Establishing Strategic pay Plans

By Shweta Bambuwala

Basic Factors in Determining Pay Rates

Employee Compensation

Direct Financial Payments

Indirect Financial Payments

Corporate Policies, Competitive Strategy, and Compensation

Aligned Reward Strategy
The employers basic task:
To create a bundle of rewardsa total reward packagethat specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy.

The HR or compensation manager along with top management creates pay policies that are consistent with the firms strategic aims.

Important Compensation Related Acts in India

Minimum Wages Act, 1948 Payment of Wages Act, 1936 Equal Remuneration Act, 1976 Companies Act, 1956 Payment of Bonus Act Payment of Gratuity Act Employee Stock Scheme (ESOS) Employee Stock Purchase (ESPS)

Compensation Policy Issues

Pay for performance Pay for seniority The pay cycle

Salary increases and promotions

Overtime and shift pay Probationary pay

Paid and unpaid leaves

Paid holidays Salary compression

Geographic costs of living differences

Equity and Its Impact on Pay Rates

Forms of Equity

External Equity

Internal Equity

Individual Equity

Procedural Equity

Addressing Equity Issues

Salary Surveys

Methods to Address Equity Issues

Job Analysis and Job Evaluation

Performance Appraisal and Incentive Pay

Communications, Grievance Mechanisms, and Employees Participation

Establishing Pay Rates

Steps in Establishing Pay Rates
1

Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). Determine the worth of each job in your organization through job evaluation (to ensure internal equity).

3 4 5

Group similar jobs into pay grades. Price each pay grade by using wave curves.
Fine-tune pay rates.

The Salary Survey

Step 1. The Wage Survey: Uses for Salary Surveys

To price benchmark jobs

To market-price wages for jobs

To make decisions about benefits

Sources for Salary Surveys

Sources of Wage and Salary Information

Employer SelfConducted Surveys

Consulting Firms

Professional Associations

Government Agencies

The Internet

Establishing Pay Rates (continued)

Skills

Effort Step 2. Job Evaluation: Identifying Compensable Factors Responsibility

Working Conditions

1111

Establishing Pay Rates (continued)

Preparing for the Job Evaluation
1

Identifying the need for the job evaluation Getting the cooperation of employees

2
3

Choosing an evaluation committee

Performing the actual evaluation

Establishing Pay Rates (continued)

Methods for Evaluating Jobs

Ranking

Job Classification

Point Method

Factor Comparison

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Job Evaluation Methods: Ranking

Ranking each job relative to all other jobs, usually based on some overall factor. Steps in job ranking:
1. Obtain job information. 2. Select and group jobs. 3. Select compensable factors.

4. Rank jobs.
5. Combine ratings.

Job Evaluation Methods: Job Classification

Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.
Classes contain similar jobs.
Administrative assistants

Grades are jobs similar in difficulty but otherwise different.

Mechanics, welders, electricians, and machinists

Jobs are classed by the amount or level of compensable factors they contain.

Job Evaluation Methods: Point Method

A quantitative technique that involves:
Identifying the degree to which each compensable factor is present in the job.
Awarding points for each degree of each factor. Calculating a total point value for the job by adding up the corresponding points for each factor.

Establishing Pay Rates

Point Method Step 3. Group Similar Jobs into Pay Grades

Ranking Method

Classification Methods

 Step 4. Price Each Pay GradeWage Curve

Shows the pay rates paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.

 Step 5. Fine-Tune Pay Rates

Developing pay ranges
Flexibility in meeting external job market rates.

Easier for employees to move into higher pay grades.

Allows for rewarding performance differences and seniority.

Correcting out-of-line rates

Raising underpaid jobs to the minimum of the rate range for their pay grade. Freezing rates or cutting pay rates for overpaid (red circle) jobs to maximum in the pay range for their pay grade.

Compensating Executives and Managers

Base Pay Short term incentives Long term incentives Executive benefits and perks

Elements of executive compensation

Criticisms of executive compensation

Complaints of over-payments. Undue influence on compensation determination. Disregard for the financial health of the organization. Secrecy shrouding executive compensation. Inequality of income in the organization.

CEO Pay: More in an Hour Than Workers Get All Year?

Indra K. Nooyi Director; Chairman of the Board and Chief Executive Officer PEPSICO INC (PEP) In 2010, Indra K. Nooyi received $16,175,381 in total compensation. By comparison, the median worker made $33,840 in 2010. Indra K. Nooyi made 477 times the median worker's pay.

Salary Bonus Value of Stock Awards Value of Option Awards Non-Equity Incentive Plan Compensation

$1,300,000 $0 $6,000,029 $3,507,967 $3,000,000

Change in Pension Value and $2,143,083 Deferred Compensation Earnings

All Other Compensation Total $224,302 $16,175,381

CEO-to-Worker Comparisons Per Minute

Annual

Weekly

Daily

Hourly

Indra K. $16,175,3 $311,065. $62,213.0 $7,776.63 $129.61 Nooyi 81 02 0 Minimum Wage $15,080 $290.00 $58.00 $7.25 $0.12 Worker Median $33,840 $650.77 $130.15 $16.27 $0.27 Worker U.S. President $400,000 $7,692.31 $1,538.46 $192.31 $3.21
Note: calculations assume 40 hours per week/52 weeks per year.

How Many Years to Equal Indra K. Nooyis 2010 Compensation?

Minimum 1072 years Wage Worker Completion Date

3083 A.D.

Median Worker

477 years

U.S. President 40 years

Completion Date Completion Date

2488 A.D. 2051 A.D.

How Many Workers Equal Indra K. Nooyis 2010 Compensation?

Minimum Wage Worker

1072 workers

Median Worker

477 workers

U.S. President

40 workers

Competency-Based Pay
Competencies
Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.

What is Competency-Based Pay?

Paying for the employees range, depth, and types of skills and knowledge, rather than for the job title he or she holds.

Competency-Based Pay (continued)

Why Use Competency-Based Pay?

Support HighPerformance Work Systems

Support Strategic Aims

Support Performance Management

Competency-Based Pay: Pros and Cons

Pros Higher quality Lower absenteeism

Fewer accidents
Cons Pay program implementation problems Costs of paying for unused knowledge, skills, and behaviors Complexity of program

Uncertainty that the program improves productivity

 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. Pro and Cons
More flexibility in assigning workers to different job grades. Provides support for flatter hierarchies and teams. Promotes skills learning and mobility. Lack of permanence in job responsibilities can be unsettling to new employees.

 Comparable Worth
Refers to the requirement to pay men and women equal wages for dissimilar jobs that are of comparable (rather than strictly equal) value to the employer. Seeks to address the issue that women have jobs that are dissimilar to those of men and those jobs are often consistently valued less than mens jobs.