Compensation Management :

Compensation Management :
Tools and Techniques Lee Kok Wai Lectures 4 and 5

HR’s 4 Roles & Key Accountabilities
Future/Strategic Focus Processes People Strategic Partner Change Agent Staffing Organizational Design Succession Planning Performance Measurement Training & Development Strategic HR Planning HR as Business Partner Culture and Image Employee Relations Labor Relations Environment, Health, Safety & Security VOW Survey Action Plan Compensation Benefits HR Information Systems Compliance Employee Relations Expert Administrative Expert Day-to-Day Operational Focus

Managing Human Resources in COMPAQ
Manpower Mgt. Headcount management Recruitment strategies Sources of labor supply Selection process & tools Retention strategies & plans Staff deployment Staff orientation Employee Relations Mgt. Benefits administration Code of conduct & ethics Employee discipline Employee communications Staff social, sports & recreation Community services & relations Human Resource Admin. Records & information mgt. Personnel research HR policy review HR process improvements HR performance stds & audit Legal compliance Document control Performance Mgt. (HRD) Staff training & development Succession planning Career planning Coaching & counseling Appraisal review/ranking Organization development Leadership development Compensation Mgt. T-Comp philosophy & design T-Comp planning & admin. Incentive plans (MIPs/LTB) Profit-sharing scheme Reward & recognition prog. Expatriate mgt. Culture/Values Mgt. Corporate vision Corporate mission Culture building Teambuilding Habits building EHS&S Mgt. Environment mgt. Employee wellness Employee health services Loss prevention Asset management Safety mgt.

Strategic Components of Human Resources
COMPENSATION MANAGEMENT We believe in paying competitive wages that commensurate with job size and individual performance WELFARE MANAGEMENT We believe in being a firm, fair and caring employer. We strive to make employees value their jobs and want to remain in the organization based on their abilities to contribute and grow. PERFORMANCE MANAGEMENT We believe in equipping employees with the necessary skills to do a good job, providing them with the tools, the environment, the support and the information needed to excel in their jobs. CAREER MANAGEMENT We believe in matching employees’ strengths and aptitudes to available jobs, developing them to their highest potential and offering them opportunities to advance in their careers. CULTURE/VALUE MANAGEMENT We believe in instilling our corporate core values and promoting a corporate culture that emphasizes results, teamwork, learning, sharing, service quality and work excellence.

The Strategic Compensation Model
Concepts Compensation Techniques Compensation Objectives Internal equity Role clarity and accountability. Facilitates administration and performance management. Competitive wage policies and practices. Influence employees’ work attitudes and behaviour. Attract talents. Retain talents. Motivate employees. Comply with regulations. Consistency in policy administration. Job Analysis Job Description Job Evaluation Job Grades External equity Market Definitions Salary Surveys Policy Lines Pay Structures Employee equity Seniority Increases Performance Evaluation Increase Guidelines Administration Planning, Budgeting, Monitoring, Evaluating

What is Job Evaluation? Job evaluation is a decision process of comparing one job with another job with the aim of establishing the relative importance of jobs within the organization. Job evaluation will provide an internally logical ranking of all jobs which will form the basis of the company’s salary structure

Principles For Job Evaluation
Evaluating the job, not the job-holder Evaluating the present job, not the future job Job is being carried out in a fully acceptable and competent manner Process of evaluation is based on given facts in the job descriptions. Evaluate the job based on the “primary responsibilities” and ignore the “special personal-to-holder responsibilities.”

Job Evaluation : 3 Main Methods
Qualitative Method (an example is the Job Classification Method and the Job Comparison Method) Quantifying the Qualitative Method (an example is the Point Method) Quantitative Method (an example is the Guide Chart Profile Method)

Job Classification Method adopted by Academic Institutions such as Universities
Job Class A : Doctorate Degree with at least 10 years post doctoral experience plus relevant management experience (Faculty Head) Job Class B : Doctoral Degree with at least 5 to 10 years post doctoral experience (Full Professor) Job Class C : Doctoral Degree with less than 5 years post doctoral experience or Masters Degree with over 10 years post graduate experience (Associate Professor and Senior Lecturer) Job Class D : Masters Degree with 5 to 10 years post graduate experience (Lecturer) Job Class E : Masters Degree with 3 to 5 years experience (Assistant Lecturer) Job Class F : Masters Degree with less than 3 years experience (Teaching or Research Assistant)

Job Evaluation: The Point Method
Job Evaluation Process 1. Form a Job Evaluation Steering Committee 2. Draw up a workplan for the exercise 3. Decide on the benchmark jobs 4. Decide on the job factors for the evaluation 5. Determine number of degrees for each factor 6. Prepare job descriptions based on job-factor format 7. Analyse each benchmark job in terms of factors and degrees 8. Decide on the weights of each factor 9. Determine the weighted score for each benchmark job 10. Slot in all other jobs into the job grades

The Point Method Form the Job Evaluation (JE) Steering Committee
a. The Steering Committee should be chaired by the CEO with functional Managers/ Heads as members. The HR Manager should be the Secretary of the JE Steering Committee. b. If an external consultant is employed to assist in the exercise, then he should be designated as the advisor to the Steering Committee. The HR Manager should then double-up as the counterpart for internal skills transfer.

Job Factor Score Sheet : Job # 12
D E Education 20 40 60 80 100 Experience 30 90 120 150 Interpersonal Skills 10 50 Problems Encountered Size of unit supervised Decision Making Work Environment Impact of errors Contacts/Committees Assets Controlled ($) Total Score = 440 points

The Point Method Slot all other jobs into the job grades
a. From the clusters, decide on the number of job grades to adopt. b. Slot in all other jobs into the job grades adopted.

The Guide-Chart Profile : Hay Method
This method, first developed by Dr Edward N. Hay in the early 1950s, is essentially concerned with decision making and responsibility. Guide Charts were created in 1951 in client situations. Emphasis was placed on answerability for the consequences of decisions, the degree of freedom to take decisions and bring them to fruition, the degree to which there is prime accountability, as compared to shared or contributory accountability in a job.

The Guide-Chart Profile : 4 Critical Observations
The most significant factor could be grouped as representing the knowledge required to do a job, the kind of thinking needed to solve the problems commonly faced, and the responsibilities assigned. Jobs could be ranked not only in the order of importance within the organization, but the distances between the ranks could be determined. The factors appeared in certain kinds of patterns that seemed to be inherent to certain kinds of jobs The focus of the process of job evaluation must be on the nature and requirements of the job itself, not on the skills or background or characteristics or pay of the job holder.

The Guide-Chart Profile : Hay Method
There are Three Factors with a total of eight elements which determine the value of different jobs. They are: 1. Know-How 2. Problem-Solving 3. Accountability

The Guide-Chart Profile Method : Know-How
What is Know-How Know-How is the total of every kind of skill required for average acceptable job performance. It is knowledge and experience in professional, managerial and human Relations activities necessary to fulfill the job. Know-How is measured in depth by eight degrees and in breadth by five degrees

The three dimensions of Know-How are: Practical procedures, specialized techniques and knowledge within occupational fields, commercial functions, and professional or scientific disciplines. This is commonly referred to as the Depth of Know- How. Integrating and harmonizing simultaneous achievements of diversified functions within managerial situations occurring in operating, technical, support or administrative fields. This is referred to as the Breadth of Know-How Active, practicing person-to-person skills in work with other people. This is referred to as the Human Relations Skill.

Depth Of Know-How A. Education to post –primary level B. Practiced in standard work routines and /or use of simple equipment and machines C. Procedural or systematic efficiency and use of specialized equipment D. Specialized skill gained by on-the-job experience or through part professional qualification E. Understanding of theoretical principles normally gained through professional qualification or through a detailed group of involved practices and procedures F. Seasoned proficiency in a highly specialized field, gained through experience built on theories or a broad and deep understanding of complex practices G. Mastery of principles, practices and theories gained through wide experience and/or special development H. Unique command of principles, theories and practices

Breadth Of Know-How I. Non or minimal – Performance or supervision of jobs which have closely specified objectives II. Homogeneous – Integration of operations which are homogeneous in nature and objective, and coordination with associated functions III. Heterogeneous – Integration or coordination of diverse functions or sub-functions in a company; or inter-company coordination of a tactical function IV. Broad – Integration of the major functions in an operating company; or group-wide coordination of a strategic function affecting policy formation V. Total – The management of strategic functions and policy formation

Human Relations Skills 1. Basic – Ordinary courtesy and effectiveness in dealing with others 2. Important – Understanding and influencing people, important but not over-riding considerations 3. Over-riding – Skills in developing and motivating people are over-riding considerations

Guide-Chart Profile Method : Problem Solving
What is Problem Solving The use of Know-How required by the job to identify, define, and resolve problems. “You think with what you know.” This is even true for the most creative work. The raw material of any thinking is knowledge of facts, principles and means. For that reason, Problem Solving is measured as a percentage of Know-How. Problem Solving has two dimensions: The environment in which the thinking takes place The challenge presented by the thinking to be done

The Guide-Chart Profile Method – Problem-Solving
Thinking Environment A. Detailed rules and/or rigid supervision B. Standard instructions and/or continuous close supervision C. Well-defined procedures, somewhat diversified and/or supervised D. Substantially diversified established company procedures, and general supervision E. Clearly defined company policies, principles and specific objectives under readily available direction F. Broad policies and objectives, under general direction G. General policies, principles and goals under guidance H. Business philosophy and/or principles controlling human affairs

The Guide-Chart Profile Method – Problem-Solving
Thinking Challenge I. Repetitive – Identical situations requiring solution by simple choice of things learned II. Patterned – Similar situations requiring solution by discriminating choice of things learned III. Variable – Differing situations requiring searching, finding and selecting solutions within the area of things learned IV. Adaptive – Situations requiring analytical interpretive and/or constructive thinking. Judgment is required V. Creative – Novel or non-recurring path-finding situations requiring the development of new concepts and imaginative approaches

Guide-Chart Profile Method : Accountability
What is Accountability? The answerability for action and for the consequences thereof. It is the measured effect of the job on end results of the organization. It has three dimensions: Freedom to Act - is the extent of personal, procedural, or systematic guidance or control of actions in relation to the primary emphasis of the job Job Impact on End Results – is the extent to which job can directly affects actions necessary to produce results within its primary emphasis. Magnitude – is the portion of the total organization encompassed by the primary emphasis of the job. This is usually but not necessarily, reflected by the annual revenue or expense dollars associated with the area in which the job has its primary emphasis.

The Guide-Chart Profile Method - Accountability
Freedom To Act A. Prescribed – Direct and detailed instructions, and close supervision B. Controlled – Established work routines and close supervision C. Standardised – Standardised practices and procedures, general work instructions and supervision of progress and results D. Generally regulated – Practices and procedures which have clear precedents E. Directed – Broad practice and procedures covered by functional precedents and policies and managerial direction F. Oriented Direction – Functional policies and goals, and general managerial direction G. Senior Guidance – Inherently and primarily to direct top management guidance H. Ownership Guidance – Only to ownership review and public recreation

Impact I. Very Small (under US$1M) II. Small (Between US$1M to US$10M) III. Medium (Between US$10M to US$100M) IV. Large (More than US$100M)

Environment 1. Remote – Giving information on other incidental services for use by others involved in the action 2. Contributory – Interpreter, advisory or facilitating services to those involved in the action 3. Shared – Participating with others (except superiors and subordinates) in taking action 4. Prime – Wholly responsible, with little or no shared responsibility

Salary Survey based on Hay Method
Hay Point Range Median Salary Formula * HP * HP * HP - 13,916 * HP - 10,033 * HP - 17,881 * HP

Salary Survey based on Hay Method
Hay Point Range Upper Quartile (Q3) Salary Formula * HP * HP * HP - 19,893 * HP - 10,140 * HP - 21,145 * HP

The Strategic Compensation Model
Concepts Compensation Techniques Compensation Objectives Internal equity Role clarity and accountability. Facilitates administration and performance management. Competitive wage policies and practices. Influence employees’ work attitudes and behaviour. Attract talents. Retain talents. Motivate employees. Comply with regulations. Consistency in policy administration. Job Analysis Job Description Job Evaluation Job Grades External equity Market Definitions Salary Surveys Policy Lines Pay Structures Employee equity Seniority Increases Performance Evaluation Increase Guidelines Administration Planning, Budgeting, Monitoring, Evaluating

Compensation Management
The fundamentals of salary administration Salary administration is concerned with deciding how and what staff should be paid and with the techniques and procedures for designing and maintaining salary structures, rewarding staff and exercising salary control.

Aims Of Salary Administration
The basic aims of salary administration are to attract, retain and motivate staff by developing and maintaining a competitive and equitable salary structure. To ensure that a sufficient number of suitable staff is attracted to join the organization; To encourage suitable staff to remain with the organization; To develop and maintain a logical salary structure which achieves equity in the pay for jobs of similar responsibility and consistency in the differentials between jobs in accordance with their relative values; To ensure that salary levels match market rates; To keep the salary levels adjusted in line with increases in the cost of living;

Aims Of Salary Administration
To maintain consistency in methods used to fix and review salary levels and differentials; To provide for progression within the salary structure in accordance with performance and level of responsibility; To operate the salary system fairly and convince the staff that the system is fair; To maintain a flexible salary system which will accommodate changes in the market rates for different skills and in the company’s organization structure; To achieve simplicity in operations as an aid to staff understanding and to minimize administrative effort; To operate effective systems of controlling salary costs and the administrative procedures required to achieve the above aims at the least cost to the organization.

Components Of Salary Administration
The starting point of salary administration is the determination of salary levels by job evaluation. Thereafter, salary administration is concerned with: The design and maintenance of salary structures; The operation of salary progression systems; The administration and control of salary reviews; The design and operation of bonus schemes; The provision of employee benefits and other allowances; The development of a total remuneration policy.

Compensation Tools and Techniques
Pay Structure Salary Structure Performance Related Pay Merit Payment Scheme Incentive Scheme Benefit Policies Salary Review Guidelines Compa-ratio Salary Problems

Criteria for Pay Structures
Be appropriate to the needs of the organization, in terms of its: - culture, size and the degree in which changes take place - need for flexibility - type and level of employees to be covered Be flexible in response to internal and external pressures, especially those related to market rates and skill shortages. Provide scope for rewarding high-flyers while still providing appropriate rewards for the majority of employees. Ensure that rewards are given in line with performances and achievements. Provide a basis for career planning which will motivate ambitious employees with high potential. Facilitate consistency in the treatment of varying levels of responsibility and performance.

Graded Salary Structures
All jobs are allocated into salary grade within the structure on the basis of an assessment of their internal and external value to the organization. Each salary grade consists of a salary range or band. The jobs allocated to a salary grade are assumed to be broadly of the same level – normally the same minimum and maximum rates, which correspond with grade boundaries.

A typical graded structure consists of a sequence of salary grades or ranges, each of which has a defined minimum and maximum. It is assumed that all the jobs allocated into a grade are broadly of the same value, although actual salaries earned by individuals will depend on their performance or length of service. Across the board cost of living or market rate increases will usually result in an increase to the minima and maxima of each grade. All the jobs in an organization may be covered by the same structure of salary ranges or there may be different structures for different levels or categories of jobs.

Make-up of a Salary Grade
A basic principle of a salary structure is that individuals advance through the structure either by progressing within the salary grade for the job as they improve their performance, or by promotion. In the simplest structure, people move more or less steadily from the entry point of the grade (with might be above the minimum if they have already gained relevant experience elsewhere or within the firm) to the upper limit, unless they move to a higher grade. It is possible, however, to distinguish three stages into which this progression is divided, and for salary administration purposes it is helpful to divide the grade into three zones which correspond to these stages.

Salary Structure : Ratio Method

Salary Structure : Dispersion Method

The Learning Zone The learning zone covers the period when a person is on his ‘learning curve’, familiarizing himself with the knowledge and skills required if he is to become fully competent. The length of time to go through this zone will vary according to the individual’s experience, competence and ability to learn. It would be accepted that someone might enter the range at any point in this zone, from bottom to top, depending on experience.

The Qualified Zone The qualified zone covers the period when the job holder continues to increase his capacity to do the work and to improve his performance. The minimum salary in this zone should be the market rate for the job, so far as this can be ascertained, the assumption being that the market rate is the salary level required to attract a competent individual from another job to join the company.The mid-point in this zone, which is also the mid-point of the grade, is the salary level which all competent employees would be expected to achieve. This is above the market rate in order to retain these individuals. An employee who is no more than competent could stop at this point, but most would continue to advance until they reach the top of the qualified zone, which would be regarded as the normal maximum for the job. Many such employees would in any case be promoted to a higher grade before they reach the upper limit of this zone.

The Premium Zone The premium zone is reserved for those employees, especially in the higher grade jobs, who achieve exceptional results but for whom suitable promotion opportunities do not exist. This zone enables outstanding staff to be given additional rewards and encouragement. In some salary structures, the published salary grades for each job only cover the learning and qualified zones, the premium zone being reserved for use in special cases. Progression through that zone would not be regarded as normal by management or staff.

Make-up of a Salary Range

Relationships Between Grades
20% 20%

The range may be defined in terms of the difference between the lowest and highest points in the range, using the minimum as the anchor (Maxmin ratio method): Min Midpoint Max Maxmin $20,000 $24,000 $30,000 1:50 $20,000 $25,000 $32,000 1:60 $20,000 $26,000 $34,000 1:70 Alternatively, the range may be defined as a percentage of the midpoint using the midpoint as the anchor (Salary dispersion method): Min Midpoint Max Dispersion Max Point (100%) Point Ratio $20,000(80%) $25,000(100%) $30,000(120%) +20% 1.50 $18,750(75%) $25,000(100%) $31,250(125%) +25% 1.67 $17,500(70%) $25,000(100%) $32,5000(130%) +30% 1.85

The midpoint of the range is regarded as the “target salary” for the grade, which would be the average salary of the staff in the grade. The target salary is the salary that you will pay to a fully competent professional doing the job on that grade The midpoint is usually aligned to the market rates for jobs in the grade. The salary policy of the organization determines whether the midpoint is equated to the median market rate or whether it is related to another point. eg upper quartile

The rate of salary progression through a range is determine by: - time or length of service (service increments) - individual performance (variable or merit increments) The number of salary ranges required depend on: - the upper and lower salary levels of the jobs to be covered by the structure, which give the overall range of salaries within which the individual salary ranges have to be fitted - the number of distinct levels of responsibility in the hierarchy which needs to be catered for by separate grades - the size of the differentials between each salary range.

There is a differential between the midpoints of each salary range which provides adequate scope for rewarding increased responsibility on promotion. It does not create too wide a gap between adjacent grades or reduce the amount of flexibility available for grading jobs. The salary ranges are sufficiently wide to allow recognition of the fact that people in same job grade can perform differently, from satisfactory performance to outstanding performance. There is an overlap between two consecutive salary grades which acknowledges that an experienced person should be of more value on the current grade than a newcomer in the next higher grade.

Designing the Salary Structure
Step 1 Conduct market rate surveys for existing jobs. Review existing salary structures and differentials between the salary levels of the most senior and junior jobs to be covered by the new structure. Identify key problem areas (if any) in existing structures. Step 2 Conduct an update of the job evaluation exercise, taking into consideration all changes to jobs since the last job evaluation review Step 3 Obtain market rate data for the evaluated jobs, bearing in mind that there is likely be a range of market rates rather than a precise figure. Preferably the market rate data should be based on a similar job evaluation system for comparability.

Designing the Salary Structure
Step 4 Draw up a salary grade structure between the upper and lower limits, according to policies for differentials, the width of salary grades and the size of overlap between two consecutive grades. Step 5 Slot all jobs into grade structure in accordance with the results of both the job evaluations and the market rate surveys. Step 6 Identify all cases that are below the salary range and cases that have exceeded the salary range (max-out cases) and review their job evaluation scores and grades

Advantages of Graded Structures
The relative levels of jobs in different functions can be readily assessed and recognized. Consistent methods of grading jobs and establishing differentials between them can be maintained. A well-defined and comprehensible framework exists within which salary and career progression can be planned and controlled. Better control can be exercised over salaries for new hires, merit increments and promotion increases. Graded structures facilitate order, consistency and control.

Disadvantages of Graded Structures
It can be inflexible at times, unless periodic review is carry out every 3 years or so. Fixed grades make it more difficult to accommodate the many changes to which reward structures are subject because of internal and external pressures. The sort of people they employ cannot be confined within rigid range boundaries, unless incentive schemes are available. It brings people to the top of the range barriers where they become stuck if there are no opportunities for promotion to the next grade.

Salary Administration
Key topics covered Minimum Point of Salary Range Maximum Point of Salary Range Entry Point for new staff Annual increments Salary adjustments Promotion increments Lumpsum payments Incentive schemes Flexible benefits

Current and Proposed Salary Structure Midpoints, Market Average, and Company Average Salary

Job Grades & Salary Ranges

Compa-ratios (CR) a compa-ratio (comparative ratio) is a measure of the extent which the average salaries in a grade deviate from the target salary. it is used to compare actual averages with the target salary to indicate the extent which salary levels are high or low. the formula for calculating a compa-ratio is: Average of all salaries in the grade x 100 Midpoint of the salary range a compa-ratio of 100 indicates that the average salary is aligned to the midpoint of the salary grade and no corrective steps need to be taken.

Compa-ratios (CR) a compa-ratio of 80 would indicate a need to investigate why average salaries were low and possibly no longer competitive. a compa-ratio of 120 would suggest either there were a lot of long-service staff or that staff were being overpaid, and that increases needed to be modified. compa-ratio analysis can reveal a situation where earnings drift has taken place.

Competitive Posture (CP)
Competitive Posture is a measure of how competitive the salary is with respect to a given market benchmark. Competitive Posture can be used to measure the competitiveness of both company’s or individual’s salary competitiveness in the market Competitive Posture for a company is computed as: CR = Average of all Salaries in a given Job Grade Market Benchmark Salary Competitive Posture for an individual is computed by: CR = Salary of the individual Employee

Minimum Salary Points 1. Minimum salary for the grade 2. Minimum for Job In the market 3. Set compa-ratio at 1 .00 4. Overlap between 60% to 80% 5. Avoid leapfrogging tendencies 6. Allow for realistic minimum

Maximum Salary Points 1. Maximum salary for the grade 2. Maximum for job in the market 3. Keep salary range short ( years) 4. Maxmin ratio between 1.5 to 2.0 5. Set compa-ratio at 1.00 6. Allow for realistic maximum

Minimum And Maximum Points Minimum 1. Minimum salary for the grade 2. Minimum for Job In the market 3. Set compa-ratio at 1 .00 4. Overlap between 60% to 80% 5. Avoid leapfrogging tendencies 6. Allow for realistic minimum Maximum 1. Maximum salary for the grade 2. Maximum for job in the market 3. Keep salary range short ( years) 4. Maxmin ratio between 1.5 to 2.0 5. Set compa-ratio at 1.00 6. Allow for realistic maximum

Streamlining of Salary Ranges (Executives)
Effective 1 January 1995 * Most typical value corresponds to the working midpoint of the range @ Derived from annual base salary # Dispersion factor of +/ - 25% around Q1 values

Job Reference Levels The reference job description prepared to assist non-hay evaluated companies with job matching, are each evaluated and quality assured against Hay’s standards. The evaluations are then slotted into the relevant job unit range which forms the reference levels. These reference levels and corresponding job unit ranges are now standard throughout all Hay’s main remuneration surveys and are detailed below.

Job Reference Levels

Determining Entry Salary 1. Market value 2. Candidate's existing salary 3. Basic qualifications 4. Additional qualifications 5. Relevant working experience 6. Related working experience 7. Completion of national service 8. Geographical location of company 9. Nature of industry (dirty or hazardous) 10. Minimum salary for job grade 11. Salaries of existing incumbents 12. Re-grossing annual salary

Incremental Systems Incremental systems vary from rigid procedures with fixed and predetermined movements through a scale related to age, service in the company or service in the job, to flexible systems where management exercises complete discretion over the award and size of increments without any guidelines. Between the two extremes there is a middle ground of semi-flexible systems.

Incremental Systems Fixed scales with automatic progression where individuals move through jobs or grades by predetermined steps related to age or service, these could be rate for age scales. Fixed scales are criticized because they do not give enough incentive to effort and the improvement of performance-promotion might only be an award in the longer term, if at all. They are defended because they can be operated with complete impartiality- many people, especially civil servants, question the possibility of determining a fair relationship between merit and reward where the only method of measurement is the subjective opinion of someone’s boss.

Incremental Systems Fixed scales with limited flexibility where it is possible to give double or even triple increments to high flyers and withhold increments for poor performers. Semi- fixed scales which allow automatic progression to a ‘merit bar’ at which progression for some people may stop while other can advance at different rates according to performance. Fixed parallel scales which allow for the exercise of more managerial discretion by providing different patterns of incremental progression for different levels of performance, as shown in figure 10.

Incremental Systems Variable progression with guidelines where there are no fixed incremental points, but managers are given more or less mandatory instructions on how they should exercise their discretion. The minimum guidelines in this system nay consist of the annual increments that can be awarded for different levels of performance. These may be extended in more rigid systems to give the proportion of staff who should receive a given increment. Variable progression in range without guidelines where management discretion in the award of increments and the determination of their size tends to be restricted only by the maximum of the salary range and the budget they are allowed for salary increases.

Annual Increment Fixed increment system - Fixed $ - Fixed %
Variable increment system - Fixed variable - Fixed Plus (merit increment) Flexible increment system - Fixed component + flexible component Matrix system - Salary quadrant vs. performance matrix

Salary Progression Curve

Increment vs Performance Matrix

Market Value Computation

Salary Review Guidelines
Overall cost guidelines  in which a budget of x% of payroll is imposed for merit reviews. This is the essential guideline, and managers may be left to distribute the pool as they please, or subject to various degrees of control. Guidelines maximum and minimum increases  managers are told that they cannot give an increase of more than x% or less, on the grounds that too high an increase could produce inequities and too low of an increase is meaningless.

Guidelines on the relationship between performance and reward  the awards should be related to an overall assessment of performance on a scale such as: Assessment Increment (%) A – Outstanding 9 – 10 B – Good 7 – 8 C – Satisfactory 4 – 6 D – Needs improvement 0% plus counseling* E – Unsatisfactory Termination *only if there is hope of improvement & individual needs encouragement

Guidelines on the distribution of increments  an attempt to overcome the varying standards of judgment leading to an ‘all my ducks are swans’ approach to rewarding staff. The distribution scale may be related to a guideline like this: Assessment Increment (%) Distribution A – outstanding 9 %– 10% 10% B – good 7% – 8% 20% C – satisfactory 4 %– 6% 50% D – needs improvement 0% 10% E – unsatisfactory 0% 10%

Guidelines on rates of progression  managers are helped to plan salary progression by being given an indication of the number of years it should take staff at different levels of performance to reach the top of the grade and, in zones of salary range, the limits within the range which can be reach according to their performance. Assessment Limit In Grade Typical Length Learning zone 1 to 3 years years Performing zone 4 to 6 years years Exceeding zone 2 to 4 years years -

Salary Problems Absorbing market rates pressures
 arises when general and individual salary reviews have not enabled the company’s salary levels to keep pace with increase in market rates.  it is exacerbated if the company is expanding and is compelled to obtain key staff who are in short supply. Widening differentials  differentials are widening between and within companies in the following areas: - between high-and low-paying organizations – the variations in prosperity between differing sectors of industry and commerce and between regions are major contributors to this problems. - between companies paying bonuses or incentives and those paying straight salaries.

Salary Problems Performance pay
- between top and middle management within companies – this is partly incentive led - between executives recruited by search and those with a one-company career. Performance pay  tend to favour the few whose results can be measured.  merit-assessment are too often based on subjective and biased judgments.  can be avoided only by intensive training of assessors and by careful monitoring of the appraisal scheme.

Salary Problems Staff reaching the top of their salary league
 staff reaching the top of their salary range may feel demotivated if there are no prospects for promotion  it is possible to deal with this problem by introducing on top of the normal salary range a premium zone which is reserved for outstanding staff whose promotion is blocked. Starting salaries  the problem of starting new staff at higher rates than existing employees should be minimized if internal salary levels are regularly reviewed in comparison with market rates.

Salary Problems Deteriorating job evaluation schemes
 the scheme may not have been controlled properly, so that grade drift occurs through unjustifiable upgradings.  scheme may have lost credibility because it no longer gives acceptable solutions.  administration may have become so bureaucratic that the time taken to produce answers is unduly prolonged.  the solution is to make a determined effort to tighten controls and speed up administration, making only minor modifications to the scheme.

Objectives of Performance-Related Pay (PRP)
Motivate all employees, not just the high-flyers. Increase the commitment of employees by encouraging them to identify with its mission and values. Reinforce existing cultures and values to foster high levels of performance, innovation and teamwork. Help to change cultures where they need to become more performance- oriented and results-oriented; or where the adoption of other new and key values should be rewarded. Discriminate consistently and be equitable on the distribution of rewards to employees according to their performance results and contributions.

Objectives of Performance-Related Pay (PRP)
Deliver a positive message about performance expectations of the company – focuses attention on key performance issues. Direct attention and endeavour by specifying the organization’s performance goals and standards. Emphasize individual performance or teamwork as appropriate. Improve the recruitment and retention of high-quality staff. PRP costs will be in line with company performance.

Key Factors to Consider When Introducing PRP
Matching the culture successful PRP schemes need to match the culture and core values of the organization. Linking PRP to business strategy the focus needs to be on strategic business issues which emerge from the business planning process. Balancing quantitative and qualitative measures while most PRP schemes rely on quantitative measures of performance, qualitative factors need to be introduced for the measurement of individual behaviour eg balanced scorecards The need for flexibility flexibility in making ‘milestone’ payments which convey the right messages for the future. The need to promote teamwork the importance of teamwork should be recognized in structuring the scheme and defining critical success factors and performance indicators.

Key Factors to Consider When Introducing PRP
The need to avoid short-term thinking setting long-term as well as short-term goals, and discussing short-term objectives in their overall context. Involvement in the design process designing PRP schemes should be an iterative process : trying and testing ideas on measures and structures with those who will eventually be involved in a scheme. Getting the message across all types of PRP are very powerful forms of communication. To get the right messages across for any scheme, one must make key decisions on the following: How can the scheme achieve the best possible launch? Is it better to give no pay-out rather than a low pay-out? What is the best psychological moment for pay-out? What communications should be used to gain maximum motivational impact from payment? How should communications be handled when the scheme requires changes?

Competence and Performance-Related Pay Curve
New Entry Professional Competent Professional Experienced Professional Performance Levels Excellent Good Salary ($) Satisfactory Performing Exceeding Learning Competence bands

Advantages of individual Merit Payment Scheme
Directly link individual performance with salary progression. Provide individualized progression rates. Recognize increasing competence gained through experience.

Disadvantages of Individual Merit Payment Scheme
Dependent on the quality of performance appraisal; which can be arbitrary, subjective or inconsistent. Unless carefully conceived and managed, it can demotivate people who, although not be delivering spectacular results are still important. Merit payment, as distinct from bonuses, create extra payroll costs when benefits such as pensions are related to base pay. A merit payment is, in effect, a permanent increase in salary, yet the quality of performance in future years may not justify this payment. Merit pay can result in an upward drift in payroll costs without a commensurate improvement in performance. Merit pay is effective as a motivator only if rewards are clearly related to performance and are of a significant value.

Sales Incentive Plan Business Objectives Marketing Strategy
Sales Strategy & Coverage Model The Sales Plan Sales Job Definition Quota and Crediting Compensation Plan Design Sales Plan Implementation

Total Compensation Architecture
Fixed Variable Total Potential Rewards Target Sales Incentive for Quota Achievement Accelerated Incentives for Quota Over-achievement $ Earnings Base Salary/ Fixed Pay + FAT/MBO = Above quota achievement Recognition Performance Profit Sharing Stock Options* *Selective use based on position and performance, competency and future growth potential

Incentive Schemes For Sales Staff
Where it is felt that sales staff need to be motivated by an incentive commission scheme the majority of companies find that the best approach is a basic commission on sales volume or, in more sophisticated firms, on the contribution to fixed costs and profits of the sales of each product group or product. The standard commission is typically set at about one-third of salary to provide a noticeable incentive without adversely affecting feelings of security. A successful sales commission plan should satisfy all the criteria listed above for bonus schemes. But it is particularly necessary to ensure the following:

Incentive Schemes For Sales Staff
A) The reward is fair in relation to the efforts of the sales representative. This means that attention has to be paid to setting and agreeing realistic and equitable targets, making allowances for special circumstances outside the control of the sales representative which might affect sales, and splitting commission fairly when more than one person has contributed to the sale; B) The scheme directs sales effort in accordance with management’s policy on the product mix and does not encourage the representative to concentrate on what is easiest to sell; C) The scheme does not encourage high pressure selling which results in an unacceptable level of returns, cancellations and complaints; D) The scheme does not encourage representatives to neglect their indirect selling activities, such as servicing customers.

Criteria for Success of Incentive Scheme
It should be appropriate to the type of work carried out and the workers employed. The reward should be clearly and closely linked to the effort of the individual or group. Individuals or groups should be able to calculate the reward they get at each of the level of output they are capable of achieving. Individuals or groups should have a reasonable amount of control over their efforts and therefore their rewards. The scheme should operate by means of a defined and easily understood formula. The scheme should be properly installed and maintained. Provision should be made for controlling the amounts paid to ensure that they are proportionate to effort. Provision should be made for amending rates in defined circumstances.

Individual Incentive Schemes
Straight piece-work  payment of a uniform price per unit of production.  can be expressed in two main forms: - money piecework - time piecework Differential piecework  the wage cost per unit is adjusted in relation to output.

Individual Incentive Schemes
Measured daywork  the pay of employees is fixed on the understanding that they will maintain a specified level of performance, but the pay does not fluctuate in the short term with their performance.  the criteria for success in operating it are the following: total commitment of management, employees and unions. an effective work measurement system, and efficient production planning and control and inventory control procedures. the establishment of a logical pay structure with appropriate differentials from the beginning of the scheme’s operation. the maintenance of good control systems to ensure that corrective action is taken quickly if there are any shortfall on targets.

Group Incentive Scheme
Provide for the payment of a bonus either equally or proportionately to individuals within a group or team. Bonus is related to the output achieved over an agreed standard or to the time saved on a job. Group bonus scheme are in some respects equivalent to individual incentive schemes. It encourages team spirit, breaks down demarcation lines, and enables the group to discipline itself in achieving targets. Potential disadvantages are that management is less in control of production – the group decides what earnings are to be achieved and can restrict output.

Designing an Incentive Scheme
How performance will be measured. The employees who will take part in the scheme and who will therefore have part of their pay directly linked to their own performance or group. The employees who will not take part in the scheme and how they will be compensated. Whether or not the scheme will be an individual one or one linked to group performance or related to plant performance. Whether the bonus payments will be related to basic pay. The proportion of pay which can be earned as bonus.

Designing an Incentive Scheme
The full basic rate. The relationship between output/effort and reward, eg the extent to which, if at all, there is a differential built into the scheme which shares the results of higher productivity between the company and the workers. The basis upon which employees not earning bonuses will be paid. The timings of bonus payments and the lapse of time before payments are made. The arrangements, if any, to alleviate the problems of large fluctuations in bonus payments. The methods to be used to maintain the scheme and to inform employees of their earnings

Aims of Bonus Schemes The principal aim of a bonus scheme is to provide an incentive and a reward for effort and achievement. Executive bonus schemes linked to company profits can also aim to make senior managers feel that their personal prosperity is linked to the performance of their company or unit. Bonus schemes are supplementary to basic salary and are most appropriate where they apply to entrepreneurial types such as chief executives, marketing men and sales staff who, it is assumed, will strive for material reward, and whose results upon which their bonus depends can be clearly linked to their personal efforts and achievements.

Bonus Schemes Criteria
The amount of the award received after tax should be sufficiently high to encourage staff to accept exacting targets and standards of performance. Standard bonuses should not be less than 10% of the basic salary and, if an effective incentive is wanted , the standard bonus should be around 20% to 30% of salary The incentive should be related to quantitative criteria over which the individual has a substantial measure of control The scheme should be sensitive enough to ensure that rewards are proportionate to achievements The individual should be able to calculate the reward he can get for a given level of achievement

Bonus Schemes Criteria
The formula for calculating the bonus and the conditions under which it is paid should be clearly defined Constraints should be built into the scheme which ensure that staff cannot receive inflated bonuses which may not reflect their own efforts The scheme should contain provisions for a regular review, say, every two or three years, which could result in its being changed or discontinued The scheme should be easy to administer and understand, and it should be tailored to meet the requirements of the company

Executive Bonus Schemes
There are innumerable formulae for executive bonus schemes, and each company must adopt one which suits its own circumstances. The simplest formula is for a percentage out of net profits before tax to be paid Pro- Rata to the executive’s basic salary. In some schemes, dividend payments and provisions for reserves are deducted from net profits before the distribution of bonuses and there is usually an upper limit to the amount of bonus that can be paid. These schemes are crude but provide a direct incentive as long as results are directly influenced by the actions of the executives in the scheme. They can get out of hand unless an upper limit is strictly applied, and their emphasis on profits may make some executives seek short term gains at the expense of the longer term development of the company.

Executive Bonus Schemes
Other schemes are based on a formula which measures company performance. Bonuses are paid when a target figure is attained increased further as the target figure is exceeded. The increase of bonus may be on a straight-line basis, ie. directly proportionate to the improvement in results. Alternatively, it may be geared either by decreasing the rate of bonus the more the target is exceeded, which is generally regarded as poor practice, or by increasing the rate, which could be an expensive device. A straight-line progression is to be preferred. The formula in some schemes is directly applied to the executive’s salary. In other schemes, a percentage of profits on an increasing scale is released into a bonus pool which is distributed in proportion to salary.

Benefits Policies Range of benefits provided
- benefits such as pensions and holidays are mandatory; whilst permanent health insurance are optional extras. Scale of benefits provided - taking into account its cost to the company and its perceived value to employees. Proportion of benefits to total remuneration - a decision has to be made on the proportion of total remuneration to be allocated to other benefits which incur expenditure of cash by the company. - this policy decision is related to decisions on the range and scale of benefits provided.

Benefits Policies Allowing choice
a policy is required on the extent to which the company should allow its employees to choose the benefits they want. Allocation of benefits the policy on the allocation of benefits determines the extent to which it is decided that a single status company should be create.

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