PERSONNEL MANAGEMENT - IES MCRC, Bandra.

Compensation Plans- Perquisites & Bonus - Lecture 5A

Compensation Plans  Components of Remuneration  Extent of pay  Justification for Paying More  Remedials

Components of Remuneration  Salary determined by job evaluation  Bonus based on performance  Commission based on its profits  Long-term incentives stock options  Perquisites Club memberships, medical expense reimbursement

Extent of Pay  It depends on employer’s ability & employee’s bargaining strength  Salaries are subject to annual reviews & hikes  Salaries are linked to performance  Secrecy is maintained in respect of executive remuneration.

Justification for paying more  They matter much in organizations  They are in short supply  Retaining them is difficult  They need to be motivated  If executives elsewhere are paid more, why not Indian executives.

Remedial  Income beyond a certain limit must be subject to higher taxation  Executives, on their own, must take up more socially responsive actions  Conscious efforts must be made to increase the supply of managers & technicians  Participative management needs to be encouraged.

Job Status, Grade and Salary and Wage Structure - Lecture 5B

What does compensation (what you receive for your services) mean to you?

A Definition...  All forms of financial return, tangible services and benefits  that employees receive as part of their employment relationship

Components of a Total Compensation Program - 1  Financial  Direct wages, salaries, commissions, bonuses  Indirect insurance plans  life, health, dental, disability social assistance benefits  retirement plans, social security, workers’ comp paid absences  vacations, holidays, sick leave

Components of a Total Compensation Program - 2  Non-Financial  The Job interesting, challenging, responsible opportunity for recognition, advancement feeling of achievement  Job Environment policies, supervision, co-workers, status symbols, working conditions, flextime, compressed work week, job sharing, telecommuting, flexible benefits programs

Factors that Influence Wage Levels WAGE MIX Conditions of Labor Market Area Wage Rates Cost of Living Collective Bargaining Legal Requirements Compensation Policy of Organization Worth of Job Employee’s Relative Worth Employer’s Ability to Pay

Designing a Compensation System Steps in the Decision Process

Step 1 - Establish General Wage Level for Organization  Factors to consider:  Other firm’s rates  Union demands  Cost-of-living changes  Firm’s ability to pay

Step 2 - Establish Wage Structure (The Pay for Each Job)  Employ a job evaluation system Ranking Job Classification Point System Factor Comparison  Results: pay grades rate ranges

Step 3 - Establish Pay for Each Individual on Each Job  Inputs:  Performance appraisal information  Seniority system

A Pay Model -- 3 Basic Components  I. Compensation Objectives  II. Foundation Concepts  III. Techniques for Management

A Pay Model I. Compensation Objectives - 1  Organization Performance  Labor Costs  Attitudes and Behaviors  Laws and Regulations

A Pay Model I. Compensation Objectives - 2  Influence forms & procedures  For example: if objective is pay for performance, emphasize incentives, merit pay plans if objective is stable, experienced workforce, emphasize seniority-based pay

A Pay Model II. Foundation Concepts  Equity  External Equity  Comparison: outside organization  Internal Equity  Comparison: inside organization, among jobs  Employee Equity  Comparison: individuals doing same job for same organization

Equity Theory I = Inputs effort, ability, experience O = Outcomes pay, benefits, perks Equity Op/Ip = Oo/Io Under-reward Inequity Op/Ip < Oo/Io Over-reward Inequity Op/Ip > Oo/Io p = personal, o = comparison other

Why does Equity Matter? What Behaviors are Likely to Occur when Inequity is Felt?

A Pay Model III. Techniques for Management  A. Pay Level  B. Pay Structure  C. Individual Pay Rates

A Pay Model III. Techniques for Management A. Pay Level  Defined: average rates paid by employer  Applicable concept: External Equity  3 Pure Alternatives lead competition match competition lag competition  Mechanism used: Market Wage Survey

Market Wage and Salary Surveys s Select key jobs. s Determine relevant labor market. s Select organizations. s Decide on information to collect: wages/benefits/pay policies. s Compile data received. s Determine wages and benefits to pay.

Market Wage Levels Company A’s Wage Level Company B’s Wage Level Market Wage Level Which company is leading the market?Which company is leading the market? Which company is lagging the market?Which company is lagging the market? What would the wage level line look like for a company that was meeting/matching the market?What would the wage level line look like for a company that was meeting/matching the market?

A Pay Model III. Techniques for Management B. Pay Structure  Defined: pay rates for different jobs within a single organization  Applicable concept: Internal Equity  Pay more for jobs with greater qualifications less desirable working conditions more valuable output  Mechanism used: Job Analysis & Job Evaluation

Job Evaluation  defined: the systematic evaluation of job descriptions  outcome: a hierarchy of organizational jobs according to their content and value to the organization  Methods: ranking classification factor comparison point method

Standard for Comparison Other JobsFixed Criteria Unit of Comparison Whole Job Factors RankingClassification Factor Comparison Point

Job Ranking System Simplest and oldest system of job evaluation by which jobs are arrayed on the basis of their relative worth

Job Classification System System of job evaluation by which jobs are classified and grouped according to a series of predetermined wage grades

Point System Quantitative job evaluation procedure that determines the relative value of a job by the total points assigned to it

Factor Comparison System Job evaluation system that permits the evaluation process to be accomplished on a factor-by-factor basis by developing a factor comparison scale

Hay Profile Method Job evaluation technique using three factors – knowledge, mental activity, and accountability – to evaluate executive and managerial positions

A Pay Model III. Techniques for Management C. Individual Pay Rates  Defined: pay rates for different individuals doing the same job within an organization  Applicable concept: Employee Equity  2 Techniques Flat Rate Pay Ranges  Mechanisms used: Performance or Seniority

Wage Curve Curve in a scatter-gram representing the relationship between relative worth of jobs and wage rates

Components of the Wage Structure

Pay Grades Groups of jobs within a particular class that are paid the same rate or rate range

Elements of the Rate Range

Job Status, Grade and Salary and Wage Structure  Grade Structure  To avoid problem with grades

Grade Structure  Grade structures are the basic underlying element of most compensation schemes.  They are simple, easy to understand and use, and effective.

Grade Structure  The salary range is typically +/- 15 to 25% percent of the midpoint.  The salary midpoint of a grade is typically 20-30% higher than the preceding grades salary midpoint.  The maximum of a grade may be higher than the minimum of the next higher grade (but doesn't need to be). GradeSalary Minimu m Salary Midpoin t Salary Maximum 1 7,50010,00012, ,50012,00014, ,50014,00016, ,00017,00020,000

To avoid problems with grades  Being thoughtful when you assign jobs to grades  Following the same process for everyone  Making the process as open and transparent as is practical  Having respected people assign jobs to grades  Having some kind of appeal process (this can be informal)  When there is a dispute look for the underlying business issue (i.e. this key employee is going to quit) rather than focusing on the mechanics of the system (i.e. they are at the pay maximum of the grade)

Pick the most appropriate one 1. Methods of Job Evaluation a) factor comparison b) ranking c) Both the above 2. Component of remuneration a) Supervision b) Bonus pay c) Co-workers

Match the term with its definition 1. Wage Curve 2. Compensation 3. Job Evaluation A. The systematic evaluation of job descriptions B. Curve in a scatter-gram representing the relationship between relative worth of jobs and wage rates C. All forms of financial return, tangible services and benefits that employees receive as part of their employment relationship

Activity  Develop a pay-for-performance plan for each of the following cases: Staff of customer service executives in a service business Automobile mechanics of a large car dealership company listed in BSE  Make suitable assumptions.

Thank You