Compensation Management

Instructor: Assoc. Prof. Dr. Pham Thi Bich Ngoc.

National Economics University, Hanoi

Contents

 Compensation/total reward concept

 Structure of compensation
 Factors influencing on compensation
 Job evaluation
 Develop a compensation program

Compensation/Total Reward
Concepts

Total reward refers to all the

monetary, nonmonetary and
psychological payments that an
organization provides for employees in
exchange for the work they perform

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 Structure of Compensation

Base pay

financial Contingent pay Transactional

Employee benefits
Total
reward
Learning and development

Non-financial The work experience Relational

Recognition, achievement

FINANCIAL REWARDS

Financial rewards comprise all rewards

which have a monetary value and add up to
total remuneration:
 Base pay
 pay contingent on performance,
contribution, competency or skill
 pay related to service
 financial recognition schemes
 benefits such as pensions, sick pay and
health insurance.

NON-FINANCIAL REWARDS

Non-financial rewards are those which

focus on the needs people have to
varying degrees for recognition,
achievement, responsibility, autonomy,
influence and personal growth

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 Equity and Its Impact on Pay Rates

Forms of Compensation
Equity

External Internal Individual Procedural

equity equity equity equity

Addressing Equity Issues

Area wage and salary surveys

Job analysis and job evaluation

Methods to
Address Equity
Issues
Performance appraisal and incentive pay

Communications, grievance mechanisms,

and employees’ participation

Factors influencing compensation

Employee
• Performance
• Seniority
• Experience
• Competency

External environment Job

• Labour market • Complexity of job
• Geographical differences Salary • Requirments of knowlegde, skills
• Cost of living • Required efforts
• Regulation • Working conditions

Company
• Business field
• Company operation
• Company size
• Compensation policy

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 Establish strategic pay plan

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Establishing Pay Rates

Steps in Establishing Pay Rates

1
Conduct a salary survey of what other employers are
paying for comparable jobs (to help ensure external equity).

2
Determine the worth of each job in your organization
through job evaluation (to ensure internal equity).

3 Group similar jobs into pay grades.

4 Price each pay grade by using wave curves.

5 Fine-tune pay rates.

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Salary Survey

Uses for Salary Surveys

To make
To price To market-price
decisions about
benchmark jobs wages for jobs
benefits

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 Sources for Salary Surveys

Sources of Wage and

Salary Information

Self-
Consulting Professional Government The
Conducted
Firms Associations Agencies Internet
Surveys

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Step 2: Job Evaluation

Identifying Compensable Factors

Working
Skills Effort Responsibility
conditions

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What is Job Evaluation ?

 Job evaluation is a formal process

determined by an organisation or by
government, by which the relative worth of
jobs is determined in order to develop an
internal pay structure

 Basic principle : jobs that require greater

qualifications, more responsibilities, and
more complex duties should be paid more
highly than jobs with lesser requirements

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 How to Evaluate Jobs

Methods for Evaluating Jobs

Job Factor
Ranking Point method
classification comparison

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Job Evaluation Methods: Ranking

1. Job Ranking Method
It ranks jobs in order of their difficulty. Each job is
appraised and ranked according to its worth to the
organization. Each job is compared with others to
determine the overall rank

Advantages and disadvantages?

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Job Evaluation Methods: Job Classification

 Raters categorize jobs into groups or classes

of jobs that are of roughly the same value
for pay purposes.
⚫ Classes contain similar jobs.
• Administrative assistants
⚫ Grades are jobs similar in difficulty but otherwise
different.
• Mechanics, welders, electricians, and
machinists
⚫ Jobs are classed by the amount or level of
compensable factors they contain.
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 Job Evaluation Methods: Job Classification

Job grading method

⚫ Method generally used by governments
⚫ Categorizing jobs into groups (classes or
grades). Grade is a group of different jobs
requiring similar skills, efforts and
responsibility
Advantages and disadvantages?

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Job Evaluation Methods: Point Method

Point System Matrix
 Compensable factors Levels
Min 1 Low 2 Moder 3 High 4
Responsibility
1) equipment process 05 10 15 20
2) material/product 05 10 15 20
3) safety of others 05 10 15 20
4) work of others 05 10 15 20
Skill
1) education 14 28 42 56
2) experience 22 44 66 88
3) knowledge 14 28 42 56
Effort
1) physical 10 20 30 40
2) mental 05 10 15 20
Job conditions
1) working conditions 10 20 30 40
2) hazards 05 10 15 20

Total points 1000 100 200 300 400

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Example of One Factor (Complexity/Problem Solving)

in a Point Factor System

Point
Level Value Description of Characteristics and Measures
0 0 Seldom confronts problems not covered by job routine or organizational policy;
analysis of data is negligible. Benchmark: Telephone operator/ receptionist.

1 40 Follows clearly prescribed standard practice and demonstrates straightforward

application of readily understood rules and procedures. Analyzes noncomplicated
data by established routine. Benchmark: Statistical clerk, billing clerk.

2 80 Frequently confronts problems not covered by job routine. Independent judgment

exercised in making minor decisions where alternatives are limited and standard
policies established. Analysis of standardized data for information of or use by others.
Benchmark: Social worker, executive secretary.

3 120 Exercises independent judgment in making decisions involving nonroutine problems

with general guidance only from higher supervision. Analyzes and evaluates data
pertaining to nonroutine problems for solution in conjunction with others.
Benchmark: Nurse, accountant, team leader.

4 160 Uses independent judgment in making decisions that are subject to review in the final
stages only. Analyzes and solves nonroutine problems involving evaluation of a wide
variety of data as a regular part of job duties. Makes decisions involving procedures.
Benchmark: Associate director, business manager, park services director.

5 200 Uses independent judgment in making decisions that are not subject to review.
Regularly exercises developmental or creative abilities in policy development.
Benchmark: Executive director.

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 TABLE 11–A5 Evaluation Points Assigned to Factors and Degrees

First-Degree Second-Degree Third-Degree Fourth-Degree Fifth-Degree

Points Points Points Points Points

Decision making 41 82 123 164 204

Problem solving 35 70 105 140 174

Knowledge 24 48 72 96 123

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Job Evaluation Methods: Point Method

Advantages?

Disadvantages?

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Job Evaluation Methods: Factor comparison

Job evaluation is based on comparison of compensable job

components. Compensable components are factors
common to all jobs being evaluated, such as: responsibility,
skills, mental and physical efforts, working conditions

⚫ Each factor is compared with the same factor for

other key jobs. The comparison is one at a time

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 Job Evaluation Methods: Factor comparison
The steps are:
 Determine the compensable factors
 Determine key jobs
 Apportion of key job’s current pay rate
 Place key jobs on a factor comparison chart

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Job Evaluation Methods: Factor comparison

Advantages?
Disadvantages?

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Step 3: Grouping Jobs

Point Method

Grouping
Similar Jobs
Ranking Method
into Pay
Grades
Classification Methods

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 Step 4: Price Each Pay Grade

 The Wage Curve

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

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Step 4: Price Each Pay Grade

 Pay grades: are comprised of jobs of
approximatively equal value
 Pay ranges:
⚫ Minimum and maximum pay rate with enough variance
between the two to allow for a significant pay
difference
 Single rate system - Pay ranges are not appropriate
for some workplace conditions such as an assembly
line
 Adjusting pay rates - Overpaid and underpaid jobs
⚫ Overpaid - Red circle rate
⚫ Underpaid - Correct as soon as possible

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Step 4: Price Each Pay Grade

 Ladders with each steps representing the same %
increase can be developed, or with the same amount
attached to each step
 A span (maximum and minimum of the ladder) of 20% on
either side of the mid-point is common
 There will be overlap between the salary grades (groups)
in term of their salary range

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 Plotting a Wage Curve

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Step 5: Fine-Tune Pay Rates

 Developing Pay Ranges
⚫ Flexibility in meeting external job market rates
⚫ Easier for employees to move into higher pay
grades
⚫ Allows for rewarding performance differences and
seniority
 Correcting Out-of-Line Rates
⚫ Raising underpaid jobs to the minimum of the rate
range
for their pay grade
⚫ Freezing rates or cutting pay rates for overpaid
(“red circle”) jobs to maximum in the pay range for
their pay grade 32

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Pricing Job

Price each Pay Grade

Placing a dollar value on the worth of a job

Wage curve : shows the relationship between the value of

the job and the average wage pay for this job

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 Special Topics in Compensation

 Broadbanding
⚫ Consolidating salary grades and ranges into a few
wide levels or “bands,” each of which contains a
relatively wide range of jobs and salary levels.
⚫ Pros and Cons?

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Broadbanding
Salary Bands and Ranges

$ 5,000 $ 15,000

1. Clerical Band

$ 10,000 $ 30,000

2. Professional Band

$ 20,000 $ 60,000

3. Managerial Band

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Steps in Broadbanding

Band 1: Job A Job B Job C Job D

Job-based $ 5,000 $ 7,500 $ 10,000 $ 15,000

Skill Level Skill Level Skill Level

Band 1: A B Skill Level C D

Skill-based $ 5,000 $ 7,500 $ 10,000 $ 15,000

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 Pay for performance
And
financial incentives

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LEARNING OUTCOMES

1. Explain how you would apply five motivation theories in

formulating an incentive plan.
2. Discuss the main incentives for individual employees.
3. Discuss the pros and cons of commissions versus
straight pay incentives for salespeople.
4. Describe the main incentives for managers and
executives.
5. Name and define the most popular organizationwide
variable pay plans.
6. Outline the steps in designing effective incentive plans.

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Motivation, Performance,
and Pay
 Incentives
⚫ Financial rewards paid to workers whose
production exceeds a predetermined standard.
 Frederick Taylor
⚫ Popularized scientific management and the use of
financial incentives in the late 1800s.
• Systematic soldiering
• Fair day’s work

 Linking Pay and Performance

⚫ Understanding the motivational
bases of incentive plans

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 The Hierarchy of Needs

 Maslow’s Hierarchy of Needs:

⚫ Physiological (food, water, warmth)
⚫ Security (a secure income, knowing one
has a job)
⚫ Social (friendships and camaraderie)
⚫ Self-esteem (respect)
⚫ Self-actualization (becoming a whole
person)

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Herzberg’s Hygiene–
Motivator Theory
 Hygienes (extrinsic job factors)
⚫ Satisfy lower-level needs
⚫ Inadequate working conditions, salary, and
incentive pay can cause dissatisfaction and prevent
satisfaction.
 Motivators (intrinsic job factors)
⚫ Satisfy higher-level needs
⚫ Job enrichment (challenging job, feedback, and
recognition) addresses higher-level (achievement,
self-actualization) needs.
 Premise:
⚫ The best way to motivate someone is to organize
the job so that doing it provides feedback and
challenge that helps satisfy the person’s higher-
level needs. 12–
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Victor Vroom’s Expectancy

Theory
 Motivation is a function of:
⚫ Expectancy: the belief that effort will lead to
performance.
⚫ Instrumentality: the connection between performance
and the appropriate reward.
⚫ Valence: the value the person places on the reward.
 Motivation = (E x I x V)
⚫ If any factor (E, I, or V) is zero, then there is no
motivation to work toward the reward.
⚫ Employee confidence building and training, accurate
appraisals, and knowledge of workers’ desired rewards
can increase employee motivation.

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 Behavior Modification /
Reinforcement Theory
 B. F. Skinner’s Principles
⚫ To understand behavior one must understand
the consequences of that behavior.
⚫ Behavior that leads to a positive consequence
(reward) tends to be repeated, while behavior
that leads to a negative consequence
(punishment) tends not to be repeated.
⚫ Behavior can be changed by providing properly
scheduled rewards (or punishments).

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Incentive Pay Terminology

 Pay-for-Performance Plan
⚫ Ties employee’s pay to the employee’s
performance
 Variable Pay Plan
⚫ Is an incentive plan that ties a group or
team’s pay to some measure of the firm’s
(or the facility’s) overall profitability
• Example: profit-sharing plans
⚫ May include incentive plans for individual
employees
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Types of Employee Incentive Plans

Individual Employee Incentive

and Recognition Programs

Sales Compensation
Programs

Pay-for-Performance Team/Group-based
Plans Variable Pay Programs

Organizationwide Incentive
Programs

Executive Incentive
Compensation Programs

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 Individual Incentive Plans

 Piecework Plans
⚫ The worker is paid a sum
(“piece rate”) for each unit
he or she produces.
• Straight piecework
• Standard hour plan

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Pros and Cons of Piecework

 Easily understandable, equitable, and

powerful incentives
 Employee resistance to changes
in standards or work processes
affecting output
 Quality problems caused by
an overriding output focus
 Possibility of violating minimum wage
standards
 Employee dissatisfaction when
incentives either cannot be earned or
are withdrawn

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Individual Incentive Plans (cont’d)

 Merit Pay
⚫ Is a permanent cumulative salary increase the firm
awards to an individual employee based on his or her
individual performance
⚫ Can detract from performance if awarded across the
board
⚫ Becomes permanent ongoing reward for past
performance
 Merit Pay Options
⚫ Give annual lump-sum merit raises that do not make
the raise part of an employee’s base salary.
⚫ Tie merit awards to both individual and organizational
performance.
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 Incentives for Professional
Employees
 Professional Employees
⚫ Are those whose work involves the application
of learned knowledge to the solution of the
employer’s problems.
• Lawyers, doctors, economists, and engineers

 Possible Incentives
⚫ Bonuses, stock options and grants, profit
sharing
⚫ Better vacations, more flexible work hours
⚫ Improved pension plans
⚫ Equipment for home offices

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Nonfinancial and Recognition

Awards
 Effects of Recognition-Based Awards
⚫ Recognition has a positive impact on
performance, either alone or in
conjunction with financial rewards.
⚫ Day-to-day recognition from supervisors,
peers, and team members is important.
 Ways to Use Recognition
⚫ Social recognition
⚫ Performance-based recognition
⚫ Performance feedback
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Incentives for Salespeople

 Salary Plan
⚫ Straight salaries
• Best for: prospecting (finding new clients),
account servicing, training customer’s sales force,
or participating in national and local trade shows

 Commission Plan
⚫ Pay is a percentage of sales results.
• Keeps sales costs proportionate to sales revenues
• May cause a neglect of nonselling duties
• Can create wide variation in salesperson’s income
• Likelihood of sales success may be linked to external
factors rather than to salesperson’s performance
• Can increase turnover of salespeople

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 Incentives for Salespeople (cont’d)

 Combination Plan
⚫ Pay is a combination of salary and
commissions, usually with a sizable
salary component.
⚫ Plan gives salespeople a floor
(safety net) to their earnings.
⚫ Salary component covers company-
specified service activities.
⚫ Plans tend to become complicated,
and misunderstandings can result.

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Incentives for Managers and

Executives
 Executive Total Reward
Package
⚫ Base salary (cash)
⚫ Short-term incentives
(bonuses)
⚫ Long-term incentives (e.g.,
stock options)

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Short- and Long-Term Incentives

 Short-Term Incentives: The Annual Bonus
⚫ Plans intended to motivate short-term
performance of managers and tied to company
profitability.
⚫ Issues in awarding bonuses
• Eligibility basis
• Fund size basis
• Individual performance award
⚫ Long-term incentives
• Stock options
• Performance shares
• Indexed options
• Premium price options
• Stock appreciation rights
⚫ Perks
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 Team/Group Incentive Plans

 Team (or Group) Incentive Plans

⚫ Incentives are based on team’s performance.
 How to Design Team Incentives
⚫ Set individual work standards.
⚫ Set work standards for each team member
and then calculate each member’s output.
⚫ Members are paid based on one of three formulas:
• All receive the same pay earned by the highest producer.
• All receive the same pay earned by the lowest producer.
• All receive the same pay equal to the average pay
earned by the group.

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Pros and Cons of Team Incentives

 Pros
⚫ Reinforces team planning and problem solving
⚫ Helps ensure collaboration
⚫ Encourages a sense of cooperation
⚫ Encourages rapid training of new members
 Cons
⚫ Pay is not proportionate to an individual’s effort
⚫ Rewards “free riders”

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Organizationwide Incentive Plans

 Profit-Sharing Plans
⚫ Current profit-sharing (cash) plans
• Employees receive cash shares of the firm’s profits at
regular intervals.
⚫ Deferred profit-sharing plans
• A predetermined portion of profits based on the
employee’s contribution to the firm’s profits is placed
in each employee’s retirement account under a
trustee’s supervision.
• Employees’ income taxes on the distributions are
deferred, often until the employee retires.

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 Gainsharing Plans

Scanlon Plan
Components

Benefits
Philosophy of Involvement
Identity Competence sharing
cooperation system
formula

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Organizationwide Incentive Plans

(cont’d)
 Employee Stock Ownership Plan (ESOP)
⚫ A firm annually contributes its own stock—or
cash (with a limit of 15% of compensation) to be
used to purchase the stock—to a trust
established for the employees.
⚫ The trust holds the stock in individual employee
accounts and distributes it to employees upon
separation from the firm if the employee has
worked long enough to earn ownership of the
stock.

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Advantages of ESOPs
 For the Company
⚫ Can take a tax deduction equal to the fair market value
of the shares transferred to the ESOP trustee
⚫ Gets an income tax deduction for dividends paid
on ESOP-owned stock
⚫ Can borrow against ESOP in trust and then repay
the loan in pretax rather than after-tax dollars
 For the Employees
⚫ Develop a sense of ownership in and commitment to the
firm.
⚫ Do not pay taxes on ESOP earnings until they receive
a distribution.
 For the Shareholders of Closely-Held Corporations
⚫ Can place assets into an ESOP trust which will allow them
to purchase other marketable securities to diversify their
holdings

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 Benefits and Services

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Some Required and Discretionary Benefits

Benefits Required by Federal Benefits Discretionary

or Most State Law on Part of Employer*

Social Security Disability, Health, and Life Insurance

Unemployment Insurance Pensions
Workers’ Compensation Paid Time Off for Vacations, Holidays, Sick
Leave, Personal Leave, Jury Duty, etc.
Leaves under the Family Medical
Leave Act Employee Assistance and Counseling
Programs
“Family Friendly” benefits for Child Care,
Elder Care, Flexible Work Schedules, etc.
Executive Perquisites

* While not required under federal law, all these benefits are regulated
in some way by federal law, as explained in this chapter.
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Policy Issues in Designing Benefit

Packages
Which benefits to offer Who will be covered

Whether to include Coverage during

retirees probation
Policy Issues
Degree of employee
How to finance benefits
choice

Cost containment Communicating

procedures benefits options

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 Pay For Time Not Worked

Unemployment Vacations and

insurance holidays

Supplemental
Sick leave Parental leave
Pay Benefits

Supplemental
Severance pay unemployment
benefits

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Insurance Benefits
 Workers’ Compensation
⚫ Provides income and medical benefits to work-related
accident victims or their dependents, regardless of
fault.
• Death or disability: a cash benefit based on earnings per
week of employment.
• Specific loss injuries: statutory list of losses.
• Injured workers are protected.
⚫ Controlling workers’ compensation costs
• Screen out accident-prone workers.
• Make the workplace safer.
• Thoroughly investigate accident claims.
• Use case management to return injured employees to
work as soon as possible.

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Insurance Benefits (cont’d)

 Hospitalization, Health, and Disability

Insurance
⚫ Provide for loss of income protection and group-
rate coverage of basic and major medical expenses
for off-the-job accidents and illnesses.
• Accidental death and dismemberment
• Disability insurance
• Mental health benefits

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 Other Benefits Issues
 Long-Term Care
⚫ Insurance for older workers is a growing issue.
 Life Insurance
⚫ Types
• Group life insurance
• Accidental death and dismemberment
⚫ Personnel policy considerations
• Benefits-paid schedule
• Supplemental benefits
• Financing (employee contribution)
 Benefits for Part-Time and Contingent Workers
⚫ Leave and health benefits available to part-time
workers.
⚫ Benefits for long-term independent contractors.

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Family-Friendly (Work–Life) Benefits

 Subsidized child care

 Sick child benefits
 Elder care
 Time off
 Subsidized employee transportation
 Food services
 Educational subsidies
 Fitness and medical facilities
 Flexible work scheduling

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Flexible Work Schedules

 Flextime
 Compressed workweek schedules
 Workplace flexibility
 Job sharing

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