Pay, Compensation and Benefits Tehzeeb Sakina Amir HRM-session 8 Spring 2011-MBA

Main contents Pay – basic factors & equity Establishing Pay rates Pricing managerial & executive jobs Competency based pay Pay for performance

Compensation All forms of pay/rewards going to employees and arising from their employment Direct financial payments – salary, bonus, incentives etc Indirect financial payments – insurance, health Legal considerations in compensation Minimum pay/wage Maximum hours, safety, working conditions etc

Pay – equity Equity theory of motivation – balance between input and rewards External equity – different companies Internal equity – fairness of job pay rate as compare to other jobs within the same company Individual equity - fairness of an individual pay as compare to his coworkers Procedural equity – fairness in procedures Salary Compression – a salary inequity problem generally caused by inflation, resulting in longer-term employees in a position earning less than workers entering the firm again

Pay – equity How equity issues are handled: Salary surveys to maintain external equity Use job analysis and job evaluation to maintain internal equity Performance appraisal & incentive pay to maintain individual equity Use communication, grievance handling mechanisms, employee participation to maintain procedural equity Salary compressions can be handled by: Having more aggressive merit pay plans Supervisors has authority to recommend ‘equity’ adjustments

Establishing Pay rates Establishing pay rates while ensuring equity – five steps The Salary Survey Benchmark jobs – a job that is used to anchor the employer’s pay scale and around which other jobs are arranged in order of relative worth. Formal & informal salary surveys Archived data on salary Using internet to do surveys

Establishing Pay rates Job Evaluation – to determine worth of one job relative to another, jobs are compared through: Intuitive approach Compensable factor – like skills, efforts, responsibility, working conditions

Establishing Pay rates Preparing Job Evaluation requires close cooperation among supervisors, HR, employees and union reps. Working closely, they: Identify the need for job evaluation (work stoppages, high turnover) Getting employees to cooperate Make a job evaluation committee Selection of best evaluation method

Establishing Pay rates Methods of job evaluation: Ranking – ranking each job relative to all other jobs, usually based on overall difficulty Obtain job information through job analysis or job description Select and group jobs (by departments or in clusters) Select compensable factors – use one factor while ranking Rank jobs Combine ratings of multiple raters

Establishing Pay rates Methods of job evaluation: Job classification – categorizing jobs into groups Classes – similar jobs Grades – similar in difficulty otherwise jobs are different in nature Grade Definition – written descriptions f the level of say responsibility & knowledge required by jobs in each grade.

Establishing Pay rates Methods of job evaluation: Point Method – in which number of compensable factors are identified and then the degree to which each of these factors is present on the job is determined. Factor Comparison - ranking jobs according to variety of skills & difficulty factors, then adding up these rankings to arrive at an overall numerical rating for each given job.

Establishing Pay rates Group similar jobs into pay grades PAY GRADE – is comprised of jobs of approximately equal difficulty or importance as established by Job Evaluation Price Each Pay Grad WAGE CURVES – shows the relationship between value of the job and the average wage paid for this job. Fine-tune Pay Rates PAY RANGES – a series of steps or levels within a pay grade, usually based on years of service

Pricing Managerial, Professional & Executives Harder to quantify factors – problems solving, judgments, etc It consists of four elements: Base pay - fixed Short term incentives – on short term goal achievements Long term incentives - stocks Executive benefits & perks – insurance, health, retirement pension plan with out deductions Compensating managerial & professional employees

Competency-based Pay Where the organization pays for the employee’s range, depth & types of skills & knowledge, rather than for the job title he holds It uses one or both: Pay for knowledge Skill-based Pay Employees build job competencies + pay is more person oriented than job oriented

Competency-based Pay It contains four main elements: A system for defining specific skills & a process for tying the person’s pay to his skill level A training system that lets employees seek & acquire skills A formal competency testing system A work design that lets employees move among jobs to permit work assignment flexibility

Reasons for Competency based pay Good part: Support High Performance Work Systems Support strategic aims Support performance management Bad part: Implementation problems High cost specially when skills are not used

Compensation trends Traditional Changing trends Focus on seniority Emphasis on job duties Narrowly defined pay ranges & jobs Changing trends Focus on contribution, performance & value Emphasis on person’s skills Focus on organization overall strategy Broader jobs & Pay ranges

Important Trends Broad-banding Comparable Worth Broad Oversight of Executive Pay Automating Compensation Administration

Broad-banding Consolidating salary grades and ranges into just a few wide levels or bands each of which contains a relatively wide range of jobs and salary levels. Pros & Cons Greater flexibility, useful where flat hierarchical structures exist Unsettling for new employees

Comparable Worth The concept by which women who are usually paid less than men can claim than men in comparable rather than strictly equal jobs are paid more. Women starting salary are traditionally low Women receives low raises as compare to men Women switch jobs not as frequently as men

Trends Broad Oversight of Executive Pay Board of directors and lawyers Automating Compensation Administration Quick to update Eliminate costs of manual processing Easy to keep a check Automated administered pay actions

Pay for Performance

Motivation & Money Fredrick Taylor popularized financial incentives – financial rewards paid to employees whose performance exceeds some predetermined standards. Taylor contributed: Fair day’s work – standards of output based on scientific analysis Scientific management – based on improving work methods through observation & analysis Use of incentive pay