Topic 6 - A Designing the Compensation Program

9. Centralization Vs. Decentralization of Pay Decisions 8. Open Vs. Secret Pay 7. Monetary Vs. Non-monetary Rewards 6. Below-Market Vs. Above- Market Compensation 5. Egalitarianism Vs. Elitism 4. Job Vs. Individual Pay 3. Performance Vs. Membership 2. Fixed Vs. Variable Pay 1. Internal Vs. External Validity Criteria for Developing a Plan Designing the Compensation System

Designing the Compensation Program In the past, practices have often been made by top management, based on their own judgement about how they feel about the program. Today, more effective compensation programs are designed by: –Starting with a coherent philosophy, –Considering sound fiscal practices and the broad range of alternatives available, and –Involving employees at all levels to identify the most effective programs

Designing A Base Pay Structure After determining internal equity relationships among jobs, and Identifying competitive pay practices in the market place, The next order of business is the design of a pay structure.

The Facets of a Compensation Program Compensation program objectives –More than attract, retain and motivate –Role of different pay components Desired competitive posture –Relevant competitors –Base salary/total compensation Internal equity considerations –Relevant differentiating factors –Performance, seniority, skills, responsibilities, interpersonal abilities –Individual vs. team vs. organization roles Economic factors –Sharing of risks –Limits of ability to pay Differences by function, levels

Designing A Base Pay Structure The Architects of the Pay Structure Must: –Establish a pay policy line. –Design pay grades using pay grade minimum and maximum and desired spreads of the range. –Determine overlap between pay grades. –Determine if the organization needs more than one pay structure and why.

Compensation Approaches Figure 12–4

Compensation Decisions & Determinants Rs.  There are three core decisions, those involving:  pay level,  pay structure, and  pay system.  Supporting these are three other decisions, concerning  pay form,  pay treatment for special groups,  pay administration.  All these decisions are influenced by a number of environmental and organizational variables. (the economic, social/cultural, and legal environments; and the organization's structure and work force. )

Core Decision 1: Pay Level This decision determines how much the organization will pay for manpower services, or what its average pay will be. Pay level refers to the average pay for jobs, for departments, or for the entire enterprise. An average pay must be set that will secure and keep a productive work force. Major considerations in the pay level decision are –public policy, –pay for comparable work in the community or industry –company response to economic, political, and social issues. These considerations may be weighed unilaterally or together with the unions representing employees. Some of these decisions end with personal interactions (salaries), some are provided on a group basis (medical insurance, etc.)

Core Decision 2: Pay Structure The second core decision is the pay structure decision This focuses on the relationships between jobs within the organization and thus pay. Pay structure decisions usually involve arraying jobs in a hierarchy and setting pay for these jobs relative to their status within the hierarchy. It also involves decisions by the organization regarding the amount and type of benefits to provide.

Pay Structure (Contd.) Relationships between the pay of different jobs within the organization may be more important to employees than pay level. Although the pay level may attract qualified employees, inequitable pay relationships may do the opposite. Preventing such inequities and correcting them if they do occur are two of the objectives of pay structure decisions. Pay structures may be set up by management judgment or constructed through collective bargaining. The technique traditionally used in the mid 1900s in the U.S. was formal or informal job evaluation (discussed later.)

Pay Structure (Contd.) Together the pay level and pay structure decisions determine the pay for jobs. They also involve external and internal standards. Pay level decisions ensure that the organization is in line with the requirements of the external environment, and pay structure decisions ensure that the pay for jobs is internally consistent. Pay level is the height of the line above the x-axis. Pay structure is the slope of the line. (Line b represents a higher pay level than line a, but its structure is the same.)

Core Decision 3: Pay System This involves determining the pay of individual employees on the same job. It is possible for all employees on the same job to get the same pay, in which case no decision is needed. But once a decision is made to differentiate the pay of employees on the same job, two further decisions are required: –how to differentiate among employees: individual pay determination –whether to pay for time or for output: pay method decision.

Core Decision 3: Pay System Generally organizations pay –high-seniority employees more than low-seniority employees, –higher performers are paid more than lower performers (merit systems). –Often pay differences among people on the same job are based on a combination of performance and seniority (reward both membership and effectiveness)

Support Decisions: 1.Pay Form Pay form is the composition of the pay the individual receives. The major part is money, or take-home pay. But a large proportion is in benefits of several kinds. The growth of benefits, employee differences in benefit needs, and greater individualization of organization benefit programs are important issues in pay form decisions Employees receive 3 forms of pay Membership pay is given employees as a consequence of their joining and remaining in the organization. Job pay is based upon accepting a particular job and performing at a satisfactory level. Performance pay is contingent upon differential employee behavior.

Support Decisions (Contd.) 2: Pay treatment of some special employee groups. Although the organization wants similar behavior from all employee groups, compensation policies and practices may differ somewhat for salespeople, professionals, and managers. 3: Pay Administration Ensuring that pay achieves organization and individual objectives and meets public policy goals. Those responsible for compensation planning and control seek answers to questions of efficiency, effectiveness, and legality.

Compensation Strategy Segments Pay Philosophy Pay Philosophy Pay Assessment Pay Form Pay Delivery Pay Plan Design

Summary: Checklist Pay Assessment Job Vs Person Results Vs Behaviors Seniority Vs Performance Education Vs Skills Pay Delivery Narrow Vs Broad Pay Bands Small Vs Large Pay Band Overlap Open Vs Closed Pay Communications Pay Form Monetary Vs Non Monetary Fixed Vs Variable Individual Vs Team Pay Plan Design Participative Vs Non Participative Centralised Vs Decentralised Static Vs Dynamic Lead Vs Lag Pay Philosophy Internal Vs External Equity Lead Vs Lag Market Attraction Vs Retention