Compensation and Reward Management

COMPENSATION AND
REWARD MANAGEMENT
What Is Compensation?
All forms of pay or rewards going
to employees arising from their
employment.
Guided by equity, performance,
job evaluation.
Organizational Considerations:
Linking Compensation to Performance
Motivation
Retention
Controlling
costs
Productivity
Organizational
objectives
Determinants of an Organizations
Compensation Strategy
Overall
strategy of the
organization
Overall ability
of organization
to pay
Ability to
attract and
retain
employees
Strength of
union
influence
Compensation Objectives
For the employee
Purchasing power
Felt-fair
Equitable treatment
Recognition of employee performance and contribution
Government
Compliance with employment legislation
Legally sound pay and benefits program
Unions
Compliance with awards and agreements
Wages Versus Salaries

Wages
Is hourly compensation paid to operating
employees; basis for wages is time.
Salary
is income paid to an
individual on the basis
of performance, not on
the basis of time.
Wage and Salary Administration

The ongoing process of managing a wage and salary
structure; managers must be sensitive to these costs and

must be vigilant about managing them properly.
Components of Compensation
Wages and Salary- Employees get an annual increment
on wages and salaries, based on nature of the job, type of

industry, employees seniority, and merit.
Incentives- In addition to wages and salaries employees
get incentives, which are also known as payment by

results. Incentives are of two types: individual incentives
and group incentives.
Fringe Benefits- Provident fund, gratuity, accidental
benefit, health and group insurance, uniform, canteen,

discounts on purchase of companys products etc.
Components of Compensation
Perquisites- Whereas a fringe benefit is well defined and
would include all employees within the organization,

perquisites (or perk) are less well defined and sometimes
given to employees as a special privilege.
Non-monetary benefits- Job sharing, flextime,
recognition (e.g. employee of the month), challenging job

assignments are example of non-monetary benefits.
Strategic Options for Compensation Levels
Which pay level is a firm on

the decline likely to choose?
Pay for Performance: The Challenges

The Do Only What You Get Paid For Syndrome
Negative Effects on the Spirit of Cooperation
Lack of Control
Difficulties in Measuring Performance
The Credibility Gap
Potential Reduction of Intrinsic Drives
Variable Pay
Tying pay to some measure of individual, group, or
organizational performance.
Rewards are variable, costs linked to results
Advantages of Variable Pay Programs

is
directly related to improved performance

rewards those responsible for higher performance
Motivates for better performance
increases employee earnings without dragging the
organization into a higher pay structure
The organization improves profits through reduction in
unit cost of labour or production or both
Additional capital investment for expansion of
production capacity is avoided or minimised
Types of Incentive Plans

INDIVIDUAL
GROUP
ENTERPRISE
Piecework
Team Plan
Profit sharing
Standard hour
Gainsharing
Stock options
Bonuses
Merit pay
Sales incentives
The Difference Between

Gainsharing.docx
Gainsharing
The plan commonly
Profit sharing
The plan typically applies
applies to a single facility,

site, or stand-alone
organization
Gains and resulting
payouts are self-funded
based on savings
generated by improved
performance.
Payouts are made only
when performance has
improved over a historical
standard or target.
organization-wide;
Payouts are funded
through company profits.
Payouts are typically made
when there are profits;
performance doesnt
necessary have to show
an improvement.
Features of Fringe Benefits

An employee enjoys them in addition to the
salary he/she receives.

They are not given for specific jobs performed
but to make jobs more attractive.

They are not linked to productivity so do not
reward performance in any way, criteria used is

other than performance.
They have an indirect impact on workers
efficiency. If impact is direct, it is not a fringe

benefit.
Employee Benefits in India

Integral part of the compensation package.
Determined by labor legislations, location, and tax laws.
Generally, benefits include loans, housing, and transport.
Other activities include celebrations, health programs,
various allowances, family involvement, flexi timings.
Govt. regulation of Compensation &

Benefits in India
Factories Act,1947
Minimum Wages Act, 1948

Payment of Wages Act, 1936
Payment of Bonus Act, 1965
Payment of Gratuity Act, 1972

Employees Provident Fund Act, 1952
Employee State Insurance Act, 1948
Maternity Benefits Act, 1961

Pay Commissions
Shops & Commercial establishment Act of diff states
Equity and Its Impact on Pay Rates

Forms of
Compensation
Equity
External
equity
Internal
equity
Individual
equity
Procedural
equity
Internal & External Wage Curves
Addressing Equity Issues

Area wage and salary surveys
Methods to
Address Equity
Issues
Job analysis and job evaluation

Performance appraisal and
incentive pay
Communications, grievance
mechanisms, and employees
participation
Salary Surveys
Salary surveys compare an organisations
salaries to those offered in other

organisations.
Does the organisation want to compare
itself with:
Organisations in the same or related industries?
Organisations in the same geographic area?
Best practice companies?
Domestic companies?
Multinationals?
Sources for Salary Surveys

Sources of Salary
Information
SelfConducted
Surveys
Consulting
Firms
Professional
Associations
Government
Agencies
The
Internet
Example of a Pay Survey
Setting Compensation
Pay in Relation to Tenure
Pay increases based on tenure or seniority are
determined not by performance but by the
employees length of time on the job.
Pay in Relation to Skill/Competency
Where the company pays for the employees
range, depth, and types of skills and
knowledge, rather than for the job title he or
she holds
Steps in Establishing Pay Rates

1
Determine the worth of each job in your

organization through job evaluation (to
ensure internal equity).
Conduct a salary survey of what other

employers are paying for comparable jobs (to
help ensure external equity).
Group similar jobs into pay grades.
Price each pay grade by using wage curves.
Fine-tune pay rates.
Job Evaluation
Identifying Compensable Factors
Skills
Effort
Responsibility
Working
conditions
How to Evaluate Jobs

Methods for Evaluating
Jobs
Ranking
Job
classification
Point
method
Factor
comparison
Using a Point System for Job Evaluation

Compensable Factors: A fundamental compensable
element of a job such as:

Job skills
Physical effort
Working conditions
Responsibility and authority
Point Manual
Defines points assigned to the increasing degrees of compensable
factors for which the organization willing to provide payment
Common Job Factors for Comparison

Responsibilities
Skills
Physical Effort
Mental Effort
Working Conditions
Benchmark jobs are compared on the basis of these
factors.
Using the Factor-Comparison Method for

Job Evaluation
1. Define comparison factors to be used
2. Identify benchmark or key jobs in the organization
3. Rank benchmark jobs on each compensation factor
4. Allocate benchmarks job wage to each job factor
based on the relative importance of the job factor

5. Prepare two sets of ratings based on ranking and
assigned wages to determine evaluator consistency

6. Develop a job-comparison chart to rate other jobs in
the organization as compared to the benchmark jobs
Readings for Job Evaluation assignment

Job Evaluation
Compensable Factors
Methods of Job evaluation
Wage Curve(Internal and external), Wage structure, Scales,
Broad banding etc

Assigning Values and corresponding pay
Establishing a market competitive pay plan
(In a market-competitive pay plan a jobs compensation reflects
both the jobs value in the company, as well as what other
employers are paying for similar jobs in the marketplace. The
process involves many steps including selecting compensable
factors, assigning weights, assigning point-values to jobs and
determining the degree to which such factors apply to a given
job.)
Job Evaluation Method 1:

Ranking
Obtain job information
Select raters and jobs
Rank jobs
Rank
1
2
3
4
5
6
7
8
9
Best for small organizations
Job
General manager
Marketing manager
Production manager
Accounting manager
Plant engineer
Accountant
Sales representative
Plant supervisor
Receptionist

Job Grading / Classification
Decide how many classes the job structure should be

broken into
Write definitions of each class
Compare jobs with definitions and place into the

appropriate class
GRADING FOR CLERICAL WORKERS:

Job classification
CL.
DESCRIPTION
Simple work, no supervisory responsibility,

no public contact
II
Simple work, no supervisory responsibility,

public contact
III
Work of medium complexity, no

supervisory responsibility, public contact
IV
Work of medium complexity, supervisory

responsibility, public contact
Complex work, supervisory responsibility,

public contact

POINT SYSTEM
A number of factors common to all jobs are selected
Relative weights are assigned to each factor

Each factor is broken down into degrees, defined and a
point value assigned to each

Point scores for jobs can then be calculated
FACTOR
Educat
ion
Experi
ence
Job
complexity
Relation
with
others
Working
Condition
WEIGHT
50%
25%
12%
8%
5%
1st
50
25
12
2nd
100
50
24
16
10
3rd
150
75
36
24
15
4th
200
100
48
32
20
5th
250
125
60
40
25
Experience:
1st
upto 3 mths.
25
2nd
3 mths - 6 mths
50
3rd
6 mths - 1 yr.
75
4th
5th
1 yr. - 3 yrs.
3 yrs & more
100
125
Proprietary Job Evaluation Systems

(commercially available)
Hay Group
Watson Wyatt
Cullen Egan Dell
Weighted Job
Questionnaire
Hay Profile Method

Job evaluation technique using three
factors knowledge, mental activity,
and accountability to evaluate
executive and managerial positions
Price Each Pay Grade

The Wage Curve
Shows the pay rates paid for jobs in each pay grade, relative to
the points or rankings assigned to each job or grade by the job

evaluation.
Shows the relationships between the value of the job as
determined by one of the job evaluation methods and the current

average pay rates for your grades.
Wage Curves
Developing a wage curve involves the following:

Find the average pay for each pay grade
Plot the pay rates for each pay grade
Fit the line called a wage line through the points just
plotted
Wage structure
Broadbanding
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.
Wide bands provide for more flexibility in assigning workers to

different job grades.
Lack of permanence in job responsibilities can be unsettling to

new employees.
1145
FIGURE 117
Broadbanded
Structure and
How It Relates to
Traditional Pay
Grades and
Ranges
Policy Issues in Designing Benefit Packages

Which benefits to
offer
Who will be covered
Whether to include
retirees
Coverage during
probation
How to finance
benefits
Cost containment
procedures
Policy
Issues
Degree of employee
choice
Communicating
benefits options
Pay For Time Not Worked
Vacations and
Holidays
Unemployment
Insurance
Sick
Leave
Severance
Pay
Supplemental
Pay Benefits
Parental
Leave
Supplemental
Unemployment
Benefits

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COMPENSATION AND

Linking Compensation to Performance

Wages Versus Salaries

Wage and Salary Administration

structure; managers must be sensitive to these costs and

on wages and salaries, based on nature of the job, type of

get incentives, which are also known as payment by

benefit, health and group insurance, uniform, canteen,

would include all employees within the organization,

recognition (e.g. employee of the month), challenging job

Strategic Options for Compensation Levels

Which pay level is a firm on

Pay for Performance: The Challenges

Advantages of Variable Pay Programs

directly related to improved performance

Types of Incentive Plans

The Difference Between

applies to a single facility,

Features of Fringe Benefits

salary he/she receives.

but to make jobs more attractive.

reward performance in any way, criteria used is

efficiency. If impact is direct, it is not a fringe

Employee Benefits in India

various allowances, family involvement, flexi timings.

Govt. regulation of Compensation &

Minimum Wages Act, 1948

Payment of Gratuity Act, 1972

Maternity Benefits Act, 1961

Equity and Its Impact on Pay Rates

Internal & External Wage Curves

Addressing Equity Issues

Job analysis and job evaluation

salaries to those offered in other

Sources for Salary Surveys

Example of a Pay Survey

Steps in Establishing Pay Rates

Determine the worth of each job in your

Conduct a salary survey of what other

Group similar jobs into pay grades.

Price each pay grade by using wage curves.

Fine-tune pay rates.

How to Evaluate Jobs

Using a Point System for Job Evaluation

element of a job such as:

Common Job Factors for Comparison

Using the Factor-Comparison Method for

4. Allocate benchmarks job wage to each job factor

based on the relative importance of the job factor

assigned wages to determine evaluator consistency

the organization as compared to the benchmark jobs

Readings for Job Evaluation assignment

Broad banding etc

Job Evaluation Method 1:

Best for small organizations

Job Evaluation Method 2:

Decide how many classes the job structure should be

Compare jobs with definitions and place into the