HUMAN RESOURCE MANAGEMENT

COMPENSATION MANAGEMENT

CHAPTER NO. 8

AFTER STUDYING THIS CHAPTER YOU SHOULD BE ABLE TO:

Understand and differentiate between performance management and performance appraisal. Identify the factors that effect performance. Narrate performance management cycle. Describe two major purposes of performance management. Understand three job criteria and information types. Discuss the pros and cons of using different raters to appraise a persons performance . Develop , evaluate, and administer at least four appraisal methods to measure performance

Explain several rater errors by giving examples of them.

Perform an effective appraisal interview. Design Appraisal form to measure employee performance effectively.

WHAT IS COMPENSATION
COMPENSATION
Compensation is what employee receives in exchange for their contribution to the organization.

WHAT IS COMPENSATION MANAGEMENT

COMPENSATION MANAGEMENT

Compensation management help the organization to obtain, maintain and retain a productive Workforce.

OBJECTIVES OF COMPENSATION MANAGEMENT

Acquire Qualified Personnel Retain Present Employee Reward Desired Behavior
Comply with Legal Regulations

Ensure Equity

Control Cost

Facilitate Understanding Further

Administration

Efficiency

TYPES OF COMPENSATION Types of Compensation 1. Intrinsic Compensation 2. Extrinsic Compensation

TYPES OF COMPENSATION Cont . . .

1. INTRINSIC COMPENSATION

Rewards once receives from job itself such as pride in Ones work, a feeling of accomplishment, or being a part of a team.

2. EXTRINSIC COMPENSATION

Rewards one gets from employer usually money, a promotion or benefits

FINANCIAL Vs. NON FINANCIAL REWARDS

Individual

Financial Rewards

Group Organization Wide

Non Financial Rewards

Fringe Benefits

TYPES OF VARIABLE PAY PLANS

Piece Rate Sales Commissions Bonuses Special Recognition

INDIVIDUAL

ORGANIZATION WIDE

GROUP

Profit Sharing

Employee Stock Options Executive Stock Options

Gain Sharing

Labor Cost Reduction

PHASE WISE MODEL OF COMPENSATION MANAGEMENT

Phase 1 Identity and Study jobs

Job Analysis Job Description Job Evaluation Job Standard

Position Description
Phase 2 Internal Equity

Job Ranking
Phase 3 External Equity

Job Grading

Factor Comparison

Point System

Salary & Wages Survey

Dept. Of Labor

Employee Associations Professional Association Self Conducted Survey Pricing Job

Phase 4 Matching Internal and External Work

Job Evaluation Worth Match Rate & Range for Each Job

Labor Market Worth

PHASE WISE MODEL OF COMPENSATION MANAGEMENT

Phase 1 Identity and Study jobs

Job Analysis
Position Description Job Description Job Standard

JOB ANALYSIS
JOB ANALYSIS

A Systematic way of gathering and analyzing information about the Content, Context, and the Human Requirements of jobs for the purpose of developing Job description, Job specification & Job evaluation.

PHASE WISE MODEL OF COMPENSATION MANAGEMENT

Job Evaluation
Job Ranking

Phase 2 Internal Equity

Job Grading
Factor Comparison Point System

JOB EVALUATION
Systematically determining the relative worth of the jobs to create job structure.

Or
Determining the worth of job for reward, benefits & compensation system.

JOB EVALUATION METHODS

1. Job Ranking Method 2. Job Grading / Classification Method

4. Point System

3. Factor Comparison Method

1. JOB RANKING METHOD

DEFINITION

Arrangement of job in a simple rank order form highest to lowest or form lowest to highest.
Raters examine the JD of the each job. Arrange in order according to value. e.g. starting from lowest to highest Janitor ranked 1 Secretary gets 2 Office manager gets 3

2. JOB GRADING METHOD

Assigned a grade or class for each job.

Step 1 Step 2

These classification are created by identifying a number of job related factors such as, education, experience and responsibilities with the goal to determine classes or grades of Job.

After classifications, jobs are ranked in an overall order of importance according to criteria chosen and each job is placed in its appropriate grade The standard description that most nearly matches the JD determines the jobs grading/classification.

Step 3

3. FACTOR COMPARISON METHOD

The each compensable factor such as responsibility, skill, mental effort, physically effort and working conditions is compared one at time with the same factor for other key job and then evaluated.
i. Determine the Compensable Factor ii. Determine Key Jobs Steps Of Factor Comparison Method iii. Apportion Present Wages for Key Jobs

iv. Place Key Jobs on a Factor Comparison Chart

v. Evaluate Other Jobs

4. POINT SYSTEM METHOD

An approach to job evaluation in which numerical values are assigned to specific job factors and the sum of those values provides a quantitative assessment of a jobs relative worth.

Determine the Critical factor Determine Sub-factor Determine the levels of factors
Allocate points to factor under each level

2
Steps Of Point System Method 3

4
5 6

Develop a point manual Apply the point system

Factors
SKILL

1st Degree 15 20 15 10

2nd Degree 30 40 30 20

3rd Degree 45 60 45 30

4th Degree 60 80 60 40

5th Degree

Education
Experience

75 100 75 50

Initiative and Ingenuity

EFFORT

Physical demand
Mental or visual demand

5 5
5

10 10
10

15 15
15

20 20
20

25 25
25

RESPONSIBILITY
Equipment or process Material or product Safety of others Work of other job conditions

5
5

10
10

15
15

20
20

25
25

JOB CONDITIONS
Working conditions Unavoidable hazards

10
5

20
10

30
15

40
20

50
25

A Point Manual Description of Responsibility: Equipment and Material

1. RESPONSIBILITY

b.

Equipment and materials: each employee is responsible for conserving the companys equipment and material. This includes reporting mal functioning, equipment or defected material, keeping equipment and material clean or in proper order, and maintaining , repairing, or modifying equipment and materials according to individual job duty. The company recognizes that the degree of responsibility for equipment and material varies widely through out the organization

Level1: Employee reports mal functioning equipment or defective materials to immediate superior. Level 2: Employee maintain the appearance of equipment or order of materials and has responsibilities for the security of such equipments and materials Level 3: Employee performs preventive maintenance and minor repairs on equipment or corrects minor defects in materials Level 4: Employee performs major maintenance or overhauls of equipment or is responsible for deciding type, quantity, and quality of material to be used.

PHASE WISE MODEL OF COMPENSATION MANAGEMENT

Wage & Salary Survey

Department of Labor

Phase 3 External Equity

Employee Associations
Professional Association Self-Conducted Surveys

WAGE AND SALARY SURVEY

A collection of data on existing compensation rates for workers performing similar jobs in other organizations.

Steps in Wage And Salary Survey

i. Identifying Key Jobs
ii. Selecting the Organizations to Survey
Department of Labor Employee Associations Professional Association Self-Conducted Surveys On live Surveys

iii. Data Collection Sources

iv. Interpreting the Data

PRICING JOB
Allocate the Value to the job After matching the job evaluation worth with the market worth.

Establishing Pay Structure

Steps in Pricing Job

Establishment of Pay Grades

Establishment of Pay Ranges

ESTABLISHING PAY STRUCTURE

Wage Curve Used for tying pay survey information to job evaluation data.

Market Line Pay Grades

The line on a graph showing the relationship between job value, as determined by job evaluation points, and pay survey rates.
A grouping of individual jobs having approximately the same job worth. It involves collapsing multiple salary grades and ranges into a few wide levels known as bands.
Using the market line as a starting point, the employer can determine maximum and minimum pay levels for each pay grade by making the market line the midpoint line of the new pay structure.

Broad Banding

Pay Ranges

ESTABLISHING PAY STRUCTURE

Establishing Pay Structure

Pay Scatter Gram

Pay Grades & Pay Ranges

INCENTIVE SYSTEMS & GAIN SHARING

Incentive System
links compensation and performance by rewarding performance instead of seniority or hours being worked. Incentive system could be individual based

Gain SHARING

Matches an improvement (gain) in performance with a distribution (sharing) of the benefits with employees.

INCENTIVE SYSTEMS & GAIN SHARING

INCENTIVES Piece Work DESCRIPTION
Compensates the worker for each unit of output

Production Bonuses
Commissions Merit Raises Pay for knowledge/pay for Skills Compensation Non Monetary Incentive Executive Incentive

Paid to workers for exceeding output goals

The seller may be paid a percentage of selling price or a flat amount for each unit sold Pay increases given after an evaluation of performance Rewarding employees with higher pay as an incentive for increased knowledge or skills they acquire.

e.g. recognition programs in which employee receives certificates, time off, vacations etc Stock option: the right to purchase the companys stock at a predetermined price. Weighted incentive systems: reward executives on the basis of improvements in the multiple areas of business

INCENTIVE SYSTEMS & GAIN SHARING

GAIN SHARING DESCRIPTION
Many company have stock purchase plans that allow workers to buy shares in the company, so owing the fractional part of the firm and sharing its success Allow groups of workers to receive bonuses for exceeding predetermined levels of output.

Employee Ownership
Production Sharing Plans Profit Sharing Plans Cost Reduction plans

Share profits with the employees

Scanlon Plan: Employees aim to reduce costs and then share in the savings that result. Bonuses on improvements in quality of labor costs compared with the historical norms

EQUITY FACTOR APPROACH

The perceived fairness of the relation between what a person does (inputs) and what the person receives (outcomes).

EQUITY FACTOR APPROACH Cont . . .

COMPARISON OTHER

PERSON

My Rewards (Outcomes) My Contributions (Inputs)

Others Rewards

Other's Contributions

Equity Inequity (UnderRewarded) Inequity (OverRewarded)

My Rewards My Contributions

Others Rewards Other's Contributions

My Rewards My Contributions

Others Rewards Other's Contributions

EQUITY FACTOR APPROACH Cont . . .

PROCEDURAL JUSTICE
The perceived fairness of the process used to determine the distribution of rewards.

DISTRIBUTIVE JUSTICE
Perceived fairness of the amount and allocation of rewards among individuals.

PHASE WISE MODEL OF COMPENSATION MANAGEMENT

Pricing Job
Pay above the Market Rate Pay Market Rate Pay below the Market Rate

Phase 4
Matching Internal and External Work

MARKET RATE & COMPENSATION PLANS 1. Pay Above the Market Rate Advantages
Attracts better employees. Minimize voluntary turnover. Fosters Strong culture & competitive Superiority

Disadvantages
Additional Compensation Cost Sense of entitlement

MARKET RATE & COMPENSATION PLANS 1. Pay Market Rate Advantages

Higher quality of

Disadvantages

Human Does not attract huge factor

Resource at midrange of market- forever driven Compensation. Turnover will vary with labor demand of competitively firms.

MARKET RATE & COMPENSATION PLANS 1. Pay Below Market Rate Advantages
Lower Compensation Costs Useful in labor Market where Unemployment rate large High Turnover, Especially wage

Disadvantages
Lower Quality Employee Low Moral / Job Satisfaction

Objectives of Compensation Management

Acquire Qualified Personnel

Ensure Equity

Reward Desired Behavior

Facilitate Understanding

Retain Present Employee

Control Cost

Comply with Legal Regulations

Intrinsic Compensation

Types of Compensation

Extrinsic compensation
Financial Rewards Non Financial Rewards
Wages & Salaries Fringe Benefits Incentives Gain Sharing

Financial Rewards Vs. Non Financial Rewards

COMPENSATION MANAGEMENT
PHASE 1 Scientific Job Analysis Management

Phases of Compensation Management

(Identify & Study the Job)

Scientific PHASE 2 Job Evaluation Management

(Internal Equity)

(Salary & Wages Survey)

PHASE 3 Scientific External Equity Management

(Matching Internal & External Equity)

PHASE 4 Scientific Pricing Job Management

Scientific Management Position Description

Job Description Job Standard

Job Ranking Management Job Grading Factor Comparison Point System

Scientific

Department of Labor Management Employee Associations Professional Associations Self Conducted Survey

Scientific

Job Evaluation Worth Management Match Rate & Range for each Job Labor Market Worth

Scientific

Market Rate & Compensation Plans

Pay Above the Market Rate Pay Market Rate Pay Below the Market Rate

Management Quality Circle

CHAPTER 8

THOUGHT OF THE DAY

If you pick the right people and give them the opportunity to spread their wings and put compensation as a carrier behind it you almost don't have to manage them.
Jack Welch