COMPENSATION AND BENEFITS

Subject Code: 16MBA HR303 IA Marks: 20

No. of Lecture Hours / Week: 03 Exam Hours: 03 Total
Number of Lecture Hours: 56 Exam Marks: 80 Practical
Component: 02 Hours / Week
Course Objectives
 To know the theoretical and practical developments in the area of compensation and benefits.
 To discuss the strategic importance of compensation for the achievement of organizational goals.
 To understand the relationship between compensation objectives and business strategy.
 To discuss the role of compensation in attracting, motivating, and retaining a high-quality workforce.
Course Outcomes: The students will be able to

 Gain insights of various conceptual aspects of Compensation and Benefits.

 Determine the performance based compensation system for business excellence.
 Understand the Legal & Administrative Issues in Compensation Global Compensation

Unit 1: (7 Hours)
Introduction To Compensation: Definition of Compensation, Basic Concepts of Compensation
(Wages, Salary, Benefits, DA, Consolidated pay, Equity based Programs, Commission, Reward,
Remuneration, Bonus etc.) The Pay Model, Strategic Pay Policies, Strategic Perspectives of Pay,
Strategic Pay Decisions, Best Practices vs. Best-Fit Options.

Unit 2: (5 Hours)
Defining Internal Alignment: Definition of Internal Alignment, Internal Pay Structures, and
Strategic Choices in Internal Alignment Design, Internal Structure.

Unit 3: (7 Hours)
Job Evaluation: Definition of Job Evaluation, Major Decisions In Job Evaluation, Job Evaluation
Methods, Final Result – Pay Structure – various methods of calculation of compensation: Straight
Piece Rate Method. Flat Time Rate Method, Halsey Premium Bonus Plan, Rowan Premium Bonus
Plan, Taylor Differential Piece Rate Method.

Unit 4: (8 Hours)
Determining External Competitiveness and Benefits Management: Competitiveness: Definition of
Competitiveness, Pay Policy Alternatives, Wage Surveys, Interpreting Survey Results, Pay Policy Line,
Pay Grades
Benefits: Benefits Determination Process, Value of Benefits, Legally Required Benefits, Retirement,
Medical, & Other Benefits

Unit 5: (9 Hours)
Performance Based Compensation System: Employee Contributions: Pay For Performance (PFP):
Rewarding Desired Behaviors, Designing PFP Plans, Merit Pay/Variable Pay, Individual vs. Group
Incentives, Long Term Incentives. Compensation of Special Groups: Compensation Strategies For
Special Groups
Unit 6: (20 Hours)
Legal & Administrative Issues in Compensation Global Compensation: Legal Issues, Pay
Discrimination, Comparable Worth, Budgets and Administration: Recognizing Variations, Social
Contract, Culture & Pay, Strategic Choices in Global Compensation, Comparing Systems, Expatriate Pay.
Practical Components
 Students must prepare a comprehensive compensation plan to be offered to a Sales Executive, A
General Manager and The CEO of an organization.
 Students to collect information from an IT organization regarding the Cost To Company of an
employee.
 Students have to prepare questionnaire for conducting wage survey and carry out wage survey for
any selected sector and prepare a report for the same.
 Solve various case studies.
 Students must compare and analyze compensation practices in different countries.
 Students to calculate the bonus amount eligible to an employee working as a HR Executive for the
past 10 years in an automobile manufacturing organization.

RECOMMENDED BOOKS:

Compensation & Reward Management, BD Singh, 2nd edition, Excel BOOKS, 2012, ISBN:
9350620111, 9789350620113
Compensation, Milkovich & Newman, 6th edition, Irwin/McGraw-Hill, ISBN: 0256259658,
9780256259650
Compensation and Benefit Design, Bashker D. Biswas, FT Press, 2012, ISBN: 0133064859,
9780133064858
An Introduction to Executive Compensation, Steven Balsam, Academic Press, 2002, ISBN:
0080490425, 9780080490427

REFERENCE BOOKS:

Strategic Compensation, Joseph J. Martocchio, 3rd Edition, Prentice Hall, 2004, ISBN: 0131918737,
9780131918733
Compensation Management in A Knowledge based world, Richard I. Anderson, 10th edition,
Pearson Education
Compensation Management, Er Soni Shyam Singh, Excel Books, ISBN: 8174465766,
Unit 1: (7 Hours)

Introduction To Compensation: Definition of Compensation, Basic Concepts of Compensation

(Wages, Salary, Benefits, DA, Consolidated pay, Equity based Programs, Commission, Reward,
Remuneration, Bonus etc.) The Pay Model, Strategic Pay Policies, Strategic Perspectives of Pay,
Strategic Pay Decisions, Best Practices vs. Best-Fit Options.

1. DEFINING COMPENSATION

Compensation, or pay (the words are used interchangeably in this book), refers to all forms of
financial returns and tangible services and benefits employees receive as part of an employment
relationship.
Compensation (also known as Total Rewards) can be defined as all of the rewards earned by
employees in return for their labour. This includes:

 Direct financial compensation consisting of pay received in the form of wages, salaries,
bonuses and commissions provided at regular and consistent intervals
 Indirect financial compensation including all financial rewards that are not included in direct
compensation and understood to form part of the social contract between the employer and
employee such as benefits, leaves, retirement plans, education, and employee services
 Non-financial compensation referring to topics such as career development and advancement
opportunities, opportunities for recognition, as well as work environment and conditions
While employees tend to focus on direct financial compensation when contemplating their rewards,
according to the McKinsey Journal, for individuals who are relatively satisfied with their salary, it is
the non-financial rewards that tend to be more effective in contributing to long- term employee
engagement.

TYPES OF COMPENSATION
Total Compensation -The sum of all forms of payments or rewards provided to employees
for performing tasks to achieve organizational objectives. Different components of
compensation can be broadly categorized as:

a. Basic wage/salary
b. Dearness allowance
c. Employers Contributions
d. Fringe benefits
e. Variable pay etc.
Definitions & Concepts
Wage & Salary administration: is the application of systematic approach to the problem of
ensuring that the employees are paid in a logical, equitable & fair manner.
Wage: Indian Labor Organization defines the term Wage as the “the remuneration paid by the
employer for the services of hourly, daily, weekly & fortnightly employees.
Salary - Regular wages received by an employee from an employer on a weekly, biweekly, or
monthly basis. It includes employee benefits such as health and life insurance, savings plans,
and Social Security.
Earnings: Earnings are the total amount of remuneration received by an employee during a
given period. These include salary, dearness allowance, House rent allowance, city
Compensatory allowance, other allowances, over time payments, etc.
Nominal/Money Wage: It is the Wage paid or received in monetary terms.
Real Wage: It is the amount of Wage arrived after discounting nominal wage by the living
cost. It represents the purchasing power of money wage.
Commission: The advantage of paying employees with a commission pay structure is that the
method is production-driven--the more of your product or service the employee sells, the
more money the employee makes. If the employee puts forth little effort, you have not wasted
payroll funds. Setting up a system to pay employees through a commission plan requires
organization, record keeping and communication.
Bonus: Bonus is the extra payment, which is received as a reward for doing one’s job well. It
usually comes along with salary of the employee. It is the gesture of appreciation from the
organization towards their employees (statutory bonus- is annual and CTC). Bonus as an
incentive is given globally in most of the organization across different nations. It is not only
given for the job well done but also to keep the employees motivated and focused.

Cost to company (CTC): It is a term for the total salary package of an employee, used in
countries such as India and South Africa. It indicates the total amount of expenses an
employer (organization) spends on an employee for one year.
Types of Compensation:
 Direct financial compensation consisting of pay received in the form of wages, salaries, bonuses
and commissions provided at regular and consistent intervals.

 Indirect financial compensation including all financial rewards that are not included in direct
compensation and understood to form part of the social contract between the employer and
employee such as benefits, leaves, retirement plans, education, and employee services.

 Non-financial compensation referring to topics such as career development and advancement

opportunities, opportunities for recognition, as well as work environment and conditions.

Basic Wages / Salary

Basic Salary: It is 40% to 50% of CTC (Cost to Company). Basic salary is fully taxable.
Statutory components like PF, ESIC, bonus, gratuity and other benefits like LTA are
calculated based on this amount. Periodic adjustments to base wages may be made based on
changes in the overall cost of living, changes in what other employers are paying for the same
work, or changes in experience or skill.
Employer Contributions: Contribution means contribution made by employer for employee’s
long-term saving schemes or social benefits scheme as per statutory compliance.
Employee Provident Fund: It is the contribution made by employer (12% of Basic salary)
against EPF. It is statutory obligation on part of the employer. Employee gets benefit of PF
deduction (12% of basic) at his part under Section 80C of income tax.
ESIC (Employee State Insurance Corporation): The employee’s contribution to ESIC will be
1.75% whereas his employer needs to deposit 4.75% of gross salary. Hence employer keeps it
as part of Employee CTC.
Statutory Bonus: Bonus is deferred earnings, and some companies choose to pay it out in
advance. The bonus rate is between 8.33% and 20% based on the 'available surplus' as
mentioned in the act. Statutory Bonus in India is paid as per Payment of Bonus act
(1965). Employer keeps it as part of CTC and is fully taxable.
Dearness Allowance
Dearness Allowance is a cost of living adjustment allowance (COLA) paid to employees and
pensioners in the country. It is calculated as a percentage of an employee’s basic salary to
mitigate the impact of inflation on people. Very few private companies use it as salary
component. It is mostly given to government employees. DA is also fully taxable private
companies add this to the Cost to Company (CTC) along with other components like HRA
and Perquisites etc.
Fringe Benefits/ Perquisites/ Reimbursements
All expenditure by the employer other than basic wage / salary it includes those benefits
which the employee can convert into cash (taxable and non-taxable income). These have
been supplementary benefits and services like House Rent Allowance (HRA), City
Compensatory Allowance (CCA), Conveyance / Car Allowance, Medical Allowance,
Education Allowance, Training, Mobile or Telephone bill reimbursement, Daily Allowance,
Food Allowance etc. are known as fringe benefits.
Perquisites or Perks include chauffeur driven car, corporate aircraft, and company apartment,
home security, club membership, paid holidays, paternity leave, self defense training,
company credit card, etc.
To meet requirements of various legislations relating to fringe benefits. Types of fringe
benefits/social security & welfare programs: -

I Monetary Rewards: -
1) Payment for Time not worked: -
Hours of work: - Sec 51 of the Factories Act, 1948 specifies that no adult worker shall be
required to work in a factory for more than 48 hrs in any week.
Paid Holidays: - According to the factories act, 1948, an adult worker shall have a weekly
paid Holiday, preferably Sunday.
Shift Premium: - Companies operating second & third shifts pay a premium to the workers,
who are required to work during the odd hours shift.
Holiday Pay: - Organization offers double the nominal rate of the salary to those workers
who work on paid holidays.
Paid vacation: - Workers in Manufacturing mining & plantations who worked for 240 days
during a calendar year are eligible for paid vacation at the rate of one day for every 20 days
worked.
2) Employee Security: - Physical & Job security to the employee should also be provided
with a view to promoting security to the employee & his family members.
a) Retrenchment Compensation: - The Industrial Disputes Act, 1947 provides for the
payment of compensation in case of lay off & retrenchment. The non-seasonal industrial
establishment employing 50 or more workers has to give one month’s notice or one month’s
wages to all the workers who are retrenched after one year’s continuous service. The
compensation is paid at the rate of 15 days wage for every completed year of service with a
maximum of 45 days wage in a year.
b) Lay-off Compensation: - Employees are entitled to lay off compensation at the rate of 50%
of the total of the basic wage & dearness allowance for the period of their lay off except for
weekly holidays. It can normally be paid upto 45 days in a year.
3) Safety & Health: - Employee’s state Insurance Act, 1948, deals comprehensively about
the health benefits to be provided.
a) Sickness Benefits: - Insured employees are entitled to get cash benefit for a maximum of
56 days in a year.
b) Maternity Benefit: - Insured women employees are entitled to paid maternity leave for 26
weeks (8 weeks before the delivery & 18 weeks after the delivery).
c) Disablement Benefits: - Insured employees who are disabled temporarily or permanently
due to employment injury & for occupational diseases are entitled to get the cash benefit
under this head.
d) Dependent’s Benefit: - If an insured person dies as a result of an employment injury
sustained as an employee, his dependents who are entitled to compensation under the act
shall be entitled to the periodical payments.
e) Medical Benefits: - This benefit shall be provided to an insured employee or to a member
of his family where the benefits is extended to his family.
4) Welfare & Recreational Facilities: -
a) Canteens: - Sec 46 of the factories act 1948, imposes a statutory obligation to employees to
provide canteen in factories employing more than 250 workers.
b) Consumer Societies: - Most of the large organizations located for from the towns & which
provide housing facilities near the organization set up the consumer stores in employee’s
colonies & supply all necessary goods at fair prices.
c) Credit Societies: - To encourage thrift & provide loan facilities at reasonable terms &
conditions primarily to employees.
d) Employee counseling: - It reduces absenteeism, turnover, tardiness etc.
e) Education Facilities: - It includes reimbursement of fees, setting up of schools, colleges,
hostels etc.
5) Old Age & Retirement Benefits: - Employers provide some benefits to the employees
after retirement & during old age with a view to create a feeling of securities about the old
age. These benefits are called old age & retirement benefits.
a) Provident Fund: - Employees is all factories under Factories Act, 1948 are considered by
the Act, Both the employer & employee contribute to the fund. The employees on attaining
15 years of membership are eligible for 100% of the contribution with interest.
b) Pension: - This Scheme is for the payment of a lump sum amount of Rs4000 to an
employee on his retirement as retirement benefit & a lump sum amount of Rs 2,000 in the
event of death of an employee as life insurance benefit.
c) Gratuity: - This is another type of retirement benefit to be provided to an employee on
retirement or at the time of physical disability & to the dependents of the decreased
employee. It is a reward to an employee for is long service with his present employer.
d) Deposit Linked Insurance: - The maximum amount of benefit payable under the deposit-
linked insurance is Rs 1000.

II) Non-Monetary Rewards: -

1) Knick – Knacks Covers accessories, companies Watches, tiepins, Diaries, Calendars,
Wallets & T-Shirts.
2) Tokens, movie – tickets, food coupons, vacation trips, etc.

Variable Pay
Variable pay and incentive varies depending upon the performance of an employee. It is
applied across the organization as part of their employee CTC. Organizations willing to share
their profits by paying higher variable pay to employees. Variable pay is used to recognize
and reward ideas, employee contribution toward company productivity, profitability,
teamwork, safety, quality or some other merit deemed important. Variable pay is awarded in
a variety of formats including profit sharing, bonuses, holiday bonus, deferred compensation,
cash and goods and services such as a company-paid trip.

Incentives
Incentives are the rewards to an employee over & above his base wage or salary, in
recognition of his performance & contribution. Incentives can be classified on basis of
monetary value as Monetary and Non-monetary incentives. Incentives can also be classified
on basis of mode of dispersal as individual, group and organization-wide.
Individual
Time based incentive plan: Under which per hour wage rate is determined and incentives are
paid on the amount of time saved. Most such plans, be it, Halsey Plan, Rowan Plan, Emerson
Plan or Bedeaux Plan, follow same method i.e. (pay bonus on the basis of timed saved by
employee), but with different formula.
Output based incentive plan: Under output-based plan, per piece wage rate is determined &
incentives paid on the bases of output produced. i.e. more output in standard time OR
standard output in less time. For output-based incentive following methods can be used such
as: Taylor plan, Merrick plan. Gantt plan.
III. Organization-Wide

a. Profit sharing
Profit sharing is an arrangement by which employees receive in addition to wages; a share
fixed in advance in profit of the enterprise. It is an agreement between employer & his
employee.
According to International Labor Organization, "Profit-sharing is a method of industrial
remuneration under which an employer undertakes to pay to employee, a share in net profit
of e enterprise in addition to regular wages"
b. Co -partnership
Co-partnership is an extension of profit sharing. Under this method worker's share in
company's profit is paid in the form of share by which they become entitled to participate in
decision-making process.
c. Gain-sharing
This method aims at increasing productivity and decreasing labour cost and sharing result
gains wit employee. It is based on a mathematical formula, which compares a standard
performance with expected performance during given period. When actual performance
exceeds the standard performance, saving is shared with the employees.

d. ESOPs (Employee Stock Option Plans)

This method is originated in the USA in early 1990s. Under this plan, the eligible employee
is allotted company's share below the market price, The term "stock option" implies the right
of eligible employee to purchase a certain numbers of stocks in future at an agreed price. The
eligibility criteria may include length of service, contribution to the department etc.

II. Group based or team-based incentives:

A group based or team-based incentive plans reward for all team members equally based on
overall performance of the team member. Under group-based incentive plan, individual
output can't be measured. Team performance is evaluated on the basis of time taken rather
than output produced. If team completes their target in well advanced to standard time the
team member are eligible for incentives.

Reward
Reward is an incentive plan to reinforce the desirable behavior of workers or employers and
in return for their service to the organization. Rewards can be monetary in the form of salary
or non-monetary in the form of awards for some special services to the company or simply
giving an employee a work which he enjoys doing. The primary objective of organizations in
giving rewards is to attract, maintain and retain efficient, high performing and motivated
employees.
Rewards can be of two types- Intrinsic and extrinsic rewards.
Intrinsic rewards are rewards, which satisfy an employee internally. Only money is not
enough to motivate people and it is important to make people realize their contribution to the
organization matters. That motivates employees internally. Intrinsic rewards can be giving
meaningful work to employees, giving autonomy to employees, allowing employees to take
responsibility in areas of their expertise and provide developmental opportunities to
employees. Extrinsic rewards unlike intrinsic rewards are mostly tangible rewards like pay,
advancement, recognition, time off etc

COMPENSATION MANAGEMENT

The Pay Model

Pay model or the compensation model varies from industry to organizations. Each and every
industry has their own pay model, which is generally based on three components. The basic
components of pay model are: -
1. Compensation Objectives
2. Compensation Policies
3. Compensation Techniques

Compensation Objectives

Compensation or pay systems are programmed and are formalized to attain organization motives
and common motives according to which lead growth of company objectives. The basic objectives
are: -
 1. Efficiency in performance
2. Equity in pay system
3. Compliance with laws and regulations

Efficiency in performance objectives are

Firstly it helps in improving performance, increasing quality and satisfying customers need with
controlling labor costs.

The Equity objectives are

Initially designing a pay system, which will help in managing and recognizing employee’s
contribution and its need. Equity pay system is the basic pay method, which portrays equal fair pay
for a day work. This pay system ensures equal pay to the employees.

The Compliance with rules and regulations objectives are

Pay model should always be according to the various central and state wage legislations and
regulations. As the rules and regulations of pay model changes or fluctuates so the compensation
system always to be accustomed accordingly.

Pay Techniques

Pay Techniques tie the four basic policies to the pay objectives.
Internal Alignment, External Alignment, Employee Contributions, Administration/ Management of
pay system.
With the tremendous growth and complexities in organization regarding pay structures the specific pay
model devised by HR practitioner Milkovich. Reasons to follow this model are:

 The pay structure determines relation among job and skills and competency within an organization.
 Pay model is based upon work’s importance in achieving the organization’s motives.
 The clarity and equality in the pay model devise the employee attitude towards the organization and
its rules and regulations.
 The pay techniques in the pay model help to define the relevant labor markets in which the
employer competes and use that information with the organization’s policy to derive a pay structure.
 Another importance of the pay model is that it controls the efficiency of organization and helps to
retain and motivate its workforce and labor costs.
 Competition at external level helps in devising a pay level according to the pay structure paid by
competitors for the same level of job. Various forms of pay and benefits along with annuity funds
paid, apart from these funds what are the other benefits paid like contributions through seniority pay
increase, stock options, performance based approaches, retention moves, attract new people and
motivate the existing ones.

STRATEGIC PAY POLICIES

 Internal alignment
 External competitiveness
 Employee contributions, and
 Administration of the pay system

Internal Alignment: Internal alignment refers to comparisons between jobs or skill levels inside a single
organization. Jobs and people’s skills are compared in terms of their relative contributions to the
organization’s objectives. How, for example, does the work of the programmer compare with the work of
the systems analyst, the software engineer, and the software architect? Does one contribute to providing
solutions to customers and satisfying shareholders more than another? Does one require more knowledge
or experience than another? Internal alignment refers to the pay rates both for employees doing equal
work and for those doing dissimilar work. In fact, deter-mining what is an appropriate difference in pay
for people performing different work is one of the key challenges facing managers. Internal alignment
policies affect all three compensation objectives. Pay relationships within the organization affect
employee decisions to stay with the organization, to become more flexible by investing in additional
training, or to seek greater responsibility. By motivating employees to choose increased training and
greater responsibility in dealing with customers, pay relationships indirectly affect the capabilities of the
workforce and hence the efficiency of the entire organization. Fairness is affected in employees’
comparisons of their pay to the pay of others in the organization. Basic fairness is provided by Canadian
human rights laws, which make paying on the basis of race, gender, age, and other grounds, illegal.

External Competitiveness: External competitiveness refers to compensation relationships external

to the organization; i.e., comparison with competitors. How should an employer position its pay
relative to what competitors are paying? How much do we wish to pay accountants in comparison to
what other employers would pay them? What mix of pay forms—base, incentives, stock, benefits—
will help achieve the compensation objectives? Employers have several policy options. Medtronic’s
policy is to pay competitively in its market based on its financial performance versus the financial
performance of its competitors, while AES’s policy is to expect people to be willing to take less to
join the company.

Increasingly, organizations claim their pay systems are market driven, i.e., based almost exclusively
on what competitors pay. However, “market driven” gets translated into practice in different ways.
Some employers may set their pay levels higher than their competition, hoping to attract the best
applicants. Of course, this assumes that someone is able to identify and hire the “best” from the pool
of applicants.
What mix of pay forms a company uses is also part of its external competitive policy. Medtronic
sets its base pay to match its competitors but ties incentives to performance. Plus it offers stock
options to all its employees to promote a culture of ownership. The assumption is that owners will
pay closer attention to the business. Further, Medtronic believes its benefits, particularly the
emphasis on programs that balance work and life, make it a highly attractive place to work.

Medtronic believes it is how it positions its pay, and what forms it uses, that gives it an advantage
over its competitors. A Medtronic competitor, say MDS, may offer lower base pay but greater
opportunity to work overtime or fatter bonuses. AES believes making all employees stockholders is
consistent with its emphasis on social responsibility.

External competitiveness decisions—both how much, and what forms—have a twofold effect on
objectives: (1) to ensure that the pay is sufficient to attract and retain employees—if employees do
not perceive their pay as competitive in comparison to what other organizations are offering for
similar work, they may be more likely to leave—and (2) to control labour costs so that the
organization’s prices of products or services can remain competitive. Thus, external competitiveness
 directly affects both efficiency and fairness. And it must do so in a way that complies with relevant
legislation.
Employee Contributions: The policy on employee contributions refers to the relative emphasis
placed on performance. Should one programmer be paid differently from another if one has better
performance and/or greater seniority? Or should all employees share in the organization’s financial
success (or failure) via incentives based on profit? Perhaps more productive teams of employees
should be paid more than less productive teams.

The degree of emphasis to be placed on performance is an important policy decision, since it

directly affects employees’ attitudes and work behaviours. Employers with strong pay-for-
performance policies are more likely to place greater emphasis on incentives and merit pay.
Starbucks emphasizes stock options and sharing the success of corporate performance with the
employees. General Electric emphasizes performance at the unit, division, and companywide level.
Recognition of contributions also affects fairness, since employees need to understand the basis for
judging performance in order to believe that their pay is fair.

Administration: Policy regarding administration of the pay system is the last building block in our
model. Although it is possible to design a system that is based on internal alignment, external
competitiveness, and employee contributions, the system will not achieve its objectives unless it is
managed properly.

The greatest system design in the world is useless without competent management. Managers
choose what forms of pay to include and how to position pay against competitors. They must
communicate with employees and judge whether the system is achieving its objectives. They must
ask, are we able to attract skilled workers? Can we keep them? Do our employees feel our system is
fair? Do they understand how their pay is determined? How do the better-performing firms, with
better financial returns and a larger share of the market, pay their employees? Are the systems used
by these firms different from those used by less successful firms? How do our labour costs compare
to our competitors? Answers to these questions are necessary in order to tune or redesign the system,
to adjust to changes, and to highlight potential areas for further investigation. At AES, there is no
compensation department, nor even a human resources management department. Instead, teams of
employees make all the compensation decisions. The assumption is that this approach will ensure
that everyone feels they are being treated fairly.

Strategic perspectives of pay

A strategic perspective focuses on those focuses on those competitive choices that competitive
choices that help the organization gain help the organization gain and sustain competitive and sustain
competitive advantage.

Pay System Objectives

Attract and retain employees
Motivate performance
Promote skills and knowledge development
Shape corporate culture
Reinforce and define structure
Determine pay costs

Example: The Strategic Compensation Decisions Facing Starbucks

Objectives:
How should compensation support business strategy and be adaptive to the cultural and regulatory
environment?

Starbucks objectives:

Grow by making employees feel valued.

Recognize that every dollar earned passes through Employees’ hands.
Use pay, benefits, and opportunities for personal development to help gain employee loyalty and
become difficult to imitate.

Alignment:
How differently should the various types and levels of skills be paid within the organization?

Starbucks:

De-emphasize differences.
Use egalitarian pay structures, cross-train employees to handle many jobs, and call employees
partners

Competitiveness:
How should total compensation be positioned against our competitors? What forms of compensation
should we use?

Starbucks:
Pay just slightly above other fast-food employers.
Provide health insurance and stock options for all employees (including part-timers).
Give everyone a free pound of coffee every week.

Contributions:
Should pay increases be based on individual and/or team performance, on experience and/or
continuous learning, on improved skills, on changes in cost of living, on personal needs, and/or on
each business unit’s performance?

Starbucks:

Emphasize team performance and shareholder returns.

For new managers in Beijing and Prague, provide training opportunities in the U.S.
Administration:
How open and transparent should pay decisions be to all employees? Who should be involved in
designing and managing the system?

Starbucks:
As members of the Starbuck’s “family,” our employees realize what is best for them.
Partners can and do get involved

Strategic Pay Decisions

Pay decisions refer to the methods used by human resources and payroll professionals to choose the pay
scales of employees. Techniques that assist payroll professionals in making their pay decisions include:

1. External measures such as benchmarking (salary surveys) and ongoing reporting that constitute a
market survey approach.
2. Internal measures such as projections, simulations, and predictive modeling or the use of pay grades
use an organization's needs to assess the relative value of tasks within it.
3. Variable systems like pay-for-performance create a policy line that connects job pay and job
evaluation points.

Benchmarking

Benchmarking is when an organization compares its own pay practices and job functions against those of
its competitors. Obvious cautionary points in the use of these kinds of salary surveys include the inclusion
of only appropriately similar peers in the comparison, the inclusion of only appropriately similar jobs in
the comparison, and accurately weigh and combining rates of pay when multiple surveys are used.

There are two types of salary surveys that can be used in benchmarking: labor market comparisons and
product market comparisons. Labor market comparisons are best when employee recruitment and
retention is a major concern for the employer and when recruiting costs are a significant expense. Product
market comparisons are more salient when labor expenses make up a major share of the employer's total
expenses, when product demand is very fluid, when the labor supply is relatively steady, and/or when
employee skills are specific to the product market in question.

Within the benchmarking process, the job category and range of pay rates within it are important to
the payroll professional. Certain key jobs are very common to organizations in a given field and have
a relatively stable set of duties. As a result, key jobs are useful in benchmarking since they allow for
more accurate comparison across many organizations. Non-key jobs are unique to their organizations
and are therefore not useful in benchmarking. Job content is far more important than job title in this
context, although it is easy to confuse content for title. Range of pay rates refers to the variety in pay
rates that workers in one job area might receive.
Salary Surveys

The use of salary surveys demands credible survey sources with multiple participating organizations.
Organizations responding to a given survey must be similar to the organization using that survey.
Close attention to job function is also crucial; it is inappropriate to match and compare salaries based
on job title alone.

Internal Measures

Benchmarking uses external measures to make internal pay decisions. Internal measures are also
available in most cases, and include the use of analytic techniques such as projections, simulations,
and predictive modeling in the pay decision-making process. External and internal measures have
very different focuses. External measures ask the market what any given individual should be paid.
Internal measures correlate pay decisions to potential organizational benefits.

Pay Grade System

A pay grade system is simply tiered levels of pay based on position, experience, and seniority. Using
a pay grade system has its own risks that should be backed by strongly predictive internal measures
because once pay grades are in place; the cost of changing and updating them is significant. This can
lead to stagnation in an organization's pay scale system.

Connected to this problem is the fact that an existing pay scale can reward skill sets that were highly
useful to the organization in the past more than skill sets that are currently needed. Projections,
simulations, and predictive modeling assist in counteracting these issues, as they make use of an
organization's own internal data to ensure that assessments of value and need are accurate.

Pay for Performance Systems

Variable pay decisions systems like pay-for-performance are designed to motivate employees and
ensure intra-organizational cooperation. When designing this kind of system, the first thing to assess
is the personnel goals of the organization (as this kind of system can be tailored significantly).
Interacting with managers across departments can help payroll professionals understand what is most
important to the various areas of the organization at any given time.

Merit and incentive pay programs are common forms of pay-for-performance systems. Promotions
based on performance rather than set time periods are also critical to pay-for- performance schemes.

Best Practices vs. Best Fit Options

The best-fit approach focuses on the importance of making sure that the HR strategies are suitable to
the different circumstances of the entire organization, together with culture, operational processes as
well as external environment. Thus, it focus on the idea that different human resource (HR) strategies
have to focus on a given needs of both the organization and its people. Due to the said reason, most of
critics and commentators believe that best fit approach is more important and vital than the best
practice.
The terms ‘best fit’ and ‘best practice’ are used in strategic human resource management literature
and are applied to the specific policy area of reward systems. Each approach attempts to explain the
way that HR policies in general and reward policies in particular can lead to greater organisational
effectiveness.
Unit 2: (6 Hours)
Defining Internal Alignment: Definition of Internal Alignment, Internal Pay Structures, Strategic
Choices In Internal Alignment Design, Internal Structure

2. DEFINITION OF INTERNAL ALIGNMENT

Internal alignment, often called internal equity, refers to the pay relationships between the jobs / skills
/ competencies within a single organization. The relationships form a pay structure that can support
the workflow support the workflow, is fair to fair to employees, and directs their behavior directs their
behavior toward organization objectives.

Internal Alignment: Engineering Job Structure

Engineer: Limited use of basic principles. Close supervision.

Senior Engineer: Full use of standard principles and concepts. Under general
supervision.
Systems Engineer: Wide applications of principles and concepts, plus working
knowledge of other related disciplines. Under very general direction.

Lead Engineer: Applies extensive knowledge as a generalist or specialist. Exercises

wide latitude.

Advisor Engineer: Applies advanced principles, theories, and concepts. Assignments

often self- initiated.

Consultant Engineer: Exhibits an exceptional degree of ingenuity, creativity,

and resourcefulness. Acts independently to uncover and resolve operational problems

Internal Pay Structures

Pay structure, refers to the array of pay rates for different work or skills within a single organization.
The number of levels, differentials in pay between the levels, and the criteria used to determine those
differences create the structure.

What Shapes Internal Structure?

External Factors: Economic pressures, Govt policies, laws, Regulations, Stakeholders, customs &
cultures.
Organization Factors: Strategy, HR Policy, Technology, HR capital, Employee expectations, CTC
 Internal Structure: Levels, Differentials, and Criteria

External Factors

Economic Pressures
Early theorists concentrated on the supply of labour to explain pay structures with the most famous
being marginal productivity theory

Govt policies & regulations

Human rights legislation forbids pay systems that discriminate on the basis of gender, race, religion,
sexual orientation, national origin and many other grounds. Pay equity acts require equal pay for work
of equal value,’ based on skill, effort, responsibility, and working conditions. 'Much pay related
legislation attempts to regulate economic forces to achieve social welfare objects. The most obvious
place to affect an internal structure is at the minimums (minimum wage legislation) and maximums
(special reporting requirements for executive pay)

Stakeholders
Unions, stakeholders, and political groups all have a stake in formulating internal pay structures.
Unions seek small pay differences among jobs and seniority-based promotions as a way to
promote solidarity among members.

Cultures and Customs

Culture is the mental programming for processing information that people share in common. Such
shared mindsets may form a judgment of what is “fair”.

Organization Factors

Organization Strategy
The basic belief of a strategic perspective is that pay structures that are not aligned with the
organization strategy may become obstacles to the organization’s success.

Organisation Human Capital

A major influence on internal structures human capital-are education, experience, knowledge,
abilities and skills. The stronger the link between skills, experience and an organization’s strategic
objective, the more pay those skills will command.

Organisation Design of Work

Technology used to produce goods and services influences the organization design, work to be
performed and skills required performing it.
 Overall HR Policies

The amount of pay tied to a promotion, the nature of promotions, i.e. the lateral, development, and
greater responsibilities) pay differences must be consistent with what the organization is trying to
accomplish.

Internal Labour Markets: Combining External & Internal Forces

The notion of internal labour markets, i.e., the policies and procedures that regulate internal hiring
and promotions, form career paths, and pay is based on internal policy. This theory combines both
economic and organizational factors.

Employee Expectations: A key Factors

Acceptance is based on two measures of fairness, distributive justice and procedural justice, along
with ensuring employees that the structure is fair.

Cost to company (CTC) is a term for the total salary package of an employee, used in countries such
as India and South Africa. It indicates the total amount of expenses an employer (organization) spends
on an employee during one year.

Internal structure

Internal pay structure is defined by

The number of levels of work!

The pay differentials between the levels!
The criteria used to determine those levels and differentials!
These are the factors that a manager may vary to design a structure that supports the workflow, is
fair, and directs employee behaviors toward objectives

Traditional vs. Broadband Salary Structures

Traditional salary structures are organized with numerous layers and range structures (or pay grades)
with a relatively small distance between each range. This provides a hierarchal system enabling
employees to be promoted from one pay grade to another. When designed correctly, traditional
structures enable the recognition of differing rates of pay for performance and guarantee a
reasonable level of control over internal compression and salary expenditures.
Broadband salary structures are more flexible and consolidate pay grades into fewer structures with
wider salary ranges.
Single vs. Multiple Salary Structures
Fifty percent of companies with salary range structures have multiple structures varying by job
and/or geographic location. There is a strong correlation between job level and number of salary
structures. Single salary structures are more common for executives and multiple salary structures
are more common for nonexecutive positions

Strategic Choices In Internal Alignment Design:

Tailored versus Loosely Coupled

Tailored structure- pay structure for well-defined jobs with relatively small differences in pay;
Loosely & coupled structure- pay structure for jobs that are flexible, adaptable, and changing.

Egalitarian versus Hierarchical:

Egalitarian structures operate on the belief that all employees should be treated equally in their pay.
This means that there are few levels, less hierarchy and small pay differentials between levels. A
hierarchical structure would form the other extreme, with large pay differentials between levels.

Career Path Differentials:

We need to understand how differentials within the career path support work flow. The next several
chapters discuss how these internal structures (the levels, differentials, and criteria) are designed and
managed.

WHICH INTERNAL STRUCTURE FITS BEST?

"In practice, the decision about which structures best fits a particular business strategy probably lies
in our original definition of internal alignment: An internally aligned structure supports the work
flow, is fair to employees, and directs their behaviour toward organization objectives.

It mainly depends on:

How the work is organized

Fair to employees
Directs behavior toward organization objectives
Unit 3: (7 Hours)
Job Evaluation: Definition of Job Evaluation, Major Decisions In Job Evaluation, Job Evaluation
Methods, Final Result – Pay Structure – various methods of calculation of compensation: Straight
Piece Rate Method. Flat Time Rate Method, Halsey Premium Bonus Plan, Rowan Premium Bonus
Plan, Taylor Differential Piece Rate Method.

Job Analysis
A job is defined as a collection of duties and responsibilities, which are given together to an individual
employee. Job analysis is the process of studying and collecting information relating to operations and
responsibilities of a specific job.

Job analysis (also known as work analysis) is a family of procedures to identify the content of a job in
terms of activities involved and attributes or job requirements needed to perform the activities. Job
analysis provides information to organizations, which helps to determine which employees are best fit for
specific jobs. Through job analysis, the analyst needs to understand what the important tasks of the job
are, how they are carried out, and the necessary human qualities needed to complete the job successfully.

Job Analysis should collect information on the following areas:

Duties and Tasks The basic unit of a job is the performance of specific tasks and duties.
Information to be collected about these items may include: frequency, duration, effort, skill,
complexity, equipment, standards, etc.
Environment This may have a significant impact on the physical requirements to be able to
perform a job. The work environment may include unpleasant conditions such as offensive odors
and temperature extremes. There may also be definite risks to the incumbent such as noxious
fumes, radioactive substances, hostile and aggressive people, and dangerous explosives.
Tools and Equipment Some duties and tasks are performed using specific equipment and tools.
Equipment may include protective clothing. These items need to be specified in a Job Analysis.
Relationships Supervision given and received. Relationships with internal or external people.
Requirements The knowledges, skills, and abilities (KSA's) required to perform the job. While
an incumbent may have higher KSA's than those required for the job, a Job Analysis typically
only states the minimum requirements to perform the job.

Why Perform Job Analysis?

The purpose of Job Analysis is to establish and document the 'job relatedness' of employment
procedures such as training, selection, compensation, and performance appraisal.

Determining Training Needs

Job Analysis can be used in training/"needs assessment" to identify or develop:

Training content
 Assessment tests to measure effectiveness of training
Equipment to be used in delivering the training
Methods of training (i.e., small group, computer-based, video, classroom...)

Compensation

Job Analysis can be used in compensation to identify or determine:

Skill levels
Compensable job factors
Work environment (e.g., hazards; attention; physical effort)
Responsibilities (e.g., fiscal; supervisory)
Required level of education (indirectly related to salary level)

Selection Procedures
Job Analysis can be used in selection procedures to identify or develop:

Job duties that should be included in advertisements of vacant positions;

Appropriate salary level for the position to help determine what salary should be offered to a
candidate;
Minimum requirements (education and/or experience) for screening applicants;
Interview questions;
Selection tests/instruments (e.g., written tests; oral tests; job simulations);
Applicant appraisal/evaluation forms;
Orientation materials for applicants/new hires

Performance Review
Job Analysis can be used in performance review to identify or develop:

Goals and objectives

Performance standards
Evaluation criteria
Length of probationary periods
Duties to be evaluated
Job Description

Job description includes basic job-related data that is useful to advertise a specific job and attract a
pool of talent. It includes information such as job title, job location, reporting to and of employees,
job summary, nature and objectives of a job, tasks and duties to be performed, working conditions,
machines, tools and equipments to be used by a prospective worker and hazards involved in it.

Purpose of Job Description

 The main purpose of job description is to collect job-related data in order to advertise for a
particular job. It helps in attracting, targeting, recruiting and selecting the right candidate for the
right job.
 It is done to determine what needs to be delivered in a particular job. It clarifies what employees
are supposed to do if selected for that particular job opening.
 It gives recruiting staff a clear view what kind of candidate is required by a particular department
or division to perform a specific task or job.
 It also clarifies who will report to whom.

Job Specification

Also known as employee specifications, a job specification is a written statement of educational

qualifications, specific qualities, level of experience, physical, emotional, technical and
communication skills required to perform a job, responsibilities involved in a job and other unusual
sensory demands. It also includes general health, mental health, intelligence, aptitude, memory,
judgment, leadership skills, emotional ability, adaptability, flexibility, values and ethics, manners
and creativity, etc.

Purpose of Job Specification

 Described on the basis of job description, job specification helps candidates analyze whether are
eligible to apply for a particular job vacancy or not.
 It helps recruiting team of an organization understand what level of qualifications, qualities and
set of characteristics should be present in a candidate to make him or her eligible for the job
opening.
 Job Specification gives detailed information about any job including job responsibilities, desired
technical and physical skills, conversational ability and much more.
 It helps in selecting the most appropriate candidate for a particular job.

Job description and job specification are two integral parts of job analysis. They define a job fully
and guide both employer and employee on how to go about the whole process of recruitment and
selection. Both data sets are extremely relevant for creating a right fit between job and talent,
evaluate performance and analyze training needs and measuring the worth of a particular job.
3. Job evaluation

After employing, development and utilizing the people, the management has to compensation the services
of the employees in the form of wages or salaries. There would be some a number of jobs in an
organisation. There would be some job with common characteristics in terms of amount of work, degree of
responsibility, nature of the work etc. Payment of a different level/amount of salary for each of the jobs is
rather difficult. In fact, it would be impossible to evaluate all the individual jobs. Management, in view o
the difficult of evaluating the individual jobs, combine the jobs into groups based on their commonness in
terms of the work, responsibilities, authority, autonomy/freedom, job characteristics, job specification etc.
Management evaluated the jobs with a view to know the worth of the job and determine the wage or salary.
Now, we shall study job evaluation in the following lines

Work Measurement
Work measurement is essential in order find out whether a normal individual can perform the work or not,
the job has to be redesigned in order to design the job in such a way that a normal individual can carry it
out successfully. The work measurement includes the physical, social and psychological aspects of the
work. The component of the work includes mental effort, physical effort, visual attention, initiatives,
responsibility, working conditions and physical hazards. Work can be measured in different degrees of
intensity, simplicity/difficult.

3.1 Meaning/Definitions’ Job Evaluation

Job evaluation deals with money and work. It determines the relative worth or money value of jobs. The
International Labor Organization defined job evaluation as “attempt to determine and compare demands
which the normal performance of a particular job makes on normal workers without taking into account the
individual abilities or performance of the workers concerned.”

Wendell L.French defined job evaluation as, “a process of deter- mining the relative worth of the various
jobs within the organisation, so that differential wages may be paid to jobs of different worth.” Job
evaluation is defined as “the overall activity if living an orderly, systematic method and procedure of
ranking, grading and weighing of jobs to determine the value a specific job in other jobs.”

1. Expressing Feelings and Emotions: Allowing the people to be rational, to express their feelings,
sentiments, emotion, anger or tenderness is important. Full range of express of feelings result in
high motivation, commitment and creative ability. The people may be allowed to exhibit their
anger, emotion and exhilaration

2. Authenticity, Openness and Directness; Most of the people exhibit duplicity, tell half-truths and
mask their true motives. Such behaviour inhibits the growth if the individuals and productivity as
resources are misused in this process. Honesty and directness enable people to put their energies
into the problem and improve effectiveness.
 3. Foresting Co-operation: Some executives adopt the role of divide and manage. Thus, the believe in
win-lose competition for various employee benefits. This style results in wastage of human and
other resources. Hence, executives should create and develop co-operation among employee for
effectiveness.

4. Giving Attention: Giving attention to process activities not only at the time of assigning activities
and bringing relations among employees but also at the later stages.

5. Confronting Conflict: Some executives suppress the conflict. But it has long run effect on
employee morale. Hence, identifying the root causes of the problem and working out a satisfactory
solution rather than suppressing the conflict are need.

British Institute of Management (1970) define job evaluation as, ”the process of analyzing and assessing
the content of jobs, in order place them in an acceptable rank order which can then be used as a basis for a
remuneration system. Job evaluation, there-fore, is simply a technique designed to assist the development
of new pay structures by defining relativities between job on a consistent and system basis.”

Thus, job evaluation may be defined as a process of determining the relative worth of jobs, ranking and
grading them by comparing the duties, responsibilities, requirements skill, and knowledge of a job with
other jobs with a view to fix compensation payable to the concerned job holder.

Objectives of Job Evaluation

The following objectives are derived from the analysis of the above-mentioned definitions:
1. To gather data and information relating to job description, job specification and employee
specifications of various jobs in an organisation.
2. To compare the duties, responsibilities and demands of job with other jobs.
3. To determine the hierarchy and place of various in an organisation.
4. To determine the ranks or grades of various jobs.
5. To ensure fair and equitable wages on the basic of relative worth or value of jobs. In other words,
equal wages are fixed to the jobs of equal worth or value.
6. To minimise wage description based on sex, age, caste, region, religion etc.

Job evaluation is a systematic way of determining the value/worth of a job in relation to other jobs in an
organization. It tries to make a systematic comparison between jobs to assess their relative worth for the
purpose of establishing a rational pay structure. Job evaluation, on the other hand, specifies the relative
value or worth of each job in an organization.
Purpose of Job Evaluation:
 Designing new organization and roles/ jobs
 Changing the organizational design/ roles/ jobs
 Aligning roles and pay to the organizational goals
 Developing an effective organization
 Defining interdependencies among different jobs
 Clarifying accountabilities of jobs
 Managing succession in organization
 Reviewing the existing pay structure
 Auditing legal compliance of pay policies
 Implementing benchmark pay structures

Principles of Job Evaluation

 Definition: Jobs must be clearly defined such that they are identifiable and easily
distinguishable. These jobs must then be part of the job description.
 Evaluation: A job evaluation scheme must be arrived upon and used as a standard and all jobs in
the organisation must be evaluated as per that scheme only.
 Job Understanding: Job evaluators need to have deep insights into the job design process. They
must have a methodical understanding of various tasks involved.
 Concern: Job evaluation must be concerned with the job and not with the person. i.e. it is the job
that has to be evaluated and not the person
 Assessment: The assessment has to be carried out in an acceptable manner and by competent
people. Further, it is based on judgment and is not scientific but can however be used to make
objective judgments if used correctly.

Major Decisions In Job Evaluation

They are
1. Establish purpose of evaluation.
2. Decide whether to use single or multiple plans.
3. Choose among alternative approaches.
4. Obtain involvement of relevant stakeholders.
5. Evaluate plan’s usefulness.

1. Establish the Purpose

Job evaluation is part of the process for establishing an internally aligned pay structure. A structure
is aligned if it supports the organization strategy, fits the work flow, is fair to employees, and
motivates their behavior toward organization objectives.
Supports organization strategy: Job evaluation aligns with the organization’s strategy by including
what it is about work that adds value—that contributes to pursuing the organization’s strategy and
achieving its objectives. Job evaluation helps answer, How does this job add value?

Supports workflow: Job evaluation supports work flow in two ways. It integrates each job’s pay with its
relative contributions to the organization, and it helps set pay for new, unique, or changing jobs.
Is fair to employees: Job evaluation can reduce disputes and grievances over pay differences among jobs
by establishing a workable, agreed-upon structure that reduces the role of chance, favoritism, and bias in
setting pay.
Motivates behavior toward organization objectives: Job evaluation calls out to employees what it is
about their work that the organization values, what supports the organization’s strategy and its success. It
can also help employees adapt to organization changes by improving their understanding of what is
valued in their new assignments and why that value may have changed. Thus, job evaluation helps create
the network of rewards (promotions, challenging work) that motivates employees. If the purpose of the
evaluation is not called out, it becomes too easy to get lost in complex procedures, negotiations, and
bureaucracy. The job evaluation process becomes the end in itself instead of a way to achieve an
objective. Establishing its purpose can help ensure that the evaluation actually is a useful systematic
process.

If the purpose of the evaluation is not called out, it becomes too easy to get lost in complex
procedures, negotiations, and bureaucracy. The job evaluation process becomes the end in itself
 instead of a way to achieve an objective. Establishing its purpose can help ensure that the evaluation
actually is a useful systematic process.

2. Single versus Multiple Plans

Rarely do employers evaluate all jobs in the organization at one time. More typically, a related group
of jobs, for example, manufacturing, technical, or administrative, will be
the focus. Many employers design different evaluation plans for different types of work. They do so
because they believe that the work content is too diverse to be usefully evaluated by one plan. For
example, production jobs may vary in terms of manipulative skills, knowledge of statistical quality
control, and working conditions. But these tasks and skills may not be relevant to engineering and
finance jobs. Rather, the nature of the contacts with customers may be relevant. Consequently, a
single, universal plan may not be acceptable to employees or useful to managers if the work covered
is highly diverse. Even so, there are some plans that have been successfully applied across a wide
breadth and depth of work. The most prominent examples include the Hay plan and the position
analysis questionnaire.
A benchmark job has the following characteristics:

• Its contents are well known and relatively stable over time.
• The job is common across a number of different employers. It is not unique to a particular employer.

• A reasonable proportion of the work force is employed in this job.

A representative sample of benchmark jobs will include the entire domain of work being evaluated—
administrative, manufacturing, technical, and so on—and capture the diversity of the work within
that domain.

3. Job Evaluation Methods

Ranking, classification, and point method are the most common job evaluation methods, though
uncounted variations exist. Research over 40 years consistently finds that different job evaluation
plans generate different pay structures. So the method you choose matters. They all begin by
assuming that a useful job analysis has been translated into job descriptions methods.

4. Involvement of stakeholders
If the internal structure’s purpose is to aid managers—and if ensuring high involvement and
commitment from employees is important—those managers and employees with a stake in the
results should be involved in the process of designing it. A common approach is to use committees,
task forces, or teams that include representatives from key operating functions, including no
managerial employees. In some cases, the group’s role is only advisory; in others, the group designs
the evaluation approach, chooses compensable factors, and approves all major changes.
Organizations with unions often find that including union representatives helps gain acceptance of
the results. Union-management task forces participated in the design of a new evaluation system for
the federal government. However, other union leaders believe that philosophical differences prevent
their active participation. They take the position that collective bargaining yields more equitable
results. So the extent of union participation varies. No single perspective exists on the value of active
participation in the process, just as no single management perspective exists.
5. Evaluate plan’s usefulness
Research suggests that attending to the fairness of the design process and the approach chosen (job
evaluation, skill/competency-based plan, and market pricing), rather than focusing solely on the
results (the internal pay structure), is likely to achieve employee and management commitment, trust,
and acceptance of the results. The absence of participation may make it easier for employees and
managers to imagine ways the structure might have been rearranged to their personal liking.

Job evaluation Methods

Job evaluation is done by any of the following methods:

 Points rating - Different levels are accorded to the various elements of jobs and then the points
allocated to different levels are totaled to get point score of the jobs which
forms the basis of pay structure.
 Factor comparison - A comparison of various independent factors of jobs is done and points are
given to each factor rank of individual job. These points are then totaled to rank
the jobs.
 Job ranking - Job is not broken into factors or elements, rather it is evaluated as a whole and is
compared with other jobs to be ranked accordingly.
 Paired comparison - Jobs are compared with each other and allocated points depending on
being ‘greater, lesser or equal’. These points are added to create rank order of
jobs.

3.2 JOB EVALUATION METHODS/TECHNIQUES

Jobs are evaluated on the basis of various techniques. These techniques are grouped into two classes, viz.,
and quantitative and non-quantitative techniques. Non-quantitative techniques include ranking (simple
ranking and paired comparison ranking) and job classification and grading method. Quantitative technique
includes point rating and factor comparison method.

I. Non-quantitative Techniques or Methods

Conventionally, non-quantitative, simple and crude techniques developed. They are ranking and job
classification methods.

a. Simple Ranking: This is the simplest and administratively the easiest technique. The evaluator
compares one job with other job bases on duties, responsibilities and a demand made by the jobs on
the job incumbent and the degree of importance of the job to the organization and ranks all the jobs
from the most important to the least important. The evaluator has to appraise and rank the jobs but not
the job incumbents.

b. Ranking the key Job: Ranking of the all the jobs at a stretch under simple ranking method are
difficult. The evaluator, in order to minimize this problem, has identify the key or representative jobs
at the first stage, rank the key jobs at the second stage, Identify and rank all other jobs at the third
stage.
c. Paired Comparison: Another of the ranking method is that each job cannot be compared with all
other jobs for the purpose of ranking. The method of paired comparison can be adopted minimize this
problem. Under this paired comparison ranking method the evaluator ranks each job in turn against all
other jobs to be appraised, so that a series of paired rankings is produced. This method is more
comprehensive, local and reliable compare to the simple ranking method.

d. Single Factor Ranking Method: Another problem in the ranking method is difficulty of the method
if linking has to be done on the basis of number of factors. In view of this, Goldenberg has suggested a
single factor scheme. The Single factor considered is the discretionary contents present in each job
related to other jobs. The single most importance task to be performed in a job is identified and
compared within the single most important task to be performed in other jobs.

Thus, pure ranking does not cover these refinements. The jobs are to be priced after they are ranked.
In other wards, money value should be assigned to each job. Key jobs with known monetary value
will be used as the basis to determine the money value of other jobs.

Advantages: Advantages of this method include:

i. This method is the simplest, quickest and least from the viewpoint of time and money, This method is
most appropriate in small organisations,
ii. It is also appropriate for ranking the top managerial personnel in large organisations and
iii. It is used as a first and basic step of job evaluation.

Disadvantages: Despite the above-mentioned advantages, this method suffers for the following
disadvantages:

i. This method provides no yardstick for measuring the relative worth of one job against the
ii. This method provides no yardstick for measuring the relative worth of one job against the
other,
iii. Job requirements, job specifications and employee specifications are not considered in
evaluation,
iv. It does not indicate the extent or degree to which one job is worthy than the other and It is not
a comprehensive and systematic technique.

Job Classification and Grading Method

Class and grant used differently in this method. A grade is a group of difficulty or requiring similar
knowledge and skill to perform. A class is a subdivision of a given occupation. For example, Class I Clerk,
Class II Clerk, Class III Clerk, Class IV Clerk and Class V Clerk, The jobs tasks are concerned. However,
classes and grades are designed for similar jobs and thus receive similar pay. For example, a grade may
consist of jobs like Financial Accountant, Financial Accountant, Senior Financial Accountant and Financial
Accountant. Under this method, jobs at different levels in the organizational hierarchy are divided into
various grades with a clear-cut definition of the each grand. Grades are formulated on the basic tasks
requirements of
CLERICAL WORKER CLASSIFICATION SYSTEM

Class I Simple work, no supervisory responsibility, no public contact

Class II Simple work, no supervisory responsibility, public contact
Class III Work of medium complexity, no supervisory responsibility, public contact
Class IV Work of medium complexity, supervisory responsibility, public contact
Class V Complex work, supervisory responsibility, public contact

Skill, knowledge, responsibilities and authority of various jobs. There are several steps in the mechanism of
this method. The important among them are:

 Determine the shape and size of organization structure, i.e., tall or flat organization, geographical or
functional organization etc.

 Preparation of job descriptions

 Preparation of grade descriptions based on various components

 Establish of a number of job grades and division of the organization into various grades like Grade-I,
Grade-II... Grade-VI

 Discussion and negotiation with trade union preventatives, regarding the number of grades, grade
description, getting their consent, finalizing the grades description and recording them

 Selection of key jobs and grading them.

 Grading the entire jobs.

 Classifying the jobs of grade and

 Assigning the money value to the key grades first and the to all other grades.

Advantages: This method enjoys the following advantages:

a. It is also simple and easy to understand and operate,

b. It provides an opportunity for a systematic organization structure,
c. Pay grades are better and appropriate for comparison with whose of other organizations,
d. It is more elaborate than ranking method.

Limitations: In spite of the above mention advantages, this method suffers from the following limitations:
 It sometimes seems to be arbitrary though it takes the view of the representation of the trade unions.

 Writing grade descriptions is not easy in this method. However, classification and gradation represent
a link in the historical development of job evaluation between ranking and a points system.

II. Quantitative Techniques or Methods

These are two methods under conventional quantitative techniques, viz., point’s ration and a factor
comparison system

i. Points Rating Method: Merrily R.Lott introduced this method. This was one of the earliest
approaches for evaluating jobs based on quantitative values. This method is analytical in the sense that
jobs are broken into components for purpose of comparison. This method is analytical in the sense that
jobs are broken into components for purpose of comparison. This method is quantitative as each
component of the job is assigned a numerical value. Thus, characteristics or factors considered to have
a bearing on all jobs in the programme like skill, knowledge, responsibility, working conditions etc.,
are selected under this method. Each factor is divided into degrees or levels and point value is
assigned to each level. The total of point values assigned to each factor gives the total point values for
each job, which can be compared.

This method evaluation should be developed systematically and applied methodically in order to avoid the
anomalies. The important steps in the process of developing this technique are:

i. Constituting a representative committee of members from various departments for job evaluation
ii. Selecting a sample of jobs and preparing job descriptions, job specifications and employee
specification

iii. Selecting and defining those factor which are related to all jobs and are considered to be most critical
in determining the relative degrees of difficulty and responsibility between jobs. Eight to twelve
factors are most desirable. The following factors may be considered for this purpose:

1. Skill: Education. Training, judgment, analysis, mental complexity, metal dexterity adaptability etc.

2. Effort: Physical demand, visual effort, concentration, mental effort, alertness etc.

3. Responsibility: For preventing monetary loss, machine, materials, safety, policy etc.

4. Job Conditions: Working conditions, hazards etc.

5. Determining the weight of each factor according its relative importance. Assigning the percentage
value to each factor. The total percentage of all percentage of all factor is 100.

6. Defining each factor, specifying the scope and elements of each factor

7. Dividing each factor into level and defining each level

8. Determining relative value of each level within factors. Factors can be divided into point values by
arithmetic or geometric progression. The following example gives a clear idea.

9. Testing the Mechanism: Get the total point with help to the above discussed method for a few
sample jobs and compare them with the results obtained through other methods. Proceed further, if
the system produces acceptable results.

10. Appraise all the jobs and arrive at composite numerical value for each job.

11. Price the points in order arrive at the wage level and establish a wage structure with the help of
organizational hierarch of jobs and salary policy.

There are no hard fact rules regarding factors, sub-factors assigning the weightages, deciding upon degrees
and values.

This system is only a preliminary step in arriving at an equitable pay structure. There are no scientific
techniques to guide in respect of assigning money value to the points. But various factors like influence of
trade unions, pay structure in comparable industries, financial position if the company at living cost affects
the pay level. However, point system will help in arriving and a equitable pay structure. The important in
this context is conversion of point scores into monetary values by assigning a standard unity of money to
each point. Money values of various scores can be attained by plotting a graph with a points rating on X-
axis and money value of the Y-axis. There are certain alternative regarding plotting money on the and
money value of the Y-axis. There are certain alternatives regarding plotting money on the Y-axis.
Important one is showing current salary rates o Y-axis against of a score of a job concerned on X-axis.
Trend line through a scatter of points is seemed in figure. In case point, score I divided among various
grade o jobs in an organization, the pay level can be related to the grades. The minimum and maximum pay
of each grade are shown in the figures. The pay scales of various jobs will be fixed with the minimum and
maximum limits of the pay.
This method is superior to the other method discussed, So far as this is analytical as well quantitative.

Advantages
 Almost the same pay scale can be arrived be arrived at for the t same jobs because agreement
among rates on the same is very close.
 Definitions are written applicable terms to the jobs
 Assigning monetary values is very easy.
Prejudice, bias and error of human judgment are minimized in this technique.

Point score or monetary values cannot be manipulated very easily.

1. Assignment of point score or point score or money value is consistent and accurate.
2. Once the score is assigned to a particular job, it long- standing
3. Wage differentials would be systematically and according to the content of the under this
method.

Despite these merits, this technique also suffers from various disadvantages.

Disadvantages

 It is difficult to determine factor level and assign point values

 It would be somewhat difficult to explain the mechanism and operation of this method to employees’
supervisor and trade union leader.
 Operation of this method involves expenditure, spending of much time and clerical work

However, this technique is superior to the conventional non-quantitative techniques in several respects.
Another conventional quantitative technique is the point factor or factor comparison method.
 ii. The Point Factor or Factor Comparison Method

This method is bases both on the principles of points rating and principle of ranking. This method is
analytical as are jobs are broken into sub-factor and components. Under this method, first the components
and sub-factors are ranked under various factor headings. The next step is assigning the monetary values to
the components or sub-factors of each job. Thus, each job is ranked a number of times (i.e., number of
compensable components or sub- factors)

The mechanism or modus operandi of this involves the following steps:

 Developing job descriptions, job specifications or job requirements covering physical requirements,
mental requirements, skill requirements, training and experience, responsibility and authority,
working conditions etc.

 Select a number of key jobs: this step is more critical and useful fro the point of final evaluation as
the otherjobs are assigned monetary values based on the fixed wage rates arrived for the key jobs on
the basis of negotiations. A key job must be clearly divisible into sub-factors and components. This
step also involves dividing the job into sub-factors and components.

 The third step is ranking of key jobs: The –factors of each key must be given relative ranks based on
their individual contribution to the total job. Exhibit show s of sub-factors of two key job, viz.,
Welder and Mechanical Engineer. Competitive picture of the ranking of these two jobs is shown in
matrix of factor rankings.

 The fourth step involves valuing the sub-factor of each of the key jobs. This step is also known as
factor evaluation. Money worth of each sub-factor of the jobs is ascertained in order to know the total
money value (or salary) of each of the jobs. Exhibit shows factor evaluation or monetary value (per
day) of each of the key jobs.

 The fifth step is integrating the monetary value of sub-factors arrived through factor evaluation with
those of ranking of factors. It is to find out whether the difference among factors as per the ranking
and factor evaluation is one and the same or not. Ross checking is provided through Exhibit, where the
money value of each sub-factor is given in brackets
 The six step is comparing all the jobs (factor by factor) of the same grade or level with the related key
job and establishing monetary value to the sub-factor various job based on the the related key job and
establishing monetary value to the sub-factor various job based on the monetary value of sub-factors
or key jobs. There are certain advantages to this technique over others.

Advantages

 It is analytical and quantitative method.

 This method is a combination of two techniques, i.e., ranking and factor comparison.
 Since the modus operand of this system is relatively easy to understand, it can be operated and
explained to supervisors, employees and trade union leaders.

 This technique is more reliable and valid, compared to techniques as each job is compared with all
other jobs from respects, i.e., factor rank order and factor comparison

 This technique assigns money value more or les fairly and objectively as there is cross checking of
money value with rank order

However, this technique suffer from certain disadvantages

Disadvantages
 It is costly and somewhat difficult to the operate compare to the conventional non- quantitative
technique.
 Factor evaluation in this not that much objective as that of point rating technique.
 This technique does not consider all the sub-factors as the operating of the system would be difficult if
it considers all the factors.

Advantages of Job Evaluation

Job evaluation has a certain advantages over other techniques of pay fixation. They are:
 It is a logical and to a certain extent an objective method of ranking and grading the jobs.
 It help to fit the newly created jobs in the existing structure
 Employee grievances, doubts and complaints would be at the lower ebb as it a systematic and
objective method of wage fixation
 It eliminates some undesirable factors like in qualities in bargaining capacities of employees and
employers, fluctuations in market rates etc.
 It satisfies the principles of fair wage, wage equity, uniformity in wages etc.
 It helps to redesign the jobs for minimizing wide wage differentials
 It ensures employee satisfaction about wage level and wage equity
 It also helps to redesign the jobs by reallocating the easy and difficult tasks equally among various
jobs.
MERIT RATING
James Lundy defines merit rating as “the process of evaluating an employee’s performance on the job”.
Merit rating is concerned with employee appraisal. It is a systematic and impartial procedural for
determining the excellence with which an individual is performing a job.
Kimball and Kimball define merit rating as “the evaluation of any given worker as his fitness for a given
job in term of assigned factors by which he may be intelligently apprised.”

Objectives of Merit Rating

The objectives of merit rating are to:

 Furnish a period of record of the relative value of each employee as judged his superiors
 Determine and justify wage differentials existing for the same job.
 Provide more accurate information for the purpose of promotions, transfers and demotions
 Provide a means of evaluating the selection and training techniques.
 Provide information for employee counseling.
 Ensure congenial superior-subordinate relationship
 Job evaluation and merit rating are not one and the same but different. The differences between job
evaluation and merit rating are presented in Exhibit.
Final Result – Pay Structure

The final result of the job analysis–job description–job evaluation process is a structure, a hierarchy
of work. The hierarchy translates the employer’s internal alignment policy into practice. These
structures are obtained via different approaches to evaluating work. The jobs are arrayed within four
basic functions: managerial, technical, manufacturing, and administrative. The
Managerial and administrative structures were obtained via a point job evaluation plan; the technical
and manufacturing structures, via two different person-based plans. The manufacturing plan was
negotiated with the union. The exhibit illustrates the results of evaluating work: structures that
support a policy of internal alignment. Organizations commonly have multiple structures derived
through multiple approaches that apply to different functional groups or units. Although some
employees in one structure may wish to compare the procedures used in another structure with their
own, the underlying premise in practice is that internal alignment is most influenced by fair and
equitable treatment of employees doing similar work in the same skill/knowledge group.
Pay Structure

Calculation of Compensation
Ways of Determining Wages / Salary

1. Flat time Method

2. Straight Piece Rate Method
3. Halsey Premium Bonus Plan
4. Rowan Premium Bonus Plan
5. Taylor Differential Piece Rate Method

1. Flat Time Method

This is the oldest and the most common system and the wages are based on time spent on the job
irrespective of the amount of work done.

Earnings = Number of hours worked x Rate per hour or unit.

Calculate the total earnings of each work group for one day and for one week, if they worked for 45hr/week

(Hours of work: - Sec 51 of the Factories Act, 1948 specifies that no adult worker shall be required to work
in a factory for more than 48 hrs in any week.)

2. Straight Piece Rate Method

This system is based on the productivity or output of workers. A predetermined rate is paid for each
completed unit of output irrespective of the time taken.
Earnings = Number of units produced x Rate per unit or hour

If the skilled worker produced 12 units per day, how much would he earn when compared to Flat time
method.

3. Halsey Premium Plan

The system is also known as split bonus plan or fifty-fifty plan. F.A. Halsey, an American engineer,
introduced the plan. Under this plan, a minimum hourly wage is paid and in addition the worker is paid a
premium or bonus, if his performance is better than the accepted standard. Standard hours to produce each
unit may be computed on historical basis. If the worker takes more than the standard time, he is paid wages
equal to his time rate for the time actually spent on the job. If, however, the job in completed in less than
the standard time, he is paid bonus in addition to a minimum hourly wage. In practice, the bonus is
calculated to give the employee 50% of the time saved. The remaining 50% goes to the employer.

1. Features

The main features of Halsey Premium plan are as follows:

a) Standard time is fixed for each work.
b) It guarantees the hourly wages to workers for the actual time taken.
c) Bonus is paid if the time is saved (i.e., when actual time is less than the standard time).
d) Bonus is equal to 50% of the time wages of time saved.

2. Computation of Total Earning

Total Earnings = Time Rate Wages + Bonus Or = Actual Time Taken × Time Rate + 50% [Time saved ×
Time Rate]

3. Example

Time taken 6 Hours, Time Rate `10 per hour, Time Allowed 8 hours Total Earnings = 6 hours × `10 + 50%
[(8 hours – 6 hours)] × `10 = `60 + `10 = ` 70
4. Advantages
It is easy to understand and simple to operate.
It guarantees the hourly wages to workers for the actual taken time.
It provided an incentive for an efficient worker who completes his work in less than the standard time. It
provides an incentive to the employer to provide better production facilities as he receives 50% share in
savings achieved.

Halsey-Weir System

This plan was introduced by G & J Weir Ltd. in Glasgow. This is the modified version of Halsey plan. The
Halsey Weir System is the same as the Halsey System except that the bonus paid to workers is 30% of the
time saved.
This method enjoys all the advantages of the Halsey plan but earned the unpopularity as larger share of
bonus goes to the employer.

4. Rowan Plan

J. Rowan introduced this plan. Under the Rowan method, the worker’s day rate is guaranteed. A standard
time is fixed and if the worker effects a saving, a percentage equal to the percentage of saving is added to
the actual time taken.

1. Features
a) Standard time is fixed for each work.
b) It guarantees the hourly wage to workers for the actual time taken.
c) Bonus is paid if the time is saved (i.e., actual time is less than the standard time)
d) Bonus is that proportion of time wages as time saved bears to the standard time.

2. Computation of Total Earnings

Total Earning = Time Rate Wages + Bonus OR Actual Time Taken x Time Rate +Time SavedTime
allowed× (Actual Time x Time Rate)

3. Example

Time taken 6 hours, time Rate ` 10 per hour, Time Allowed 8 hours Total earnings = 6 hours ×`10+8−68×
(6 hours ×` 10) = ` 60 + 2/8 ×` 60 = ` 75

4. Advantages
a) It guarantees the hourly wages to workers for the actual time taken.
b) It provides more incentive to moderately efficient workers who save time up to 50% of the standard time
than Halsey Plan.
c) It provides an incentive to the employer to provide better production facilities as he receives a large
share in savings achieved.
d) It protects the employer against wrong rate setting, as the bonus can never reach 100% of time wages as
in Halsey Plan.

Comparison between Halsey Plan and Rowan Plan

Time Saved Bonus earnings per hour and labour cost per unit
Bonus, Rate of increase in per hour earning and Labour
cost per unit is higher in Rowan plan than Halsey Plan.
a) When time saved is less than 50% of standard time

Bonus, Earning per hour and labour cost per unit are
same under both the plans.
b) When time saved is 50% of standard time

(c) When time saved is more than 50% of standard time Bonus, Rate of increase in per hour earning, and labour
cost per unit is higher in Halsey Plan than Rowan Plan.

5. Taylor’s Differential Piece Rate System

The scheme was first introduce in the U.S.A. by F.W.Taylor, the father of scientific management, and was
subsequently modified by Merrick. This system is based upon two or more fixed piece rates. One-piece rate
is used for workers, whose production is lower than the minimum prescribed production and a higher rate is
paid per piece to workers who produce above the level.
The system was designed with the following objective
To discourage below average worker by providing no guaranteed wages and setting low piece rate for low
level of production
To reward the efficient worker by setting higher piece rate for higher level of production.

1. Features
a) Standard time is fixed for each work.
b) Two piece rates are fixed- (i) a lower rate (i.e., 80% of normal piece rate) for the worker who produces
below the standard output (ii) a higher rate (i.e., 120% of normal piece rates) for the worker who produces
standard output or more than the standard output.

2. Computation of Total Earnings

a) For worker who produces less than the standard output
Total earning = Actual output × Normal piece Rate × 80%
b) For worker who produces standard output or more than the standard output
Total earning = Actual output × Normal piece Rate × 120%

3. Example

Standard output 100 units, Normal piece Rate Re 1 per piece, X produced 60 units, Y produced 100 units,
Z produced 110 units. Earnings using Taylor's differential piece rate will be as follows: X’s earning = 60
units × Re 1 × 80% = ` 48 Y’s earning = 100 units × Re 1 × 120% = `120 Z’s earning = 110 units × Re 1 ×
120% = ` 132

4. Advantages
a) It is simple to understand and easy to operate.
b) It provides incentive to efficient workers.
c) It helps the employer to increase the production by offering higher rates to more efficient workers.
d) It helps the employer to reduce the overhead cost per unit because of increased production.

5. Disadvantages
a) It penalizes very severely the inefficient workers because a slight reduction in output may result in a
larger reduction in their earnings.
b) It does not guarantee the hourly wages and this insecurity affects the morale of worker.
c) Labour cost will differ between two levels of performance because of two different rates.
d) Higher and lower rates may be the source of conflict among the workers.
e) Employer- Employee relations may also be strained if the standard is put at a high level.

PROBLEM BASED ON INCENTIVE BONUS

Calculate the earnings of a worker under (i) Halsey Plan and (ii) Rowan Plan from the following
particulars:
Hourly rate of wages guaranteed Rs.50 per hour.
Standard time for producing one dozen articles - 3 hours.
Actual time taken by the worker to produce 20 dozen articles - 48 hours.

The firm employs five workers at an hourly rate of Rs.20.00. During the week, they worked for four
days for a total period for 40 hours each and completed a job for which the standard time was 48
hours for each worker. Calculate the labour cost under the Halsey method and Rowan method of
incentive plan payments.

A worker under the Halsey Method of remuneration has a day rate of Rs.72 per week of 48 hours plus
a cost of living bonus of Rs 6 per hour worked. He is given an 8 hours task to perform which he
accomplishes in 6 hours. He is allowed 30% of the time saved as premium bonus. What would be
his total hourly rate of earnings, and what difference would it make if he were paid under the
Rowan Method.
 A worker produced 200 units in a week's time. The guaranteed weekly wage payment for 45 hours is
Rs.81. The expected time to produce one unit is 15 minutes, which is raised further by 20% under
the incentive scheme. What will be the earnings per hour of that worker under Halsey (50%
sharing) and Rowan bonus schemes?

A skilled worker in XYZ Ltd. is paid a guaranteed wage rate of Rs.30 per hour. The standard time per
unit for a particular product is 4 hours. P, a machine man, has been paid wages under the Rowan
Incentive Plan and he had earned an effective hourly rate of Rs. 37.50 on the manufacture of that
particular product. Required: What could have been his total earnings and effective hourly rate,
had he been put on Halsey Incentive Scheme (50%)?

The standard time allowed to complete a job is 100 hours and the hourly rate of wage payment is
Rs.40. The actual time taken by the worker to complete the job is 80 hours. Calculate the total
wages of the worker on the basis of
(i) Time Rate, (ii) Halsey Plan (iii) Rowan Plan
Also compute the effective earnings per hour under the above methods.

Standard Time allowed 10 units per hour Normal Piece Rate Rs.50 for 10 units Differential Piece Rate:
80% of Piece Rate for output below standard 120% of Piece Rate for output at or above standard A
produces 75 units in a day of 8 hours B produces 100 units in a day of 8 hours
Required: Compute wages of A and B and Labour Cost per unit under Taylor Differential Piece
Rate System.

A worker takes 6 hours to complete a job under a scheme of payment by results. Standard time allowed
for the job is 9 hours. His wage rate is Rs.15 per hour. Material Cost of the job is Rs.160 and
overhead is recovered at 200% of total direct wages.

Unit 4: (8 Hours)
Determining External Competitiveness and Benefits Management: Competitiveness: Definition of
Competitiveness, Pay Policy Alternatives, Wage Surveys, Interpreting Survey Results, Pay Policy Line,
Pay Grades
Benefits: Benefits Determination Process, Value of Benefits, Legally Required Benefits, Retirement,
and Medical, & Other Benefits

Definition of Competitiveness:

Competitiveness pertains to the ability and performance of a firm, sub-sector or country to sell and
supply goods and services in a given market, in relation to the ability and performance of other firms,
sub- sectors or countries in the same market. It’s the Ability of a firm or a nation to offer products and
 services that meet the quality standards of the local and world markets at prices that are competitive and
provide adequate returns on the resources employed or consumed in producing them.
Competitiveness is the comparison of the compensation both inside & outside the organization.

External Competitiveness: refers to the pay relationships

In external competitiveness, (the second pay policy) comparisons are made outside the organization
– comparisons with other employers that hire the same kinds of employees. External competitiveness
is expressed in practice by (1) setting a pay level that is above, below, or equal to that of competitors,
and (2) determining the mix of pay forms relative to those of competitors.

External competitiveness refers to the pay relationships among organizations – the organization’s
pay relative to its competitors. Pay level refers to the average of the array of rates paid by an
employer: (base + bonuses + benefits + options) number of employees. Pay forms are the various
types of payments, or pay mix, that make up total compensation. Both pay
level and pay mix focus on two objectives: (1) control costs, and (2) attract and retain employees.

Control Costs

The higher the pay level, the higher the labor costs: Labor costs = pay level x number of employees
The higher the pay level relative to what competitors pay, the greater the relative costs to provide
similar products or services. So you might think that all organizations would pay the same job the
same rate. However, they do not.

Attract and Retain Employees

Different employers set different pay levels. They deliberately choose to pay above or below what
others are paying for the same work. Not only do the rates paid for similar jobs vary among
employers, but a single company may set a different pay level for different job families. Exhibit
illustrates this point. However, when total compensation (bonuses, stock options, and benefits) is
looked at, the pay rate for the position might be further below or actually above the market rate. For
example, an engineer is 2% below the market rate when only his base wage is observed. But when
total compensation is taken into consideration, he might be 30% below the market rate.

What Shapes External Competitiveness?

Factors that affect a company’s decision on pay level and mix: (1) (LABOR MARKET FACTORS)
competition in the labor market for people with various skills; (2) (PRODUCT MARKET
FACTORS) competition in the product and service markets, which affects the financial condition of
the organization; and (3) (ORGANIZATION FACTORS) characteristics unique to each organization
and its employees, such as its business strategy, technology, and the productivity and experience of
its work force.
These factors act in concert to influence pay-level and pay-mix decisions.

Labor Market Factors

Economists describe two basic types of markets: the quoted price and the bourse. Stores that label
each item’s price or ads that list a job opening’s starting wage are examples of quoted-price markets
 (Amazon). Bourse markets allow for haggling to occur over the terms and conditions until an
agreement is reached (e-Bay). In both the bourse and the quoted market, employers are the buyers
and the potential employees are the sellers. People and jobs match up at specified pay rates.

How Labor Markets Work

Theories of labor markets usually begin with four basic assumptions:

Employers always seek to maximize profits People are homogeneous and therefore interchangeable;
a business school graduate is a business school graduate is a business school graduate. The pay rates
reflect all costs associated with employment (e.g., base wage, bonuses, holidays, benefits, even
training). The markets faced by employers are competitive, so there is no advantage for a single
employer to pay above or below the market rate.
Understanding how markets work requires analysis of the demand and supply of labor. The demand
side focuses on the actions of the employers: how many employees they seek and what they are able
and willing to pay those employees. The supply side looks at potential employees: their
qualifications and the pay they are willing to accept in exchange for their services.
Labor Demand

How many people will a specific employer hire? The answer requires an analysis of labor demand.
In the short term, an employer cannot change any other factor of production (i.e., technology, capital,
or natural resources. Under such conditions, a single employer’s demand for labor coincides with the
marginal product of labor.
The marginal product of labor is the additional output associated with the employment of one
additional human resource unit, with other production factors held constant. The marginal revenue of
labor is the additional revenue generated when the firm employs one additional unit of human
resources, with other production factors held constant.
Marginal Product

Diminishing marginal productivity results from the fact that each additional employee has a
progressively smaller share of the other factors of production with which to work. In the short term,
other factors of production (e.g., office space, number of computers, telephone lines) are fixed. As
more business graduates are brought into the firm without changing other production factors, the
marginal productivity must eventually decline.

Marginal Revenue

Marginal revenue is the money generated by the sale of the marginal product, the additional output
from the employment of one additional person. Therefore, the employer will continue to hire
graduates until the marginal revenue generated by the last hire is equal to the costs associated with
employing that graduate. Because other potential costs will not change in the short run, the level of
demand that maximized profits is that level at which the marginal revenue of the last hire is equal to
the wage rate for that hire. A manager using the marginal revenue product model must do only two
things: (1) determine the pay level set by market forces, and (2) determine the marginal revenue
generated by each new hire. This will tell the manager how many people to hire. The model provides
a valuable analytical framework, but it oversimplifies the real world. In most organizations, it is
almost impossible to quantify the goods or services produced by an individual employee, since most
production is through joint efforts of employees with a variety of skills. So neither the marginal
product nor the marginal revenue is directly measurable. However, if compensable factors define
 what organizations value, then job evaluation reflects the job’s contribution and may be viewed as a
proxy for marginal revenue product.
Labour Supply

This model assumes that many people are seeking jobs, that they possess accurate information about
all job openings, and that no barriers to mobility (discrimination, licensing provisions, or union
membership requirements) among jobs exist. If unemployment rates are low, offers of higher pay
may not increase supply – everyone who wants to work is already working. If competitors quickly
match a higher offer, the employer may face a higher pay level but no increase in supply.

Pay Policy Alternatives:

Pay level is the average of the array of rates inside the organization. There are 3 conventional pay-
level alternatives:
1. To-lead: if you Lead the market your pay structure (salary range midpoints) are targeted to be
better / higher than the competition.
2. To-meet: to Lag the market is to provide less in midpoints than the proverbial going rate.
3. To-follow: a conscious strategy, many choose to pin their market competitiveness to a certain
calendar date, either the first of the year, midway or the end. Their goal is to position themselves
to either lead or lag the market as of that target date, which means that their competitive situation
would fluctuate before and after

 Lead-Lead: If you want your pay structure to remain ahead of the market for the entire year (i.e.,
certain industries, skilled workforce, limited labor pool, etc.), you peg your midpoints to be
competitive throughout. By targeting the end date, December 31st you will stay ahead of the
game even as the market slowly catches up. You will lead the market for both the first and the
second six months of the year.

 Lag-Lag: On the opposite scale,if you're satisfied to remain behind the market for the complete
fiscal year (i.e., certain industries, less skilled workforce, abundant labor pool, affordability
issues, etc.), you peg your pay structure to be competitive (matched) only for one day, the first of
the year. From January 2nd onward your structure then slips behind the market, falling ever
further all the way through to December 31st. You will lag the first six months and even more so
for the second six months.

 Lead-Lag: A common practice is to split the difference, because you're not too worried over six
months of slippage. So you peg your structure to July 31st. You will then lead the market for the
first six months, then lag the market by an acceptable amount for the second six months.

Wage Surveys: A wage survey is a systematic process of collecting & making judgements about the
compensation paid by other employers. They provide the data for setting the pay policy relative to
competition & translating that policy into pay levels & structures.

1. Designing the survey:

2. Who should be involved in the survey design?
3. How many employers should be involved? Which jobs should be included?
4. What information to collect?
Data Elements To Consider For Survey
Nature of the organization: Fin performance, Size & Structure

Nature of the Total Compensation System: Cash forms used, Non-Cash forms used

Incumbent & Job: Date job, individual, pay

Interpreting survey results:

1. The policy on competitive position is translated into practice by pay policy lines.
2. The use of grades & ranges recognizes both internal & external pressures on pay decisions.
3. Pay ranges permit the employers to value & recognize these differences with pay.

Pay policy Line: A mathematical expression that describes the relationship between a job’s pay & its
evaluation points.

Pay Grades: Grouping jobs of similar worth or content together for pay administration purposes.
Range speed is the distance between min & max amounts in a pay grade.

Benefits:
Employee benefits are that part of the total compensation package, other than pay for time worked,
provided to employees in whole or in part by employer payments (e.g., life insurance, pension,
workers’ compensation, vacation).
Benefits are the programs an employer uses to supplement employees’ compensation, such as paid
time off, medical insurance, company car, and more. Employee benefits are optional, non-wage
compensation provided to employees in addition to their normal wages or salaries. These types of
benefits may include group insurance (health, dental, vision, life etc.), disability income protection,
retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid), funding
of education, as well as flexible and alternative work arrangements.

Benefits are forms of value, other than payment, that are provided to the employee in return for their
contribution to the organization, that is, for doing their job. Some benefits, such as unemployment and
worker's compensation, are federally required. (Worker's compensation is really a worker's right,
rather than a benefit.)

Prominent examples of benefits are insurance (medical, life, dental, disability, unemployment and
worker's compensation), vacation pay, holiday pay, and maternity leave, contribution to retirement
(pension pay), profit sharing, stock options, and bonuses. (Some people would consider profit sharing,
stock options and bonuses as forms of compensation.)

Benefits determination process

The process involves the following steps:

1. What is expected from benefits?

2. Appropiriate mix of benefits
 3. How much to provide?
4. Which employees should be given benefits?
5. What is received in return for benefits?

Strategic reasons for offering benefits

 Help attract employees
 Help retain employees
 Elevate the image of the organization with employees & other organisations.
 Increase job satisfaction

ADVANTAGES OF COMPENSATION AND BENEFITS.

A well-designed compensation and benefits plan helps to attract, motivate and retain talent in the
firm (which is my Wear). A well designed compensation & benefits plan will benefit the
boutique in the following ways.

1. Job satisfaction: the employees would be happy with their jobs and would love to work for you if they
get fair rewards in exchange of their services.

2. Motivation: We all have different kinds of needs. Some of us want money so they work for the
company, which gives them higher pay. Some value achievement more than money, they would associate
themselves with firms, which offer greater chances of promotion, learning and development. A
compensation plan that hits workers’ needs is more likely to motivate them to act in the desired way.

3. Low Absenteeism: Why would anyone want to skip the day and watch not-so-favorite TV program at
home, if they enjoy the office environment and are happy with their salaries and get what they need and
want?

4. Low Turnover: Would your employees want to work for any other boutique if you offer them fair
rewards? Rewards, which they thought they deserved?

ADVANTAGES TO EMPLOYEES
1. Peace of Mind: the offering of several types of insurances to your workers relieves them
from certain fears. the workers as a result now work with relaxed mind.
2. Increases self-confidence.

Value of benefits:

A total rewards approach to compensating employees is more than just salaries and bonuses.
The human resources professional community has expanded how it defined the discipline generally
known as compensation and benefits to rename it "total rewards." The definition of compensation
and benefits was rather limited--mainly the perception of it--to mean what you pay employees, and
the types of benefits such as medical coverage, income protection options, vacation and sick time.
Components of Total Rewards

Total rewards is a relatively new term coined by members of the human resources professional
community and adopted by human resources associations, such as the Society for Human Resources
Management and WorldatWork, an association primarily for compensation professionals.

Formerly referred to as simply compensation and benefits, total rewards take on a more creative and
broad definition of the ways employees receive compensation, benefits, perks and other valuable
options. WorldatWork defines this new term: "Total rewards include everything the employee
perceives to be of value resulting from the employment relationship."

Small businesses and large corporations alike are affected by the economy, and thus are quick to
devise more creative and less-costly options to reward employees. Small businesses with smaller
budgets are prone to consider leveling actual compensation and providing benefits to minimize the
expense of maintaining a satisfied workforce.

For example, under the old reference to compensation and benefits, employers considered the cost of
an employee's salary, the employer versus employee cost for medical coverage, and the value of
vacation and sick pay for each worker. Renaming these activities gives employers the motivation to
engage in more creative ways to reward employees. Rewards do not always have to be cost of living
increases; salary increases for excellent performance and the cost of having employees out of the
office for sick days or vacations.

Assessing the Value

The value of total rewards is high, simply because of the wider variety of factors that comprise total
rewards. In addition to salaries and wages, total rewards may be broad structures of compensation
and benefits package. On the other hand, total rewards may include many noncash incentives and
recognition. A total rewards program might include on-site childcare and athletic gym membership.
Some companies allow their employees use of the company's retreat or vacation dwelling, very
beneficial for travelers who don't want to wipe out their vacation money on lodging. Other
substantial perks can include tuition reimbursement, payment for attendance and completion of
professional development activities, or opportunities for employees to design their own schedules
with arrangements such as telecommuting. All of these rewards are valuable, although there isn't an
enormous cash outlay with which you must be concerned. When you consider total compensation in
the form of total rewards, the added value is remarkable.

Legally Required Benefits:

o Social Security: For death, retirement, disability, benefits for dependents of retired/disabled worker,
survivor benefits
o Workers’ Compensation: For work related injuries: permanent and temporary total disabilities,
permanent partial disability, survivor benefits, medical expenses, rehabilitation, Insurance paid for
by employers
o Unemployment Compensation: For subsistence between jobs, employer provides stability, Varies
by state, Financed by employers, Experience rating,
 Eligibility, coverage, duration, amount
o Family Medical Leave Act: 12 “work weeks” of unpaid leave during 12 month period,
Reasons: --Birth or adoption of a child, foster child, Care for close family member with serious
health condition, Your own serious health condition makes you unable to perform your job
o Firms with 50 or more employees (5% of employers, 60% of workers are covered)
o Key exemptions for highly compensated employees
o Return to an “equivalent position”
Employment Insurance

Employment Insurance provides temporary financial assistance for unemployed Canadians while
they look for work or upgrade their skills. People who are sick, pregnant or caring for a newborn or
adopted child, as well as those who must care for a family member who is seriously ill with a
significant risk of death, may also be assisted by Employment Insurance.

Employment Insurance (EI) premiums are calculated on, and deducted from, an employee's
maximum insurable earnings (MIE), which are insurable salary, wages, cash allowances and other
remuneration paid to an employee. The Canada Revenue Agency is responsible for determining what
is considered insurable employment and which earnings are insurable.

Most employees in Canada are considered to be in “insurable employment” and covered by EI. As of
January 1, 1997, every hour of work is insurable up to a yearly maximum earnings limit, replacing
the previously required weekly minimum earnings or hours worked.

All employees in insurable employment must have EI premiums deducted from their earnings.
Premiums are set annually as a rate per $100 of Insurable Earnings up to the level of Maximum
Insurable Earnings. Their employers are also required to make payments at 1.4 times the employee
rate, unless Human Resources and Skills Development Canada has granted the employer a reduced
rate.

Procedures for premium deductions and remittances are outlined in “Canada Revenue Agency
Instructions to Employers”

Types of Employment Insurance benefits

There are several types of benefits available to Canadians, depending on their situation.

Regular Benefits

These benefits are available to individuals who lose their jobs through no fault of their own (for
example, due to shortage of work, seasonal layoffs, or mass layoffs) and who are available for and
able to work, but can’t find a job.
 Maternity and Parental Benefits

These benefits provide support to individuals who are pregnant, have recently given birth, are
adopting a child, or are caring for a newborn.

Sickness Benefits

These benefits are for individuals who are unable to work because of sickness, injury, or quarantine.

Compassionate Care Benefits

These benefits are available to people who have to be away from work temporarily to provide care or
support to a family member who is gravely ill with a significant risk of death.

Statutory Obligations

A statutory obligation is a requirement that employers are required to provide their employees as
determined by the law of the province or territory where the employer operates.

Employment Standards Legislation sets out the minimum terms and conditions of employment for
those who operate federally and for each province or territory. Both employers and employees must
follow these minimum obligations unless they offer terms or conditions more generous that the ones
mandated by legislation.

Therefore, employment standards legislation sets out minimum standards relating to employment
terms and conditions. The legislation also includes exceptions for certain types of employees, such as
managers and professionals. Some key areas covered by legislation are:

 Minimum Wage
 Hours of Work
 Vacations and Holiday Leave
 Maternity and Paternity Leaves
 Adoption and Parental Leaves
 Emergency/Sick Leave/Compassionate Leave
 Bereavement Leave
 Leave entitlement
 Grievance procedures
 Termination of employment

Human Rights Legislation goes beyond just the employment relationship but does address certain
issues relating to potential workplace discrimination
 Occupational Health and Safety Legislation creates health and safety obligations for both employers
and employees to minimize the risk of workplace accidents.

Worker’s Compensation Legislation provides workers who become sick or injured at work with
compensation for both economic and non-economic losses, in certain circumstances for participating
organizations.

Retirement

Retirement and pension benefits are provided to retired government officials to ensure a regular
income and a secure future. The provision of such financial benefits results in a feeling of
independence and a decent standard of life. As far as retirement benefits are concerned, they usually
consist of leave encashment, retirement gratuity and contributed provident fund.

Along with these retirement benefits, senior citizens are also entitled to pension benefits that allow
them to live a hassle free life after completion of their job tenure. Different types of pension
available to senior citizens are superannuation, retiring pension, voluntary retirement pension,
compensation pension, compassionate allowance, extraordinary pension and family pension.

Superannuation pension is meant for those government officials who retire at the age of 60 years.
Voluntary pension is awarded to those who wish to retire three months in advance after completing
20 years of service. Extraordinary pension is another pension scheme that is awarded to those
government employees who are disabled or the families of those employees who lose their lives
during the tenure of their job.

Dearness Allowance Rates

Dearness Allowance or DA is another benefit provided to senior citizens. The Government

announces DA rates twice a year. This allowance is added to the salary or pension of government
employees. DA rates are also applicable to senior citizens who have taken complete retirement.
Those who go in for reemployment are not eligible to avail dearness allowance.

Employment-based pensions

A retirement plan is an arrangement to provide people with an income during retirement when they
are no longer earning a steady income from employment. Often retirement plans require both the
employer and employee to contribute money to a fund during their employment in order to receive
defined benefits upon retirement. It is a tax deferred savings vehicle that allows for the tax-free
accumulation of a fund for later use as a retirement income. Funding can be provided in other ways,
such as from labor unions, government agencies, or self-funded schemes. Pension plans are therefore
a form of "deferred compensation". A SSAS is a type of employment-based Pension in the UK.

Some countries also grant pensions to military veterans. The government oversees military pensions;
an example of a standing agency is the United States Department of Veterans Affairs. Ad hoc
committees may also be formed to investigate specific tasks, such as the U.S. Commission on
Veterans' Pensions (commonly known as the "Bradley Commission") in 1955–Pensions may extend
past the death of the veteran himself, continuing to be paid to the widow

Social and state pensions

Many countries have created funds for their citizens and residents to provide income when they
retire (or in some cases become disabled). Typically this requires payments throughout the citizen's
working life in order to qualify for benefits later on. A basic state pension is a "contribution based"
benefit, and depends on an individual's contribution history. For examples, see National Insurance in
the UK, or Social Security in the United States of America.

Many countries have also put in place a "social pension". These are regular, tax-funded non-
contributory cash transfers paid to older people. Over 80 countries have social pensions. Some are
universal benefits, given to all older people regardless of income, assets or employment record.
Examples of universal pensions include New Zealand Superannuation and the Basic Retirement
Pension of Mauritius.[6] Most social pensions, though, are means-tested, such as Supplemental
Security Income in the United States of America or the "older person's grant" in South Africa.

Disability pensions

Some pension plans will provide for members in the event they suffer a disability. This may take the
form of early entry into a retirement plan for a disabled member below the normal retirement age.

Phased Retirement

Today’s work place is challenged with having up to four different generations working side by side.
For most employers, designing a compensation and benefit structure that address the unique needs of
each demographic group, is a complex task. Added to that is the shift in pension structures over the
past few years. Some non-profit organizations provide their employees with a pension fund; however
most tend to offer only contributions to an RRSP. This leads to an increasing number of employees
not feeling able to retire.

It is important that organizations understand the details of their pension plan, whether it is a defined
benefit or contribution or simply an RRSP program before considering design changes.

For those not hindered by a design change, one option that is gaining in popularity, especially in this
sector, is providing a phased retirement program for older skilled employees.

For employees:
Components of the phased program are allowing employees who might be considering retiring to
delay their departure date, continue to earn a partial income that reduces the burden on their pension
income, they continue to receive benefit coverage and are able to acclimate gradually by continuing
to reduce their hours until they are prepared to leave.

For employers:

Employers are able to develop a timely and effective succession plan without losing critical skills or
intellectual capital. Organizations benefit by being able to tap into the most experienced staff at a
reduced salary, while transitioning to a new team or organizational design.

Hurdles:

Employees need to understand the impact continuing to work may have on pension or benefit
programs; also to be considered is the timing of starting your phased approach. If an employee starts
too soon, they might not have accumulated enough to compensate for the reduced salary.

Employers need to be sure that the phased retirement program is structured in a way that will not
diminish the work of the organization or the financial position of the employee.

Medical Benefits

The injured or ill worker who is eligible for workers' compensation will receive necessary medical
care directly related to the original injury or illness and the recovery from his/her disability. The
treating health care provider must be authorized by the Workers' Compensation Board, except in an
emergency situation. Some injured or ill workers may require diagnostic tests, x-ray examinations,
magnetic resonance imaging (MRI) or other radiological examinations or tests. As of March 13,
2007, insurance carriers, which includes self-insured employers and the State Insurance Fund, are
authorized to contract with a legally and properly organized diagnostic networks to perform
diagnostic tests, x-ray examinations, magnetic resonance imaging or other radiological tests or
examinations or tests. In addition, insurance carriers may require claimants to obtain or undergo such
diagnostic tests with a provider or at a facility that is affiliated with the network the carrier has
contracted with, except when a medical emergency exists requiring an immediate diagnostic test or if
the network does not have a provider or facility able to perform the diagnostic test within a
reasonable distance from the claimant's residence or place of employment.

Organizational health expense plans are generally permitted in the following areas across Canada:

1. Hospital room charges in excess of the standard rate to cover semi-private or private
accommodation
2. Hospital charges for emergency treatment outside Canada
3. Drugs, medication and vaccines and other supplies available only by prescription
4. Professional services of a physician for out-of-country medical expenses
 5. Professional services for private duty nursing
6. Charges for special medical appliances such as crutches, artificial limbs or wheelchairs
7. Non-emergency ambulance services
8. Dental treatments not requiring hospitalization.
9. Professional services provided by licensed paramedical, such as psychologists, massage therapists,
speech therapists, podiatrists, physiotherapists, chiropractors, osteopaths, or naturopaths.
10. Vision care expenses including frames and lenses, contact lenses, fitting and remedial treatment,
laser eye correction surgery. This option is one that many employers struggle to provide their
employees with as the number requiring vision care is so great, the cost of including this option
could raise the employer’s costs by anywhere from 20 to 40%

It is common practice to include many of the above items under a single extended healthcare plan.
Most benefit carriers will tailor a plan to include only those features and coverage’s desired. Certain
items, however, are often restricted or sold in combination with other coverage’s to contain overall
plan costs or to subsidize heavily utilized services.

Extended healthcare plan options should be selected based on the organization’s overall
compensation objectives and employee needs. For small organizations, the range of coverage options
may be limited if the plans are financed on a fully insured basis. These plans offer restricted
flexibility to limit the occurrence of high-risk claims. These pre-packaged plans are available to
small organizations through affiliation with umbrella organizations such as chambers of commerce,
boards of trade, trade associations and professional organizations. For larger organizations, the range
of options is mostly limited by cost considerations.

Other Benefits Dental

Dental plan design is the art of finding a delicate balance between understanding what the
foundational priorities are, and allocating sufficient funds, to ensure that the coverage is perceived as
being sufficient and appropriate.

Although the type of dental work can differ from person to person, some common elements have
been found:

1. Most employees, their spouses and children, require basic preventative dental care and repair.
Therefore, most employers elect to design the plan in such a way as to minimize the cost to employees
of basic coverage.

2. Since major restorative care and orthodontics tend to be more elective in nature and less common in
need across the employee group than basic services, most plans do provide equal coverage in all areas.
For example, the plan might pay 100% of basic and 50% of the other two categories. It is also
common to find deductibles, co-insurance and benefit maximums for the non-basic services to free up
more funds for the necessary preventive ones.

3. High employee deductibles and co-insurance percentages can help to limit plan disbursements because
employees will be paying more of the total costs. The potential problem is that these high employee
costs may, in effect, force postponement of needed dental work until the repair bill is even higher.
Paying 100% of basic preventative care from day one is the overwhelming choice of employers.
4. Having the dental plan require a “pre-treatment” evaluation for certain expenses helps control cost
levels by ensuring that the plan only pays for reasonable treatments. It also avoids any
misunderstanding by the employee as to what services are covered and how much he or she is required
to pay. It is always preferable to ensure the employee knows what the plan will pay for and what exact
dollar amount is their responsibility.

5. A commonly asked question of benefit administrators is why the dental plan is not optional but
compulsory? If the plan is optional, only those employees who are likely to need dental care will sign
up. They will almost always use services that exceed their contributions, deductibles and co-insurance.
Those who feel that the benefits will not cover their costs will decline. Because of this “adverse
selection”, cost per employee will be so high that employers would not be perceived as competitive.

Life and AD&D

Most employers design their plans with a provision to protect the employee and/or their family in the
event of Accidental Death or Dismemberment (AD&D). Employers often provide basic coverage as
a factor of the employee’s salary, (example: 2x the employee’s salary in the event of death or total
paralysis) with additional coverage available should the employee chose to purchase it. Each
employee benefit plan should include a chart that identifies what coverage is available and the
associated cost.

Long-term disability

Long-term disability is an income-replacement provision. This is one provision that cannot be

purchased through a spousal plan. Employees are asked to pay the total cost of the premiums in order
to receive a tax-free payment should they be unable to work. Long-term disability coverage is
applied for when an employee is unable to complete a certain percentage of the essential duties of
their role due to illness on an ongoing basis. The structure of each plan can differ slightly, so
understanding what you are trying to achieve with this program including elimination periods and
termination options, is critical at the outset.

Employee Assistance Plans (EAPs)

An EAP, or employee assistance program, is a confidential, short term, counseling service for
employees with personal problems that affect their work performance. Studies have shown that
providing confidential qualified counseling and support can reduce the stress and conflict felt by the
employee, which in-turn can reduce absenteeism and ultimately turnover.

One-on-one sessions are offered and online information, coaching and support services are also
available. Employees turn to the EAP for help with a variety of issues, including the following:

Dependent care issues, such as searching for child care information, identifying services for special
needs children, obtaining advice on the college application process, or arranging for residential care
for an elder.
 Dealing with the stress of a major life change (even a positive one), such as having or adopting a
child, getting married, moving or buying a home, or getting a promotion.
Serious personal or professional concerns, such as general anxiety, depression, substance abuse,
burnout, coping with illness, the loss of a loved one, relationship challenges, or resolving
interpersonal conflicts.

Different types of programs are available to employers to provide employee assistance. Employers
can establish their own in-house programs, join a consortium of organizations to provide external
services or refer employees to public and private providers of this service. The range of costs across
these options can vary widely. Organizations must then decide the most advantageous approach to
achieve the level of improved wellness among their employees.

Death benefits replace a portion of lost family income for eligible family members of employees
killed on the job.

Maximum Medical Improvement (MMI)

 The point in time when your work-related injury or illness has improved as much as it is
going to improve, or
 104 weeks from the date you became eligible to receive temporary income benefits.

Education benefits

Alcon provides and/or assists with relevant on-site and external courses, conferences and
seminars, tuition reimbursement, professional memberships, etc.

Family benefits

Employee Assistance Program – provides assistance and support with issues such as mental
health and legal problems
Adoption Reimbursement Program
Group Legal Plan

Other Benefits, Based on Location

Associate credit union

Cafeteria
Service awards
Company store
Auto purchase discounts
Other corporate discounts
 Module 5:(9 Hours)
Performance Based Compensation System: Employee Contributions: Pay For Performance (PFP):
Rewarding Desired Behaviors, Does, Compensation Motivate Performance?, Designing PFP Plans, Merit
Pay/Variable Pay, Individual vs. Group Incentives, Long Term Incentives. Compensation of Special
Groups: Who are Special Groups?, Compensation Strategies For Special Groups

Performance-related pay is a salary paid relating to how well one works. Car salesmen or production
line workers, for example, may be paid in this way, or through commission.

Many employers use this standards-based system for evaluating employees and for setting salaries.
Standards-based methods have been in de facto use for centuries among commission- based sales
staff: they receive more pay for selling more, and low performers do not earn enough to make
keeping the job worthwhile even if they manage to keep the job.

DEFINITION:

'Employee Contribution Plan: A company-sponsored retirement plan where employees may elect to
have a portion of each paycheck deposited into a retirement account owned by the employee and
held in his or her name.

Pay-for-Performance ("PFP")

Pay-for-Performance ("PFP") systems tie compensation directly to specific business goals and
management objectives. To do this, companies must deliver competitive pay for competitive levels
of performance, pay above market for exceptional performance, and reduced pay for poor
performance. To achieve this, companies must match measurable and controllable performance
targets to company objectives.

In PFP systems, employees’ compensation is composed of a fixed base salary and a variable
component. The most commonly used variable components are:

Company equity (Phantom or actual) - the quantity and price to be paid are typically based on a
percentage of value added as determined by the performance measurement system;
Bonuses - cash awards for extraordinary accomplishments or other activity-related distributions;
Gain sharing - distribution of a portion of results realized, based on performance versus plan.

These systems are designed to retain top-performing employees, motivate the desired performance,
and control costs. If a company wants to pay for performance, it must define performance in very
specific, objective, quantifiable terms, measure it and track it.

Is Performance Based Pay Practical for Your Company?

 Over the years, many companies have attempted to implement performance based pay for
employees. Some have been successful with the programs, while others have experienced utter
failure. So what makes a performance based pay program work in some situations and not others?

Research and real-world trial and error suggest that the success of a performance based pay system
can vary greatly depending on many factors, including:

Employees’ level of commitment to the company

Length of the program
Manager expectations vs. employee expectations
Realistic balance of company cost and employee reward

These are not the only factors that can impact the success of a performance based pay system, of
course, but they are all extremely important influences on how the performance based pay system
will operate. Consider the following discussion of the points above to determine whether a
performance based pay system would be appropriate for your company:

Employee Commitment

Believe it or not, research indicates that the most successful performance based pay systems are
those that are implemented at low-commitment companies. In businesses where employees are
highly committed to the company, performance based pay initiatives are often not as well- received
by employees as they are at low commitment companies.

In low commitment companies, employees view the opportunity to receive additional pay based on
increased performance as a great way to make extra money, and their productivity increases as a
result.

In high commitment companies, however, performance based pay systems are rarely worth the
effort. Often, because they are loyal to their companies, employees are willing to work harder to
meet deadlines anyway, making performance based pay incentives an unnecessary expense.
Research shows that in some instances, highly committed employees may even become offended by
the company’s introduction of performance-based pay, viewing the program as a form of bribery.

Length of the Program

The length of your performance based pay program will be a huge determining factor of its success.
Research indicates that some of the most successful performance based pay systems tend to be those
that are implemented only temporarily.

The reason behind this is that when faced with an ongoing performance based pay system, many
employees adjust to it very quickly. After a time, employees become accustomed to receiving
increased pay, and in the event that that pay is lowered (when performance objectives are not met),
employees feel as if they have been cheated. This causes morale to drop, which can cause
 performance to decrease even more. As business researchers Michael Beer and Mark Cannon
remarked in their performance based pay research, “A workforce that always expects additional pay
for additional progress can become a liability.”

When performance based pay systems are implemented only as temporary solutions, though (for
rushed projects, important client deadlines, etc.), employees tend to view the increased pay as a
bonus, rather than as a guarantee.

Manager Expectations vs. Employee Expectations

One of the main reasons performance based pay systems fail is a lack of communication between
management and employees. In order for a performance pay program to be successful at your
company, you must ensure that employees and managers have similar expectations for the program.
Some common points that must be discussed with employees include:

 How long will the program be in place?

 What are the reasons behind the program? (Are you attempting to meet a client deadline, beat the
competition to market, temporarily push to fill a productivity gap, etc.?)
 How difficult will it be to see a pay increase based on the requirements of the program?
 How will outside factors affect evaluation? (For example, if an outside manufacturer is late with a
delivery that one of your departments needs to continue with production, will the affected department
suffer under the performance pay program’s deadlines despite the fact that the delay was no fault of
their own? If not, how will the rules be adjusted?)

If management does not discuss the ins and outs of the program with employees, then they are bound
to encounter problems. For a performance based pay program to be effective, it must also be fair, and
in order for it to be considered fair, it must be completely understood by each and every employee
who takes part in it.

Costs vs. Benefits

The most important component of your company’s performance based pay program is the balance of
costs and benefits. Studies have shown that a huge number of companies overestimate the benefits of
performance pay systems and severely underestimate the costs. In order for your performance pay
program to be successful, you must be realistic about the costs and benefits. Consider the following
questions when evaluating costs:

What estimated percentage of employees will receive increased pay under the program?

How much of a pay increase will employees have to receive in order to sustain increased
performance? Can the company afford that increase?
Realistically, how much will the company benefit from the increased employee performance?
How long can the company sustain the program?
How much time will management have to spend implementing, tweaking, and/or redesigning the
program? How much will those adjustments cost the company?
 Could the predicted benefits of the performance based pay system also be achieved through more
conventional and less costly managerial methods like coaching, training, etc.?

Performance based pay systems are not as straightforward as many companies think, so before
implementing one at your business, it’s important that you try to learn from the mistakes of those
who came before you. While performance pay programs can be extremely effective, they are
unlikely to be successful if you do not perform thorough research before implementing them.

If a performance based pay program is to succeed at your company, you must ensure that managers
and employees communicate their expectations clearly, that you carefully research the best length of
time for your program, and that you find the perfect balance between employee reward and company
profit.

Seniority Versus Performance Based Pay Systems

Determining the foundations of a pay system can be a very difficult dilemma. In most cases, the
basis of the pay system will boil down to two main options: Seniority-based pay systems and
performance-based pay systems. While the decision may seem to have implications solely in the area
of compensation management, an inappropriate pay system choice can lead to higher turnover rates,
especially for high performers.

Seniority Versus Performance Pay Systems

Seniority-based pay systems are those in which the primary basis for pay increases is the employee’s
tenure. It should be noted that seniority-based pay systems can take into account performance, but
the main factor is tenure. Some benefits of seniority-based pay include loyalty, retention, and
stability of all staff members, regardless of performance levels.

Performance-based pay systems consider performance as the primary basis for pay increases. As
with seniority-based pay systems, other factors, like tenure, can be accounted for in a performance-
based system, but employee performance, however conceptualized by the organization, is the
impetus in determining pay raises.

Performance-based pay systems can actually lead to a climate in which all employees are working
hard to achieve maximum performance. While this certainly sounds like an ideal option, there are
several downfalls, such as the potential for high turnover rates as average and lower performing
employees can get discouraged when they regularly fail to receive merit increases.

A common analogy used to help conceptualize this is the tournament analogy. The ‘winners’ are the
high performers who often receive increases, and the ‘losers’ are the average and low performers
who are being passed over for increases. As you would expect, those who consistently lose the
tournament are likely to stop playing the game, i.e. quitting.
 What Factors Can Alter This Process?

Pay System Communication

The amount of communication about how pay increase decisions are made is crucial to the
functioning of all pay systems. Workers should be told not only how the system is designed, but also
how their pay increases compare to the averages within their jobs. This can be best accomplished by
talking about pay increases as percentages, thus avoiding negative feelings related to salary
differences. A final, very important note about pay system communication is that low levels of pay
communication have shown links to increased union-organizing activities.

Pay Dispersion

The extent to which pay differs across employees in the same job is very important to the
effectiveness and implications of pay systems based on both seniority and performance. When pay
dispersion is high, there are important implications, especially to the quit rates of high performing
employees.

In a seniority-based pay system, quit rates of high performing employees are higher when there is a
great deal of pay dispersion. The assumed cause of this relationship is that high performing
employees begin to perceive that their greater amounts of effort and performance are not
appropriately appreciated by the organization. As a result, high performing employees are likely to
leave the organization.

Conversely, when pay dispersion is high in a performance-based pay system, high performing
employees tend to be the highest earners, as their high performance is being highly rewarded. In this
type of structure, high performers tend to stay with the company, as they feel they are well
compensated for their hard work. The downside is, once again, that average and low performing
employees are more likely to leave.

Rewarding Desired Behaviors:

Guiding Principles of Effective Reward Systems

There are a variety of ways to reward people for the quality of the work they do in the workplace.
For example, rewards can be in the form of money, benefits, time off from work, acknowledgement
for work well done, affiliation with other workers or a sense of accomplishment from finishing a
major task.

Rewards should support behaviors directly aligned with accomplishing strategic goals.
This principle may seem so obvious as to sound trite. However, the goal of carefully tying
employees’ behaviors to strategic goals has only become important over the past decade or so.
Recently, the term “performance” is being used to designate behaviors that really contribute to the
“bottom line.” An employee can be working as hard as anyone else, but if his/her behaviors are not
tied directly to achieving strategic goals, then the employee might be engaged only in busy-work.

Rewards should be tied to passion and purpose, not to pressure and fear.

Fear is a powerful motivator, but only for a short time and then it dissipates. For example, if you
have initially motivated employees by warning them of a major shortage of funds unless they do a
better job, then they will likely be very motivated to work even harder. That approach might work
once or twice, but workers soon will realize that the cause of the organization’s problems is not
because they are not working hard enough. They might soon even resent management’s resorting to
the use of fear. If, instead, management motivates by reminding workers of their passion for the
mission, the motivation will be much more sustainable.

Workers should be able to clearly associate the reward to their accomplishments.

Imagine if someone told you “Thank you” and did not say what for. One of the purposes of a reward
is to reinforce the positive behaviors that earned the reward in the first place. If employees
understand what behaviors they are being rewarded for, they are more likely to repeat those
behaviors.

Rewards should occur shortly after the behaviors they are intended to reinforce.

The closer the occurrence of the reward to the occurrence of the desired behavior in the workplace,
the easier it is for the employee to realize why he/she is being rewarded. The easier it is for him/her
to understand what behaviors are being appreciated.

Importance of Sense of Purpose and Feeling Appreciated

Finding and training new employees is a substantial cost, no matter the size of the organization. One
of the best ways to retain employees is to reward them for their work. One of the primary rewards for
working adults is to feel a sense of meaning or purpose in their work. If employees feel that they are
serving a useful purpose, they are much more likely to stay at their current job.

A common complaint from employees in small- to medium-sized organizations is that they feel
burned out. A common symptom of burnout is to feel unappreciated. One of the best ways to address
burnout, and retain employees, is to ensure that they feel appreciated for their work.

Thus, it is critical that organizations give careful consideration as to how they reward their
employees. Organizations do not need huge sums of money in order to reward them (besides, the
belief that money is the major reward is just a myth). Guidelines in this section will help you to think
 about what might be the best rewards for your employees and to take steps to ensure that you are
providing those rewards.

Guidelines to Rewarding Employees

There is not a set of standard rewards to be used for employees everywhere. Instead, each person has
his/her own nature and needs. The following guidelines will help you to determine what might be the
best ways to reward your employees.

1. Reward employees by letting them hear positive comments from customers about how the
employees’ activities benefited the customer.
2. Occasionally have a Board member come to an employee meeting to thank them. This usually
means a lot to employees, almost as much as having customers provide positive feedback about
the employees’ activities.
3. Understand what motivates each of your employees. You can do this by applying the “Checklist
of Categories of Typical Motivators” in the previous subsection about supporting employee
motivation on page 199. A major benefit of this approach is that each employee is afforded the
opportunity to explain what motivates him or her.
4. In each monthly staff meeting, take a few minutes to open the meeting by mentioning major
accomplishments of various employees.
5. Present gift certificates to employees who have made major accomplishments. Guidelines for
determining who gets this reward should be clearly explained in your personnel policies in order
to ensure all employees perceive the practice as fair and equitable. Allow employees to
recommend other employees for awards.
6. Probably the most fulfilling for employees is to be able to do useful work. Be sure that each
employee understands the mission of the business and how his/her work is contributing to that
mission. Post your mission statement on the walls. Discuss the action- planning section of your
strategic plan with employees so that they see how their activities tie directly to achieving the
strategic goals of the organization.

Additional Perspectives on Rewarding Employees

Links to Reward Systems

Rewards and Performance Incentives
The Pay For Performance Myth
How To Make Effort Rewarding
25 Ways to Reward Employees (Without Spending a Dime)
When to Reward Employees with More Responsibility and Money
How to Promote From Within
Merit Pay: Is It Really the Best Way to Reward Employees?
Do you prefer to hire supervisors and managers from outside the company or promote from
within the company?
How to Encourage Everyone to Do Their Best Work
Does Compensation Motivate Performance?
Incentive plans are one such way to motivate employees to expend more effort, but they are usually
not very flexible. Most incentive plans involve a pay-for-performance arrangement in which
employees are rewarded for the achievement of specific objectives. These types of compensation
strategies tend to be of medium-range duration, and include performance criteria that feature broad
operational or financial metrics. Limitations include the fact that many important performance
"events" occur over an irregular timeframe rather than a standard cycle; employees' impact on plan
criteria may be narrow or subject to uncontrollable factors; and the fact that employees may not see
the trade-off of their extra effort for a set level of payout to be attractive enough to motivate them.
For these reasons, employers should consider other compensation strategies to engage and reward
their top performers.

Compensation plan to retain and motivate employees and up your sales in a down market.

1. Pay employees salary and incentives. The companies with the highest employee morale and
productivity pay a mix of salary and incentives. The salary compensates employees for performing all the
tasks required of them and provides them with a consistent income. The incentive (which can be
commission for salespeople and a bonus for others) motivates them to meet and exceed their goals and
gives them the opportunity to increase their earnings.

Pay employees the salary portion of their compensation monthly or bi-monthly. Pay employees the
incentive portion of their compensation as soon after they meet their goals as feasible. Thus,
quarterly incentive payments are usually more motivating than annual payments and monthly
incentive payments are often best.

2. Keep the incentive part of your plan simple. The test of a good compensation plan is that the
incentive part measures no more than two to four performance factors, and all employees can accurately
explain the plan in the time it takes to walk from the front door of your office building to your
receptionist's desk.

3. Establish SMART goals. SMART goals are: Specific, Measurable, Ambitious, Realistic and Time-
bound.

For salespeople, that means establishing monthly and annual revenue goals and/or goals for opening
new accounts. For other customer contact people, establish goals for the ratio of customer
compliments versus complaints, and/or the number of customer complaints they resolve on the first
phone call. For employees in accounts receivable, consider basing goals on how much outstanding
revenue they collect against specific targets. For those in manufacturing, consider basing goals on
the number of products they manufacture free of defects.

While it's okay to pay a small part of the incentives based on the team's overall results, most of the
incentive should be based on individual results.
 4. Determine what your competitors are paying. One way to attract and retain top employees- and
keep them motivated is to pay them as much or more than your competitors. Every few years, you should
determine what your competitors are paying and adjust your compensation plan accordingly. You can do
this informally by asking employees with other companies that you interview about their compensation
plan, or more objectively by hiring an outside consulting firm to benchmark your plan against others and
advise you on how to adjust it.

5. Modify salaries based on employees' geographic location. While the incentive plan for employees
working in different cities should not change, you should adjust the salary portion to reflect the local cost
of living, so as not to penalize employees who live in more expensive cities.

6. Use merit increases to reward top performers. In a misguided attempt to keep all employees
happy, many companies misallocate the funds they budget for annual merit increases by giving all
employees essentially the same merit increases. Your first priority should be to retain and motivate star
employees, your second priority to retain and motivate satisfactory employees. Therefore, award the
largest salary increases to your stars, much more modest increases to satisfactory performers, and no
increases to employees whose performance falls below expectations.

7. Provide employees with non-financial rewards. Besides cash, employees are motivated by other
forms of recognition and rewards. For example, consider establishing an annual trip to reward employees
who have achieved certain annual goals. Besides increasing motivation, company-sponsored trips build
camaraderie and teamwork. How you train, develop and manage your employees also drives retention and
performance. However, paying them as well as you realistically can — based on their performance — is
one of the best ways to heighten their motivation.

Designing PFP Plans

Defining Performance

It is critical to link compensation to your overall business strategy. To do that effectively, you must
be able to identify the direction the organization needs to move and communicate the desired actions
to get there. Compensation provides a very effective tool for getting employees to move in the same
direction and follow the same path.

For example, suppose a young, growing company wants to increase market share. Its compensation
plan needs to reward people for bringing in new customers and clients. In contrast, a more mature
company might need a better balance between growth and profit. Accordingly, its compensation plan
should equally reward activities that generate growth and profit. Another company might identify
world-class customer service as one of its top strategic objectives. It would need to reward the
activities (in all areas of the organization, not just the customer service department) that lead to
outstanding customer service.

Results vs. Effort

Successful compensation plans pay for results. At the same time, they also need to recognize effort
because no matter how hard employees work, sometimes they don't achieve desired results. People
 can work hard and not reach their goals, and you can't ignore that, especially when factors beyond
their control impact their performance. Pay for results, but build into the plan other ways to reward
and recognize hard work.

On the results side, you also have to distinguish between performance levels. Most compensation
plans pay very little difference between average performance and outstanding performance. Effective
plans have a very clear correlation between superior results and superior rewards.

Design Issues

How do you measure the goal? The way you measure results will have a huge impact on plan design.
Do you intend to measure profit? Quality improvement? Customer service? Sales growth? A
combination of different measures? Whatever the criteria, be very specific about what you intend to
measure and how you will measure it. For example, if you measure profit, are you talking about
before or after tax? Also, make sure you have a valid and reliable measurement system and process.
Employees will not trust an incentive plan based on questionable measures.

Who participates in the plan? As companies move toward nontraditional work forces, this question
has increasing importance. Most incentive plans include all full-time employees but exclude
temporary, seasonal and contract help. Some companies require employees to be currently on staff or
to have been on staff a certain period of time in order to qualify for the incentive pay.

How will the payout be determined? Flat dollar amount? Percentage of salary? Percent of profits
above a certain threshold point? Whatever you decide, make sure employees understand the method
of payment.

How often does the plan pay out? Incentive plans typically pay out monthly, quarterly or yearly.
Keep in mind, however, that the shorter the interval between performance and reward, the more you
will impact behavior.

An ongoing research study at the Wharton School of Business demonstrates that short-term, results-
based work relationships often create a higher level of commitment than long-term relationships. The
researchers believe this is because the short-term contracts give participants a very clear idea of
what’s expected of them, what they’ll gain from delivering, the time limits of the job and the
workload necessary to complete it successfully within that time period.

What are the threshold numbers? Some plans pay out after the first dollar of profit; others only after
meeting certain minimum levels of return. If you’re attempting to incentivize hard-to- measure
standards such as customer service or teamwork, you may need to experiment with thresholds. If so,
explain to employees up front that the plan may require some experimentation. Otherwise, they may
think you're manipulating the plan in order to avoid paying out the incentive.

Who has responsibility for administering the plan? To maintain credibility with employees, treat your
incentive plan with kid-glove care. Assign an administrator who has the respect of employees and who
will maintain a constant flow of information.
 Who measures performance? Do not let the people responsible for measuring performance design
the plan. No matter how honest your employees, the temptation to manipulate the data for personal
gain may be too difficult to overcome, particularly with senior managers who stand to gain
significant amounts of money by hitting the goals.

Will you pilot the plan? Many companies prefer to test the plan on one department or division before
rolling it out to the whole company. This also allows time to make revisions and improvements.

Does the plan pay all monies due or does it have a holdback provision? Some plans have interval
benchmarks but don't pay out until the annual goal has been achieved. Others pay in increments and then
have a larger lump sum at the end. How you pay will depend on what you measure and what you hope to
accomplish with the plan.

What is the life of the plan? All plans should have a "sunset," a designated ending point. This gives
you the ability to adjust or periodically change the plan. Make sure to announce the sunset at the
beginning of the plan, not at the end.

As a final check before installing a new compensation plan, ask the following questions:

 Is the company paying for time or productivity?

 Does the compensation program reduce the need for employee supervision or maintain it?
 Will the compensation program encourage initiative and creativity or simply reinforce the status
quo?
 Does the compensation program automatically increase fixed expenses?
 Does the compensation program reinforce company profits or simply pay for individual effort,
regardless of company profitability?

Implementing the Plan

Consider a bridge program. Never decrease base pay in order to put in an incentive plan. Nothing
will erode the trust level quicker. (The only exception is a turnaround situation where the company
must cut pay in order to survive.) Instead, consider using a bridge program that maintains trust levels
while allowing employees to get used to the concept of pay for performance.

A bridging program that combines elements of fixed wage and pay for performance allows
employees to get more comfortable with profitability compensation. Plus, it allows you to make
course corrections along the way. Test your new program for 90 days and then make adjustments as
necessary. Always reserve the right to change the plan so that it benefits the customer, the company
and employees.

Merit Pay/Variable Pay

Merit Pay: Definition:
Merit pay is an approach to compensation that rewards the higher performing employees with
additional pay or incentive pay. Merit pay has advantages and disadvantages for the employees and
the employer. But, all-in-all, merit pay is the best way to reward the employees that you most want
to keep.

Merit pay plans reward employees with raises rather than bonuses or other forms of financial
compensation. Instead of tying raises solely to time on the job or promotion to a higher position, the
company gives raises for superior performance. For example, a pizzeria can give merit pay raises for
managers who successfully control ingredient costs. A medical billing company can offer merit pay
raises for employees who collect a higher percentage of outstanding bills. When an employee
receives a merit pay incentive, her salary is permanently increased.

Advantages of Merit Pay

These are reasons why you might want to consider merit pay.

 Compensation
 Employee Benefits
 Employee Awards
 Human Resources Software
 Sales Rewards Programs

 Merit pay helps an employer differentiate between the performance of high and low performing
employees and reward the performance of the higher performers.
 Merit pay, unlike profit sharing or similar bonus pay schemes, allows an employer to
differentiate between the performance of the company as a whole and the performance of an
individual. While many merit pay programs also provide an overall reward that is distributed to
all employees, to promote such values as team work, a portion of the available compensation is
reserved for strong performers.
 Merit pay also provides a vehicle for an employer to recognize individual performance on a one
time basis. This is useful for rewarding employees who may have participated in a one-time
project such as implementing a new HRIS or opening up a new sales territory.

Disadvantages and Challenges Inherent in Merit Pay

These are the challenges employers experience with merit pay.

1. There is no way, with 100% accuracy, to differentiate the performance of various employees to
determine deservers of merit pay. The most desirable accomplishments and contributions are
almost never measurable so the manager or supervisor's opinion remains a constant in
determining merit pay.
2. The amount of time and energy that organizations invest in an attempt to make performance
measurable for merit pay, including developing competencies, measurements, base lines for
performance, and so forth, is better spent on delivering service for customers.
3. Given the limitations of metrics, the ability of the supervisor to communicate to each employee
the value of his or her contribution, and what superior performance worthy of merit pay entails,
 is an ongoing challenge. Some supervisors communicate better than others and communication
about what entails superior performance is easier in some jobs than others.

Even with the limitations that exist in the awarding of merit pay, merit pay is your best opportunity
to ensure that your outstanding performers remain with your company and continue to make their
astonishing contributions. Nothing demotivates a high performer faster than knowing that employees
who have contributed much less in the organization, have received the same pay increase or bonus

Variable pay: The amount of time and energy that organizations invest in an attempt to make
performance measurable for merit pay, including developing competencies, measurements, base
lines for performance, and so forth, is better spent on delivering service for customers.

Given the limitations of metrics, the ability of the supervisor to communicate to each employee the value of
his or her contribution, and what superior performance worthy of merit pay entails, is an ongoing
challenge. Some supervisors communicate better than others and communication about what entails
superior performance is easier in some jobs than others.

Even with the limitations that exist in the awarding of merit pay, merit pay is your best opportunity to
ensure that your outstanding performers remain with your company and continue to make their
astonishing contributions. Nothing demotivates a high performer faster than knowing that employees
who have contributed much less in the organization, have received the same pay increase or bonus

Variable pay is employee compensation that changes as compared to salary, which is paid in equal
proportions throughout the year. Variable pay is used generally to recognize and reward employee
contribution toward company productivity, profitability, teamwork, safety, quality, or some other
metric deemed important.

The employee who is awarded variable compensation has gone above and beyond his or her job
description to contribute to organization success.

 Compensation
 Employee Awards
 Employee Benefits
 Sales Rewards Programs
 HR Management

Variable pay is awarded in a variety of formats including profit sharing, bonuses, holiday bonus,
deferred compensation, cash, and goods and services such as a company-paid trip or a Thanksgiving
turkey.

ADVANTAGES AND DRAWBACKS OF VARIABLE PAY

Most criticisms of variable pay can be traced to concerns about the nature, implementation, and
execution of such programs rather than the theories upon which they are based. "Most [variable pay]
 programs provide no incentive to anyone and never deliver the promised results," he charged. "Why
not? Because in 9 cases out of 10, they are not true bonus programs at all. They are simply profit-
sharing programs, and there is a world of difference between the two." By profit-sharing, I mean the
practice of taking a percentage of a company's profits, putting it into a pool, and disbursing it to the
company's employees, usually sometime after the close of the year." Stack and other analysts
contend that such distribution plans are unlikely to encourage employees toward greater productivity
because they do not get an adequate sense of how their personal contributions helped generate the
business's profits. "Many of the failures to date [in variable pay plans] have occurred because
companies simply reshuffled the same amount of compensation in a new plan, offering some through
fixed pay and some through incentives," commented Williamson. "But they didn't use the plan to
create reach change in the way they organize and value work."

But business consultants agree that variable pay programs that truly reward individual performance
can be helpful. The purpose of a good bonus program, Stack said, should be "to make the company
stronger, more competitive, able to survive and prosper in the months and years ahead…. A good
bonus program draws people into that process. It drives the value of the company by educating
people, not with formal training programs but through the work they do every day on the job. It gives
them the tools they need to make and understand decisions. It provides them with business
knowledge they can use to enhance their own standard of living and job security as they're making a
measurable difference to the company as a whole."

Individual vs. Group Incentives:

Individual incentive plans are based on meeting work-related performance standards, such as quality,
productivity, customer satisfaction, safety, or attendance. They are most appropriate when:

 Performance can be measured objectively

 Employees have control over the outcomes
 Plan does not create unhealthy competition

Individual incentive plans require monitoring, and it is important to remember that the incentive
scheme is not a substitute for good management.

Spot bonuses can also be used for individuals to show appreciation or give recognition for a job well
done. This can be a reward for developing new skills, contributing new ideas, obtaining licenses, or
finishing projects early. Typically, a spot bonus is given as a one-time discretionary payment. These
are most prevalent among non-executives.

Team or group incentive plans are a reward for collective performance. These are most effective
when all group members have some impact on goals. The rewards can be equal or different for each
member, but this requires an understanding of team dynamics. Be sure to avoid contrasting
motivational forces.
Group Incentive Schemes:
The incentive schemes can be applied on a group basis also. Group incentive schemes are
appropriate where jobs are interdependent. It is difficult to meaningfully measure individual
performance and group pressures affect the performance of the members of the group. The chief
group incentive schemes are discussed here.

Profit-sharing:

The concept of profit-sharing emerged towards the end of the nineteenth century. Profit-sharing, as
the name itself suggests, is sharing of profit of organisation among employees. The International Co-
operative Congress” held in Paris in 1889 considered the issue of profit-sharing and defined it as “an
agreement (formal or informal) freely entered into by which an employee receives a share fixed in
advance of the profits”.

The basic rationale behind profit-sharing is that the organisational profit is an outcome of the co-
operative efforts of various parties, therefore, employees should also share in profits as shareholders
share by getting dividend on their investment, i.e. share capital. The very purpose of introducing
profit-sharing is to strengthen the loyalty of employees to the organisation. Thus, profit-sharing is
regarded as a stepping stone to industrial democracy.

Both the share (percentage) of profit to be shared by employees and mechanism for its distribu- tion
are determined in advance and also made known to the employees. In order to be eligible to
participate in profit-sharing. An employee needs to serve for a certain number of years and, thus,
earn some seniority. As regards the forms of profit-sharing, Metzger has classified these into three
categories, namely,

i. Current,

ii. Deferred and

iii. Combination.

(i) Current:

Under this form, profits are paid to the employees in cash or by cheque or in the form of Stock
option immediately after the determination of profits.

(ii) Deferred:

Profits are credited to employees’ accounts to be paid at the time of retirement or at a time of his
dissociation from organization due to reasons like disability, death, severance, withdrawal from
employment, etc.
(iii) Combination:

In this case, a part of employee share of profit is paid in cash or cheque or stock and the remaining
part is deferred and credited to his/her account.

Employees receive their share in the organizational profit in the form of bonus. In India, the Payment
of Bonus Act, 1965, governs the employee bonus.

The major apprehensions expressed against profit-sharing is mat management may dress up profit
figures, as is often done for tax evasion purposes, and deprive employees of their shares in profit. It
is also commented that profit sharing, being a long-term scheme, does not work as incentive due to
the absence of immediate feedback about the efforts and rewards.

Co-partnership:

In a way, co-partnership is an improvement over profit-sharing. In this scheme, employees also

participate in the equity capital of a company. They can have shares either on the basis of cash
payment or in lieu of other incentives payable in cash like bonus. Thus, under co-partnership
scheme, employees become shareholders also by having company shares. Now, employees
participate in both —profits and management of the company.

The finer points of this scheme are that it recognizes the dignity of labour and also of a partner in the
business. This would, in turn, develop a sense of belongingness among the employees and encourage
them to contribute their best for the development of the organisation.
Scanlon Plan:

The Scanlon plan was developed by Joseph N. Scanlon, a Lecturer at the Massachusetts Institute of
Technology in USA in 1937. The plan is essentially a suggestion scheme designed to involve the
workers in making suggestions for reducing the cost of operation and improving working methods
and sharing in the gains of increased productivity.

The plan is characterised by two basic features. First, both employees and managers can partici- pate
in the plan by submitting their suggestions for cost-cutting methods. Second, increase in efficiency
on account of cost cutting is shared by the employees of the unit.

The Scanlon plan, wherever adopted, has been successful to encourage a sense of partnership among
employees, improved employee-employer management relations, and increased motivation to work.

The criticism labelled against group incentive is that the incentive benefits being similar to all
members of the group, the best performers may loose incentive. However, this can be overcome if
group incentive scheme generates peer-level pressure for superior performance and also reduces the
need for supervision. Stability in-group may be a necessary condition to make the group incentive
scheme successful.
Compensation of Special Groups:
Who Are Special Groups?
Special employee groups have two things in common. The first is that if these people fail at their
critical roles, the entire organization can be weakened. Those in special groups tend to be in a
strategic position. Also, these special group positions usually have a conflict factor. That conflict is
commonplace due to the varying demands of the group
Corporate directors, General managers, VP’s, Presidents etc. Specific groups receive special
treatment in the form of...
 Add -on packages not received by other employees
 Compensation components entirely unique in organization Characteristics of special groups–
 Tend to be strategically (or politically) important to firm
 Positions tend to have built in conflict

Compensation of corporate directors:

 Annual retainer
 Attendance fees
 Fees for participation on subcommittees

Major Benefits Offered to Directors: Retirement programs

 Matching director’s gift to college or university

 Deferral of cash compensation until retirement
 Grants to charity
 Medical insurance
 Payment of spouses’ travel expenses
 Death benefits

Components of an Executive Compensation Package:

 Base salary
 Short-term (annual) incentives or bonuses
 Long-term incentives and capital appreciation plans
 Executive benefits
 Perquisites

Popular Perks Offered to Executives:

 Company car
 Financial counseling
 Company plane
 Income tax preparation
 First-class air travel
 Country club membership
  Luncheon club membership
 Estate planning
 Personal liability insurance
 Spouse travel
 Chauffeur service
 Reserved parking
 Executive dining room
 Home security system
 Car phone
 Financial seminars
 Loans at low / no interest
 Legal counseling

Executive Pay & Performance

Pay is linked to company performance

 Company performance exceeds industry standards, big bonuses and stock payouts follow
 Poor financial performance means much smaller pay packages Ways to rein in executive
compensation
 Stockholders can vote/ propose limits to compensation
 Use of tally sheet
 Increase government regulation

Compensation Strategies For Special Groups:

1. Use Metrics as the Basis for Incentive Compensation (Metrics based Strategy)

A common mistake for incentive-based compensation is promising incentives that are not tied to
specific metrics. By having only discretionary bonuses or incentives, executives are unaware what
precisely they need to focus on to be successful.

For each executive, the metrics that are well within their control and follow the SMART criteria
(specific, measurable, attainable, relevant and time-bound) should be used as the basis for their
incentives. This way, they are aware of what they must focus on and they can optimize their work to
achieve those specific goals. Sometimes metrics like revenue and profit are applicable, but, more
often, there are better key performance indicators (KPIs) that should be used.

2. Effectively Communicate to Ensure Understanding (Communication strategy)

Another common mistake companies make is when there is a belief that compensation plans are well
understood by the executives, but really there is a huge communication gap. Make sure every
executive is fully aware of all of the components related to their compensation package.
 If an executive does not have a clear picture of their total ability to accumulate wealth in their current
position, the likelihood of looking for opportunities with more clarity of the upside is increased.
Uncertainty is almost always bad for business, and this is a case where uncertainty on the part of a
core team member can have unforeseen deleterious effects on a business.

Progress on a compensation plan should be addressed at least annually, outlining both short-term and
long-term incentives. An even better idea is for quarterly communication where the core metrics to
which incentives are tied are discussed. This prevents any miscommunication prior to when the
awards are issued.

3. Benchmark Compensation Levels (Benchmarking Strategy)

If you’re trying to attract top talent, your compensation needs to be competitive. Use benchmarking
tools and publications to ensure you’re compensating your executives in the way you intend.

In our research, companies often believe they are paying near the top-end of the spectrum for each of
their executives when, in reality, they are at or below the median compensation level for similar
companies.

Make sure the benchmarks you use are meaningful and relevant to your company. Using multiple
reference points to compare your company (for example, by revenue, industry, region, and revenue
growth) will give you a much clearer idea of how competitive your compensation levels are.

4. Value Company Equity Regularly (Value Addition Strategy)

In our research, more than half of the companies we surveyed do not have a clear idea of what the
equity awarded to their executives is worth. By granting equity-linked compensation but not tying
them to any real value, you’re simply adding uncertainty to the executive’s total compensation
picture.

If you plan on issuing equity-linked incentives, your company’s equity value should be appraised or
estimated at least annually. At regular intervals (quarterly, annually, etc.), each executive should be
told the estimated current value of their equity-linked incentives, as well as the expected future
value.

5. Include Both Short and Long-Term Incentives (Incentives Strategy)

Providing a truly competitive executive compensation package usually requires that your executive
team has both short and long-term goals from which they benefit financially should they be met.

A blend of incentive compensation that provides executives with cash incentives in the short- term
and longer-term incentives that tie an executive to the overall success of the company helps to ensure
your executive team is engaged and feeling rewarded for their hard work regularly.
Implementing an effective executive compensation does not have to be onerous, but it requires time,
planning and dedication for it to work properly. We created our CEO & Senior Executive
Compensation Report for Private Companies to provide companies with both benchmarks and best
practices for their executive team.
Module 6: (20 Hours)

Legal & Administrative Issues in Compensation: Legal Issues, Pay Discrimination, Comparable Worth,
Budgets and Administration.

Global Compensation: Recognizing Variations, Social Contract, Culture & Pay, Strategic Choices In
Global Compensation, Comparing Systems, Expatriate Pay, Practical Components

A formal compensation administration program is the basic management tool for ensuring that employees
are satisfied with their pay and benefits, which both internal and external equity are adequately addressed,
and that control is maintained over compensation costs. Such a program will help attract top talent, retain
core employees, and encourage longevity while efficiently using financial resources.

Establishing an effective compensation administration program requires job analysis, job evaluation, and
job pricing. Once established, it is important to maintain and update the compensation philosophy/strategy,
including the following aspects of the program: job grades/ranges, employee classification, salary
increases, performance appraisals, and incentives.

Legal Issues:

Government acts as a source of laws and regulations, it provides number of statutory laws and
regulations to control and monitor the compensation management in the organizations
Decision-making. Governments’ usual interests are whether –
 Procedures for determining pay are fair (pay discrimination)
 Safety nets for the unemployed and disadvantaged are sufficient (minimum wage, unemployment
insurance)
 Employees are protected from exploitation (overtime pay, child labor)

Regulation of Wages

Payment of Wages act 1936

Minimum wages Act 1948
Payment of Bonus Act 1965
Indian Companies Act 1956
Equal Remuneration act 1972
Wage Policy In India

Key Considerations in public policy relating to wages/salaries:

 As per the Industrial Truce Resolution 1947, exploitation in wages must be eliminated and provision
for payment of fair wages to labour, a fair return on capital employed in industry and reasonable
reserves for the propose of maintenance and expansion of the undertaking.
 As per the Industrial policy resolution 1948, statutory minimum wages must be fixed in sweated
industries and fair wage agreements must be encouraged in more organized industries.
 Ensure equal pay for equal work (Constitution of India)

 Wage differentials must be provided and remuneration must be linked to productivity.

 Regulate wages and salaries to eliminate / reduce undue disparities.

 Compensate for increase in cost of living.

 Determine fair wages, which are over and above minimum wages by taking into consideration (a)
Labor productivity, (b) Existing wage level, (c) National income and distribution level and (d)
Location of industry in the economy of the country.
 The capacity to pay. Supreme Court ruled that “an employer who cannot pay minimum wages has no
right to exist”. This rule is taken into consideration to determine fair wages.

 Basic needs of labour. (As per the 15th session of Indian Labour Conference held in 1957
recommended that minimum wages must be based on basic needs).

 Secure a living wage for worker (Article 43 of the directive principles of state policy of the
constitution)

Institutional Framework for wage Fixation

Unilateral wage fixation system

In this system, the employer fixes wages unilateral
Bi-partite wage fixation system
Collective bargaining
Wage boards
Pay Commissions
Third-party wage fixation system
Adjudication
Arbitration

National Wage Policy

The Study Group on wages, incomes and prices declared that national minimum wage must be
compatible with factors such as,
(a) Adjusted per capita national income
(b) Average national income for one consumption limit, and
(c) Per capita rural consumption expenditure.
Objectives of National Wage Policy

 The objectives/purposes of national wage policy are,

 To make sure that irrespective of any region or sector employee will get minimum wage to meet
their minimum necessities of life.
 To grab maximum employment opportunities.
 To achieve the goal of total anti-poverty program i.e., eliminating poverty of the bottom classes of
society by using employment at wage level, which removes poverty.
 To eradicate differentials in wages of organized sector workers and between workers of organized
and unorganized sectors.
 To standardize wage in similar industry.
 To make sure that at least minimum income is given to the workers in unorganized sector.
 To link increase in wage with increase in productivity.
 To have a machinery to enforce wages, incomes and price policy.
 To decide wages both in organized and unorganized sector.

Wage policy at company level

Compensation policies are required to be set in all firms. Apart from considering the provisions of
public policy, job evaluation and collective bargaining, several aspects must be taken into account by
an enterprise while establishing compensation policy at company level.

Wage policy at company level

Attractions and Retention
Internal Equity
External Equity
Personal Equity
Ability to Pay
Pay and Performance
Labour Costs and Productivity
Cost of Living
Merits and Seniority Progression
Motivation
Integrity

Pay Structures
Managerial and professional: Top, Middle and Junior
Technical/ Supervisory
Administrative and clerical staff
Manual (workers): Highly skilled, skilled, semi-skilled and un skilled

Components of Pay/Wage Structure

Basic wage
Dearness allowances (DA)
Other allowances

Method of Payment

Allowances

Wage Incentive Schemes or Payment by Results

Individual performance
◦Premium Bonus System
◦Piece Rate Systems
Group performance and
Plant or enterprise performances
◦Time-rate Systems
◦Merit Rating Systems

Types of Incentives to Managerial Employees

 Commission is given to managerial employees which is a specific percentage of profit

 Bonuses are given in the form of cash or kind (i.e. discount coupons, paid holiday travel,
sponsorship to educational programs and so on)
 Stock options wherein managerial employees are entitled to get shares at special price, which is
less than market value and or on a fixed formula

Key Considerations for an Effective PBR Schemes

•Both standards of performance and criteria used for measuring performance must be fair, clearly
communicated to all employees. Even aspects of performance measured must be under the control of
concerned employees.
•The link between employee’s pay and his/her performance should be clear, simple and easy to
understand.
•The basis used for profit sharing ratio must be acceptable to both management and employees.
•Employee participation, consultation, and negotiation with the union in different aspects must be
encouraged.
•Under PBR system, there should not be much gap between actual performance and incentive
payment.

Key Considerations for an Effective PBR Schemes

•The PBR scheme must be attractive so that employees feel that they are fairly compensated.
•The scheme must guarantee the minimum pay to employees rather than leading to deduction in
existing income of employees.
•The scheme must lead to savings of costs and or progress in output and quality.
•The scheme must be clearly communicated to all the concerned people along with the provisions
relating to review, redressal of grievances, training, performance measurement and maintenance of
record.
•Employees, unions and management must have trust and understanding among themselves which is
essential for effective labour management cooperation.

Comparable Worth

A policy that women performing jobs judged to be equal on some measure of inherent worth should be
paid the same as men, excepting allowable differences, such as seniority, merit, production based pay
plans, and other non gender related factors. The objective is to eliminate use of market setting wages
for jobs held by women.
“Equal pay for work of equal value" or “Equal pay for work of comparable worth"

Establishing a comparable worth plan has 4 steps:

1. Adopt a single job evaluation plan for all jobs within a unit.
2. All jobs with equal evaluation results should be paid same.
3. Identify general representation in each group
4. The wage-to-job evaluation point ratio should be based on the wages paid for male- dominated
jobs since they are presumed to be free of pay discrimination.

Pay Discrimination

Discrimination usually defined as including

◦Access discrimination, which occurs when qualified women and minorities are denied access to
particular jobs, promotions, or training opportunities;
◦Evaluation discrimination, which takes place when minorities or women are paid less than men for
performing substantially equal work.

Compensation practices where pay may be discriminated are:

 Extra pay plans

  Leave policies
 Maternity leave
 Pension policies

How to Prevent Wage Discrimination and Ensure Equal Pay

All employers should be keenly aware of their obligation to make certain that their employees are
paid fair and equal wages to avoid lawsuits brought under the Equal Pay Act (EPA) and other laws.
This How To looks to assist employers who wish to avoid costly wage discrimination lawsuits and
ensure equal pay for equal work.

Step 1: Understand the Laws

As the Government Acts as a source of laws and regulations, it provides number of statutory laws and
regulations to control and monitor the compensation management in the organisations. Government
intervention in the pay decisions i.e., highly considerable. In India, various regulatory Acts such as
minimum wages Act 1948, payment of wages Act, 1936, Payment of bonus act 1965 and Equal
remuneration Act, 1972 are introduced to regulate compensation plan in Indian organisations. These acts
play a key role in deciding the compensation package to reduce wage disparities among the employees.

In US, the federal government provides minimum-wage legislation, the equal pay Act and title VII of the
civil rights Act in order to monitor and control the pay related aspect act, compliance with rules and
regulations imposed by the government is one of the main objective in the pay model.

Step 2: Institute a Policy Prohibiting Wage Discrimination

In order to ensure equal pay in the workplace, employers should implement and enforce a policy
prohibiting compensation discrimination or wage discrimination based on an employee's
membership in a protected class. This can often be part of a Discrimination Policy or EEO Policy
that prohibits discrimination in compensation and a practice of ensuring equal pay. Employers need
to make sure that all employees are paid fair and equal wages based on their position and skill.

Step 3: Make Decisions Based on Skill and Performance

Employers, supervisors and HR managers need to make sure that all employment decisions
regarding promotions, raises, bonuses, etc., are based on legitimate and nondiscriminatory factors
such as skill, merit and performance rather than an employee's membership in a protected class.
Employers should avoid wage differentials based on sex, race, national origin or any other protected
class unless they can be justified by legitimate and nondiscriminatory reasons.

Step 4: Train Supervisors and Managers to Avoid Wage Discrimination

Employers need to make sure that all supervisors and managers receive proper training on how to
avoid wage discrimination and make employment decisions based on legitimate and
nondiscriminatory reasons.
Step 5: Document Guidelines and Requirements for Salaries and Bonuses

Employers should make sure that any salary guidelines or requirements for any bonus (whether it is
based on merit, productivity, sales or commissions) are well documented and based on fair,
objective, predictable and measurable criteria. This should be adequately conveyed to employees so
that they know what the employer's expectations are and are not left wondering how an employer
arrived at a particular decision.

Step 6: Be Aware of State and Local Laws Prohibiting Wage Discrimination

Employers need to be aware that a number of states have laws prohibiting wage discrimination.
Although the federal EPA only specifically prohibits wage discrimination on the basis of sex, some
state laws may go beyond this. Employers should familiarize themselves with the laws of the state
and cities in which they operate.

Step 7: Document and Be Ready to Defend All Employment Decisions

Employers need to make sure to carefully document all decisions regarding pay, performance and
promotion. Doing so will provide an adequate record and serve as a defense in case of a claim of
wage discrimination.

Step 8: Audit Pay Practices

Employers should frequently review their pay practices to make sure that they are not engaging in
discrimination. Employers should make sure that any differentials that do exist are based on
legitimate and nondiscriminatory factors and supported by written documentation, and if they are
not, they should correct them. By doing so, employers may dramatically reduce the chance that they
will be faced with a claim for wage discrimination.

Step 9: Aim to Hire an Integrated and Diverse Workforce

Employers should try to make sure that they hire and recruit qualified candidates regardless of
gender or membership in a protected class. Employers and hiring managers should make decisions
based on education, skill and merit. Employers should avoid making stereotypical assumptions about
what a job applicant can and cannot do based on his or her membership in a protected class.

Step 10: Provide Timely and Effective Performance Evaluations

Employers should aim to provide employees with yearly or biannual performance evaluations. In
doing so, employers should clearly set out the employer's expectations and show the employee how
the employee is meeting them or not meeting them.
Step 11: Do Not Prohibit Employees from Discussing Wages

Employers should not prohibit employees from discussing information regarding wages, salary or
benefits with other employees. The National Labor Relations Act specifically affords employees the
right to engage in mutual concerted protected activity and work collectively to improve their wages,
hours and working conditions. In addition, Colorado, California, Colorado, Illinois and Michigan
have laws that prohibit employers from requiring that employees refrain from discussing their wages
and/or waive their right to discuss such information.

BUDGET AND ADMINISTRATION

In Compensation

Basic Compensation Design Decisions

¨Compensation’s role in HRM strategy
¨Competitiveness and market position
¨What is organization willing to pay for
¨Basis for rewards
¨Performance-based pay
¨Decision-making practices
¨Communications policy

Principles of Administration of Compensation

•There should be a definite plan to ensure that differences in pay for jobs are based upon variations in
job requirements.
•Prompt and correct payments of the dues of the employees.
•The plan should carefully distinguish between jobs and employees.
•Equal pay for equal work.
•The wage and salary structure should be flexible.
•The employees and the trade union, if there is one, should be informed about the procedures used to
establish wage rates.
•The wage should be sufficient to ensure for the worker and his family reasonable standard of living.

Compensation Administration

•The major functions of an administration consist of the following:

•Approval and /or recommendation of management on job evaluation methods and findings.
•Review and recommendation of basic wage and salary structure.
•Co-ordination and review of relative departmental rates to ensure conformity.
•Review of budget estimates for wage and salary adjustments and increases.
Managing Labor Costs / Budget
Controlling Employment: Head Count and Hours
Controlling Direct Compensation Costs

Controlling Indirect Compensation Costs Top Down

1. Managing Labor Costs
2. Core and Contingent Employees
3. Splintered Supplies: St. Luke’s Labor Cost Model
4. Control Salary Level: Top Down
5. Current year’s rise
6. Ability to pay
7. Competitive market
8. Turnover effects
9. Cost of living
10. Cost of Living
11. Changes in product and service markets
12. Changes in wages in labor markets
13. What Drives Level Rise?

Three Distinct but Related Concepts and Their Measures Control Salary Level: Bottom Up
1. Instruct managers in compensation policies and techniques
2. Distribute forecasting instructions and worksheets
3. Provide consultation to managers
4. Check data and compile reports
5. Analyze forecasts
6. Review and revise forecasts and budgets with management
7. Conduct feedback with management
8. Monitor budgeted versus actual increases
9. Compensation Forecasting and Budgeting Cycle

Inherent Controls
Range maximums and minimums
Broad bands
Compa-ratios
Variable pay
Analyzing costs

Compa-ratios

¨Compa-ratio = salary/midpoint for range

¨Compa-ratio of 1.0, salary = midpoint

¨Below 1.0 – salary below midpoint

¨Above 1.0 – salary above midpoint

¨Can be used for average salaries in unit

Why Communicate Pay Information?
¨Devotion of considerable resources to designing a fair and equitable system intended to
¤Motivate effective performance
¤Encourage productivity
¨Misperception of pay system by employees
¨Openness about pay may
¤Engender goodwill
¤Affect perceptions of pay equity

The Compensation Communication Cycle –

Pay: Change Agent in Restructuring
¨Pay often plays a singular role when organizations restructure
¨Strategic changes in business strategy mean the pay strategy must be realigned
¨Pay changes play two roles
¤Catalyst for change
¤Follower of change
Structuring the Compensation Function
Centralization versus decentralization
Flexibility within corporate-wide principles
Reengineering and outsourcing
Summary

Budgets and Administration

 Budget:

 A formal statement of the financial resources set aside for carrying out specific activities in a given
period of time.

 It helps to co-ordinate the activities of the organisation.

Budgetary control:

 A control technique whereby actual results are compared with budgets.

 Any differences (variances) are made the responsibility of key individuals who can either exercise
control action or revise the original budgets.

Advantages of budgeting in compensation management:

There are a number of advantages to budgeting and budgetary control:

 Compels management to think about the future, which is probably the most important feature of a
budgetary planning and control system. Forces management to look ahead, to set out detailed plans for
achieving the targets for each department, operation and (ideally) each manager, to anticipate and give the
organisation purpose and direction.

 Promotes coordination and communication.

 Clearly defines areas of responsibility. Requires managers of budget centres to be made responsible for
the achievement of budget targets for the operations under their personal control.

 Provides a basis for performance appraisal (variance analysis). A budget is basically a yardstick
against which actual performance is measured and assessed. Control is provided by comparisons of actual
results against budget plan. Departures from budget can then be investigated and the reasons for the
differences can be divided into controllable and non- controllable factors.

 Enables remedial action to be taken as variances emerge.

 Motivates employees by participating in the setting of budgets.

 Improves the allocation of scarce resources.

  Economizes management time by using the management by exception principle.

Global Compensation: Recognizing Variations

 How people get paid around the world depends on differences (and similarities) in the following
general factors
– Economic
– Institutional
– Organizational
– Employee

Variation in International Pay Practices:

Social contracts
Cultures
Trade unions
Ownership and financial markets
 Managers’ autonomy
The Social Contract

 Employment relationship Viewed as part of the social contract

– Employment relationship is more than an exchange between an individual and an
employer
– It includes
 
The government

All enterprise owners

All employees
 Relationships and expectations of these parties form the social contract

Culture

 Shared mental programming rooted in values, beliefs, and assumptions shared in common by a
group of people
 Influences how information is processed
Culture and Managing Pay

 Assumption that pay systems must be designed to fit different national cultures is based on the
belief that most of a country’s inhabitants share a national character
 Job of a global manager
– Search for national characteristics whose influence is assumed to be critical in managing
international pay systems

Culture Matters, but So Does Cultural Diversity:

 How useful is the notion of a national culture when managing international pay?
– Only a starting point
– Can be thought of as the “average”
– Provides some information about what kinds of pay attitudes and beliefs you are likely to
find in an area
– Over reliance on the “average” can seriously mislead
 Interplay among various conditions within each nation or region, taken as a whole, form distinct
contexts for determining compensation
– Economic
– Institutional
– Organizational
– Individual

Factors Affecting International Pay

 Ownership and capital markets

 Managers’ autonomy
Comparing Systems/Costs:

 Factors affecting wage comparisons

– Standard of living costs
– Purchasing power
– Working time required

Strategic Choices In Global Compensation

Localizer: “Think Global, Act Local”
– Designs pay systems to be consistent with local conditions
 – Business strategy is to seek competitive advantage by providing products and services
tailored to local customers
– Operate independently of corporate headquarters
Exporter: “Headquarters Knows Best”
– Basic total pay system designed at headquarters and is “exported” world-wide for
implementation at all locations
– Exporting a basic system makes it easier to move managers and professionals among
locations
– One plan from headquarters gives all managers around the world a common vocabulary
and a clear message what the leadership values

Globalizer: “Think and Act Globally and Locally”

– Seek a common system to be used as part of “glue” to support consistency across all
global locations
– Headquarters and operating units are heavily networked to shared ideas and knowledge
– Performance is measured where it makes sense for the business
– Pay structures are designed to support business

Types of Expatriates:
 Expatriates - Individuals whose citizenship is that of employer’s base country
 Third country nationals (TCNs) - Individuals whose citizenship is neither employer’s base
country nor location of subsidiary
 Local country nationals (LCNs) - Individuals who are citizens of country in which subsidiary is
located

Elements of Expatriate Compensation

 Salary
 Taxes
 Housing
 Allowances and Premiums
Common Allowances in Expatriate Pay Packages:
 Financial Allowances
 Social Adjustment Assistance
 Family Support

Balance Sheet Approach:

 Premise – Employees on overseas assignments should have same spending power as they would
in their home country
 Home country is standard for all payments
 Objectives
– Ensure cost effective mobility of people to global assignments
– Ensure expatriates neither gain nor lose financially
– Minimize adjustments required of expatriates
Other Approaches: Compensation for Expatriates
 Negotiation
 Localization
 Modified balance sheet
  Decrease allowances
 Lump-sum/cafeteria plan

Expatriate Systems → Objectives

 How the expatriate pay system affects competitive advantage, customer satisfaction, quality,
or other performance concerns
 Lack of attention to aligning expatriate pay with organization objectives
 Employee Preferences