Managing Compensation By Muhammad Zohaib Sufyan SZABIST

Total Compensation Total Compensation Base Compensation Pay Incentives Indirect Compensation

Designing a Compensation System  Internal V/S External Equity  Fixed V/S Variable Pay  Performance V/S Membership  Job V/S Individual Pay  Egalitarianism V/S Elitism  Below-Market V/S Above-Market Comp.  Monitory V/S Non-Monitory Awards  Open V/S Secret Pay  Centralization V/S De-Centralization of Pay-Decision

Internal Vs. External Equity Internal Equity: The perceived fairness of the pay structure with in a firm. External Equity: The perceived fairness in pay relative to what other employers are paying for the same type of labor. Distributive Justice: It holds that employees exchange their contributions or input to the firm for a set of out comes. Employees constantly compare what they bring to the firm and what they receive, and also compare this input/output ratio with other employees also.

Supply of Qualified Employees Demand For Employees Wage Number of Qualified Employees N1 W1 0 Labor Market Model

Fixed Vs. Variable Pay  There is a great deal of variation in the way firms answer the fixed versus variable pay question.  On average, 5% of an employee’s pay in USA is variable. This compares to 20% in Japan.  Variable compensation has many forms, including individual bonuses, team bonuses, profit sharing and stock ownership programs.  Variable pay can be used advantageously in non established smaller companies and companies that would otherwise have to implement layoffs because their revenues are volatile.

Performance Vs. Membership Performance-Contingent Compensations Employees’ pay is tied to individual or group contributions. The most extreme forms of Performance-Contingent Compensations are traditional piece-rates plans. Membership- Contingent Compensations Firms that emphasize Membership- Contingent Compensations provide the same or a similar wage to every employee in a given job, as long as the employee achieves at least satisfactory performance.

Job Vs. Individual Pay Most Traditional Compensation System assumes that a firm should evaluate the value or the contribution of each job, regardless that who is performing? and how he is performing? In Knowledge-based pay or Skill-based pay system the employees are paid on the basis of the jobs they can do or talents they have that can be successfully applied to a variety of tasks and situations.

Egalitarianism Vs. Elitism  Elitist Pay System A pay plan in which different compensation systems are established for employees or groups at different organizational levels  Egalitarian Pay System A pay plan in which most employees are part of the same compensation system

Below Vs. Above the Market  Below Market Firms paying below market tend to be small, young, and nonunionized. They often operate in economically depressed areas and have a higher proportion of women and minorities in the work force. Growing firms making risky business decisions that leave them short of cash may also offer a lower base salary relative to the market.  Above Market Above market pay policies are more prevalent among larger companies in less competitive industries, the decision to pay above market for all employees groups allows the firm to hire the “cream of the crop”

Monetary Vs. Non-Monetary Reward  Monitory Rewards Quite visible  Non monitory Rewards Very much invisible like; interesting work, challenging assignments, and public recognition. Unlike cash non- monetary rewards are intangible

Open Vs. Secret Pay Secret Pay system  Secret pay system often leads to greater pay dissatisfaction  People tend to feel more underpaid then they really are Open Pay system  It forces the managers to remain more fair and effective in administrating compensation  Managers can defend their compensation decisions publicly  It is not appropriate for every organization

Centralize Vs. Decentralize Pay Centralization of Pay-Decision  It is controlled  Compensation specialists are involved  Appropriate and cost effective De-Centralization of Pay-Decision  Delegated deep down (Unit Managers)  Markets (external equity ) is also considered  Recommendable for large and diverse organizations

Compensation Tools  Job Based Approaches Groups the jobs that are paid within same pay range These pay ranges are called pay grades  Skill Based Approached Person paid not on the job which he/she is doing but skills he or she has to do multiple tasks in the company

Job Based Compensation Plans  Step 1: Conduct Job Analysis  Step 2: Write Job Description  Step 3: Determine Job Specification  Step 4: Rate worth of all jobs using predefined system  Step 5: Create a Job Hierarchy  Step 6: Classify Jobs by Grade levels  Step 7: Achieve external equity by doing market survey

Skill Based Compensation Plan  All employee start off at the same level of salary  They move to next level once they acquire new skills  Three type of skills are rewarded Vertical Skill : Become expert of given field Horizontal Skills : Learn more tasks within the firm Self Management Skills

How much consideration should the organization give to the psychological health of its employees when designing a pay for performance system? Discussion

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