and role flexibility Scope for rewarding performance Ensure that consistent decisions are made on pay in relation to job size, contribution, skill and competence Clarify career ladders Logically and clearly constructed Enable the organizations to exercise control over the implementation of p[ay policies and budgets

63 Mohan Madgulkar-Compensation Management/2006 Principles of pay structure design Is in accordance with the organization's philosophy and policies concerning differentials, relationships with market rates, and the scope for and methods of progressing the pay in jobs. Designed on a logical basis and helps in the application of equitable and consistent reward management process. Assist the management and maintenance of appropriate internal and external relativities Flexible enough to enable the organization to respond to change Reward competence and performance Can be implemented with minimum amount of efforts and cost. Is likely to be acceptable to management and every other member of the organization

64 Mohan Madgulkar-Compensation Management/2006 Methodology of developing pay structures Analyze present arrangement Set objectives and timetable Decide who is going to conduct the review Estimate the likely cost of conducting and implementing the review Decide the extent of employee involvement Brief employees Make preliminary decision about the type of structure required Analyze and evaluate jobs Make a final decision on the type of structure (s) required and the main design and operational features Prepare a detailed design for the structure and how it will be managed and maintained. Communicate with the staff the details of the structure and how it will affect them Train managers on hoe to operate the structure Monitor the implementation of the structure Evaluate the application and impact of the structure.

65 Mohan Madgulkar-Compensation Management/2006 Three important types of pay structures Graded Job family Broad banded

66 Mohan Madgulkar-Compensation Management/2006 Graded pay structure A graded pay structure consists of a sequence of job grades to each of which is attached a pay range. A pay grade is a grouping of different jobs that are considered substantially equal for pay purposes. Grades enhance the organizations ability to move people among jobs that are within a pay grade without changing their pay. Jobs are allotted to grades on the basis of their relative size. A pay range is attached to each grade. This defines the minimum and maximum rate payable to any job in a grade and indicates the scope provided for job holders to progress through the range

67 Mohan Madgulkar-Compensation Management/2006 Job family structures Market rate pressures operate differently on particular occupations or categories of employees There are significant variations in the type of work carried out and the competencies required by different occupational groups, which can not be easily centered for in a single pay structure A job family structure consists of separate graded pay structures for each of the job families which have been identified for this purpose. These structures are aligned individually to market rates and contain a number of pay ranges which reflect the particular levels of work within the job family.

68 Mohan Madgulkar-Compensation Management/2006 What are job families? A job family consists of jobs in a function or discipline such as research scientists, development engineers or personnel specialists. The jobs will be related in terms of fundamental activities carried out and the basic skills required, by they will be differentiated by the level of responsibility, skill or competence involved. A job family is a group of jobs. Their essential nature and purpose is similar but the work is carried out at different levels. Job families may be functional, in that they cover specific work groups within a function such as marketing, finance or personnel. Or they may be generic, in that they cover similar types of work across functional boundaries e.g. administrators, managers or team leaders

69 Mohan Madgulkar-Compensation Management/2006 Broadbanding Collapse narrow salary grades into wide bands. –20 grades reduced to 4 to 5 bands. –40-60% ranges increased to % Increased emphasis on market pricing jobs Decreased emphasis on job evaluation

70 Mohan Madgulkar-Compensation Management/2006 Broadbanding Compressing a hierarchy of pay grades or salary ranges into a number of wider bands Typically no more than five or six bands Wide pay spans Market pricing used to define reference points Focus on lateral career development and competence growth

71 Mohan Madgulkar-Compensation Management/2006 Broadbanding What are the advantages and disadvantages of broadbanding?

72 Mohan Madgulkar-Compensation Management/2006 Technical Band 160% Broadbanding Salary grades for Engineers I II III IV $35K $85K 40%

73 Mohan Madgulkar-Compensation Management/2006 Advantages of Broadbanding Facilitate Lateral career moves – Enhanced flexibility for transfers –Cross-functional teams with fluid duties More flexible pay decisions –Few control points such as midpoints or salary caps. –More pay opportunities based on skills

74 Mohan Madgulkar-Compensation Management/2006 Salary Surveys

75 Mohan Madgulkar-Compensation Management/2006 Why Conduct Salary Surveys? To create and adjust pay structure Adjust actual pay in response to the market Monitor other forms of pay, such as shift differentials, bonuses, incentives, overtime practices

76 Mohan Madgulkar-Compensation Management/2006 What Is The Market? Who? –Employers who compete for the same occupations and skills –Employers who compete for employees in the same geographic area – Employers who compete with the same products How to determine this? –Who are our competitors? –Where do we recruit? –Where are employees going? Interaction of skill/place/product –If labor market is rich in a particular skill, may recruit/price locally –If labor market does not include skills, recruiting and pricing are on a wider scale –Commuting time within a market may also be a factor

77 Mohan Madgulkar-Compensation Management/2006 Guidelines for Salary Surveys Make or buy? How many firms to include Price fixing issues What jobs to survey What data to collect How to survey

78 Mohan Madgulkar-Compensation Management/2006 Putting it Together: The Pay Regression Line Job evaluation (internal equity) gives us relative value of jobs within the organization Salary surveys (external equity) gives us value of selected jobs outside the organization

79 Mohan Madgulkar-Compensation Management/2006 Contingent Pay

80 Mohan Madgulkar-Compensation Management/2006 Contingent pay covers the various methods of providing additional rewards for individuals or teams

81 Mohan Madgulkar-Compensation Management/2006 Types of contingent pay Contingent pay for individuals Service related pay: provides fixed increments which are usually paid annually to people on the basis of continued service either in a job or in a grade Competence related pay: Links pay to an assessment of competence achieved Contribution related pay: Links pay both to performance as measured by results and competence Skill based pay: Which provides additional payments that reflect the level of skill attained

82 Mohan Madgulkar-Compensation Management/2006 Types of contingent pay contd. Contingent pay for teams –Payments to members of a formally established team or the provision of other forms of non-financial reward which are linked to the performance of that team. The rewards are shared by the team members in accordance with a published formula. Contingent pay based on organizational performance: –Profits sharing: Provides a cash payment related to the level of profits –Profit related pay:Provides for a proportion of pay to go up or down in line with profits –Gain sharing :Shares gains in terms of added value or some other measure between the company and its employees, and includes various forms of its involvement

83 Mohan Madgulkar-Compensation Management/2006 Performance related pay Provides individuals with financial rewards in the form of increases to basic pay or cash bonuses which are linked to an assessment of performance, usually in relation to agreed objectives.

84 Mohan Madgulkar-Compensation Management/2006 Reasons for introducing performance related pay To attract the right type of applicant and to send strong messages to those employees the organization wanted to loose as well as those they wanted to retain To achieve organizational transformation by promoting values suggesting that the company was performance-driven, cost conscious and flexible, and by encouraging commitment- locking individuals in through objectives cascading from the companys business plan.

85 Mohan Madgulkar-Compensation Management/2006 Stages in development of PRP program Define the objectives Analyze the existing situation Decide on the involvement of line managers, team leaders, employees, trade unions. Consider alternative designs Consider process elements Produce overall design Prepare implementation program Implement communication and training programs Implement the plan Evaluate the impact of the plan

86 Mohan Madgulkar-Compensation Management/2006 Advantages and disadvantages of PRP AdvantagesDisadvantages Motivates Is a lever of change Links rewards to results Delivers message that performance is important Helps to attract and retain staff Meets basic human need-to be rewarded for achievement Is not the only motivator Is not an effective motivator Can demotivate May deliver the wrong message Problems of measuring performance Relies on managerial judgment which may be partial Emphasizes quantity at the expense of quality Is prejudicial to teamwork May be discriminatory May not deliver value for money May not be appropriate Is too often taken on trust May be right in principle but is hard to make work in practice

87 Mohan Madgulkar-Compensation Management/2006 Advantages and disadvantages of Competence related pay AdvantagesDisadvantages Encourages competence development Fits de-layered organizations by facilitating lateral career moves Helps to integrate role and organizational core competence Forms part of an integrated, competence based approach to people management Delivers message that competence is important Relies on appropriate relevant and agreed competence profile Assessment of competence levels may be difficult Might pay for irrelevant competencies Link to pay may be arbitrary Costs may escalate if inappropriate or unused competencies are rewarded

88 Mohan Madgulkar-Compensation Management/2006 Competence related pay Method of rewarding people wholly or partly by reference to the level of competence they demonstrate in carrying out their roles. It is a method of paying people for the ability to perform.

89 Mohan Madgulkar-Compensation Management/2006 Process of competence related pay Competency analysis Agreeing competency requirements in a particular role Assessing levels of competence for individuals against the requirements Relating pay of individuals to the assessment

90 Mohan Madgulkar-Compensation Management/2006 Appropriateness Well researched competency framework exists Criteria are available for the measurement/assessment of competencies The organization is concerned with the development of competence levels Managers and staff are properly briefed and trained on the assessment of competence

91 Mohan Madgulkar-Compensation Management/2006 Performance Management A business process intended to ensure alignment of group and individual efforts for achievement of continuous business improvement How much and how??

92 Mohan Madgulkar-Compensation Management/2006 Critical success factors Ongoing tracking Direct linking to companys mission Timely communication and skills training Connection between reward and performance Objective feedback and review Employee ownership – I own the direction in which I go Senior leadership involvement

93 Mohan Madgulkar-Compensation Management/2006 Mission Why does the company Exist ? Vision of future Where is it going? Strategic organizational goals How will it Get done? Esp. Focusing on Values. Core Organizational Capabilities Performance Development & planning

94 Mohan Madgulkar-Compensation Management/2006 Four stages of performance Contribute by following direction –Contribute demonstrating individual competency Contribute through people –Contribute by shaping the organization

95 Mohan Madgulkar-Compensation Management/2006 Performance management at a glance Business strategy & goals Unit performance Goal setting Individual / team goal setting And planning Write performance goals/ plans Write development plan for current Performance goal and future interest Select coaches Ongoing progress review And coaching Formal assessment And pay link 1 2 3

96 Mohan Madgulkar-Compensation Management/2006 Performance management & rewards Not purely for what you DO but also HOW you do it. Integration of demonstrated development, performance, results and competitive market to determine total compensation Performance and incentive compensation linked to business results

97 Mohan Madgulkar-Compensation Management/2006 Productivity linked incentive schemes

98 Mohan Madgulkar-Compensation Management/2006 Objectives Achieve competitiveness through pay increases which are more related to productive measures as a way of absorbing increased labor costs, while at the same time rewarding and motivating employees

99 Mohan Madgulkar-Compensation Management/2006 Types Individual based Profit sharing Gain sharing Employee share ownership

100 Mohan Madgulkar-Compensation Management/2006 Elements Adequate criteria to measure performance which is understood communicated and accepted Appropriate performance appraisal system Regular feedback of performance Appropriate quantum of pay which is subjected to performance criteria Periodic evaluation Recognition to factors outside the control of employees

101 Mohan Madgulkar-Compensation Management/2006 Benefits of productivity linked incentive The benefits to management and employees are: where performance/profits increase, higher pay is an incentive to employees where profits reduce, the reduction in the performance-related pay can cushion employees against redundancies employee identification with the success of the business is enhanced variations in pay lead to employees becoming more familiar with the fortunes (or misfortunes) of the business. This would depend on the information-sharing practices of the management.

102 Mohan Madgulkar-Compensation Management/2006 Guidelines A performance pay system should be designed to promote the kind of performance an organization needs. In order to do so an analysis should first be made of the objectives and results sought the principles/policies and practices needed to obtain the results (e.g. team work) should be established these policies and practices should form part of an overall human resource management strategy. Employees should be consulted in the formulation of the plan (to ascertain the type of rewards most likely to have motivational effect), in regard to its operation and distribution of rewards, and in monitoring the scheme.

103 Mohan Madgulkar-Compensation Management/2006 Guidelines ( contd.) The criteria for the determination of performance pay should be objective measurable and measure only what is important that it is operated along with an appraisal system which measures performance appropriately designed to feed back information to employees, and not only to management easily understood related to what is controllable, so as to exclude what is beyond the control of employees. The intrinsic reward system should be strengthened if need be, e.g. through consultation, communication, participatory systems training job satisfaction and responsibility reorganization of work processes

104 Mohan Madgulkar-Compensation Management/2006 Guidelines ( Contd.) How the performance pay is shared is as important as the quantum, because the manner of sharing affects employees' perceptions as to whether the scheme is equitable. The impact of the scheme also depends on the frequency of the payment. Therefore the reward should follow the performance as soon as possible. The scheme should be given wide publicity within the enterprise. The performance level should be achievable or else the scheme will have no motivational impact. The quantum of pay on account of performance which is placed at risk (i.e. the amount that can be lost due to poor performance) should be carefully determined. At the same time the scheme should be sufficiently flexible to absorb downturns and adequately reward when performance is good.

105 Mohan Madgulkar-Compensation Management/2006 Paying for Contribution

106 Mohan Madgulkar-Compensation Management/2006 Rewarding Contribution What do we really mean by Contribution related pay and how is it different from PRP? What are the key building blocks? What do you have to do to get this right?

107 Mohan Madgulkar-Compensation Management/2006 What Do We Mean By Contribution Related Pay? a new concept in contingent pay design which links pay both to performance, as measured by results, and competence

108 Mohan Madgulkar-Compensation Management/2006 How Much Of It Is There About? (2) Paying for contribution will be the most popular method of rewarding managers and staff. Such an approach reflects a general dissatisfaction with flat rate market rises ……. but it also reflects problems experienced with pay progression linked solely to individual performance (outputs) with no appreciation of how they are achieved, and with progression exclusively linked to skills or competencies (inputs) with no recognition of results. CIPD Reward Management Survey 2004

109 Mohan Madgulkar-Compensation Management/2006 A New Direction? People as costs Tends to focus on individual One Dimensional results focus Rewards immediate past performance Little recognition of motivation research Or the key role of line managers Simplistic Tends to be controlled by HR Pay links usually a fixed formula Discretionary effort-people as assets Focus on team and individual Investment in skills/behaviours for the future Results matter too – but look at interdependencies Draws on commitment/ engagement/motivation research Capability is crucial Tends to be owned by users Variety of reward methods FROM Pay for performance TO Pay for Contribution

110 Mohan Madgulkar-Compensation Management/2006 Key Elements Constructive focus Clear rules of the game on personal and pay progression Based on: –an agreement on deliverables/results –and –acquisition and use of competences required for current role e.g. IT skills –behaviours acknowledged as key to success (e.g. customer orientation, respect for others, partnership working, developing others) –base pay progression and variable pay – best fit for level/role Performance management as the key vehicle for continuing dialogue on delivery and development

111 Mohan Madgulkar-Compensation Management/2006 Establishing individual/team objectives Describing job expectations Describing competencies and planning improvements Describing tasks Training and development planning Agreeing performance standards Coaching Counselling Feedback and day-to-day planning meetings Self monitoring Monitoring training & development activities Formal review of performance Performance measurement Formal team feedback sessions Individual self-review Peer group and upwards appraisal 360 degree Praise Promotion/Job enrichment Links to individual and/or team pay Prizes Special Awards Other forms of recognition Managing Performance Reviewing Performance Planning Performance Rewarding Performance A Virtuous Cycle A Reminder About Performance Management

112 Mohan Madgulkar-Compensation Management/2006 High Impact on the Organisation Low An ongoing Management Process (2) Competency Based (Mixed Model) (3) Organisation/Culture Change Process (5) Level of Intervention Degree of integration with other HR and related processes/ Management Capability A once a Year Event (1) Holistic Process (4) The Impact of Performance Management AIMS Feature of PM Process We want to improve our skills in objective setting/appraising Once a year event Not integrated Little managing of performance We want to improve our appraisal scheme We want to integrate competencies and/or skills in our appraisal process We want to ink up our PM process to other initiatives/ processes e.g. Investors in People, Business Process Re- design, Business Planning, EFQM We want to transform how we operate Business Process Re- engineering An integrated management process covering four phases – Planning, Managing, Reviewing and Rewarding A competency-based integrated PM process A holistic process with explicit links to other initiatives/ processes 360 feedback usually involved PM process part of an integrated HR project – Pay, Work Definition, Organisation Change, Benefits Management

113 Mohan Madgulkar-Compensation Management/2006 And The Impact On Pay …. Not Relevant Manage Exceptions Only Decisions on Rating Rating and Pay Total Ownership Fixed Increments Flexible Increments Pay matrix Flexible Guidelines Line Management held Budget Strength of Message Management Capability HIGH Pay Progression Mechanism LOW

114 Mohan Madgulkar-Compensation Management/2006 Making Contribution related pay work requires: Clarity about organisational strategy and plans and requirements they will make on: –Departments, teams and individuals Values that recognise that how can be as or more important as what Skill/competence frameworks that support delivery and are well understood Learning and development resources Sound performance management processes Clear pay progression rules linked to roles/levels (often in job families) Capable managers who praise achievement and confront contribution shortfalls

115 Mohan Madgulkar-Compensation Management/2006 Getting The Detail Right (1) Are your skill/competence/competency frameworks good enough? i.e. –specific to role/job or career family –linked to skills/behaviours associated with high quality delivery –designed and used to support learning and development, recruitment AND assessment of contribution –supportive of your organisations change and transformation agenda –Clearly communicated and understood

116 Mohan Madgulkar-Compensation Management/2006 Competencies – A Reminder

117 Mohan Madgulkar-Compensation Management/2006 Getting The Detail Right (2) Performance Management Just in time Training/Communication, Competence – Confidence – Trust – Engagement. Focus on coaching/regular feedback. Appreciative enquiry –what would be happening if this area of contribution was going well – what would you/others be doing to create success? Focus on raising rather than rating contribution (a besetting sin of PRP). Recognition that managers and their people raise contribution levels – pay systems and performance management forms/systems cannot do this. It is the quality of dialogue not the elegance of the paperwork that matters. Reward should support this.

118 Mohan Madgulkar-Compensation Management/2006 Contribution Rating Rating is only important where contribution level is directly linked to pay decisions. The approach to rating depends on the purpose and emphasis of the performance management process:- Organisational Contribution Individual Development Quantitative Judgments Qualitative Indicators Individual Remuneration A1 + 2OutstandingExceptional contribution B2 + 1SuperiorConsistently high level of contribution C3 0Fully AcceptableA good years work D4 - 1IncompleteAcceptable contribution, some shortcomings E5 - 2Marginal/Not ProvenContribution less than acceptable/learner/ achiever Where rating is judged essential, a 5-point scale is often used. This may be expressed in numbers, letters and descriptors e.g. Words and psychology matter a lot!

119 Mohan Madgulkar-Compensation Management/2006 Pulling It All Together Capability building will be key especially for line managers. Decide how this approach fits with the current culture, strategy and existing processes. Start paying for personal contribution as soon as this makes sense. Consult, involve and put L plates on what you do – everyone stands to learn. Communicate early and often. Top team clarity & commitment is crucial.

120 Mohan Madgulkar-Compensation Management/2006 Team Based Pay

121 Mohan Madgulkar-Compensation Management/2006 Team-based Pay Team Definition (Katzenbach & Smith, 1993) Group of employees whose members are mutually accountable to each other for common goals. Team members interact on a regular basis. There is the possibility of synergy between team members. Size of team is between 2 and 25 members.

122 Mohan Madgulkar-Compensation Management/2006 Types of Teams (Cohen & Bailey, 1997) Work Team –Controls a business process such as customer service or manufacturing. Product or service quality is a key criteria. –Permanent work assignment and full-time commitment. Project Team –Project is limited by completion time such as new product design or construction project. Delivery time, budget variance and design quality are some criteria. –Full-time commitment; after project team members are reassigned to different projects.

123 Mohan Madgulkar-Compensation Management/2006 Types of Teams (Contd) Parallel Teams –Used to solve specific problems such as quality, safety, employee grievances or impact of technology change. –Used in parallel to functional units where employees spend most of their work time. –Requires only a part-time commitment as team member.

124 Mohan Madgulkar-Compensation Management/2006 Why Use Team Pay? To Encourage Behaviors such as… Peer Cooperation Information Sharing Unselfish behavior supportive of team –Sacrifice personal interest for good of team such as giving up leisure time on weekend to work for an important team goal. Mutual Monitoring –Provide performance feedback to team members.

125 Mohan Madgulkar-Compensation Management/2006 Monetary Team Rewards (Gomez-Mejia & Balkin, 1992) Team Bonus - Cash payment to tied to achieving major team performance outcome and allocated on non-recurring basis. Team Merit Pay - Cash adjustment to salary tied to achieving team behavioral and performance outcomes. Skill-based Pay - Adjustment to base pay rate of team members tied to team competence level. Gainsharing - Share gains of unit/department with interdependent teams. Spot Cash Rewards - Discretionary basis.

126 Mohan Madgulkar-Compensation Management/2006 Non-monetary Team Rewards Team Recognition Reward - Public ceremony or announcement in company newsletter. Team Celebration - Celebrate team win; includes special dinner, ticket to sports event,etc. Merchandise - Team jacket, pin, emblem to build team identity and espirit de corps. Travel - Team members (and possibly spouses) travel to resort for relaxation and fun - often used for sales teams after successful marketing push.

127 Mohan Madgulkar-Compensation Management/2006 Team Pay: Design Issues Eligibility - full or part time? managers? Newcomers? Size of Reward - large or small? Individuals shares - equal or equitable shares? Frequency of rewards - one time only? recurring? Criteria for Reward - performance metric? Outcome? Milestone? Behavior/ Funding the reward - self-funding: costs savings, profits, customer goodwill. Administration of rewards - team? managers? HR? customers?

128 Mohan Madgulkar-Compensation Management/2006 Team Pay: Controversies Dealing with Free Riders Inhibiting High Individual Performers Interdependent Teams may Compete rather than Cooperate with each other.

129 Mohan Madgulkar-Compensation Management/2006 Benefits and perquisites

130 Mohan Madgulkar-Compensation Management/2006 Meaning of fringe benefits Those benefits which are supplied by an employer to or for the benefits of an employee and which are not in the form of wages, salaries and time rates payment Any wage cost not directly connected with the employees productive effort, performance or sacrifice. Benefit is primarily a means in the direction of ensuring, maintaining and increasing the income of the employee. It is a benefit which supplements ordinary wages and which is of value to them and their families in so far as it materially increases their retirement.

131 Mohan Madgulkar-Compensation Management/2006 Meaning of perquisites An element of compensation provided in addition to cash which can directly facilitate more effective performance for the job, as well as augmenting the total value of compensation The term perquisites should be reserved for those benefits which are not fundamentally catering personal security and personal needs.

132 Mohan Madgulkar-Compensation Management/2006 Objectives of benefits To increase the commitment of the employees to the organization To provide for the actual or perceived needs of employees To demonstrate that the company cares for its employees To ensure that an attractive remuneration package is provided which attracts and retains high quality staff To provide tax-efficient method of remuneration which reduces tax liabilities with those related to equivalent cash payments

133 Mohan Madgulkar-Compensation Management/2006 Goals of fringe benefits Social goal Human relations goals Macro economic goals

134 Mohan Madgulkar-Compensation Management/2006 Benefits policies Range of benefits to be provided Scale of benefits provided Proportion of benefits to total remuneration Allowing choice Allocation of benefits Harmonization Market considerations Government policy Trade unions

135 Mohan Madgulkar-Compensation Management/2006 Major categories Payment for time not worked Hazard protection Employee services Legally required payment

136 Mohan Madgulkar-Compensation Management/2006 Cost to the company Cost to the company includes the value of all the perks and benefits one gets from the company in addition to ones salary. All the components of the salary may not be always apparent. In order to arrive at a comprehensive figure one has to carefully add the value of all components or their cash equivalent.

137 Mohan Madgulkar-Compensation Management/2006 Tax considerations A tax efficient remuneration package can benefit both employers and employees. From the employees perspective it can enhance the benefits of working for that employer, from the employers point of view, it can mean reduced costs. In the past, tax efficiency was one of the main reasons for the proliferation of benefits, but it has become progressively less important as governments have tightened up the fiscal rules relating to employee benefits. Because fiscal regulations are constantly changing, it is essential to update the information related to tax law for salaried persons.


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