Compensation Reference Books: Chapter # 8 Human Resource Management (Dessler) Human Resources and Personnel Management ( keith Davis) Resource person: Furqan-ul-haq Siddiqui

Why Work?

To get Compensated

Is that money only…..?

Compensation Total of all rewards given to employees in return for their services. Direct financial compensation - Pay received in the form of wages, salaries, bonuses, and commissions Salary- A form of periodic payment from an employer to an employee, which may be specified in an employment contract or Fixed income of white collar or executives over a period of time. Wage- A payment usually of money for labor or services usually according to contract and on an hourly, daily, or piecework basis —often used in plural. Wage earners often have to give up pay for leaving early, coming in late, missing a day, or taking a vacation or Fixed wages of blue collar or manual worker over a period of time Commission- Variable pay on sales. Bonuses- reward for performance (one-time), not added in base pay. Increment- Performance or seniority based additions in base bay Indirect financial compensation - All financial rewards not included in direct compensation (Fringe Benefits). Nonfinancial compensation - Satisfaction a person receives from job itself or from work environment

Components of a Total Compensation Program External Environment Internal Environment Financial Non-Financial Direct Wages Salaries Commissions Bonuses Indirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Employee Stock Option Plans Supplemental Unemployment Benefits Employee Services Premium Pay Unique Benefits The Job Skill Variety Task Identify Task Significance Autonomy Feedback Job Environment Sound Policies Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions Workplace Flexibility Flextime Compressed Work Week Job Sharing Flexible Compensation Telecommuting Part-time Work Modified Retirement

Pay Compression- A salary inequity problem, generally caused by inflation, resulting in longer-term employees in a position earning less than workers entering the firm today.

Another approach of classifying Compensation Intrinsic rewards satisfaction derived from the job itself, such as pride in one’s work, feeling of accomplishment or being part of a team. Extrinsic reward Benefits provided by the employer usually money, promotion or benefits.

Equity and Its Impact on Pay Rates Description Pay should be based upon contributions made by the Employees. Higher effort should be rewarded with higher pay. Application to Compensation Pay should be tied to the performance level of individual Employee The Equity Theory of Motivation States that if a person perceives an inequity, the person will be motivated to reduce or eliminate the tension and perceived inequity. Equality-Compensation of employees on a unified way, regardless of their performance

Equity in Financial Compensation Equity - Fair pay treatment for employees External equity - Firm's employees are paid comparably to workers who perform similar jobs in other firms. Internal equity - Exists when employees are paid according to relative value of their jobs within same organization. Individual Equity - How fair an individual’s pay as compared with what his/her co-workers are earning for the same/very similar jobs within the company. Procedural equity- The perceived fairness of the procedures to make decisions regarding the allocation of pay.

Equity Perceptions Other Self

< = > Person A Person B Equity Under-reward Over-reward Outputs Inputs < Outputs Inputs Outputs Inputs = Outputs Inputs Equity Outputs Inputs > Outputs Inputs Over-reward

Methods to Address Equity Issues Salary surveys To monitor and maintain external equity. Job analysis and job evaluation To maintain internal equity, Performance appraisal and incentive pay To maintain individual equity. Communications, grievance mechanisms, and employees’ participation To help ensure that employees view the pay process as transparent and fair.

Determinants of Individual Financial Compensation The Organization Compensation Policies Organizational Politics Ability to Pay The Employee Job Performance Merit Pay Variable Pay Competency-Based Pay Seniority Experience Organization Membership Potential Political Influence Luck Job Pricing The Labor Market Compensation Surveys Expediency Cost of Living Labor Unions Society The Economy Legislation Individual Financial Compensation The Job Job Analysis Job Descriptions Job Evaluation Collective Bargaining

Organization as Determinant of Individual Financial Compensation Compensation Policies- Policies that provide general guide-line for making compensation decision. Pay leaders – pay higher wages and salaries then competing firms. Attracts better employees Minimizes voluntary turnover Fosters strong culture and competitive superiority Additional compensation costs Market rate, or going rate – pay what most employers pay for same job Quality of human resources at midrange of market-driven compensation costs Does not attract higher performers Turnover will vary with labor demands of competing firms

Pay followers – pay below market rate because of poor financial condition or believe they do not require highly capable employees Lower compensation costs Useful in labor markets where unemployment is high Lower-quality employees Low morale/job satisfaction Higher turnover; especially among high performers

The Labor Market as a Determinant of Financial Compensation Organization’s Decisional Level- the levels in which compensation decisions are made impacts pays Organizational Politics- Political considerations may also enter into the equation. A sound, objective compensation system can be destroyed by organizational politics Ability to Pay--Organization’s assessment of its ability to pay is important factor in determining pay levels The Labor Market as a Determinant of Financial Compensation Labor Market Consists of potential employees located within the geographic area from which employees are recruited. Compensation Survey- A mean of obtaining data regarding what other firms are paying for specific jobs within a labor market.

Expediency-- sometimes due to intensive competition between highly skilled employees, organizations ignore survey data and use other devices to set compensation. Cost of Living-- Determination of pay on cost of living index. Labor unions-- Mandatory collective bargaining between management and unions as “wages, hours, and other terms and conditions of employment”. Society-- Consumers may be interested in compensation decisions because it often effects pricing of firms goods and services. Economy- In depressed economy labor supply>labor demand resulting lower rates & vice versa Legislation

3. Employee as a Determinant of Financial Compensation Performance-based Pay Merit Pay- Pay increase given to employees based on their level of performance as indicated in the appraisal Bonus- A one time reward for a good performance Piecework- Employees are paid for each unit they produce Skill Based Pay- A system that compensates employees on the bases of job-related skills and knowledge they possess

Seniority- Length of time an employee has been associated with the company. Experience- Total length of time an employee has been performing same nature of work through out career. Membership in the organization Potential Political Influence Luck

The Job as a Determinant of Financial Compensation Organizations pay for value they attach to certain duties, responsibilities, and other job-related factors. Especially used in organization who have internal equity. Job Analysis- JD & JS Job Evaluation- Firm determines the relative worth of one job in relation to another to eliminate pay inequities. Ranking/Ordering Method- Ranking job worth according to its value from lower to higher by examining the description of job.

Classification/grading Method- Involves dividing up the job hierarchy into a number of pay groups or grades that are similar in difficulty but otherwise different Point System- Assigning numerical value to specific job components and sum of these values provides a quantitative assessment of job worth.

Overview of the Point System Level- Job Class (Banker) Job Factor Weight OG-I OG-II OG-III OG-IV Education 50% 50 100 150 200 Responsibility 30% 30 70 110 150 Physical effort 12% 12 24 36 48 Working conditions 8% 8 24 40 50 Total

Factor Comparison method- may called combination of ranking and point system. In this method rater creates a monetary scale containing five factors and ranks job according to their value for each factor. Step1- Determine critical factor Step2- Determine key jobs Step3- Apportion current wages for key jobs Step4- Place key jobs on FCC Step5- Evaluate other jobs

Step3 The Apportionment of wages for key jobs

Step4 Factor Comparison Chart

Job Pricing In pricing jobs, job evaluation worth is matched with labor market worth. In this, we placing a dollar value on worth of a job. Pay grades - Grouping of similar jobs to simplify pricing jobs Wage curve - Fitting of plotted points to create a smooth progression between pay grades Pay ranges - Minimum and maximum pay rate with enough variance between the two to allow for a significant pay difference

Pay Ranges for Pay Grades Scatter Diagram of Evaluated Jobs Illustrating the Wage Curve, Pay Grades, and Pay Ranges Average Pay per Hour (Current Rates or Market Rates) $19.80 5 18.50 4 17.20 3 15.90 Wage Curve Pay Ranges for Pay Grades 2 14.60 14.00 1 13.30 12.90 12.00 100 200 300 400 500 Evaluated Points 1 2 3 4 5 Pay Grades Evaluated Points Pay Grade Minimum Midpoint Maximum 0- 99 1 $12.00 $13.30 $14.60 100-199 2 13.30 14.60 15.90 200-299 3 14.60 15.90 17.20 300-399 4 15.90 17.20 18.50 400-500 5 17.20 18.50 19.80

Broadbanding –.Consolidating salary grades and ranges into just a few wide levels or “bands,” each of which contains a relatively wide range of jobs and salary levels to improve effectiveness Single rate system - Pay ranges are not appropriate for some workplace conditions. Everyone in the same job get same pay, regardless of productivity. Adjusting pay rates - Overpaid and underpaid jobs

Broadbanding and Its Relationship to Traditional Pay Grades and Ranges Average Pay Per Hour Grade 3 Grade 2 Band B Grade 1 Band A Low High Job Worth

HOW EMPLOYERS ESTABLISH PAY RATES Conduct a salary survey of what other employers are paying for comparable jobs. Benchmark job: A job that is used to anchor the employer’s pay scale and around which other jobs are arranged in order of relative worth. Employee committee determines the worth of each job in your organization through job evaluation Group similar jobs into pay grades Price each pay grade by using wage curves Fine-tune pay rates