Compensation Management :

Tools and Techniques

Lee Kok Wai

Lectures 4 and 5

HRs
HRs 44 Roles
Roles &
& Key
Key Accountabilities
Accountabilities

Future/Strategic Focus
Strategic
Partner

HR as Business Partner

Strategic HR Planning

Compensation
Benefits
Compliance
HR Information
Systems

Administrative
Expert

Staffing

Performance
Measurement
Succession
Planning
Employee
Relations

Training &
Development

People

Processes

Culture and Image

Organizational
Design

Change
Agent

VOW Survey
Action Plan
Labor
Relations

Environment,
Health, Safety &
Security

Day-to-Day Operational Focus

Employee
Relations
Expert

Managing Human Resources in COMPAQ

Manpower Mgt.
Headcount management
Recruitment strategies
Sources of labor supply
Selection process & tools
Retention strategies & plans
Staff deployment
Staff orientation

Performance Mgt. (HRD)

Staff training & development
Succession planning
Career planning
Coaching & counseling
Appraisal review/ranking
Organization development
Leadership development

Employee Relations Mgt.

Benefits administration
Code of conduct & ethics
Employee discipline
Employee communications
Staff social, sports & recreation
Community services & relations

Human Resource Admin.

Records & information mgt.
Personnel research
HR policy review
HR process improvements
HR performance stds & audit
Legal compliance
Document control

Culture/Values Mgt.
Corporate vision
Corporate mission
Culture building
Teambuilding
Habits building

Compensation Mgt.
T-Comp philosophy & design
T-Comp planning & admin.
Incentive plans (MIPs/LTB)
Profit-sharing scheme
Reward & recognition prog.
Expatriate mgt.

EHS&S Mgt.
Environment mgt.
Employee wellness
Employee health services
Loss prevention
Asset management
Safety mgt.

Strategic Components of Human Resources

COMPENSATION MANAGEMENT
We believe in paying competitive wages that commensurate with job size and
individual performance
WELFARE MANAGEMENT
We believe in being a firm, fair and caring employer. We strive to make employees value
their jobs and want to remain in the organization based on their abilities to contribute and
grow.
PERFORMANCE MANAGEMENT
We believe in equipping employees with the necessary skills to do a good job, providing
them with the tools, the environment, the support and the information needed to excel in
their jobs.
CAREER MANAGEMENT
We believe in matching employees strengths and aptitudes to available jobs, developing
them to their highest potential and offering them opportunities to advance in their careers.
CULTURE/VALUE MANAGEMENT
We believe in instilling our corporate core values and promoting a corporate culture that
emphasizes results, teamwork, learning, sharing, service quality and work excellence.

The Strategic Compensation Model

Concepts

Compensation Techniques

Compensation Objectives

Internal
equity

Job
Job
Job
Job
Analysis Description Evaluation Grades

Role clarity and accountability.

Market
Salary
Definitions Surveys

Competitive wage policies and

practices.

External
equity

Policy
Lines

Pay
Structures

Facilitates administration and

performance management.

Influence employees work

attitudes and behaviour.
Employee
equity

Administration

Seniority
Increases

Performance Increase
Evaluation Guidelines

Planning, Budgeting, Monitoring, Evaluating

Attract talents.
Retain talents.
Motivate employees.
Comply with regulations.
Consistency in policy
administration.

What is Job Evaluation?

Job evaluation is a decision process of
comparing one job with another job with the
aim of establishing the relative importance
of jobs within the organization.
Job evaluation will provide an internally
logical ranking of all jobs which will form the
basis of the companys salary structure

Principles For Job Evaluation

Evaluating the job, not the job-holder
Evaluating the present job, not the future job
Job is being carried out in a fully acceptable

and competent manner

Process of evaluation is based on given facts

in the job descriptions.

Evaluate the job based on the primary

responsibilities and ignore the special

personal-to-holder responsibilities.

Job Evaluation : 3 Main Methods

Qualitative Method (an example is the

Job Classification Method and the Job

Comparison Method)

Quantifying the Qualitative Method (an

example is the Point Method)

Quantitative Method (an example is the

Guide Chart Profile Method)

Job Classification Method adopted by

Academic Institutions such as Universities
Job Class A : Doctorate Degree with at least 10 years post doctoral

experience plus relevant management experience (Faculty Head)

Job Class B : Doctoral Degree with at least 5 to 10 years post

doctoral experience (Full Professor)

Job Class C : Doctoral Degree with less than 5 years post doctoral

experience or Masters Degree with over 10 years post graduate

experience (Associate Professor and Senior Lecturer)

Job Class D : Masters Degree with 5 to 10 years post graduate

experience (Lecturer)

Job Class E : Masters Degree with 3 to 5 years experience

(Assistant Lecturer)

Job Class F : Masters Degree with less than 3 years experience

(Teaching or Research Assistant)

Job Evaluation: The Point Method

Job Evaluation Process
1. Form a Job Evaluation Steering Committee
2. Draw up a workplan for the exercise
3. Decide on the benchmark jobs
4. Decide on the job factors for the evaluation
5. Determine number of degrees for each factor
6. Prepare job descriptions based on job-factor format
7. Analyse each benchmark job in terms of factors and
degrees
8. Decide on the weights of each factor
9. Determine the weighted score for each benchmark job
10. Slot in all other jobs into the job grades

The Point Method

Form the Job Evaluation (JE) Steering
Committee
a. The Steering Committee should be chaired by
the CEO with functional Managers/ Heads as
members. The HR Manager should be the
Secretary of the JE Steering Committee.
b. If an external consultant is employed to assist in
the exercise, then he should be designated as
the advisor to the Steering Committee. The HR
Manager should then double-up as the
counterpart for internal skills transfer.

Job Factor Score Sheet : Job # 12

Factor

Education

20

40

60

80

100

Experience

30

60

90

120

150

Interpersonal Skills

10

20

30

40

50

Problems Encountered

30

60

90

120

150

Size of unit supervised

10

20

30

40

50

Decision Making

30

60

90

120

150

Work Environment

10

20

30

40

50

Impact of errors

30

60

90

120

150

Contacts/Committees

10

20

30

40

50

60

80

100

20 points
40
Total Score = 440

Assets Controlled ($)

The Point Method

Slot all other jobs into the job grades
a. From the clusters, decide on the
number of job grades to adopt.
b. Slot in all other jobs into the job grades
adopted.

The Guide-Chart Profile : Hay Method

This method, first developed by Dr Edward N.
Hay in the early 1950s, is essentially
concerned with decision making and
responsibility. Guide Charts were created in
1951 in client situations.
Emphasis was placed on answerability for the
consequences of decisions, the degree of
freedom to take decisions and bring them to
fruition, the degree to which there is prime
accountability, as compared to shared or
contributory accountability in a job.

The Guide-Chart Profile : 4 Critical Observations

The most significant factor could be grouped as

representing the knowledge required to do a job, the

kind of thinking needed to solve the problems
commonly faced, and the responsibilities assigned.
Jobs could be ranked not only in the order of

importance within the organization, but the distances

between the ranks could be determined.
The factors appeared in certain kinds of patterns

that seemed to be inherent to certain kinds of jobs

The focus of the process of job evaluation must be

on the nature and requirements of the job itself, not

on the skills or background or characteristics or pay
of the job holder.

The Guide-Chart Profile : Hay Method

There are Three Factors with a total of
eight elements which determine the
value of different jobs. They are:

1. Know-How
2. Problem-Solving
3. Accountability

The Guide-Chart Profile Method : Know-How

What is Know-How
Know-How is the total of every kind of skill

required for average acceptable job

performance. It is knowledge and experience
in professional, managerial and human
Relations activities necessary to fulfill the
job.

Know-How is measured in depth by eight

degrees and in breadth by five degrees

The Guide-Chart Profile Method : Know-How

The three dimensions of Know-How are:

Practical procedures, specialized techniques and

knowledge within occupational fields, commercial
functions, and professional or scientific disciplines. This
is commonly referred to as the Depth of Know- How.

Integrating and harmonizing simultaneous achievements

of diversified functions within managerial situations
occurring in operating, technical, support or
administrative fields. This is referred to as the Breadth of
Know-How

Active, practicing person-to-person skills in work with

other people. This is referred to as the Human Relations
Skill.

The Guide-Chart Profile Method : Know-How

Depth Of Know-How
A. Education to post primary level
B. Practiced in standard work routines and /or use of simple equipment and
machines
C. Procedural or systematic efficiency and use of specialized equipment
D. Specialized skill gained by on-the-job experience or through part
professional qualification
E. Understanding of theoretical principles normally gained through
professional qualification or through a detailed group of involved
practices and procedures
F. Seasoned proficiency in a highly specialized field, gained through experience
built on theories or a broad and deep understanding of complex practices
G. Mastery of principles, practices and theories gained through wide
experience and/or special development
H. Unique command of principles, theories and practices

The Guide-Chart Profile Method : Know-How

Breadth Of Know-How
I. Non or minimal Performance or supervision of jobs which have
closely specified objectives
II. Homogeneous Integration of operations which are
homogeneous in nature and objective, and coordination with
associated functions
III. Heterogeneous Integration or coordination of diverse functions
or sub-functions in a company; or inter-company coordination
of a tactical function
IV. Broad Integration of the major functions in an operating
company; or group-wide coordination of a strategic function
affecting policy formation
V. Total The management of strategic functions and policy
formation

The Guide-Chart Profile Method : Know-How

Human Relations Skills
1. Basic Ordinary courtesy and effectiveness in
dealing with others
2. Important Understanding and influencing
people, important but not over-riding
considerations
3. Over-riding Skills in developing and
motivating people are over-riding
considerations

The Guide-Chart Profile Method : Know-How

Table 1: Matrix Of Depth And Breadth Of Management Know-How
Human Relations None
1
A
50
Primary
57
66
B
76
Elementary
87
Vocational
100
C
115
Vocational
132
152
D
175
Advanced
200
Vocational
230
E
264
Basic
304
Professional, etc 350
F
400
Seasoned
460
Professional, etc 528
G
608
Professional
700
Mastery
805
H
Unique Authority

I
or Minimal
2
3
57
66
66
76
76
87
87 100
100 115
115 132
132 152
152 175
175 200
200 230
230 264
264 304
304 350
350 400
400 460
460 528
528 608
608 700
700

II
III
Homogeneous
Heterogeneous
1
2
3
1
2
3
76
87 100 115 132 152
87 100 115 132 152 175
100 115 132 152 175 200
115 132 152 175 200 230
132 152 175 200 230 264
152 175 200 230 264 304
175 200 230 264 304 350
200 230 264 304 350 400
230 264 304 350 400 460
264 304 350 400 460 528
304 350 400 460 528 608
350 400 460 528 608 700
400 460 528 608 700
460 528 608 700
528 608 700
608 700
700

IV
Broad
1
2
175 200
200 230
230 264
264 304
304 350
350 400
400 460
460 528
528 608
608 700
700

3
230
264
304
350
400
460
528
608
700

1
264
304
350
400
460
528
608
700

V
Diverse
2
304
350
400
460
528
608
700

3
350
400
460
528
608
700
805

Guide-Chart Profile Method : Problem Solving

What is Problem Solving
The use of Know-How required by the job to

identify, define, and resolve problems. You

think with what you know. This is even true for
the most creative work. The raw material of any
thinking is knowledge of facts, principles and
means. For that reason, Problem Solving is
measured as a percentage of Know-How.

Problem Solving has two dimensions:

The environment in which the thinking takes place
The challenge presented by the thinking to be done

The Guide-Chart Profile Method Problem-Solving

Thinking Environment
A. Detailed rules and/or rigid supervision
B. Standard instructions and/or continuous close
supervision
C. Well-defined procedures, somewhat diversified and/or
supervised
D. Substantially diversified established company
procedures, and general supervision
E. Clearly defined company policies, principles and specific
objectives under readily available direction
F. Broad policies and objectives, under general direction
G. General policies, principles and goals under guidance
H. Business philosophy and/or principles controlling
human affairs

The Guide-Chart Profile Method Problem-Solving

Thinking Challenge
I.

Repetitive Identical situations requiring solution by

simple choice of things learned

II. Patterned Similar situations requiring solution by

discriminating choice of things learned
III. Variable Differing situations requiring searching,
finding and selecting solutions within the area of
things learned
IV. Adaptive Situations requiring analytical interpretive
and/or constructive thinking. Judgment is required
V. Creative Novel or non-recurring path-finding
situations requiring the development of new concepts
and imaginative approaches

Guide-Chart Profile Method : Accountability

What is Accountability?

The answerability for action and for the consequences

thereof. It is the measured effect of the job on end results
of the organization. It has three dimensions:

Freedom to Act - is the extent of personal, procedural, or

systematic guidance or control of actions in relation to the
primary emphasis of the job

Job Impact on End Results is the extent to which job can

directly affects actions necessary to produce results
within its primary emphasis.

Magnitude is the portion of the total organization

encompassed by the primary emphasis of the job. This is
usually but not necessarily, reflected by the annual
revenue or expense dollars associated with the area in
which the job has its primary emphasis.

The Guide-Chart Profile Method - Accountability

Freedom To Act
A. Prescribed Direct and detailed instructions, and close
supervision
B. Controlled Established work routines and close supervision
C. Standardised Standardised practices and procedures, general
work instructions and supervision of progress and results
D. Generally regulated Practices and procedures which have clear
precedents
E. Directed Broad practice and procedures covered by functional
precedents and policies and managerial direction
F. Oriented Direction Functional policies and goals, and general
managerial direction
G. Senior Guidance Inherently and primarily to direct top
management guidance
H. Ownership Guidance Only to ownership review and public
recreation

The Guide-Chart Profile Method - Accountability

Impact
I. Very Small (under US$1M)
II. Small (Between US$1M to US$10M)
III. Medium (Between US$10M to US$100M)
IV. Large (More than US$100M)

The Guide-Chart Profile Method - Accountability

Environment
1. Remote Giving information on other incidental
services for use by others involved in the action
2. Contributory Interpreter, advisory or facilitating
services to those involved in the action
3. Shared Participating with others (except
superiors and subordinates) in taking action
4. Prime Wholly responsible, with little or no
shared responsibility

Salary Survey based on Hay Method

Hay Point
Range

Median Salary Formula

200 - 300

129.46 * HP - 1386

301 - 400

155.27 * HP - 9127

401 - 500

167.24 * HP - 13,916

501 - 600

159.47 * HP - 10,033

601 - 700

172.55 * HP - 17,881

701 - 800

150.75 * HP - 2621

Salary Survey based on Hay Method

Hay Point
Range

Upper Quartile (Q3)

Salary Formula

200 - 300

144.89 * HP - 1648

301 - 400

165.55 * HP - 7845

401 - 500

195.67 * HP - 19,893

501 - 600

176.16 * HP - 10,140

601 - 700

194.51 * HP - 21,145

701 - 800

168.63 * HP - 3029

The Strategic Compensation Model

Concepts

Compensation Techniques

Compensation Objectives

Internal
equity

Job
Job
Job
Job
Analysis Description Evaluation Grades

Role clarity and accountability.

Market
Salary
Definitions Surveys

Competitive wage policies and

practices.

External
equity

Policy
Lines

Pay
Structures

Facilitates administration and

performance management.

Influence employees work

attitudes and behaviour.

Employee
equity

Administration

Seniority Performance Increase

Increases Evaluation Guidelines

Planning, Budgeting, Monitoring, Evaluating

Attract talents.
Retain talents.
Motivate employees.
Comply with regulations.
Consistency in policy
administration.

Compensation Management
The fundamentals of salary administration
Salary administration is concerned with deciding
how and what staff should be paid and with the
techniques and procedures for designing and
maintaining salary structures, rewarding staff
and exercising salary control.

Aims Of Salary Administration

The basic aims of salary administration are to attract,
retain and motivate staff by developing and maintaining
a competitive and equitable salary structure.
To ensure that a sufficient number of suitable staff is

attracted to join the organization;

To encourage suitable staff to remain with the

organization;

To develop and maintain a logical salary structure which

achieves equity in the pay for jobs of similar

responsibility and consistency in the differentials
between jobs in accordance with their relative values;

To ensure that salary levels match market rates;

To keep the salary levels adjusted in line with increases

in the cost of living;

Aims Of Salary Administration

To maintain consistency in methods used to fix and

review salary levels and differentials;

To provide for progression within the salary structure in

accordance with performance and level of responsibility;

To operate the salary system fairly and convince the

staff that the system is fair;

To maintain a flexible salary system which will

accommodate changes in the market rates for different

skills and in the companys organization structure;

To achieve simplicity in operations as an aid to staff

understanding and to minimize administrative effort;

To operate effective systems of controlling salary costs

and the administrative procedures required to achieve

the above aims at the least cost to the organization.

Components Of Salary Administration

The starting point of salary administration is the
determination of salary levels by job evaluation.
Thereafter, salary administration is concerned with:
The design and maintenance of salary structures;
The operation of salary progression systems;
The administration and control of salary reviews;
The design and operation of bonus schemes;
The provision of employee benefits and other

allowances;

The development of a total remuneration policy.

Compensation Tools and Techniques

Pay Structure
Salary Structure
Performance Related Pay
Merit Payment Scheme
Incentive Scheme
Benefit Policies
Salary Review Guidelines
Compa-ratio
Salary Problems

Criteria for Pay Structures

Be appropriate to the needs of the organization, in terms of its:
- culture, size and the degree in which changes take place
- need for flexibility
- type and level of employees to be covered
Be flexible in response to internal and external pressures,

especially those related to market rates and skill shortages.

Provide scope for rewarding high-flyers while still providing

appropriate rewards for the majority of employees.

Ensure that rewards are given in line with performances and

achievements.

Provide a basis for career planning which will motivate ambitious

employees with high potential.

Facilitate consistency in the treatment of varying levels of

responsibility and performance.

Graded Salary Structures

All jobs are allocated into salary grade within the

structure on the basis of an assessment of their

internal and external value to the organization.

Each salary grade consists of a salary range or

band.

The jobs allocated to a salary grade are assumed

to be broadly of the same level normally the

same minimum and maximum rates, which
correspond with grade boundaries.

Graded Salary Structures

A typical graded structure consists of a sequence of
salary grades or ranges, each of which has a defined
minimum and maximum. It is assumed that all the
jobs allocated into a grade are broadly of the same
value, although actual salaries earned by individuals
will depend on their performance or length of service.
Across the board cost of living or market rate
increases will usually result in an increase to the
minima and maxima of each grade. All the jobs in an
organization may be covered by the same structure of
salary ranges or there may be different structures for
different levels or categories of jobs.

Make-up of a Salary Grade

A basic principle of a salary structure is that individuals

advance through the structure either by progressing

within the salary grade for the job as they improve their
performance, or by promotion.

In the simplest structure, people move more or less

steadily from the entry point of the grade (with might be

above the minimum if they have already gained relevant
experience elsewhere or within the firm) to the upper
limit, unless they move to a higher grade. It is possible,
however, to distinguish three stages into which this
progression is divided, and for salary administration
purposes it is helpful to divide the grade into three
zones which correspond to these stages.

Salary Structure : Ratio Method

Job Grades Minimum
Midpoint
Maximum
0
6000
8400
10800
1
7500
10500
13500
2
9375
13125
16875
3
11719
16406
21094
4
14648
20508
26367
5
18311
25635
32959
6
22888
32043
41199
7
28610
40054
51498
8
35763
50068
64373
9
44703
62585
80466
10
55879
78231
100583
11
69849
97789
125729
12
87311
122236
157161

Salary Structure : Ratio Method

Salary Structure

Salary in RMB

200000
150000

Series1
Series2

100000

Series3
Series4

50000
0
1

9 10 11 12 13

Company Job Grades

Salary Structure : Dispersion Method

Job Grades
0
1
2
3
4
5
6
7
8
9
10
11
12

Minimum
Midpoint
Maximum
6,000
8,000
10,000
7,500
10,000
12,500
9,375
12,500
15,625
11,719
15,625
19,531
14,648
19,531
24,414
18,311
24,414
30,518
22,888
30,518
38,147
28,610
38,147
47,684
35,763
47,684
59,605
44,703
59,605
74,506
55,879
74,506
93,132
69,849
93,132
116,415
87,311
116,415
145,519

Salary Structure : Dispersion Method

Salary in RMB

Salary Structure : Dispersion Method

160000
140000
120000
100000
80000
60000
40000
20000
0

Series1
Series2
Series3
Series4

Job Grades

9 10 11 12 13

The Learning Zone

The learning zone covers the period when a person
is on his learning curve, familiarizing himself with
the knowledge and skills required if he is to
become fully competent. The length of time to go
through this zone will vary according to the
individuals experience, competence and ability to
learn. It would be accepted that someone might
enter the range at any point in this zone, from
bottom to top, depending on experience.

The Qualified Zone

The qualified zone covers the period when the job holder
continues to increase his capacity to do the work and to
improve his performance.
The minimum salary in this zone should be the market rate
for the job, so far as this can be ascertained, the assumption
being that the market rate is the salary level required to
attract a competent individual from another job to join the
company.The mid-point in this zone, which is also the midpoint of the grade, is the salary level which all competent
employees would be expected to achieve. This is above the
market rate in order to retain these individuals. An employee
who is no more than competent could stop at this point, but
most would continue to advance until they reach the top of
the qualified zone, which would be regarded as the normal
maximum for the job. Many such employees would in any
case be promoted to a higher grade before they reach the
upper limit of this zone.

The Premium Zone

The premium zone is reserved for those employees,
especially in the higher grade jobs, who achieve
exceptional results but for whom suitable promotion
opportunities do not exist.
This zone enables outstanding staff to be given
additional rewards and encouragement. In some salary
structures, the published salary grades for each job
only cover the learning and qualified zones, the
premium zone being reserved for use in special cases.
Progression through that zone would not be regarded
as normal by management or staff.

Make-up of a Salary Range

$
9,000

%
150

Premium Zone
8,250
7,500

135

Qualified
Zone

6,750

125
115

Learning Zone
6,000

100

Relationships Between Grades

$
12,975
$
9,800
$
9,000

8,650
3
7,200

20%

2
6,000

20%

Graded Salary Structures

The range may be defined in terms of the difference

between the lowest and highest points in the range,

using the minimum as the anchor (Maxmin ratio
method):
Min Midpoint Max

Maxmin

$20,000

$24,000 $30,000 1:50

$20,000

$25,000 $32,000 1:60

$20,000

$26,000 $34,000 1:70

Alternatively, the range may be defined as a percentage

of the midpoint using the midpoint as the anchor (Salary
dispersion method):
Min

Midpoint

Point

(100%) Point

Max

Dispersion

Ratio

$20,000(80%) $25,000(100%)

$30,000(120%)

+20%

1.50

$18,750(75%) $25,000(100%)

$31,250(125%)

+25%

1.67

$17,500(70%) $25,000(100%)

$32,5000(130%) +30%

1.85

Max

Graded Salary Structures

The midpoint of the range is regarded as the target

salary for the grade, which would be the average

salary of the staff in the grade. The target salary is
the salary that you will pay to a fully competent
professional doing the job on that grade
The midpoint is usually aligned to the market rates
for jobs in the grade.

The salary policy of the organization determines

whether the midpoint is equated to the median
market rate or whether it is related to another point.
eg upper quartile

Graded Salary Structures

The rate of salary progression through a range is

determine by:

- time or length of service (service increments)

- individual performance (variable or merit increments)
The number of salary ranges required depend on:

- the upper and lower salary levels of the jobs to be covered

by the structure, which give the overall range of salaries
within which the individual salary ranges have to be fitted
- the number of distinct levels of responsibility in the
hierarchy which needs to be catered for by separate grades
- the size of the differentials between each salary range.

Graded Salary Structures

There is a differential between the midpoints of each

salary range which provides adequate scope for

rewarding increased responsibility on promotion.

It does not create too wide a gap between adjacent

grades or reduce the amount of flexibility available for
grading jobs.
The salary ranges are sufficiently wide to allow

recognition of the fact that people in same job grade

can perform differently, from satisfactory
performance to outstanding performance.

There is an overlap between two consecutive salary

grades which acknowledges that an experienced

person should be of more value on the current grade
than a newcomer in the next higher grade.

Designing the Salary Structure

Step 1
Conduct market rate surveys for existing jobs.
Review existing salary structures and differentials between

the salary levels of the most senior and junior jobs to be

covered by the new structure.

Identify key problem areas (if any) in existing structures.

Step 2
Conduct an update of the job evaluation exercise, taking into

consideration all changes to jobs since the last job evaluation

review

Step 3
Obtain market rate data for the evaluated jobs, bearing in

mind that there is likely be a range of market rates rather than

a precise figure.

Preferably the market rate data should be based on a similar

job evaluation system for comparability.

Designing the Salary Structure

Step 4
Draw up a salary grade structure between the upper

and lower limits, according to policies for

differentials, the width of salary grades and the size
of overlap between two consecutive grades.

Step 5
Slot all jobs into grade structure in accordance with

the results of both the job evaluations and the

market rate surveys.

Step 6
Identify all cases that are below the salary range and

cases that have exceeded the salary range (max-out

cases) and review their job evaluation scores and
grades

Advantages of Graded Structures

The relative levels of jobs in different functions can be

readily assessed and recognized.

Consistent methods of grading jobs and establishing

differentials between them can be maintained.

A well-defined and comprehensible framework exists

within which salary and career progression can be

planned and controlled.

Better control can be exercised over salaries for new

hires, merit increments and promotion increases.

Graded structures facilitate order, consistency and

control.

Disadvantages of Graded Structures

It can be inflexible at times, unless periodic review

is carry out every 3 years or so.

Fixed grades make it more difficult to accommodate

the many changes to which reward structures are

subject because of internal and external pressures.

The sort of people they employ cannot be confined

within rigid range boundaries, unless incentive

schemes are available.

It brings people to the top of the range barriers

where they become stuck if there are no

opportunities for promotion to the next grade.

Salary Administration
Key topics covered
Minimum Point of Salary Range
Maximum Point of Salary Range
Entry Point for new staff
Annual increments
Salary adjustments
Promotion increments
Lumpsum payments
Incentive schemes
Flexible benefits

Current and Proposed Salary Structure Midpoints, Market

Average, and Company Average Salary
150,000
135,000
120,000

Current Salary Structure M idpoint

105,000

Projected Market Average

Company Average Salary

90,000

Proposed Salary Structure

75,000
60,000
45,000
30,000
15,000
0
1

10

11

12

13

14

60

Job Grades & Salary Ranges

Compa-ratios (CR)
a compa-ratio (comparative ratio) is a measure of the

extent which the average salaries in a grade deviate

from the target salary.

it is used to compare actual averages with the target

salary to indicate the extent which salary levels are

high or low.

the formula for calculating a compa-ratio is:

Average of all salaries in the grade

---------------------------------------------------------------------------------------------------------------------------------------------------------------

x 100

Midpoint of the salary range

a compa-ratio of 100 indicates that the average salary

is aligned to the midpoint of the salary grade and no

corrective steps need to be taken.

Compa-ratios (CR)
a compa-ratio of 80 would indicate a need to

investigate why average salaries were low and

possibly no longer competitive.

a compa-ratio of 120 would suggest either there

were a lot of long-service staff or that staff were

being overpaid, and that increases needed to be
modified.

compa-ratio analysis can reveal a situation

where earnings drift has taken place.

Competitive Posture (CP)

Competitive Posture is a measure of how competitive the

salary is with respect to a given market benchmark.

Competitive Posture can be used to measure the

competitiveness of both companys or individuals salary

competitiveness in the market

Competitive Posture for a company is computed as:

CR = Average of all Salaries in a given Job Grade

Market Benchmark Salary

Competitive Posture for an individual is computed by:
CR = Salary of the individual Employee

Market Benchmark Salary

Salary Administration
Minimum Salary Points
1. Minimum salary for the grade
2. Minimum for Job In the market
3. Set compa-ratio at 1 .00
4. Overlap between 60% to 80%
5. Avoid leapfrogging tendencies
6. Allow for realistic minimum

Salary Administration
Maximum Salary Points
1. Maximum salary for the grade
2. Maximum for job in the market
3. Keep salary range short (8 - 12 years)
4. Maxmin ratio between 1.5 to 2.0
5. Set compa-ratio at 1.00
6. Allow for realistic maximum

Salary Administration
Minimum And Maximum Points
Minimum

Maximum

1. Minimum salary for the grade

1. Maximum salary for the grade

2. Minimum for Job In the market

2. Maximum for job in the market

3. Set compa-ratio at 1 .00

3. Keep salary range short (8 - 12 years)

4. Overlap between 60% to 80%

4. Maxmin ratio between 1.5 to 2.0

5. Avoid leapfrogging tendencies

5. Set compa-ratio at 1.00

6. Allow for realistic minimum

6. Allow for realistic maximum

Streamlining of Salary Ranges (Executives)

Effective 1 January 1995

Existing Salary
Hay Survey @
Proposed Salary Range
Hay Points
Ranges
(Sept 94)
(Using Q1 Ref) #
Range *MTV Min $ Med $ Max $ Q1 $ Med $ Q3 $ New Grad Min $ Med $ Max $
1056-1260
880-1055
735-879
614-734
519-613
439-518
371-438
314-370
269-313
228-268
192-227

1142
954
805
677
571
479
406
342
291
252
208

9,000
7,000
6,000
5,000
4,000
3,500
3,000
2,500
2,000
1,500
1,000

10,050
8,500
7,000
6,000
5,000
4,000
3,500
3,000
2,500
2,000
1,500

12,000
10,000
8,000
7,000
6,000
4,500
4,000
3,500
3,000
2,500
2,000

11,727
9,475
8,172
6,878
5,616
4,565
3,756
3,033
2,480
2,148
1,772

12,384
10,533
9,123
7,610
6,232
5,091
4,152
3,382
2,791
2,402
1,964

14,260
12,159
10,212
8,502
6,957
5,679
4,580
3,751
3,116
2,681
2,191

* Most typical value corresponds to the working midpoint of the range

@ Derived from annual base salary
# Dispersion factor of +/ - 25% around Q1 values

22
21
20
19
18
17
16
15
14
13
12

8,800
7,100
6,100
5,175
4,200
3,375
2,800
2,300
1,875
1,600
1,300

11,750
9,475
8,150
6,900
5,600
4,500
3,750
3,050
2,500
2,150
1,750

14,675
11,850
10,175
8,625
7,000
5,625
4,700
3,800
3,125
2,700
2,200

Job Reference Levels

The reference job description prepared to
assist non-hay evaluated companies with job
matching, are each evaluated and quality
assured against Hays standards. The
evaluations are then slotted into the relevant
job unit range which forms the reference
levels. These reference levels and
corresponding job unit ranges are now
standard throughout all Hays main
remuneration surveys and are detailed below.

Job Reference Levels

Re fe re nce Le ve ls

Ha y Job Unit Ra nges

Most Typical Va lue

Actua l Mid-Point

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

34-39
40-46

37
42

36.5
43

47-53
54-62
63-72
73-84
85-97
98-113
114-134
135-160
161-191
192-227
228-268
269-313
314-370
371-438
439-518
519-613
614-734
735-879
880-1055
1056-1260
1261-1507
1508-1800
1801-2140
2141-2550
2551-3020
3021-3580

49
57
66
75
90
104
125
151
173
208
252
291
342
406
479
571
677
805
954
1142
1372
1628
1960
2328
2812
3232

50
58
67.5
78.5
91
105.5
124
147.5
176
209.5
248
291
342
404.5
478.5
566
674
807
967.5
1158
1384
1654
1970.5
2345.5
2785.5
3300.5

3581-4250

4056

3915.5

4251-5060
5061-6020
6021-7160
7161-8320
8321-9640
9641-11180

4656
5352
6512
7744
8912
10224

4655.5
5540.5
6590.5
7740.5
8980.5
10410.5

Salary Administration
Determining Entry Salary
1.

Market value

2.

Candidate's existing salary

3.

Basic qualifications

4.

Additional qualifications

5.

Relevant working experience

6.

Related working experience

7.

Completion of national service

8.

Geographical location of company

9.

Nature of industry (dirty or hazardous)

10. Minimum salary for job grade

11. Salaries of existing incumbents
12. Re-grossing annual salary

Incremental Systems
Incremental systems vary from rigid procedures
with fixed and predetermined movements through a
scale related to age, service in the company or
service in the job, to flexible systems where
management exercises complete discretion over
the award and size of increments without any
guidelines. Between the two extremes there is a
middle ground of semi-flexible systems.

Incremental Systems
Fixed scales with automatic progression where

individuals move through jobs or grades by

predetermined steps related to age or service,
these could be rate for age scales. Fixed scales are
criticized because they do not give enough
incentive to effort and the improvement of
performance-promotion might only be an award in
the longer term, if at all. They are defended because
they can be operated with complete impartialitymany people, especially civil servants, question the
possibility of determining a fair relationship
between merit and reward where the only method
of measurement is the subjective opinion of
someones boss.

Incremental Systems
Fixed scales with limited flexibility where it is

possible to give double or even triple increments to

high flyers and withhold increments for poor
performers.

Semi- fixed scales which allow automatic

progression to a merit bar at which progression

for some people may stop while other can advance
at different rates according to performance.

Fixed parallel scales which allow for the exercise

of more managerial discretion by providing

different patterns of incremental progression for
different levels of performance, as shown in figure
10.

Incremental Systems
Variable progression with guidelines where there

are no fixed incremental points, but managers are

given more or less mandatory instructions on how
they should exercise their discretion. The minimum
guidelines in this system nay consist of the annual
increments that can be awarded for different levels
of performance. These may be extended in more
rigid systems to give the proportion of staff who
should receive a given increment.

Variable progression in range without guidelines

where management discretion in the award of

increments and the determination of their size
tends to be restricted only by the maximum of the
salary range and the budget they are allowed for
salary increases.

Annual Increment
Fixed increment system

- Fixed $
- Fixed %
Variable increment system

- Fixed variable
- Fixed Plus (merit increment)
Flexible increment system

- Fixed component + flexible component

Matrix system

- Salary quadrant vs. performance matrix

Salary Progression Curve

Increment vs Performance Matrix

Salary Compared to Market Value
Low

Median

High

Excellent
Performance

16%

12%

9%

Good
Performance

12%

9%

6%

Satisfactory
Performance

8%

6%

3%

Below Average
Performance

4%

3%

0%

Market Value Computation

Degree Holder (Engineering)
Relevant Experience

Low $

Medium $

High $

2,150

2,150

2,150

2,250

2,300

2,400

2,350

2,450

2,650

2,450

2,600

2,900

2,550

2,750

3,150

2,650

2,900

3,400

2,750

3,050

3,650

2,850

3,200

3,900

2,950

3,350

4,150

3,050

3,500

4,400

10

3,150

3,650

4,650

Note: Inclusive of NS increment of $200 and confirmation increment of $150

Salary Review Guidelines

Overall cost guidelines

in which a budget of x% of payroll is imposed for

merit reviews. This is the essential guideline, and
managers may be left to distribute the pool as they
please, or subject to various degrees of control.
Guidelines maximum and minimum increases

managers are told that they cannot give an increase

of more than x% or less, on the grounds that too high
an increase could produce inequities and too low of an
increase is meaningless.

Salary Review Guidelines

Guidelines on the relationship between performance and

reward

the awards should be related to an overall

assessment of performance on a scale such as:
Assessment

Increment (%)

A Outstanding

9 10

B Good

78

C Satisfactory

46

D Needs improvement

0% plus counseling*

E Unsatisfactory

Termination

*only if there is hope of improvement & individual needs encouragement

Salary Review Guidelines

Guidelines on the distribution of increments

an attempt to overcome the varying standards of

judgment leading to an all my ducks are swans
approach to rewarding staff. The distribution scale may
be related to a guideline like this:
Assessment

Increment (%)

Distribution

A outstanding

9 % 10%

10%

B good

7% 8%

20%

C satisfactory

4 % 6%

50%

D needs improvement

0%

10%

E unsatisfactory

0%

10%

Salary Review Guidelines

Guidelines on rates of progression
managers are helped to plan salary progression by
being given an indication of the number of years it
should take staff at different levels of performance to
reach the top of the grade and, in zones of salary range,
the limits within the range which can be reach according
to their performance.
Assessment

Limit In Grade

Learning zone

1 to 3 years

2 years

Performing zone

4 to 6 years

5 years

Exceeding zone

2 to 4 years

3 years

Typical Length

Salary Problems
Absorbing market rates pressures

arises when general and individual salary reviews have not

enabled the companys salary levels to keep pace with
increase in market rates.
it is exacerbated if the company is expanding and is
compelled to obtain key staff who are in short supply.
Widening differentials

differentials are widening between and within companies in

the following areas:
- between high-and low-paying organizations the variations in
prosperity between differing sectors of industry and
commerce
and between regions are major contributors to this
problems.
- between companies paying bonuses or incentives and those
paying straight salaries.

Salary Problems
- between top and middle management within companies
this is partly incentive led
- between executives recruited by search and those with a
one-company career.

Performance pay
tend to favour the few whose results can be measured.
merit-assessment are too often based on subjective and
biased judgments.
can be avoided only by intensive training of assessors and
by careful monitoring of the appraisal scheme.

Salary Problems
Staff reaching the top of their salary league

staff reaching the top of their salary range may feel

demotivated if there are no prospects for promotion
it is possible to deal with this problem by
introducing on top of the normal salary range a
premium zone which is reserved for outstanding staff
whose promotion is blocked.
Starting salaries

the problem of starting new staff at higher rates

than existing employees should be minimized if
internal salary levels are regularly reviewed in
comparison with market rates.

Salary Problems
Deteriorating job evaluation schemes

the scheme may not have been controlled

properly, so that grade drift occurs through
unjustifiable upgradings.
scheme may have lost credibility because it no
longer gives acceptable solutions.
administration may have become so bureaucratic
that the time taken to produce answers is unduly
prolonged.
the solution is to make a determined effort to
tighten controls and speed up administration, making
only minor modifications to the scheme.

Objectives of Performance-Related Pay (PRP)

Motivate all employees, not just the high-flyers.
Increase the commitment of employees by encouraging

them to identify with its mission and values.

Reinforce existing cultures and values to foster high

levels of performance, innovation and teamwork.

Help to change cultures where they need to become

more performance- oriented and results-oriented; or

where the adoption of other new and key values should
be rewarded.

Discriminate consistently and be equitable on the

distribution of rewards to employees according to their

performance results and contributions.

Objectives of Performance-Related Pay (PRP)

Deliver a positive message about performance

expectations of the company focuses attention on

key performance issues.

Direct attention and endeavour by specifying the

organizations performance goals and standards.

Emphasize individual performance or teamwork as

appropriate.

Improve the recruitment and retention of high-quality

staff.

PRP costs will be in line with company performance.

Key Factors to Consider When Introducing PRP

Matching the culture

successful PRP schemes need to match the culture and core values of
the organization.
Linking PRP to business strategy

the focus needs to be on strategic business issues which emerge from

the business planning process.
Balancing quantitative and qualitative measures

while most PRP schemes rely on quantitative measures of

performance, qualitative factors need to be introduced for the
measurement of individual behaviour eg balanced scorecards
The need for flexibility

flexibility in making milestone payments which convey the right

messages for the future.
The need to promote teamwork

the importance of teamwork should be recognized in structuring the

scheme and defining critical success factors and performance
indicators.

Key Factors to Consider When Introducing PRP

The need to avoid short-term thinking

setting long-term as well as short-term goals, and discussing short-term

objectives in their overall context.
Involvement in the design process

designing PRP schemes should be an iterative process : trying and testing

ideas on measures and structures with those who will eventually be
involved in a scheme.
Getting the message across

all types of PRP are very powerful forms of communication. To get the right
messages across for any scheme, one must make key decisions on the
following:
How can the scheme achieve the best possible launch?
Is it better to give no pay-out rather than a low pay-out?
What is the best psychological moment for pay-out?
What communications should be used to gain maximum
motivational impact from payment?
How should communications be handled when the scheme
requires changes?

Competence and Performance-Related Pay Curve

Salary ($)

Excellent
Good
Satisfactory

Learning

New Entry
Professional

Performing

Competent
Professional

Exceeding

Experienced
Professional

Competence bands

Performance
Levels

Advantages of individual Merit Payment Scheme

Directly link individual performance with

salary progression.

Provide individualized progression rates.

Recognize increasing competence gained

through experience.

Disadvantages of Individual Merit Payment Scheme

Dependent on the quality of performance appraisal; which can be

arbitrary, subjective or inconsistent.

Unless carefully conceived and managed, it can demotivate

people who, although not be delivering spectacular results are

still important.

Merit payment, as distinct from bonuses, create extra payroll

costs when benefits such as pensions are related to base pay.

A merit payment is, in effect, a permanent increase in salary, yet

the quality of performance in future years may not justify this

payment.

Merit pay can result in an upward drift in payroll costs without a

commensurate improvement in performance.

Merit pay is effective as a motivator only if rewards are clearly

related to performance and are of a significant value.

Sales Incentive Plan

Business Objectives
Marketing Strategy
Sales Strategy &
Coverage Model

The Sales Plan

Sales Job
Definition
Quota and
Crediting
Compensation Plan
Design
Sales Plan
Implementation

Total Compensation Architecture

Variable

Fixed

Base
BaseSalary/
Salary/
Fixed
FixedPay
Pay

TargetSales
Sales
Target
Incentivefor
for
Incentive
QuotaAchievement
Achievement
Quota
AcceleratedIncentives
Incentives
Accelerated
forQuota
Quota
for
Over-achievement
Over-achievement

FAT/MBO
FAT/MBO
Recognition
Recognition

Total Potential
Rewards
$ Earnings

Above quota
achievement

Performance

Profit
Profit
Sharing
Sharing
Stock
Stock
Options*
Options*

*Selective use based on position and

performance, competency and future growth
potential

Incentive Schemes For Sales Staff

Where it is felt that sales staff need to be motivated by
an incentive commission scheme the majority of
companies find that the best approach is a basic
commission on sales volume or, in more sophisticated
firms, on the contribution to fixed costs and profits of
the sales of each product group or product. The
standard commission is typically set at about one-third
of salary to provide a noticeable incentive without
adversely affecting feelings of security.
A successful sales commission plan should satisfy all
the criteria listed above for bonus schemes. But it is
particularly necessary to ensure the following:

Incentive Schemes For Sales Staff

A) The reward is fair in relation to the efforts of the sales
representative. This means that
attention has to be paid to
setting and agreeing realistic and equitable targets, making
allowances for special circumstances outside the control of
the sales representative which might affect sales, and
splitting commission fairly when more than one person has
contributed to the sale;
B) The scheme directs sales effort in accordance with
managements policy on the product mix and does not
encourage the representative to concentrate on what is
easiest to sell;
C) The scheme does not encourage high pressure selling
which results in an unacceptable level of returns,
cancellations and complaints;
D) The scheme does not encourage representatives to
neglect their indirect selling activities, such as servicing
customers.

Criteria for Success of Incentive Scheme

It should be appropriate to the type of work carried out and the

workers employed.

The reward should be clearly and closely linked to the effort of

the individual or group.

Individuals or groups should be able to calculate the reward they

get at each of the level of output they are capable of achieving.

Individuals or groups should have a reasonable amount of

control over their efforts and therefore their rewards.

The scheme should operate by means of a defined and easily

understood formula.

The scheme should be properly installed and maintained.

Provision should be made for controlling the amounts paid to

ensure that they are proportionate to effort.

Provision should be made for amending rates in defined

circumstances.

Individual Incentive Schemes

Straight piece-work

payment of a uniform price per unit of production.

can be expressed in two main forms:
- money piecework
- time piecework
Differential piecework

the wage cost per unit is adjusted in relation to

output.

Individual Incentive Schemes

Measured daywork

the pay of employees is fixed on the understanding

that they will maintain a specified level of performance,
but the pay does not fluctuate in the short term with
their performance.
the criteria for success in operating it are the
following:
total commitment of management, employees and unions.
an effective work measurement system, and efficient production

planning and control and inventory control procedures.

the establishment of a logical pay structure with appropriate

differentials from the beginning of the schemes operation.

the maintenance of good control systems to ensure that corrective

action is taken quickly if there are any shortfall on targets.

Group Incentive Scheme

Provide for the payment of a bonus either equally or

proportionately to individuals within a group or team.

Bonus is related to the output achieved over an

agreed standard or to the time saved on a job.

Group bonus scheme are in some respects

equivalent to individual incentive schemes.

It encourages team spirit, breaks down demarcation

lines, and enables the group to discipline itself in

achieving targets.

Potential disadvantages are that management is less

in control of production the group decides what

earnings are to be achieved and can restrict output.

Designing an Incentive Scheme

How performance will be measured.
The employees who will take part in the scheme and

who will therefore have part of their pay directly linked

to their own performance or group.

The employees who will not take part in the scheme

and how they will be compensated.

Whether or not the scheme will be an individual one or

one linked to group performance or related to plant

performance.

Whether the bonus payments will be related to basic

pay.

The proportion of pay which can be earned as bonus.

Designing an Incentive Scheme

The full basic rate.
The relationship between output/effort and reward, eg

the extent to which, if at all, there is a differential built

into the scheme which shares the results of higher
productivity between the company and the workers.

The basis upon which employees not earning

bonuses will be paid.

The timings of bonus payments and the lapse of time

before payments are made.

The arrangements, if any, to alleviate the problems of

large fluctuations in bonus payments.

The methods to be used to maintain the scheme and

to inform employees of their earnings

Aims of Bonus Schemes

The principal aim of a bonus scheme is to provide an

incentive and a reward for effort and achievement.

Executive bonus schemes linked to company profits
can also aim to make senior managers feel that their
personal prosperity is linked to the performance of their
company or unit.

Bonus schemes are supplementary to basic salary and

are most appropriate where they apply to

entrepreneurial types such as chief executives,
marketing men and sales staff who, it is assumed, will
strive for material reward, and whose results upon
which their bonus depends can be clearly linked to their
personal efforts and achievements.

Bonus Schemes Criteria

The amount of the award received after tax should be

sufficiently high to encourage staff to accept exacting

targets and standards of performance. Standard
bonuses should not be less than 10% of the basic
salary and, if an effective incentive is wanted , the
standard bonus should be around 20% to 30% of salary

The incentive should be related to quantitative criteria

over which the individual has a substantial measure of

control

The scheme should be sensitive enough to ensure that

rewards are proportionate to achievements

The individual should be able to calculate the reward he

can get for a given level of achievement

Bonus Schemes Criteria

The formula for calculating the bonus and the

conditions under which it is paid should be clearly

defined

Constraints should be built into the scheme which

ensure that staff cannot receive inflated bonuses which

may not reflect their own efforts

The scheme should contain provisions for a regular

review, say, every two or three years, which could

result in its being changed or discontinued

The scheme should be easy to administer and

understand, and it should be tailored to meet the

requirements of the company

Executive Bonus Schemes

There are innumerable formulae for executive bonus
schemes, and each company must adopt one which
suits its own circumstances. The simplest formula is for
a percentage out of net profits before tax to be paid ProRata to the executives basic salary. In some schemes,
dividend payments and provisions for reserves are
deducted from net profits before the distribution of
bonuses and there is usually an upper limit to the
amount of bonus that can be paid. These schemes are
crude but provide a direct incentive as long as results
are directly influenced by the actions of the executives
in the scheme. They can get out of hand unless an
upper limit is strictly applied, and their emphasis on
profits may make some executives seek short term
gains at the expense of the longer term development of
the company.

Executive Bonus Schemes

Other schemes are based on a formula which measures
company performance. Bonuses are paid when a target
figure is attained increased further as the target figure
is exceeded. The increase of bonus may be on a
straight-line basis, ie. directly proportionate to the
improvement in results. Alternatively, it may be geared
either by decreasing the rate of bonus the more the
target is exceeded, which is generally regarded as poor
practice, or by increasing the rate, which could be an
expensive device. A straight-line progression is to be
preferred.
The formula in some schemes is directly applied to the
executives salary. In other schemes, a percentage of
profits on an increasing scale is released into a bonus
pool which is distributed in proportion to salary.

Benefits Policies
Range of benefits provided

- benefits such as pensions and holidays are

mandatory; whilst permanent health insurance are
optional extras.
Scale of benefits provided

- taking into account its cost to the company and its

perceived value to employees.
Proportion of benefits to total remuneration

- a decision has to be made on the proportion of total

remuneration to be allocated to other benefits which
incur expenditure of cash by the company.
- this policy decision is related to decisions on the
range and scale of benefits provided.

Benefits Policies
Allowing choice

a policy is required on the extent to which the

company should allow its employees to choose
the benefits they want.
Allocation of benefits

the policy on the allocation of benefits

determines the extent to which it is decided
that a single status company should be create.