Establishing Strategic pay Plans
By Shweta Bambuwala
Basic Factors in Determining Pay Rates
Employee Compensation
Direct Financial Payments
Indirect Financial Payments
Corporate Policies, Competitive Strategy, and Compensation
Aligned Reward Strategy
The employers basic task:
To create a bundle of rewardsa total reward packagethat specifically elicits the employee behaviors that the firm needs to support and achieve its competitive strategy.
The HR or compensation manager along with top management creates pay policies that are consistent with the firms strategic aims.
Important Compensation Related Acts in India
Minimum Wages Act, 1948 Payment of Wages Act, 1936 Equal Remuneration Act, 1976 Companies Act, 1956 Payment of Bonus Act Payment of Gratuity Act Employee Stock Scheme (ESOS) Employee Stock Purchase (ESPS)
Compensation Policy Issues
Pay for performance Pay for seniority The pay cycle
Salary increases and promotions
Overtime and shift pay Probationary pay
Paid and unpaid leaves
Paid holidays Salary compression
Geographic costs of living differences
Equity and Its Impact on Pay Rates
Forms of Equity
External Equity
Internal Equity
Individual Equity
Procedural Equity
Addressing Equity Issues
Salary Surveys
Methods to Address Equity Issues
Job Analysis and Job Evaluation
Performance Appraisal and Incentive Pay
Communications, Grievance Mechanisms, and Employees Participation
Establishing Pay Rates
Steps in Establishing Pay Rates
1
Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). Determine the worth of each job in your organization through job evaluation (to ensure internal equity).
3 4 5
Group similar jobs into pay grades. Price each pay grade by using wave curves.
Fine-tune pay rates.
The Salary Survey
Step 1. The Wage Survey: Uses for Salary Surveys
To price benchmark jobs
To market-price wages for jobs
To make decisions about benefits
Sources for Salary Surveys
Sources of Wage and Salary Information
Employer SelfConducted Surveys
Consulting Firms
Professional Associations
Government Agencies
The Internet
Establishing Pay Rates (continued)
Skills
Effort Step 2. Job Evaluation: Identifying Compensable Factors Responsibility
Working Conditions
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Establishing Pay Rates (continued)
Preparing for the Job Evaluation
1
Identifying the need for the job evaluation Getting the cooperation of employees
2
3
Choosing an evaluation committee
Performing the actual evaluation
Establishing Pay Rates (continued)
Methods for Evaluating Jobs
Ranking
Job Classification
Point Method
Factor Comparison
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Job Evaluation Methods: Ranking
Ranking each job relative to all other jobs, usually based on some overall factor. Steps in job ranking:
1. Obtain job information. 2. Select and group jobs. 3. Select compensable factors.
4. Rank jobs.
5. Combine ratings.
Job Evaluation Methods: Job Classification
Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.
Classes contain similar jobs.
Administrative assistants
Grades are jobs similar in difficulty but otherwise different.
Mechanics, welders, electricians, and machinists
Jobs are classed by the amount or level of compensable factors they contain.
Job Evaluation Methods: Point Method
A quantitative technique that involves:
Identifying the degree to which each compensable factor is present in the job.
Awarding points for each degree of each factor. Calculating a total point value for the job by adding up the corresponding points for each factor.
Establishing Pay Rates
Point Method Step 3. Group Similar Jobs into Pay Grades
Ranking Method
Classification Methods
Step 4. Price Each Pay GradeWage Curve
Shows the pay rates paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.
Step 5. Fine-Tune Pay Rates
Developing pay ranges
Flexibility in meeting external job market rates.
Easier for employees to move into higher pay grades.
Allows for rewarding performance differences and seniority.
Correcting out-of-line rates
Raising underpaid jobs to the minimum of the rate range for their pay grade. Freezing rates or cutting pay rates for overpaid (red circle) jobs to maximum in the pay range for their pay grade.
Compensating Executives and Managers
Base Pay Short term incentives Long term incentives Executive benefits and perks
Elements of executive compensation
Criticisms of executive compensation
Complaints of over-payments. Undue influence on compensation determination. Disregard for the financial health of the organization. Secrecy shrouding executive compensation. Inequality of income in the organization.
CEO Pay: More in an Hour Than Workers Get All Year?
Indra K. Nooyi Director; Chairman of the Board and Chief Executive Officer PEPSICO INC (PEP) In 2010, Indra K. Nooyi received $16,175,381 in total compensation. By comparison, the median worker made $33,840 in 2010. Indra K. Nooyi made 477 times the median worker's pay.
Salary Bonus Value of Stock Awards Value of Option Awards Non-Equity Incentive Plan Compensation
$1,300,000 $0 $6,000,029 $3,507,967 $3,000,000
Change in Pension Value and $2,143,083 Deferred Compensation Earnings
All Other Compensation Total $224,302 $16,175,381
CEO-to-Worker Comparisons Per Minute
Annual
Weekly
Daily
Hourly
Indra K. $16,175,3 $311,065. $62,213.0 $7,776.63 $129.61 Nooyi 81 02 0 Minimum Wage $15,080 $290.00 $58.00 $7.25 $0.12 Worker Median $33,840 $650.77 $130.15 $16.27 $0.27 Worker U.S. President $400,000 $7,692.31 $1,538.46 $192.31 $3.21
Note: calculations assume 40 hours per week/52 weeks per year.
How Many Years to Equal Indra K. Nooyis 2010 Compensation?
Minimum 1072 years Wage Worker Completion Date
3083 A.D.
Median Worker
477 years
U.S. President 40 years
Completion Date Completion Date
2488 A.D. 2051 A.D.
How Many Workers Equal Indra K. Nooyis 2010 Compensation?
Minimum Wage Worker
1072 workers
Median Worker
477 workers
U.S. President
40 workers
Competency-Based Pay
Competencies
Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.
What is Competency-Based Pay?
Paying for the employees range, depth, and types of skills and knowledge, rather than for the job title he or she holds.
Competency-Based Pay (continued)
Why Use Competency-Based Pay?
Support HighPerformance Work Systems
Support Strategic Aims
Support Performance Management
Competency-Based Pay: Pros and Cons
Pros Higher quality Lower absenteeism
Fewer accidents
Cons Pay program implementation problems Costs of paying for unused knowledge, skills, and behaviors Complexity of program
Uncertainty that the program improves productivity
Broadbanding
Consolidating salary grades and ranges into just a few wide levels or bands, each of which contains a relatively wide range of jobs and salary levels. Pro and Cons
More flexibility in assigning workers to different job grades. Provides support for flatter hierarchies and teams. Promotes skills learning and mobility. Lack of permanence in job responsibilities can be unsettling to new employees.
Comparable Worth
Refers to the requirement to pay men and women equal wages for dissimilar jobs that are of comparable (rather than strictly equal) value to the employer. Seeks to address the issue that women have jobs that are dissimilar to those of men and those jobs are often consistently valued less than mens jobs.