The Equity Equation: Company Confidential

The equity equation
Costs Delivering value to shareholder Potential
Solving the compensation problem
Performance
Relevance of strategy
Ownership
Delivering value to employee
Fairness, correctness and structure
Equity, criticality, impact,

Lobbying with the law on what is correct
Company Confidential
1 2005 Nokia V1-Filename.ppt / yyyy-mm-dd / Initials
Equity Considerations while designing a Compensation Program
Figure 127
Developing a Compensation Philosophy
Job Evaluation
Job Evaluation
Process of systematically determining the relative worth of jobs to create a job structure for the organization The evaluation is based on a combination of job content, skills required, value to the organization, organizational culture, and the external market This potential to blend internal forces and external market forces is both a strength and a challenge to job evaluation
Key Steps
Job evaluation is a systematic process for determining how big jobs is, primarily to decide how much to pay. For example, typically an engineering job is seen as being a bigger job than a clerk and a CFO is seen as bigger job than an engineer. The key steps in the job evaluation process are:
Gather information about the jobs: Typically done by writing job descriptions. Select people (or a person) to evaluate the jobs: This is critical as the skill of these people determines the success of the project. Evaluate the jobs using a job evaluation system: Each job is given some kind of point score or ranking based on the understanding of the evaluators
Review the results: Once all the jobs have been evaluated, the whole result is reviewed for consistency and reasonableness.
Choices available for approaching job measurement

decide the level of work to be evaluated: the position, the job, generic ladders of work, or the role. consider the method of measurement to be used: hybrid points-based plans, factor comparison methods, levels-based ranking structures, or classification plans. decide the evaluation process or processes to be put in place to ensure reasonable and consistent results. As the diagram below illustrates, the evaluation process can be summarized in three basic phases, but within each phase, there are a number of options available.
Compensable Factors: Definition
Compensable factors are paid-for, measurable qualities, features, requirements or constructs that are common to many different kinds of jobs These factors are qualities intrinsic to the job and must be addressed in an acceptable manner if the job is to be performed satisfactorily These are:
Skill Responsibility Effort Work Conditions
Compensable Factors: Skill

the experience, training, ability and education required to perform a job under consideration not with the skills the employee may possess
Technical know-how
Specialized knowledge Organizational awareness Educational levels Specialized training Years of experience required Interpersonal skills Degree of supervisory skills required
Compensable Factors: Effort

The measurement of the physical or mental exertion needed for the performance of the job
Diversity of task
Complexity of task Creativity of thinking
Analytical problem solving

Physical application of skills Degree of assistance available
Compensable Factors: Responsibility

the extent to which an employer depends on the employee to perform the job as expected, with emphasis on the importance of job obligation
Decision making authority

Scope of the organization under control Scope of the organization impacted
Degree of integration of work with others

Impact of failure or risk of job Ability to perform jobs without supervision
Compensable Factors: Working Environment

Hazards/ physical surroundings of the job
Potential hazards inherent in the job Degree of danger which can be exposed to others Impact of specialized motor or concentration skills Degree of discomfort, exposure or dirtiness in doing job
Job Evaluation: Some Guidelines

Evaluate the job not the person: Though the person has a big impact on what the job is, particularly for knowledge worker jobs, it is important to keep personality issues out of the job evaluation process. Understand the job: You cant evaluate a job unless you understand it. If there is doubt do not proceed until you learn more. Compare jobs against jobs: The ultimate question is where the job being evaluated fits relative to other jobs. While descriptions are a necessary starting point and useful reference, focus on job vs. job comparison, i.e. how does the job we are evaluating compare to the other jobs we have evaluated. Dont focus on cost of error: The funniest and most futile arguments in job evaluation revolve around how important a job is because of how much damage it could do. Another key assumption on the part of the evaluators is that the position is being done at a competent level. Excellent or poor performance in the job should not be a factor in the evaluation - this is what performance reviews are for.
Methods of Job Evaluation

There are various systems for job evaluation
Factor comparison Points systems Classification Paired Comparison
In actual application, most systems deal with the same things in roughly the same way. The exception is the classification system. The central element in job evaluation is some list of factors defining job size
1: Ranking
This method is one of the simplest to administer. Jobs are compared to each other based on the overall worth of the job to the organization. The 'worth' of a job is usually based on judgements of skill, effort (physical and mental), responsibility (supervisory and fiscal), and working conditions.
Advantages
Simple. Very effective when there are relatively few jobs to be evaluated (less than 30).
Disadvantages
Difficult to administer as the number of jobs increases. Rank judgments are subjective.
Since there is no standard used for comparison, new jobs would have to be compared with the existing jobs to determine its appropriate rank. Therefore, the ranking process would have to be repeated each time a new job is added to the organization.
2: Classification
Jobs are classified into an existing grade/category structure or hierarchy. Each level in the grade/category structure has a description and associated job titles. Each job is assigned to the grade/category providing the closest match to the job. The classification of a position is decided by comparing the whole job with the appropriate job grading standard.
To ensure equity in job grading and wage rates, a common set of job grading standards and instructions are used. Because of differences in duties, skills and knowledge, and other aspects of trades and labor jobs, job grading standards are developed mainly along occupational lines. The standards do not attempt to describe every work assignment of each position in the occupation covered. They identify and describe those key characteristics of occupations which are significant for distinguishing different levels of work.
2: Classification: Pros & Cons

Advantages Simple. The grade/category structure exists independent of the jobs. Therefore, new jobs can be classified more easily than the Ranking Method Disadvantages Classification judgements are subjective. The standard used for comparison (the grade/category structure) may have built in biases Some jobs may appear to fit within more than one grade/category.
3: Factor Comparison
A set of compensable factors are identified as determining the worth of jobs. Typically the number of compensable factors is small (4 or 5). Examples (as discussed) are:
Skill
Responsibilities
Effort Working Conditions
Next, benchmark jobs are identified. Benchmark jobs should be selected as having certain characteristics.
equitable pay (not overpaid or underpaid) range of the factors (for each factor, some jobs would be at the low end of the factor while others would be at the high end of the factor).
The jobs are then priced and the total pay for each job is divided into pay for each factor. Example matrix next:
3: Factor Comparison: Illustration

Factor Comparison: The monthly salary is divided into the following factors Monthly Rate Rs.9,000 Rs.11000 Pay for Skill Pay for Effort Pay for Responsibility 2,000 2500 Pay for working conditions 500 500
Job
Secretary Admin. Assistant Supervisor Manager
4,500 5500
2,000 2500
Rs.15,000 Rs.21,000
6,000 9,000
3,500 3,500
4,000 7,000
1,500 1,500
This process establishes the rate of pay for each factor for each benchmark job. Slight adjustments may need to be made to the matrix to ensure equitable rupee weighting of the factors. The other jobs in the organization are then compared with the benchmark jobs and rates of pay for each factor are summed to determine the rates of pay for each of the other jobs.
3: Factor Comparison: Pros & Cons

Advantages The value of the job is expressed in monetary terms. Can be applied to a wide range of jobs. Disadvantages
The pay for each factor is based on judgements that are subjective. The standard used for determining the pay for each factor may have build in biases that would affect certain groups of employees
Can be applied to newly created jobs.
4: Point Method
A set of compensable factors are identified as determining the worth of jobs. (Skill, Responsibilities, Effort & Working Conditions
The point method is an extension of the factor comparison method. Each factor is then divided into levels or degrees which are then assigned points. Each job is rated using the job evaluation instrument. The points for each factor are summed to form a total point score for the job. Jobs are then grouped by total point scores and assigned to wage/salary grades so that similarly rated jobs would be placed in the same wage/salary grade.
4: Point Method : Pros & Cons

Advantages The value of the job is expressed in monetary terms. Can be applied to a wide range of jobs. Disadvantages
The pay for each factor is based on judgements that are subjective. The standard used for determining the pay for each factor may have build in biases that would affect certain groups of employees
Can be applied to newly created jobs.
Hays Method of Job Evaluation

The foundation of job evaluation in the Hay Method is an understanding of job content.
The rule is to evaluate the job not the person.

If the evaluator doesn't understand the job from the position description, then they can ask questions, find a resource to help, or delay the job evaluation until the position description is improved. There is a document called a Guide Chart that is customized to an enterprise and based in a solid foundation of Hay algorithms. The Guide Chart is divided into "factors". There are a total of four major factors that are in turn divided into 12 dimensions.
Hay Guide Chart : Compensable Factors

1.KNOW-HOW: The total of every kind of knowledge and skill, however acquired, needed for competent job performance. Know-How has three dimensions - the requirements for: Practical Management Human Relations Skill
2.PROBLEM SOLVING: The amount and nature of the thinking required in the job in the form of analyzing, reasoning, evaluating, creating, using judgment, forming hypotheses, drawing inferences, arriving at conclusions, and the like. It measures the degree to which thinking processes must be applied to the required knowledge in order to obtain the results expected of the job. Problem Solving has two dimensions: Thinking Environment Thinking Challenge
3.ACCOUNTABILITY : This is related to the opportunity a job has to bring about some results and the importance of those results to the organization. Tied closely to the amount of opportunity is the degree to which the person in the job must answer for (is accountable for) the results. There are three (3) components in Accountability: Freedom to Act Impact (Remote/ Contributory/ Shared/ Primary) Magnitude
Weightages
These compensable factors are weighted. Generally,
Know-How - 50% of the total points Problem-Solving 20% Accountability - 20% Working Conditions - 10%.
This weighting is indicative of the common balance but it may not be the same in a customized application. Also, the Working Conditions factor is not used in every installation.
In other words, debating at length your working conditions points for a typical white-collar librarian job will make very little difference in your overall ranking. Focusing on the fairness of the evaluation of your position's requirement for know-how and problem solving will potentially achieve more.
Next
Finally, the points in and of themselves don't mean much. When enough of the evaluations are done, all jobs in the enterprise are listed from end to end by their simple total points and profile. This creates the ranking. At this point various analyses are done and decisions made to create bands or pay grades. Research suggests there should be at least a 15% difference between jobs for there to be a noticeable difference. Market factors (external salary surveys) are reviewed in the context of the enterprise's market competitiveness. The enterprise determines if they want to pay at, above or below market and for what positions. Positions may be "red-circled" due to market anomalies or business needs (like specialized, programmers in high demand).
Hay System Guide Chart Factors Summary

1: KNOW HOW (3 dimensions)
Specialized Know-How
The sum total of every kind of knowledge and skill, however acquired, needed for acceptable job performance.
Practical procedures, specialized techniques and knowledge within occupational fields, commercial functions, and professional or scientific disciplines. Planning, organizing, coordinating, integrating, staffing, directing and/or controlling the activities and resources within an organizational unit or function. Can be exercised directly or consultatively.
Management Know-How
Human Relations Skills
Active face-to-face skills needed for various relationships with other people.
PROBLEM SOLVING (2 dimensions)

Environment Challenge
The amount and nature of thinking required in the job in the firm of analyzing, reasoning, evaluating, creating, using judgment, forming hypotheses, drawing inferences, arriving at conclusions, etc.
The environment in which the thinking takes place. The challenge of the thinking to be done
ACCOUNTABILITY (3 dimensions)
Freedom to Act
The answerability for action and its consequences. It is the measured effect of the job on the end results of the enterprise.
The extent to which personal or procedural control exists. What controls affect the job
Job Impact on End Results
The degree to which the job affects or brings about the results expected of the unit or function being considered.
Magnitude
The size of the function or unit measured in the most appropriate fashion (like revenue, production, etc.)
Criticisms of Job Evaluation

Job evaluation isnt scientific: The focus should be on market rates: There is an important school of thought that we shouldnt be ranking jobs against each other within the organization; rather we should be paying market rates for each job. However, many organizations have specialist jobs, which simply have no market comparators. Job evaluation takes too much time: Too true. Organizations have worked on finding ways to make the process less bureaucratic and more efficient. A good, pragmatic manager or consultant can help ensure that job evaluation doesnt turn into a bureaucratic nightmare . Job evaluation leads to stupid actions: Eg. an excellent manager needs to hire two unnecessary sub-ordinates to make the job appear bigger and hence move to the appropriate salary level. This is real issue because in general things like budget and numbers of staff are indeed good indicators of job size. So the easiest way to make your job look bigger is to build an empire. The solution to this is simply to have smarter people do the job evaluation, people who understand job size not people blindly applying a tool.
Output: A Job Hierarchy
The output is an ordered listing of jobs based on their value to the organization The hierarchy not only provides information about which jobs are most and least valued, but also provides the relative amount of difference between jobs
Job Evaluation: Summary

Job evaluation has evolved into many different forms and methods. Therefore, wide variations exist in its use and how it is perceived No matter how job evaluation is designed, its ultimate use is to help design and manager workforce related, business focused and agreed-upon pay structure
Market Pricing & Compensation Benchmarking
The issue is
Talent shortage is a real problem Salary increases of Inflation+10% are not sustainable when productivity and performance are nowhere close to that number A strategic view on compensation will become a survival pre-requisite soon
Benchmarks for one of three reasons

Determining the pay for select positions Determining best pay practices (perquisites, benefits, structure, ) that can help improve attraction or retention Determining pay increases
Market Survey Process

Business & Compensation Strategies Job Analysis
Select Benchmark Jobs
Identify Relevant Labour Markets
Identify Data Sources
Gather Data
Analyse Data
Steps Involved
A. Plan the survey
Determine the purpose of the survey Determine the jobs to include Determine the markets to survey Determine the firms to survey Determine the information to be obtained Make the schedules Determine the survey method
B. Conduct the survey

Collect information Insure job comparability
C. Tabulate, analyze, and present results
Typical Approach to benchmarking process 1. Steering Committee Formation

To lay the groundwork for the project, agree on expectations, understand business and technology plans and strategies, and project goals.
2. Data Collection and Analysis

Collection of organizational data to get a clear understanding of the work being performed by employees. This step is essential in accurately matching to industry compensation information.
3. Job Matching
Matching roles/jobs to an external compensation database is the next step. For positions that do not easily match the database, a position description questionnaire is used to collect job content information.
Typical Approach to benchmarking process

4. Benchmark Jobs Against Market Using the external database as a benchmark, the competitiveness of the organization's compensation practices is analyzed .
Tables and graphs that summarize the comparative data with respect to agreed-upon peer groups are used as tools. Provide the organization with the information required to make effective decisions regarding compensation levels and overall attraction and retention strategies.
5. Provide Recommendations and Cost Modeling Based on the understanding of both the marketplace and the organization's compensation philosophy and business strategy, recommendations are made which may include
Modifications to the salary structure, Adjustments to your competitive positioning Adjustments for certain positions or groups.
This process also provides current industry best practices for compensation
Job Pricing
Job pricing involves the establishment of wage rates for jobs within an organization, by using a job evaluation method (Internal/ External).
Internal Job Evaluation Methods Slotting - establishing a value for a job based on its similarity to another job or jobs. Ranking - a job to job comparison resulting in an ordering of jobs from highest value to lowest value. Paired Comparison - each job in an organization is compared to every other job and the job of most value in each pairing is noted. Jobs are then ranked based on the number of times they were found to be more valuable in the comparison. Point Factor - involves three basic steps:
Compensable factors are chosen by the organization based on what is valued for its jobs (such as education, experience, and responsibility requirements), Each compensable factor is weighted and scaled (e.g. no experience required, two years experience required, five years experience required, etc.), Each job is measured against each compensable factor and a total score is derived and compared with the scores of other jobs
Market Pricing
Under a market-based pay system, compensation offered to employees for internal jobs is priced to the various labor markets where the employer competes for talent.
Actual pay ranges for internal positions determined using compensation data for similar positions offered by other companies in the market
Implementing Market Pricing

Obtain wage and salary surveythere are four primary sources for this:
Professional associations Local and regional associations Private consulting organizations
Ensure job comparabilitydetermine which jobs have market equivalents Ensure company factors match surveyuse data relevant to company size and industry Price the jobbased on annual salary increases (gleaned from surveys)
Using the output of the survey

Determine your capacity to pay Determine your compensation philosophy
Market positioning
Internal positioning (Seniority, Performance, Differentiated)
Determine your compensation structure

Fixed, flexible, variable, cash, benefits, deferred etc.)
Determine the periodicity of review and linkages with company performance
Communicate
Compensation Level: Definition

The term compensation level simply means the average compensation paid to workers at some level of analysis, e.g. the job, the department, the employing organization, an industry, or the economy.
This has two implications

1. External Implication: how does the organization compare with other organizations? (how the organization wishes to position itself in the marketplace). Internal Implication : The average compensation is a reflection of the total compensation bill of the organization. Labor is one of the claimants on organizational resources. The size of the compensation and benefits bill is a reflection of who gets what within the organization.
2.
Compensation Quartile Strategies
Figure 125
Decisions About Compensation Levels
Compensation Strategies
Above-Market Middle-Market Below-Market Paying for higher qualified, more productive workers. Attempting to balance of employer costs and need to attract and retain employees. Paying all that the firm can afford Taking advantage of the abundant supply of potential employees in a loose labor market.
Compensation Level Decisions

The compensation level decision is important both in terms of employee attraction and cost considerations,
Case: Low Compensation Level The applicant pool may dry up Some employees (often the best ones) may leave. Case: Low Compensation Level The competitive position of the organization may suffer Turnover rates may drop below some desirable minimum so that the organization tends toward inflexibility or stagnation. Total payroll cost issues The organization may be confronted with pressing compensation demands from unions & other groups.
A low compensation level may attract only less efficient workers, with the result that labor costs per unit of output rise.
Tips for Benchmarking Jobs

Select surveys that are appropriate for the positions being surveyed: right job, right geographic area, right company size, etc. Stay general. Select job descriptors based on content, rather than job title. Match closely. A job descriptor should be at least 70 percent of an incumbent's current job responsibilities. Make as many matches as possible. Match the job function, not the person. Combine judiciously. Job descriptors can be blended, but no more than two descriptors per survey should be combined to represent an incumbent's job. Watch for company levels (example: plant, division, group). Review the level guide. Some surveys instruct the user to "See level guide" at the end of a descriptor. This means you should refer to the front of that survey to identify the specific level on the data collection form. Involve employees as much as possible in benchmarking jobs
The Results
Ability to manage compensation and ensure alignment to business strategies and goals
Adding validity and structure to company compensation management processes

Increased capability to incorporate market pricing results into the administration of ones pay program Enhanced pay decision-making based on a full understanding of market competitiveness
Salary Increase in India

Average increments 5-15% in 2004
Actual 2003 Increases 2004 Forecasts
Automobiles/ Ancillaries
9.1
8.1
Chemicals/ Petrochemicals
9.1
9.4
Consumer Durable Goods/ Electronics Engineering Entertainment/ Communications/ Publications
10.0 10.5 11.2
11.5 11.4 16.0
FMCG/ Retail Hospitality IT Solution Provider
10.5 11.0 11.2
10.8 12.5 12.3
Software Development
11.9
13.0
Telecommunications
9.4
13.5
Others
11.3
11.2
48 2005 Nokia V1-Filename.ppt / yyyy-mm-dd / Initials Mercer Salary Increase Survey 2004
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 124
Compensation Decisions & Determinants

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. )
Rs.
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. If, for example, Jai is earning less money than Ravi, on a job he believes is worth more than Ravis, he is likely to consider the situation unfair and do something about it. 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 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.)
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 Company Confidential that the pay for jobs is internally consistent.
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.
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: 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 Assessment
Pay Form
Pay Philosophy
Pay Delivery
Pay Plan Design
Summary: Checklist
Pay Philosophy Internal Vs External Equity Lead Vs Lag Market Attraction Vs Retention
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
Designing Pay Structures
Developing a Pay Structure

Pay structures result from pricing job structures. Job structures, in turn, result from the application of formal or informal job evaluation to an organization's jobs In order to price a job structure, it is necessary to use rupee amounts from either current pay rates or the market data collected from compensation surveys A pay structure, then, is a combination of the job structure, the labor market, and the organization's decisions regarding the wage level
Common Pay Structures

Hourly and salaried Office, plant, technical, professional, managerial
Clerical, information technology, professional, supervisory, management, and

executive
Pay Structure Design: Questions & Issues

Should there be a difference in changes in base pay progression opportunities among jobs of varying worth ? Do employees have a significant opportunity to progress to higher level jobs ? If so, what should be the relationship between promotion to a higher job and changes in base pay Does the organization wish to recognize dangerous working conditions in its base pay schedule ? Will policies and regulations permit incumbents to earn rates of pay higher than established maximums and lower than established minimums ? What should be the reasons for allowing such deviations ?
Pay Structure Design: Questions & Issues

What is the lowest rate of pay that can be offered and still hire desirable employees ? What is the rate of pay necessary to retain employees ? Is it wise or necessary to offer more than one rate of pay to employees performing either identical or similar kinds of work ? What is considered to be a sufficient difference in base rates of pay among jobs in a class-series that requires varying levels of knowledge, skills, responsibilities, and duties. How will the pay structure accommodate across-the-board, cost-of-living, or other adjustments not related to employee tenure, performance, or responsibility and duty changes ?
Establishing Pay Structures
Pricing Job Structures

The job structure presents the compensation decision maker with a hierarchy of the jobs in the organization. A rupee value now needs to be placed on this hierarchy. This rupee value is available in the current pay rates paid for the jobs and in the compensation survey data representing the labor market. These two sets of data are combined into a matrix that is used to create a scatter diagram
pricing a job structure involves a series of techniques and decisions regarding the vertical, horizontal, and regression-line dimensions of the scatter diagram. Company Confidential
Thus,
Scatter Diagram: The Vertical Dimension

The vertical axis of the scatter diagram is a set of rupee figures from low to high. This amount may come from either the current pay rate or range for the job within the organization or the value placed upon the job in the market survey. When current pay rates are used, an initial concern is the exact pay rate to assign to each-job.
If there is a single job incumbent and/or a single pay rate for the job, then the particular rupee amount paid could be used, although this person could be paid high in the pay range. But if there is a pay range and a number of incumbents, then the exact figure to use must be determined.
If the average pay is used, the pay for the job may be overstated or understated depending on how long the incumbents have been on the job or what their performance has been.
The alternative is to use the midpoint of the pay range. This gives a good indication of the relative value of the job and not the incumbents.
Scatter Diagram: The Vertical Dimension
When survey data are used, the figures need to be adjusted in a number of ways. Since the wage data does not provide a single rate but a range of figures, therefore the best single figure to use, such as the mean or median, needs to be determined. Second, any data collected in the wage survey predate the effective date of the wage structure presently being built. Thus, the data needs to be updated to the effective date of the new wage structure.
Pay Level Strategies: 1

This decision involves determining how competitive the organization wishes to be while the wage structure remains in effect. There are three basic strategies:
Lag the Market: The organization updates the wage survey data to the current date and then installs the new wage structure. If a change in the labor market of 10 percent is assumed for the next year, then the only time the organization will be competitive with the market is at the beginning of the year. By the end of the year any decisions based upon the wage structure will be 10 percent behind the market.

Lead-Lag Here the organization takes account of the 10 percent estimated change in the market but wishes to be on average with the market. It does this by starting the year at 5 percent above the market rate. Provided the increase is steady over the year, this strategy will place the organization ahead of the market the first half of the year and behind it the second half.

Lead-the Market In this strategy the organization wishes to pay above the market rate and does so by starting the year at 10 percent above the wage survey data. By the end of the year the organization will be paying the market rate.
Scatter Diagram: Horizontal Dimension

The horizontal axis is the hierarchical ranking of all the organization's jobs. The pricing process may work with either individual jobs or pay grades The major question involving the horizontal dimension is how the hierarchy of jobs was arrived at.
Market Rates.
The organization may assume that it wishes to pay strictly market rates for its jobs and may therefore place rupee values on both axes, making a totally consistent structure. Clearly this assumes that there is a market rate for all of the organization's jobs and that this rate is satisfactory.
Job Evaluation Rates.

Depending upon the method of job evaluation used, these ratings may consist of a ranking of jobs from low to high, a series of classification levels, or a range of points.
Negotiated Rates.
Where there is a union, the hierarchy of jobs may be a negotiated ranking based upon custom or the relative power of a group of unions.
Determining A Pay Policy Line

It is the line on a graph showing the relationship between the job value, as determined by job evaluation points, and pay survey rates
Each organization must develop its own pay policy line, the trend line or line of best fit that best represents the middle value of jobs that have been evaluated or classified to have particular worth. Many organizations use the pay policy line to set midpoint values for all their jobs.
Pay policy lines are useful when plotting survey data and comparing them with the internal pay structure. From the pay policy line, organizations establish the minimum and maximum pay levels, the relationship between pay grades, and the range of a pay grade.
Determining A Pay Policy Line

The procedure most organizations follow is to identify the market rates for various benchmark jobs that cover the entire spectrum from lowest to highest rates of pay. By plotting on a chart the pay-rate information obtained through surveys, a scatter diagram or scatter plot can be developed.
Pay (Comp. Survey) In. Rs. Thousand
Developing the Pay Policy Line

Once the horizontal and vertical dimensions of the scatter diagram have been settled upon, all the jobs or the key jobs can be plotted by their values on both axes. To create a smooth progression between pay grades, a pay-policy line is fitted to the plotted points. The line may be straight or curved and may be fitted by a number of different methods. When plotting job structures of single job clusters, a straight line is usually employed. The most frequently used types of lines are the lowhigh line, the freehand line, and the least-squares line.
Examples of Pay Policy Line

Low high Line: This is a straight line connecting the highest and the lowest of the plotted points (these are often called anchor points). The rates of all intervening jobs are made to fall on the line. The low-high line appears especially useful in union bargaining of the wage structure because of its flexibility. When a final bargain is reached, it may be implemented by raising either end or both ends in such a way as to reflect the contract.
Freehand line. After the points have been plotted the trend of the data can often be easily visualized. In this case it is possible to draw a freehand line that best describes the plotted points. In drawing such a line, vertical deviations from the line are minimized if the line follows the obvious slope of the data. Although the line may be straight or curved, its advantages are greatest when it is straight. The obvious advantages of using a freehand line are that it is easy to plot and simple to explain.
Wage Survey Results: Quartiles

In using wage survey results, instead of present rates in determining the wage line, it is useful to employ a chart in which survey results have been presented as quartiles representing the pay grades of the organization
The medians (midpoints) or averages of survey results may be used in place of present wage rates in determining the wage line. The starting rate of a pay grade must be sufficient to attract employees to those jobs, and wage survey results provide evidence of what that rate must be. If the organization already has a series of pay grades in place, jobs may be slotted into the appropriate pay grade on the basis of the market rates that have been determined in the wage survey (Called a rank-to market job evaluation)
Multiple Structures
While we have considered only a single wage structure, an organization may have several wage structures one for each broad job cluster.
It is not unusual for large organizations to have at least three pay structure lines:
Blue collar manual labor, craft, and trade workers.
Nonexempt white collar salaried workers. Managerial, administrative, and professional exempt employees
Some organizations have a fourth pay structure for their highly paid executives.
The Need For Multiple Pay Structures

Reasons for multiple pay structures could be: It may be difficult to compare these different types of jobs, in which case the horizontal axis of the scatter diagram is not useful The slope of the pay-policy line for these groups may be very different. At opposite extremes would be the blue-collar workers, with a very flat slope, and the managerial group, with a very steep slope. Further, the pay-policy lines will start and stop at different places, so that there will be little overlap between them.
A major reason for using multiple pay structures is that rates of pay for more advanced jobs increase geometrically rather than linearly.
Completing the Wage Structure: Pay Grades

At this point, the wage structure consists of a horizontal dimension and a vertical dimension with a pay-policy line derived from the plotting of jobs on them On the horizontal dimension, jobs are grouped into pay grades; on the vertical dimension, money is grouped into rate ranges.
A pay grade is defined as a group of jobs that have been determined by job evaluation to be approximately equal in difficulty or importance.
If a point plan is employed in job evaluation, a pay grade consists of jobs falling within a range of points; if factor comparison is used, a range of evaluated rates; if ranking is used, a number of ranks. In the classification method of job evaluation, a pay grade consists of all jobs that are comparable to the level description.
Pay grades are nothing more than convenient groupings of a wide variety of jobs or classes similar in work difficulty and complexity requirements but possibly having nothing else in common. Company Confidential
Pay Grades
There appears to be no optimum number of pay grades for a particular wage structure. In practice, pay grades vary from as few as 4 to as many as 60. If there are few grades, the number of jobs in each will be relatively large, as will the increments from one grade to another. If, on the other hand, there are many pay grades, the number of jobs in each grade and the increments between grades will be relatively small. Although organization practice varies greatly, there has been a tendency to reduce the number of pay grades.
Pay Grades (contd.)

The actual establishment of pay grades is a decision-making process designed to
place jobs of the same general value in the same pay grade
ensure that jobs of significantly different value are in different pay grades
Provide a smooth progression, and ensure that the grades fit the organization and the labor market.
Because jobs in a pay grade are treated as identical for pay purposes, it is extremely important that grade boundaries be accepted. For this reason, it is often useful to move jobs that are very close to the maximum cutoff point into the next higher grade
There are a number of ways of grouping jobs into a limited number of grades. Let's examine four of them
Developing Pay Grades

It may provide for a single rate, or it may allow for a range of pay within a certain grade.
The top or maximum rate of pay of a pay grade states that this is the most that work produced by a job in this grade is worth to the organization. The bottom places a minimal value on the contributions of the assigned job.
The distance between minimum and maximum recognizes the range of performance and experience of incumbents in the assigned job(s).
General Characteristics Of Pay Grade Systems
Each grade provides for a range of pay. Within a pay grade range there is a minimum, a midpoint, and a maximum pay. The range from the minimum to the maximum within a single pay grade may vary from 20 to 100 percent. The most common range is from 30 to 50 percent.
The number of steps within a grade may also vary. Grades having steps will normally have from 3 to 10 steps, with 6 to 7 in-grade steps most common.
There is a direct relationship between the rate of increase per step and the number of steps within a grade.
General Characteristics Of Pay Grade Systems
The requirements of the organization will provide answers to the correct number of grades, the number of steps within grades, and their rates of progression within and between grades.
The number of pay grades to be included within a pay structure varies with the circumstances--there is no right number.
1: Cluster Approach to Pay Grades

The simplest approach is to make a scatter diagram of the organization's jobs, as is done in establishing the pay-policy line. When this is done it can often be observed that the jobs tend to cluster rather than scattering evenly. This effect can be taken advantage of by encasing the clusters horizontally and vertically, as illustrated This provides all three dimensions, but none of them is arrived at consistently, nor are they likely to be symmetrical. It may have a negative impact on salary and career progression in the organization. This has the advantages of simplicity and flexibility; small organizations are most likely to use this
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2: Division Approach
Use the horizontal dimension of the wage structure the job evaluation points to determine the number of pay grades.
This is done by determining a set number of points for each pay grade and, starting with the least number of points, marking off the lines between adjacent grades. In the figure, each pay grade is 40 points "wide." The job rate for each grade should be set by placing the range midpoint at the point where a vertical line from the point value in the middle of the grade, say 200 points for level 3 in the figure meets the pay-policy line.
3: Mid-point Progression Approach
It focuses on the pay-policy line and the vertical axis of the wage structure.
The number of pay grades is obtained by determining a standard distance between the midpoints of adjoining grades. (10% is the distance decided upon between grades in the e.g.) Starting at the midpoint of the lowest grade, we place the midpoint for each succeeding grade 10 percent higher than the lower one.
The dividing line between grades is halfway between the two midpoints. As can be seen, the horizontal dimension of job evaluation points widens with each higher grade.
This approach is often combined with increasingly broad rate ranges to make the wage structure balloon out at the higher levels. The rationale is that at higher levels, positions are harder to define and evaluate accurately, and Company Confidential greater variation in performance is possible.
4: Continuum Approach
Each job evaluation point on the horizontal axis has its own rate range; there is no grouping of jobs. The pay-policy line constitutes the midpoints. A standard maximum and minimum which are a set percentage above and below the midpoint are defined.
These lines widen as the wage level rises, making the range broader at the top than at the bottom.
A system like this requires a lot of confidence in the job evaluation system; it has gained popularity with the Hays plan
Pay Ranges
A range of pay allows an organization to move beyond pay for the job to pay for the person. Since a pay grade incorporates a range of job evaluation points, it is useful to have some range of pay for the grade.
Ordinarily, the midpoint of the range will be the job rate, the mean or median of the compensation survey data.
The other points to define are the minimum and maximum of the range. The range spread (the distance from minimum to maximum) varies greatly but is usually within a 25 to 60 percent range. Many large wage structures with a variety of jobs are narrow at the bottom and spread out at the higher levels. Once pay grades and rate ranges are designed, the wage structure is complete (see figure)
Discussed later in more depth
Broad banding
The practice of using fewer pay grades having broader pay ranges that in traditional systems.
Benefits
Encourages horizontal movement of employees Is consistent with trend towards flatter organizations Creates a more flexible organization Encourages competency development Emphasizes career development
Traditional Pay Structure vs. Broadbanding
Rs. 56,000 Rs. 49,000
Rs. 56,000
Rs. 43,000 Rs. 35,000 Rs. 30,000
Rs. 40,000
Rs. 30,000
Figure 1213
Narrow Vs Broad Bands
Pay Rate
= narrow = broad
Pay Grade
Typical Pay Range Widths
Figure 1215
Issues Involving Pay Increases

Seniority
Time spent in an organization or on a particular job. Used to determine eligibility for organizational rewards and benefits.
Maturity Curve
A curve that depicts the relationship between experience and pay rates. Assumption is that as experience increases, proficiency and performance increase.
Issues Involving Pay Increases

Cost-of-Living Adjustments (COLA)
A percentage increase in wages that allows employees to maintain the same real wages in a period of economic inflation.
Adjustments are tied to changes in an economic measure (e.g., the Consumer Price Index).
Lump-Sum Increases (LSI)

A one-time payment of all or part of a yearly pay increase.
Lump-sum payments do not increase base wages
Pay Adjustment Matrix
Figure 1217
Pay plan characteristics that differentiate pay plans between more and less uncertain environments Firms in less uncertain environments show: Greater use of market- lag pay-level policy Greater emphasis on seniority awards Greater use of lump-sum pay adjustments
Firms in more uncertain environments show: Greater use of market-match pay-level policy
Greater emphasis on performance awards

Greater use of distributive pay adjustments Greater emphasis of stock bonus awards Greater emphasis on creating cooperation with team of employees Greater use of external comparisons for evaluating pay plan effectiveness
Greater use of cash bonus awards

Greater emphasis on creating competition among individuals Greater use of internal standards for evaluating pay plan for effectiveness
Forms of Compensation
Components of a Compensation Program
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Cost to Company The cost of every employee to the company. In any given structure, it indicates the entire financial expenditure that the company incurs for the particular employee including future provisions and expenses incurred.
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Direct Compensation
Compensation Type
Base Pay The basic monetary compensation that an employee receives, usually as a wage or salary. It is direct cash compensation. Payments calculated on the amount of time worked. Consistent payments made each period regardless of the number of hours worked in the period. Compensation linked to individual, team, or organizational performance. An indirect reward given to an employee or group of employees as a part of organizational membership.
Wages Salary
Variable Pay Benefit
Base Pay: Trends

New Economy organizations: lag traditional counterparts in salary increases. This is due to high hiring rates and the use of stock option substitutes.
dont mind overpaying for an initial hire. This can create wage compression, as veteran employees see new hires earning more than they do.
have less divergent salaries and wages among their staff pay higher salaries to producers key software programmers and sales personnel. These salaries may be as much as 20% above what the market pays. give seniority increases and general across-the-board increases more commonly than merit increases. move production jobs off-shore whenever possible.
rarely use job evaluation and job analysis.

base salaries on the person, who is paid is based upon his or her skills and talents. The position the individual holds is less important.
Non Cash Perquisites

1. House Rent Allowance: It is only a non-cash perquisite for employees who receive accommodation from the company but if the employees do not receive accommodation from company then the employee receives the a percentage Basic Salary as H.R.A.
2. House Maintenance- A percentage of the non-cash perquisites is allotted for house maintenance. This again is a non-cash perquisite for individual who receive accommodation from the company and where the maintenance expenditure is borne by the company. Employees who do not receive accommodation from the company will receive it as cash
3. Leave Travel Allowance- A portion the non- cash perquisites is allotted for leave travel allowance. LTA depends on rules of the income tax Department. As of now, employees can utilise this benefit in a block of four years (The Government of India decides slabs of 4 years). Two LTA payments are free of tax subject to the submission of the evidence of travel.
Non Cash Perquisites

4. Medical- Private medical benefits are any plans, which have the purpose of paying for medical treatment of employees and their spouse/dependants, ensuring that support is available to meet medical expenses, should they occur, in a timely and effective manner. Different organisations may have other allowances based on their company policy. Eg. Utilities, Education Allowance, Uniform Allowance etc.
5.
Benefits:
Total compensation consists partly of the pay of the employee and partly of a set of other rewards that are loosely called benefits.
Benefits are unlike base pay in that they are awarded for different objectives, they are not periodically given, they are oftentimes deferred rather than current, and they require different types of administration
Benefits are ordinarily given to employees on the basis of being members of the organization, not on the basis of the job held or performance on that job There is no common definition of what is included in the benefit package. For instance, some will include legally required benefits, and others only the ones that are voluntary Unlike the paycheck, many of these benefits are hidden from the employee, especially if they are deferred for long periods. This suggests that benefit administration requires a large component of communication.
Why Benefits?
They are required by law They are desired by employees. They increase the satisfaction of employees or at least reduce dissatisfaction. They are demanded by unions.
They help to develop an atmosphere of trust in the organization. Taking care of employees through benefit programs increases the feeling that the relationship between the organization and the individual goes beyond an economic transaction.
The more that benefits are oriented toward reduction of insecurity among employees, the more stable is the economic environment.
Examples of Benefits
1. Extra payments for time worked: (Holiday premiums or Shift premiums) 2. Non-production awards and bonuses: (Anniversary awards/ Attendance bonus/ Quality bonus/ Safety awards/ Service bonus/ Suggestion awards) 3. Payments for time not worked: (Family allowances, Paid Holidays, Paid Sick Leave, Severance Pay) 4. Payments for employee security: (Contributions toward accident insurance, hospitalization & life insurance) 5. Payments for employee services: (Canteen service, Company Housing, Educational assistance, employee discounts for purchases, voluntary medical examination, festival gifts)
Retirement Benefits
Retirement benefits, which is a benefit/final salary arrangement where the employees retirement benefits are based on a formula linked to his/her earnings near retirement. The employee pays an agreed level of contributions and the Company meets the balance of the costs. Provident Fund Provident fund is a defined contribution/money purchase arrangement, where the employee and the Company pay contributions into an individual account that earns investment returns over time. A contribution of 12% of the basic salary of every employee credited in the employees the provident fund account. The companys contribution towards the provident fund is another 12%. Superannuation Is a retirement benefit and is paid annually to the Super annuation fund. Once member enter into employment and is paid more than 1500 he is entitled to Super annuation. 15% of his annual salary is deducted and accumulated with interest on the investment that the company makes on his behalf. Gratuity An individual is entitled for gratuity under the Gratuity Act after completion of 5 years of service. The sum that an employee receives is the last drawn basic salary multiplied by the number of years in service.
Prevailing Environment - Global Scenario

Employers are increasingly taking a view that Retirement benefit costs are but one component of an employees total remuneration. Employers can maximize their return on total remuneration costs by allowing individual employees flexibility (within regulatory & legal provisions) in deciding how they will receive their money. Retirement benefit program is a facility offered by the employer. It makes sense to allow individual employees to tailor their benefits & contributions to their personal circumstances. Employees have different needs at different stages-hence need to look at different cross section of the employees differently.
Prevailing Environment Indian Scenario

Retirement benefits in India are usually organized under the following :
Employees Provident Fund Gratuity Scheme Pension Plans Leave Encashment Scheme Medical Benefit Scheme (Statutory , DC) (Statutory , DB) (Non-statutory, DB or DC) (Non-Statutory) (Non-Statutory)
What needs to be Post Retirement Income?

Need for Regular Income after Retirement
Maintaining standard of living Need to look after oneself
Improving longevity
Absence of social security
Factors affecting Level of Income required

Inflation
Higher cost of health care in old age
What Do Employers Want?

Employers prefer to have control of cost. Employers would like to provide infrastructure so that employee needs can be fulfilled. Employers like pension plans to be a tool of retention and reward.
Needs Vary Across Companies & Business Lines
Age of the organization High Low

Retention Global talents High sjkilled Younger age group High tech Competitors MNCs
Future growth needs
High
Talents Retenti on VRS Skilled labor VRS Skilled labour Labour intensiv e
Low
Younge r age group Labour intensiv e
Pension Scheme Designs

Two preliminary approaches :
Defined Benefit Scheme: the employee upon retirement is guaranteed a set income for as long as he or she lives. There is usually also a clause that allows a percentage continuance beyond that for the person's spouse. Defined Contribution Scheme : Employees do not know what income they will receive upon retirement but do know how much money there is in the retirement plan fund earmarked for them.
Customizing through Hybrid Options
Benefit Certainty (Member) Final Salary
Defined Contribution
Cost certainty (Company)
Trends in Retirement Benefits Programs

The recent trend is toward employees taking responsibility for themselves. Retirement program is seen as a facility offered by the employer. Each employee should have opportunity to participate to the extent desired, based on his or her own assessment of personal needs. Employees may be allowed to tailor their benefits and contributions to their personal circumstances. Retirement programmes need to offer employees considerable choice in the way the assets supporting their benefits are invested.
Individual Salary Determinants
From the viewpoint of the employee, the end product of any compensation program is a paycheck. The wage determination must be personalized by making a further set of decisions.
the wage level, is an external organizational decision that determines the organization's competitive posture internal organizational decision involving the structuring of the jobs within the organization Although pay rates are determined for jobs, it is people who receive paychecks - the next decision is whether all people on a particular job are to receive the same pay or different pay; and if different, on what basis and how?
compensation inputs can be classified into three general areas job, performance and personal. Pay system decisions must incorporate the performance and personal factors into compensation, in order to provide a regular paycheck perceived as equitable to the employee The major way in which organizations allow for factors other than the job to enter into the determination of an individual's pay is to develop a range of pay for each job or grade of jobs. Pay range is a range determined by the organization to be appropriate for anyone who occupies a particular job. A pay range consists of a minimum pay rate (the beginning hire rate), a midpoint (the market or job rate), and a maximum (the highest rate the organization is willing to pay for the job).
Rationale for Pay Ranges

Need for performance differences Retention: critical personnel can be paid above the market rate for the job Employee expectation s : (Manage internal equity issues, performance, length of service, doing specific jobs/ special projects)
Collective bargaining: In contract negotiation, the organization may agree to rate ranges or to an expansion of rate ranges as an alternative to a general increase.
1:Single Rate Pay Systems

There is a single rate is paid for the job and the individual receives just that rate. This pay rate is the market rate and may be paid to either a job or a pay grade (option [a] below)
A job rate is used, the wage line provides the job rate.
The individual is paid in accordance with the number of points assigned to the job by the job evaluation system, This type of system is useful where performance variation and/or other personal characteristics are nonexistent or unimportant
2: Step Ranges
Consists of a series of steps, usually a specified distance apart, either in percentages or flat amounts. Step ranges may vary considerably in number of steps and the total range the steps cover.
The first consists of a starting rate & a job (market) rate New employees brought in at the starting rate and then moved up to the job rate in a series of steps.
This system places the market rate not at the top of the range but in the center of it. Employees are hired at the starting rate, and progress to the midpoint over time on the basis of learning job Thus, a person at the midpoint of the range is assumed to be a satisfactory performer. Movement above the midpoint is assumed to be for performance, or other characteristics beyond the normal or average. (Option [c])
If done properly, this movement corresponds with the learning curve of the job.
The market rate is the maximum, since it is assumed that once the person has learned the job, performance differentials are minimal (Option [b])
3: Open Ranges
In this system organization defines the midpoint, the maximum and the minimum of the range. An employee may be paid anywhere within this defined range
This helps focus more clearly on performance The average performer would be paid at the midpoint. New employees would start at the bottom and move to the midpoint as they learn the job and become average performers. Payment above the midpoint reserved for above-average performance.
The person's pay is not automatically adjusted when the pay structure is adjusted. At this point, the person's performance is reviewed and adjustment is made in relation to that performance
Option d has a series of steps up to the midpoint and an open range above the midpoint; option e has an open range from minimum to maximum.
Dimensions of a Pay Structure

Pay Structures have three dimensions The Range Breadth The number of pay grades The overlap
Dimension 1: Range Breadth

The breadth of the rate range is the distance from the top to the bottom of the range a to b in the prev. figure. It is the vertical dimension of the range.
The breadth may be stated in rupee amounts or in percentages. The latter is more common .
Assuming that performance is the criterion, the breadth would represent the opportunity for performance differences in the job. Where ranges are narrow, the assumption is that performance differences are narrow and vice versa.
Organizations that promote intentionally fast encourage narrow ranges, since people do not stay within one grade very long. A wide range is encouraged if adjustments need to be large to be noticed by employees
Range Maximums
Establishing range maximums is particularly difficult There is some logical maximum value for any job, regardless of how well it is performed. Ideally when this point is reached the person is promoted, either to a new job or by upgrading the tasks of the present job. Some organizations provide steps beyond the maximum of the range. There are usually two rationales for this
seniority long term employees who are solid performers but ill never be promoted recruiting and retaining mission critical employees
Dimension 2: Number of Grades

The number of pay grades is reflected in the horizontal dimension of figure A structure with a single pay grade would have a minimum and maximum embracing the total wage structure and would include all jobs. A large number of pay grades often coincides with a narrow range, permitting a large number of promotions and multiple classifications in job families in the organization. A small number of pay grades allows for flexibility, in that it assigns people to a wide range of jobs without changing their pay grade. there is no optimum number of pay grades for a particular job structure. But 10 to 16 seems to be most common.
Considerations for number of grades:

Organisation size: larger the size, more the number of grades Comprehensiveness of the job structure: A structure that covers the whole organization will tend to have more pay grades than one that deals only with one job cluster. the type of jobs : Production jobs whose pay policy line is relatively flat will tend to have fewer pay grades than a managerial structure that has a steep slope. pay-increase and promotion policy of the organization. A large number of pay grades allows for many promotions but entails narrow ranges and a narrow classification of jobs.
Dimension 3: Overlap
The final pay range determinant is the degree of overlap between any one pay grade and the adjacent grade (c to d in figure).
Overlap allows people in a lower pay grade to be paid the same as or more than those at a higher grade.
The rationale for such a phenomenon is that a person at a lower pay grade whose performance is very good is worth more to the organization than a new person at the higher pay grade who is not yet performing effectively. Overlap will work well where there are many wide pay grades.
Methods of Progression: Moving Employees through Rate Changes
Rate ranges make possible different pay rates for individuals in the same job and/or grade level.
All methods of progression specify how a person moves from the bottom of the range to the top of the range.
The major methods are
automatic progression, a combination of merit and automatic progression and merit progression.
An organization does not have to restrict itself to only one method; it may use different methods for different jobs or even different methods for a single job at different parts of the rate range
Automatic Progression
Consists of pay increases based automatically on length of service. Sometimes referred to as scheduled increases In some situations, such as basic industries, there are a small number of increases often in rapid succession (every three months) to the maximum rate for the job. These are jobs in which proficiency can be gained in a short time. This is used when organizations are interested in encouraging learning on the job. On the other hand, some organizations may have many steps (five or more) and grant increases once a year. In these situations longevity on the job leads to higher proficiency, and the organization wishes to reward continuity of employment
Automatic Progression (Contd.)

Automatic progression does not have to be totally automatic. A fully automatic progression plan is actually a variation of the single-rate or flat-rate system.
If all employees can expect to reach the maximum of the pay range after a given period on the job, the assumption is that the maximum is the real rate for the job
Variation can be introduced in two ways.
First the time period may vary from step to step. Eg. some systems move people rapidly to the midpoint and then much more slowly; the extended steps beyond the midpoint are clearly tied to longevity.
The second variation introduces a little merit into the system by either denying movement to the next step for poor performance, giving good performers a double-step jump, or shortening the time period between step increases.
Combination of Automatic/ Merit

It is possible also to design progressions that try to balance merit and longevity. These let employees focus on different criteria at different places in the pay range. The usual combination is automatic progression to the midpoint the market rate and progression beyond the midpoint on the basis of merit. By this method:
all employees can be expected to reach average proficiency within a certain time on the job (this period matches the automatic movement to the midpoint). However, not all employees exceed average performance on the job, and movement from the midpoint on should be based on performance that is above average.
It is important to do a good job of matching time taken to reach the midpoint with time taken to reach proficiency in the job. Only then are the labor costs equalized; if these are out of balance, then labor costs are higher or lower than is optimum.
Combination of Automatic/ Merit (contd)

One can also combine longevity and merit while determining how an employees pay will progress. Under this arrangement
All employees receive an automatic adjustment,

Those with above-average performance receive more, such as a two-step jump. It is also possible to hold back those who are not performing well. The latter action is rare but can be effective in probationary situations.
Merit Progression
A pure merit progression employs an open pay range with only the minimum, maximum, and midpoint defined Movement within the range is based strictly on performance, and there are no adjustments for general increases. This pay-for-performance system requires an integration of performance appraisal with pay determination In practice, a merit progression is usually a combination of merit and longevity.
In this method, the good performer should get to the top of the pay range faster than the average or poor performer
The Rationale The movement to proficiency is actually an improvement in performance and should be treated as such; people differ in their rate of improvement to proficiency, and this should be taken into account; it is performance that the organization wants and should pay for Company Confidential
Pay Ranges & Recruitment

We have assumed that the organization has been hiring people who are just qualified and moving them up in the range as they learn the job In cases of hiring a person who can do the job from the beginning, he should be hired at the market rate (the midpoint). In actuality, then, people are likely to be brought into the organization anywhere up to the midpoint of the range, based upon their qualifications. Thus, a system in which the ranges ends at the market rate has a flat rate for hiring fully qualified employees.
Pay Ranges & Recruitment

The labor market may complicate the pay range when there is a shortage of applicants. When it is hard to recruit, one way organizations adjust is to raise the starting pay to wherever in the range it must go in order to obtain people. This may result in hiring rates at the top of the pay range or above. This extreme situation makes any upward movement within the grade difficult or impossible for the person.
A person who is then expected to stay in the grade for three or more years before promotion can only look forward to general increases.
Correcting Out-of-line Pay

The pay range defines the minimum and maximum that a person may be paid for a given job. For a number of reasons an individual's pay may be more or less than the prescribed range. The organization needs policies for dealing with these out-of-line pay.
Green Circle Pay:

Current Employee Pay (In Rs.)
It refers to the case in which a person is paid less than the minimum of a grade. This occurs, for example, when a person is promoted into a position in a higher pay grade, but not given a pay increase Red Circle Pay:
Refers to the case where a person is paid above the maximum of the range for his or her job. Other names for this situation are ringed, flagged, or personal pays, red allowances, overrates, and personal out-of-line differentials . Company Confidential
Green Circles: Underpaid Employees

This situation usually occurs when the wage structure is changed upward and the individual was at the bottom of the rate range. The underpaid employee should have his/ her pay raised to the minimum of the range, immediately if possible or in a couple of steps. If the person is performing adequately, Usually there will be a few underpaid employees, and a policy of bringing their rates into line immediately protects the integrity of the pay system. But if many employees are underpaid, a careful review is required: not only may the costs of adjustments be high but also equity between the newly raised employees and other employees on the job may require a phasing in of increases.
Green Circles: Underpaid Employees

It is possible, for a number of reasons, that the employee is not worth the minimum of the range.
If the labor market is very tight and marginal workers must be hired and retained, a lower classification involving job redesign to accommodate the person's skills would be in order. This same reasoning could apply to older and handicapped employees who cannot fully carry out their jobs Redesign may be unnecessary where there is already a lower-level job to which the person can be assigned. Or a trainee rate may be appropriate if the employee is still learning the job.
Red Circles: Overpaid Employees

Solutions to overpay vary from doing nothing to reducing the pay to the top of the range. The most common solutions are:
Freeze the pay until general increases catch up with the current pay.
Transfer or promote the person to a job in an appropriate pay grade.

Freeze the pay for a limited period, such as one year. Then attempt either of the previous strategies. If this is unsuccessful, reduce the pay at the end of the period. Red-circle the job and not the person.
Eliminate the differential after a period such as a year or gradually over time.
Overpaid Employees: Other Approaches

The Adder:
This is a payment to the employee in quarterly installments of the difference between his or her rate and the maximum of the range
The employee is given 100 percent of the differential the first year, 75 percent the next year, and so on until there is no differential.
Advantage: The top rate for the job is made clear and both the person and the organization are aware of the exceptional and temporary character of the differential.
Lump Sum Payment.

For example, the employee may be paid the difference for the year as a lump sum payment and have his or her pay rate brought immediately into line. Any solution to overpay involves questions of equity. Overpayment is usually not the fault of employees, and any reduction in pay will be seen as unfair by them. On the other hand, there is also the perception of equity by other employees, so some action is always called for
Other Variables Influencing Pay

The person's performance appraisal, Pay history Present position in the range, Experience; Time since the last pay increase; The amount of that increase; Pay relationship within the work area and other parts of the organization;
Labor-market conditions;
The financial condition of the company; Previous decisions regarding wage level and structure.
The interaction of these forces determines whether a person receives an increase, and if so the amount of that increase
Pay Compression
A situation in which pay differences among individuals with different levels of experience and performance in the organization becomes small This occurs when new people are brought into a pay grade at the same, a higher, or even a somewhat lower rate than people currently in it. This is most obvious in the case of new hires who are brought in at pay rates almost the same as those of employees who have been there a year.
Pay Compression (contd.)

Rates for new hires are determined by the external labor market. Unless one pays that amount, the new employee will not accept the job offer.
Current employees have their wages set by the internal labor market, which is an administrative decision.
The result is that new hires make too much in relation to those already working Compression is also likely to occur with
first-line supervisors of nonexempt employees who are paid overtime; with sales managers, whose sales staff can make more selling on commission than the manager; and with middle management, who are squeezed between top management and the increases given to lower-level employees
Pay Compression: Solutions

One obvious solution is to ignore it. This is possible if people are moving rapidly and the problem is mostly one of timing. The person feeling the inequity can be told that it will disappear shortly. Or Adjust the internal structure more completely to the external realities. This may be an expensive alternative but is necessary if the organization is experiencing turnover and employee discontent.
Summary
Organizations wish to pay for more than just the job that the employee does. Employees contribute both in terms of membership (staying on the job) and being productive while on the job. Both of these sets of contributions need to be rewarded by the organization.

The Equity Equation: Company Confidential

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The Equity Equation: Company Confidential

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The equity equation

Costs Delivering value to shareholder Potential

Solving the compensation problem

Delivering value to employee

Fairness, correctness and structure

Equity, criticality, impact,

Equity Considerations while designing a Compensation Program

Developing a Compensation Philosophy

Choices available for approaching job measurement

Compensable Factors: Definition

Compensable Factors: Skill

Compensable Factors: Effort

Analytical problem solving

Compensable Factors: Responsibility

Decision making authority

Degree of integration of work with others

Compensable Factors: Working Environment

Job Evaluation: Some Guidelines

Methods of Job Evaluation

2: Classification: Pros & Cons

3: Factor Comparison: Illustration

Secretary Admin. Assistant Supervisor Manager

3: Factor Comparison: Pros & Cons

Can be applied to newly created jobs.

4: Point Method : Pros & Cons

Can be applied to newly created jobs.

Hays Method of Job Evaluation

The rule is to evaluate the job not the person.

Hay Guide Chart : Compensable Factors

Hay System Guide Chart Factors Summary

Human Relations Skills

PROBLEM SOLVING (2 dimensions)

Job Impact on End Results

Criticisms of Job Evaluation

Output: A Job Hierarchy

Job Evaluation: Summary

Market Pricing & Compensation Benchmarking

Benchmarks for one of three reasons

Market Survey Process

Select Benchmark Jobs

Identify Relevant Labour Markets

Identify Data Sources

B. Conduct the survey

C. Tabulate, analyze, and present results

Typical Approach to benchmarking process 1. Steering Committee Formation

2. Data Collection and Analysis

Typical Approach to benchmarking process

Implementing Market Pricing

Using the output of the survey

Determine your compensation structure

Determine the periodicity of review and linkages with company performance

Compensation Level: Definition

This has two implications

Compensation Quartile Strategies

Decisions About Compensation Levels

Compensation Level Decisions

Tips for Benchmarking Jobs

Adding validity and structure to company compensation management processes

Salary Increase in India

Consumer Durable Goods/ Electronics Engineering Entertainment/ Communications/ Publications

10.0 10.5 11.2

11.5 11.4 16.0

FMCG/ Retail Hospitality IT Solution Provider