COMPENSATION MANAGEMENT

Presented By, Neenu Wilson. II Sem MBA@JMC

DEFINITION

It is the process of providing adequate, equitable and fair remuneration to the employees. It includes job evaluation, wage and salary administration, incentives, bonus, fringe benefits, social security measures, etc Compensation is what employees receive in exchange for their contribution to the organization. Compensation management helps the organization obtain, maintain and retain a productive workforce.

A MODEL OF THE CONSEQUENCES OF PAY DISSATISFACTION

performance

Desire for more pay

strikes

Grievances

Search for a higher paying job

Absenteeism

Turnover Lower attractiveness of job Absenteeism

Pay dissatisfaction

Job dissatisfaction

Psychological withdrawal

Dispensary visits

Poor mental health

CONSEQUENCES OF PAY DISSATISFACTION

Without adequate compensation, current employees are likely to leave & also difficult to recruit new people. Pay issues may lower performance, increase grievances or cause workers to quit. Poorly compensated jobs lead to absenteeism. Over payment can harm the organization and its people, causing anxiety guilt and discomfort. High compensation cost also reduces firms competitiveness and its ability to provide jobs. Balance between Satisfaction & Competitiveness underlies firms compensation efforts.

Types of Compensation

Compensation provided to employees can direct in the form of monetary benefits and/or indirect in the form of non-monetary benefits known as perks, time off, etc. Compensation does not include only salary but it is the sum total of all rewards and allowances provided to the employees in return for their services.

If the compensation offered is effectively managed, it contributes to high organizational productivity .

Direct Compensation

Direct compensation is the fixed pay an employee receives on a regular basis, either in the form of a salary or as an hourly wage. It includes cash incentives and various share offers from employers. The defining factor is that it has a cash value.

Indirect Compensation

Fringe Benefits

Need of Compensation Management

A good compensation package is important to motivate the employees to increase the organizational productivity. Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals. Salary is just a part of the compensation system, the employees have other psychological and self-actualization needs to fulfill. Thus, compensation serves the purpose. The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards.

OBJECTIVES OF COMPENSATION MANAGEMENT

Acquire qualified personnel -pay levels must respond to supply and demand of workers
in the labour market since employees compete for wages.

Retain present employees

-Employees may quit when compensation levels are not competitive, resulting in higher turnover.

Ensure equity -internal & external equity. Internal equity requires that pay
be related to the relative worth of the jobs, so that similar jobs get similar pay. External means paying the workers what their counterparts in other firms in the labour market are being paid.

OBJECTIVES CONTD.

Reward desired behavior -Effective compensation plans reward performance, loyalty, experience, responsibilities, and other behaviors. Control costs -without effective compensation system ,a worker could be over- or
underpaid.

Comply with legal regulations - Effective compensation system considers the legal challenges
imposed by and ensures the employers compliance.

Facilitate understanding -This is easily understand by HR specialists, operating managers, and employees. Further administration efficiency

Compensation decisions are influenced by both internal and external factors:

Internal:

Financial conditions Corporate/managerial philosophy Corporate strategy/life cycle

External:

Labor market factors Area wages/cost of living Collective bargaining agreements Government regulations

Fair Labor Standards Act (1938) Equal Pay Act (1963)

Phases Of Compensation Management

Job analysis
Phase I Identify and study jobs

Job evaluation
Job grading factor comparison Point system

Job ranking
Phase II Internal equity

Wages and salary surveys Professional associations Pricing Jobs

Employer associations
Phase III External equity

Self conducted surveys

Job evaluation worth

Match

Labor market worth

Phase IV Matching internal and external worth

JOB ANALYSIS

Job analysis collects information about jobs to produce job and position descriptions. This information also helps to provide the basis for job standards.

JOB EVALUATIONS

Job evaluations are systematic procedures use to determine the relative worth of jobs. The most common methods are job ranking, job grading, factor comparison, and point system

JOB RANKING
The ranking method requires a committee typically composed of both management and employee representatives to arrange jobs in a simple rank order, from highest to lowest. The committee members compare the two jobs and judge which one is more important or difficult. Then they compare another job with the first two, and so on until all the jobs have been evaluated and ranked. Limitations Unmanageability when there is large no:of jobs. Subjectivity of the method-no definite or consistent standards that

JOB

GRADING

In this method each job is assigned a grade or class. Eg include shop jobs, clerical jobs, sales jobs, and so o depending on the type of jobs the organization requires. Once classified, they are ranked in an overall order importance according to the criteria chosen, each job is place in its appropriate classification. This shares the disadvantages of the Ranking approach. The largest user of this approach has been the US civil Servi commission, which gradually is replacing this method wi more sophisticated approaches. To determine appropriate ob grade ,match standard descriptio with job description.

FACTOR COMPARISON

It requires the job evaluation committee to compare critical or compensable job components. The compensable components are those factors common to all the jobs being evaluated-such as responsibility skill ,mental effort, physical effort ,and working conditions. Each factor is compared one at a time with the same factor for other key jobs, to determine the importance of each job.

It includes 5 steps

Step1:Determine the compensable factors Critical factors such as responsibility skill ,mental effort, physical effort ,and working conditions are most commonly used. Step2:Determine the key jobs Common jobs are selected because it is easier to discover the market rate for them.10-25 key jobs are selected by the committee. Step3:Apportion present wages for key jobs. The job evaluation committee then allocates a part of each jobs current wage rate to each critical factor.

THE APPORTIONMENT OF WAGES FOR KEY JOBS

COMPENSABLE OR CRITICAL FACTORS Responsibility Skill Mental effort Physical effort Secretary (Rs) 3.4 3 2.80 1.7 Janitor (Rs) 1.8 1.8 1.5 2.70 File clerk (Rs) 1.4 1.3 1.4 .9

Working conditions
Total Wage rate

1.6
12.50 12.50

1.90
2.70 9.70

.8
5.80 5.80

Step4:Place key jobs on a factor comparison chart.

Once the wages are assigned to the compensable factors of each key information is transferred to a factor comparison chart. Key job titles are placed in the factor columns according to the rate of wages assigned to the job for each critical factor.

A Factor Comparison chart

Rate
4 3

Responsibility
Secretary

Skill effort

Mental effort

Physical Condition

Working

Secret ary Janitor File clerk Janitor File clerk

Secretar y Secretar y File clerk Janitor File clerk

1
0 File clerk

Step5:Evaluate other jobs.

The titles of key jobs in each column of the factor comparison chart serve as benchmarks, other non-key jobs are evaluated by fitting them on the rate scale under each factor column. Factor comparison requires a unique set of standard jobs for each organization, so it is a tailor made approach. Jobs are compared with other jobs to determine a relative value. Drawback include complexity. They include same criteria to compare all jobs.

 POINT

SYSTEM

It is used more than any other method. This system evaluates the compensable factors of each job.
This system requires 6 steps and is usually implemented by a job evaluation committee or by an individual analyst. Step1:Determine the critical factors

Point system uses the same factor comparison method but it adds more details by breaking down these factors into sub factors. Several levels associated with each factor. these helps analysts reward different degrees of responsibility, skill and other critical factors.

Step2:Determine the levels of factors

Step3:Allocate points to sub factors

With the factors listed down one side and the levels placed across the top, the result is a point system matrix.

Step4:Allocate points to levels

Once the total points for each job element are assigned under highest level, analysts allocate points across each row to reflect the importance of different levels.

Step5: Develop the point manual

Analyst then develop a Pont manual. It contains the written explanation of each job. What is expected for the various levels of each sub factor.
When the point matrix and manual is ready, the relative value of each job can be determined. This process is subjective. It requires the specialists to compare job descriptions with the point manual for each sub factor.

Step6:Apply the point system

A Point System Matrix

MIN
1.Responsibility Safety of others Equipment and materials Assisting trainees Product or/service quality 25 20 5 20 50 40 20 40

LEVELS

LOW

MODERATE
75 60 35 60

HIGH
100 80 50 80

2.Skill

Experience education

45 25

90 50

135 75

180 100

3.Effort Physical mental 4.Working conditions Unpleasant Hazards Total points

25 35

50 70

75 105

100 150

20 20

40 40

60 60

80 80 1000

 Wages

and salary surveys

To determine the fair rate of compensation, most firms rely on wage and salary surveys. Discover what the other employers in the same labour market are paying for specific jobs.

Pricing

jobs

In pricing jobs, the job evaluation worth is matched with labour market worth. Two activities are involved:establishig the appropriate pay level for each job, and grouping different pay levels into structure that can be managed effectively.

All organizations face three basic compensation decisions:

A. Pay-Level Decision:

Are we going to lead, meet, or lag the market? Comparison: Employees working on similar jobs in other organizations

B. Pay-Structure Decision:

How do we determine differences in pay for various jobs in our organization? Comparison: Employees working on different jobs within the organization

C. Individual Pay Determination:

How do we determine how much to pay various people in our organization? Comparison: Employees working on the same jobs within the organization

A. Pay-Level Decisions
Wage and salary surveys are one of the major tools used to make external comparisons
Decision points: Which jobs to make comparison for? What is the appropriate labor market? Which organizations to survey?

B. Pay-Structure Decisions:
Pay-structure decisions are typically made in one of two ways:
a. based on attributes of employees: -- knowledge- or skill-based pay b. based on attributes of the job: -- job evaluation:
the process of determining the relative worth of various jobs within an organization

Four Types of Job Evaluation Systems

1. 2. 3. 4. Ranking Systems Classification (Job Grade) Systems Point Systems Factor Comparison Systems

Comparing Different Job Evaluation Systems

Job as a Whole (Nonquantitative) Job Parts or Factors (Quantitative) Factor Comparison System Point System

Basis for Comparison

Job vs Job

Job Ranking System

Job vs Scale

Job Grade System

C. Individual-Pay Determination:
On what do we base our individual pay determination?
performance seniority ???

(politics, non-job relevant issues)

THE COMPENSATION SYSTEM

Compensation analyst find it more convenient to lump job together into job classes.

In the Job Grade approach, the jobs are already groped into predetermined categories. In point system classifications are based on point ranges. Grouping causes the wage trend line to be replaced by a series of ascending dashes.

What are the basic goals of any compensation system?

to attract high quality employees to retain high quality employees to stimulate high performance

What are the basic components of any compensation system?

base pay (wages) incentives benefits

Total Compensation = Direct + Indirect Compensation

Base Pay

Incentives

Benefits

Designing a compensation system

Traditional way of paying was done by ignoring the interaction of organizational members and buying employees time by the hour. NO Incentives, rewards etc Today we value employees. In a rewarding environment , people work hard.

MODEL FOR COMPENSATION SYSTEM

Analyse present compensation structure Formulate salary policies Select compensation system Develop implementation plan Evaluate and monitor

Various Types of Incentives

1. 2.

Profit-sharing plans
Gain-sharing plans (e.g.,Scanlon plan)

3.
4.

Lump-sum bonuses
Individual plans (e.g., piece-rate plans, merit pay)

Conclusion:
Decisions concerning compensation issues are some of the most critical decisions faced by organizations today, because of their influence on: -- organizational survival and growth -- employee perceptions of fairness and equity

Reference:

HR Management 3rd edition

Biswajeet Pattanayak Essentials of HR Management and Industrial relations P.Subba Rao

Compensation Overview
What are the basic tools of any compensation system?

Wage surveys Job analysis/evaluation Performance appraisal

Why do wages differ?

Differences by industry Differences by occupation Differences based on individual performance, seniority, etc.