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

2. Why Work?

3. To get Compensated

4. Is that money only…..?

5. 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

6. 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

8. 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.

9. 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.

11. 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

12. 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.

13. Equity Perceptions
Other
Self

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

15. 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.

17. 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

18. 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

19. 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

20. 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.

21. 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

22. 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

23. 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

24. 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.

25. 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.

26. Overview of the Point System
Level- Job Class (Banker)
Job Factor Weight OG-I OG-II OG-III OG-IV
Education 50%
Responsibility 30%
Physical effort 12%
Working conditions 8%
Total

27. 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

28. Step3 The Apportionment of wages for key jobs

29. Step4 Factor Comparison Chart

30. 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

31. 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
$ $ $

32. 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

33. 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

34. 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