Compensation

Compensation
• Pay is a statement of an employee’s
worth by an employer.
• Pay is a perception of worth by an
employee.

2
 Total Compensation

Direct Indirect

Wages / Salaries Time Not Worked

• Vacations
• Breaks
• Holidays
Commissions
Insurance Plans
Bonuses • Medical
• Dental
• Life
Gainsharing
Security Plans
• Pensions

Employee Services
• Educational assistance
• Recreational programs
Presentation Slide 9–1
3
Compensation Management and
Other HRM Functions
Supply of applicants
Aid or impair recruitment Recruitment affects wage rates

Selection standards affect

Pay rates affect selectivity Selection level of pay required

Training and Increased knowledge leads

Pay can motivate training
Development to higher pay

Training and development may Compensation A basis for determining

lead to higher pay Management employee’s rate of pay

Low pay encourages Pay rates determined

unionization
Labor Relations through negotiation

Presentation Slide 9–2

4
 Strategic Compensation
Planning
• Strategic Compensation Planning
– Links the compensation of employees to the
mission, objectives, philosophies, and culture of
the organization.
– Serves to mesh the monetary payments made
to employees with specific functions of the HR
program in establishing a pay-for-performance
standard.
– Seeks to motivate employees through
compensation.
5
Significant Goals Driving Pay and
Reward Changes

Figure 9.1
6
Linking Compensation to
Organizational Objectives
• Value-added Compensation
– Evaluating the individual components of the
compensation program (pay and benefits) to
see if they advance the needs of employees
and the goals of the organization.
• “How does this compensation practice benefit the
organization?”
• “Does the benefit offset the administrative cost?”

7
 Common Strategic
Compensation Goals
• To reward employees’ past performance
• To remain competitive in the labor market
• To maintain salary equity among employees
• To mesh employees’ future performance with
organizational goals
• To control the compensation budget
• To attract new employees
• To reduce unnecessary turnover

8
 Strategic Compensation
Policy Concerns
• The rate of pay within the organization and whether it is to be above, below,
or at the prevailing community rate.

• The ability of the pay program to gain employee acceptance while

motivating employees to perform to the best of their abilities.

• The pay level at which employees may be recruited and the pay differential
between new and more senior employees.

• The intervals at which pay raises are to be granted and the extent to which
merit and/or seniority will influence the raises.

• The pay levels needed to facilitate the achievement of a sound financial

position in relation to the products or services offered.

9
 The Pay-for-Performance
Standard
• Pay-for-Performance Standard
– The standard by which managers tie
compensation to employee effort and
performance.
– Refers to a wide range of compensation
options, including merit-based pay, bonuses,
salary commissions, job and pay banding,
team/ group incentives, and various
gainsharing programs.

10
 Designing a Pay-for-
Performance System
• How will performance be measured?
• How will monies to be allocated for
compensation increases.
• Which employees will be eligible?
• How will payouts be made?
• How often will payouts occur?
• How large will the payouts be?
• Will employees perceive the rewards as valued?

11
 Motivating Employees through
Compensation
• Pay Equity (also Distributive Fairness)
– An employee’s perception that compensation received is
equal to the value of the work performed.
– A motivation theory that explains how people respond to
situations in which they feel they have received less (or
more) than they deserve.
• Individuals form a ratio of their inputs to outcomes in their job
and then compare the value of that ratio with the value of the
ratio for other individuals in similar jobs.

12
 Relationship between Pay
Equity and Motivation

The greater the perceived disparity between my input/output ratio and

the comparison person’s input/output ratio, the greater my motivation
to reduce the inequity.

Figure 9.2
13
 Expectancy Theory and
Pay
• Expectancy Theory
– A theory of motivation that holds that
employees should exert greater work effort if
they have reason to expect that it will result in
a reward that they value.
– Employees also must believe that good
performance is valued by their employer and
will result in their receiving the expected
reward.

14
Pay-for-Performance and
Expectancy Theory

Figure 9.3
15
Motivating Employees through
Compensation
• Pay Secrecy
– An organizational policy requiring that
compensation levels and decisions about
employee compensation be kept secret and,
usually, prohibiting employees from revealing
their compensation information to anyone.
• Can create employee misperceptions and distrust of
compensation fairness and pay-for-performance
standards.

16
 The Bases for
Compensation
• Hourly Work
– Work paid on an hourly basis.
• Piecework
– Work paid according to the number of units
produced.
• Salary Workers
– Employees whose compensation is computed
on the basis of weekly, biweekly, or monthly
pay periods.
17
 The Bases for
Compensation (cont’d)
• Nonexempt Employees
– Employees covered by the overtime
provisions of the Payment of wages Act.
• They must be paid time and one-half their regular
pay for all work performed after forty regular hours
of work.

18
 The Bases for
Compensation (cont’d)
• Exempt employees
– Employees who not covered in the overtime
provisions of the Fair Labor Standards Act.
• Managers, supervisors, and white-collar
professional employees are exempted on the basis
of their exercise of independent judgment and
other criteria.

19
 Components of the Wage
Mix
Labor Market Compensation Strategy
Conditions of the Organization

Area Wage
Rates Worth of
the Job
Cost of WAGE
Living
MIX Employee’s
Relative
Worth
Collective
Bargaining
Employer’s
Legal Ability
Requirements to Pay
Presentation Slide 9–3
20
Factors Affecting the Wage
Mix

Figure 9.4
21
 The Wage Mix—Internal
Factors
• Compensation Strategy
– Setting organization compensation policy to lead, lag,
or match competitors’ pay.
• Worth of a Job
– Establishing the internal wage relationship among jobs
and skill levels.
• Relative Worth of an Employee
– Rewarding individual employee performance
• Ability-to-Pay
– Having the resources and profits to pay employees.

22
 The Wage Mix—External
Factors
• Labor Market Conditions
– Availability and quality of potential employees
is affected by economic conditions,
government regulations and policies, and the
presence of unions.
• Area Wage Rates
– A firm’s formal wage structure of rates is
influenced by those being paid by other area
employers for comparable jobs.

23
 The Wage Mix—External
Factors
• Cost of Living
– Local housing and environmental conditions
can cause wide variations in the cost of living
for employees.
– Inflation can require that compensation rates
be adjusted upward periodically to help
employees maintain their purchasing power.

24
 The Wage Mix—External
Factors
• Collective Bargaining
– Escalator clauses in labor agreements that
provide for quarterly upward cost-of-living
wage adjustments for inflation to protect
employees’ purchasing power.
– Unions bargain for real wage increases that
raise the standard of living for their members.
– Real wages are increases larger than rises in
the consumer price index; that is, the real
earning power of wages.
25
 Consumer Price Index (CPI)
• A measure of the average change in prices over time in a
fixed “market basket” of goods and services

26
 Job Evaluation
• Job Evaluation
– The systematic process of determining the
relative worth of jobs in order to establish
which jobs should be paid more than others
within an organization.

27
 Different Job Evaluation
Systems
SCOPE OF COMPARISON

JOB AS JOB PARTS

BASIS FOR A WHOLE OR FACTORS
COMPARISON (NONQUANTITATIVE) (QUANTITATIVE)

Job vs. job Job ranking Factor comparison

system system

Job vs. scale Job classification Point

system system

Figure 9.5
28
 Job Evaluation Systems
• Job Ranking System
– Oldest system of job evaluation by which jobs are
arrayed on the basis of their relative worth.
– Disadvantages
• Does not provide a precise measure of each job’s worth.
• Final job rankings indicate the relative importance of jobs,
not extent of differences between jobs.
• Method can used to consider only a reasonably small
number of jobs.

29
 Paired-Comparison Job
Ranking Table

Directions: Place an X in the cell where the value of a row job is higher than that of a column job.

Figure 9.6
30
 Job Evaluation Systems
• Job Classification system
– A system of job evaluation in which jobs are
classified and grouped according to a series
of predetermined wage grades.
– Successive grades require increasing
amounts of job responsibility, skill, knowledge,
ability, or other factors selected to compare
jobs.

31
 Point System
• Point System
– A quantitative job evaluation procedure that determines
the relative value of a job by the total points assigned
to it.
– Permits jobs to be evaluated quantitatively on the basis
of factors or elements—compensable factors—that
constitute the job.
• Point Manual
– A handbook that contains a description of the
compensable factors and the degrees to which these
factors may exist within the jobs.
32
 Point Values for Job Factors
of The Indian Association of Industrial
Management
FACTORS
1ST 2ND 3RD 4TH 5TH
DEGREE DEGREE DEGREE DEGREE DEGREE

Skill
1. Education 14 28 42 56 70
2. Experience 22 44 66 88 110
3. Initiative and ingenuity 14 28 42 56 70

Effort
4. Physical demand 10 20 30 40 50
5. Mental or visual demand 5 10 15 20 25

Responsibility
6. Equipment or process 5 10 15 20 25
7. Material or product 5 10 15 20 25
8. Safety of others 5 10 15 20 25
9. Work of others 5 10 15 20 25

Job Conditions
10. Working conditions 10 20 30 40 50
11. Hazards 5 10 15 20 25

HRM 2
Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass. 33
 Factor Comparison System
• Factor Comparison System
– A job evaluation system that permits the
evaluation process to be accomplished on a
factor-by-factor basis by developing a factor
comparison scale.
– The compensable factors of a job evaluated
are compared against the compensable
factors of key jobs within the organization that
serve as the job evaluation scale.

34
 Characteristics of Key Jobs
• Key Jobs
– Jobs that are important for wage-setting purposes and
are widely known in the labor market.
• Characteristics of Key Jobs
– They are important to employees and the organization.
– They vary in terms of job requirements.
– They have relatively stable job content.
– They are used in salary surveys for wage determination.

Presentation Slide 35
9–4
 Job Evaluation for
Management Positions
• Hay Profile Method
– Job evaluation technique using three factors
—knowledge, mental activity, and
accountability—to evaluate executive and
managerial positions.

36
 The Compensation
Structure
• Wage and Salary survey
– A survey of the wages paid to employees of
other employers in the surveying
organization’s relevant labor market.
– Helps maintain internal and external pay
equity for employees.
• Labor Market
– The area from which employers obtain certain
types of workers.
37
 Collecting Survey Data
• Outside Sources of Data
– Bureau of Labor Statistics (BLS)
• National Compensation Survey
– State and local wage surveys
– Online survey data

38
 Collecting Survey Data
• Conducting Employer-initiated Surveys
– Select key jobs.
– Determine relevant labor market.
– Select organizations.
– Decide on information to collect: wages/
benefits/ pay policies.
– Compile data received.
– Determine wage structure and benefits to pay.

39
 FOR MTNL and BSNL
Sl.No. Existing CDA Corresponding IDA
pay scale pay scale(NEW)

Officers 22400-525- 25000-650-30200

cadre 24500
Group C 18400-500- 23750-600-28550
22400
Group C 14300-400- 18500-450-23900
18300
Group B 12000-375- 17500-400-22300
16500
Group A 10000-325- 16000-400-20800
15200
Group A 8000-275-13500 14500-350-18700
40
Housing rent allowance
Sl. No. Classification of cities/Towns Rates of HRA
1. A-1 30% of basic pay
2. A, B-1 & B-2 15% of basic pay
3. C 7.5% of basic pay
4. Unclassified 5% of basic pay

City Compensation allowance

Sl. No. Classification of cities/Towns Rates of CCA
1. A-1 Rs.300/-
2. A Rs.240/-
3. B-1 Rs.180/-
4. B-2 Rs.120/-
41
Group insurance scheme
S. Category Monthly Sum
No. Premium Assured

1. Executives drawing Rs.315/- Rs. 3

IDA pay scale of (Rs.300/- lakhs
Rs.13000-18250/- +Rs.15/-)

2. Executives drawing Rs.525/- Rs. 5

IDA pay scale of (Rs.500/- lakhs
Rs.14500-18700/- +
and above Rs.25/-)_
42
 Medical Facilities

S.No. EMPLOYEE GROUPELIGIBILITY 

1. Group D General Ward
2. Group C Semi-Pvt Ward
3. Grp B & Grp A (upto STS)             Pvt.Ward(non 
A.C.)
4 Grp  A  JAG  and  above Pvt.Ward  with 
A.C.
5. CMD & Board Directors (Full Time) Deluxe room with 
AC.
 
 

43
 Hotel Accommodation
Pay Range Entitlement A.I, A Cities B.I Cities Other
& expensive & localitie
localities expensive s
Rs. localities
Rs.
CMD/Director of Board Five Star Five Star If No Star If
Rs. No
Hotel on actual Star
actual actual
Officers in HAG Four star 3500 1750 900

Officers in SAG Four star 3000 1500 750

Officers in JAG Three star 2200 1100 550

Officers in STS 75% of Three 1650 825 410

star

Sr.SDE/SDE / Sr.AO/AO and equivalents 550 400 300

JTO and equivalents having starting Rs. 400 300 250

8570/- in IDA Pay Scale

Rs. 5860/- To Rs. 8569/- in IDA Pay Scale 300 250 200

44
Below Rs. 5860/- in IDA Pay Scale 175 125 100
Regulation of Pension Amount
Pension amounts regulated on the basis as under-
a. Qualifying service - Service rendered while on duty.
b. Pay regulation.
c. Average emolument- average of the emoluments drawn
during the last ten month of service.

Gratuity
Retirement Gratuity: One fourth of emoluments ( Last pay +
DA) on the date of retirement for each completed six
monthly period of qualifying service subject to a
maximum of 16.5 times the emoluments on retirement or
completion of 5 year qualifying service.

45
 Death Gratuity: Death Gratuity is granted when a Govt. servant
dies while in service according to the following rates-

Length of
Death Gratuity payable to family
Service

Less than
2 times of Emoluments.
one year

One year or
more, but
6 times of Emoluments.
less than 5
years
5 year or
more, but
12 times of Emoluments.
less than 20
years
Half of emoluments for every completed six-monthly period
20 year or
of qualifying service subject to a maximum of 33 times 46
more
emoluments of Rs. 3.5 lakhs whichever is less.
 General provident fund
GPF final payment will be made when the
subscriber-
1.  Retires from service/permitted to retire or
declared by a competent Medical Authority to
be unfit for further services.
2. Proceeds on leave preparatory to retirement .
3. Quits service.
4. Is dismissed /removed from services.

47
48
The Wage Curve
• Wage Curve
– A curve in a scattergram representing the relationship
between relative worth of jobs and wage rates.
• Pay Grades
– Groups of jobs within a particular class that are paid the
same rate.
• Rate Ranges
– A range of rates for each pay grade that may be the
same for each grade or proportionately greater for each
successive grade.

49
Freehand Wage Curve

Figure 9.7
50
Single
Rate
Structure

Figure 9.8
51
Wage
Structure
with
Increasing
Rate
Ranges

Figure 9.9
Presentation Slide 9–5
52
 The Wage Curve (cont’d)
• Competence-based Pay, (also skill-based pay or
knowledge-based pay)
– Compensation for the different skills or increased
knowledge employees possess rather than for the job
they hold in a designated job category.
• Red Circle Rates
– Payment rates above the maximum of the pay range.
• Broadbanding
– Collapses many traditional salary grades into a few
wide salary bands.

53
 Government Regulation of
Compensation
All employees to be paid before 7th of
Payment of month. To avoid exploitation. Variable
wages Act 1936 dearness allowance revives wages every
2 years with Cost of living index.

Minimum wages Stipulates minimum level of payment for

Act 1948 sustenance.

Bonus is profit sharing at a rate of 8.33%.

All the employees of service sector,
Payment of
educational institutions and
bonus Act 1965
manufacturing units are covered in the
act.

54
 Significant Compensation
Issues
• Equal Pay for Comparable Worth
– The concept that male and female jobs that are
dissimilar, but equal in terms of value or worth to the
employer, should be paid the same.
• Wage-Rate Compression
– Compression of pay differentials between job classes,
particularly the pay differentials between hourly
workers and their managers.
• Low-wage Budgets
– Current wage budgets reflect the general trend toward
tight compensation cost controls.
55