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Compensation Revision

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What is Compensation and Benefits?
 Compensation and benefits (Reward Management) deals with the strategies, policies and
processes required to ensure that the contribution of people to the organization is
recognized by both financial and non-financial means
...

 Procedural justice
o The ways in which managerial decisions are made and reward policies are put into
practice
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

The criteria for decisions are applied consistently to all employees



Employees are provided with early feedback about the outcome of decisions
...

o It also conforms to the ‘felt-fair’ principle
...

o The assumptions underpinning the theory are that:


there is an unrecognized standard of fair payment for any level of work



unconscious knowledge of the standard is shared among the population at
work



pay must match the level of work and the capacity of the individual to do it



people should not receive less pay than they deserve by comparison with
their fellow workers

Fundamentals of Reward management
 Equity
 Consistency
 Transparency
 Strategic alignment
 Contextual and culture fit
 Fit for purpose
 Market rate analysis
The aims of reward management are to:
 Support the achievement of business goals by developing a performance culture and
stimulating high performance
 Define what is important in terms of behaviors and outcomes
 Align reward practices with employee needs

Mr
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Its management involves deciding on pay
levels and developing and operating grade and pay structures
 Contingent Pay: Contingent pay consists of payments which are related to performance,
competency, contribution, skill or length of service
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 Total Earnings: Gross earnings, for individuals, refer to the total income earned prior to
the application of any tax deductions or adjustments
...

 Job Evaluation: The job evaluation is the tool employers use to measure each position's
contribution level to the company
...

 Pay Structure: A pay structure is a collection of pay grades, levels or bands which links
related jobs within a hierarchy or series
...


Mr
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The Context of Reward management
 The corporate, national and international context; the impact of the internal and external
environments, including national and global competition, on reward strategies and
practices
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Benefits of Total Reward
 Simply put, the elements of a total rewards program constitute all the things a business
uses to attract employees, including salary, bonuses, incentive pay, benefits and
employee growth opportunities such as professional development and additional training
...
The system works in a cyclical manner consisting of four total parts
...

o Such a plan provides immediate incentive for employee retention by giving an
employee a series of long-term projections and goals
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 Controllable Expenses
o The long-term and complete scope of total rewards programs allows a small
business to create relatively accurate estimates of how much money it spends on
each employee over the course of a number of years
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 Program Administration
o Total rewards programs provide the advantage of centralized administration in all
employee-related concerns, including benefits, pay and training
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particularly small businesses, such a system of administration provides the
advantage of a complete system through which to control all of these aspects
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Six Action Steps to Develop a Total Rewards Strategy
1
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Align your people strategy to the business strategy
3
...

4
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Implement the total rewards strategy
6
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Strategic Reward Management:
 It therefore deals with both ends and means
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As a means, it shows how it is
expected that the vision will be realized
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 Reward management aims to create and efficiently operate a reward structure for an
organization
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 Its benefits:
o Gain holistic view of reward mechanisms and ways to develop them
o Strengthen competence to develop a reward system aligned with strategy
o Be able to benchmark other organizations’ reward management practices
o Improve reward management that supports the organization’s strategy
o Get the results you want through the right kind of reward scheme
o Bring solutions to HR challenges in your organization
 Aligning Reward Management Objectives to Organizational Plans
o By integrating reward management objectives into the organization’s planning
process, Organizations are able to ensure that the management of HR contributes
to mission’s accomplishment
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Herzberg Two Factor Theory & Its Relation to Total Rewards
 The Two-factor theory indicates that one set of factors at work cause job satisfaction, while
another set of factors cause dissatisfaction
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It was developed by Frederick Herzberg, a
psychologist, who theorized that job satisfaction and job dissatisfaction act independently
of each other
...
According to Herzberg, individuals are not content with the satisfaction of
lower-order needs at work such as minimum salary levels or safe and pleasant working
conditions
...
This appears to parallel Maslow's theory of a need hierarchy
...
Thus, satisfaction and dissatisfaction are
not on a continuum with one increasing as the other diminishes, but are independent
phenomena
...

 Herzberg found that the job characteristics related to what an individual does (the nature
of the work he performs) apparently have the capacity to gratify such needs as
achievement, competency, status, personal worth, and self-realization, thus making him
happy and satisfied
...
Instead, dissatisfaction results from
unfavorable assessments of such job-related factors as company policies, supervision,
technical problems, salary, interpersonal relations on the job, and working conditions
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 Thus, if management wishes to increase satisfaction on the job, it should be concerned
with the nature of the work itself—the opportunities it presents for gaining status, assuming
responsibility, and for achieving self-realization
...
If management is equally concerned with both
satisfaction and dissatisfaction, then managers must give attention to both sets of job
factors
...
g
...

o Hygiene factors (e
...
status, job security, salary, fringe benefits, work conditions)
that do not give positive satisfaction, though dissatisfaction results from their
absence
...

 Essentially, motivation factors are needed to motivate an employee to higher performance
...
Herzberg also
further classified our actions and how and why we do them
...

 This theory highlights the importance of rewards systems and monitoring when and how
employees are rewarded
...

Internal & External Equity
 The internal and external analysis allows an organization to evaluate the compensation
plan based on the fairness of employee compensation
...

 Equity pay is ensuring that all parties involved are receiving the same benefits based on
the internal and external factors
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 Internal influences
o It involve employees doing the same job, a difference in job responsibilities, or even
a specific department but for the same company
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o The pay scale allows the employee to view the benefits he or she will receive in
relation to the responsibility given
...

o According to Martocchio (2008), “Job evaluation is key for casting internally
consistent compensation systems as strategic tools
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o The evaluation outlines differences and similarities in job responsibilities, this can
be described in the experience level, performance, and knowledge
...

 Understanding the external influences
o It is just as important as the internal factors
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o Organizations are competing to attain the best employees to help their company
grow
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Mr
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o Human Resource Managers is responsible to assess the outside competition
properly in regard to the above mentioned to maintain a competitive advantage with
similar companies
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o An evaluation of the marketing prices can also be used to retain the employees
already on staff
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o This is referred to as poaching or raiding
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o Internal equity allows the organization to warrant an equal pay among the
employees based on the pay scale or performance
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o An employee can perceive that he or she is doing the same job as another
employee and should receive the same pay
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o The employee may feel that his or her individual performance is the same or above
in comparison to the employees who are performing
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Mr
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o The disadvantages of external equities are the cost to remain in a competitive
market
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o It is still undecided on which is the most important between internal and external
equity and there is no right or wrong answer
o Finding a balance and ensuring that the internal and external equities in the
organization is important
...

o The external and internal compensation plan should meet the organizational goals
will create the culture it seeks
...
A structured and clear benefits plan offered in the organization could limit
confusion of the employees of worth and value
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Analysis of Current Reward Arrangement
a
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The effectiveness of present reward arrangement
c
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Analysis of External Environment
a
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Globalization

Mr
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Changes in demographics and employment
d
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Trends in the marketplace
3
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Organizational values and culture
b
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Type of business
d
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Diagnosis

Factors Affecting Pay Levels
Introduction
 The most significant policy decisions are about levels of pay
...

ECONOMIC DETERMINANTS OF PAY
The labor theory of value
 According to Karl Marx value of goods and services is determined by the amount of labour
that goes into them
 They are only concerned with job content and ignore market rate pressures
...
The price of labour is the rate of pay required to attract and retain people in
organizations
...

Classical economic competitive theory
 It states that pay levels are prices that in labor markets are determined by supply and
demand considerations

Mr
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This is sometimes known as the theory of equalizing differences
 Classical theory is based on ‘other things are equal’ and that a ‘perfect market’ for labour
exists
...
And there is no such thing as a
universally perfect market
Human capital theory
 conceptualizes workers as embodying a set of skills which can be “rented out” to
employers
 For the employee, the expected returns on human capital investments are a higher level of
earnings, greater job satisfaction and, at one time, but less so now, a belief that security in
employment is assured
 For the employer, the return on investment in human capital is expected to be the
improvements in performance, productivity, flexibility and capacity to innovate that should
result from enlarging the skill base and increasing levels of competence
...

Agency theory
 Agency theory, or principal agent theory, in its purest form recognizes that in most firms
there is a separation between the owners (the principals) and the agents (the managers)
...
The payment aspect of the contract is the method
used by the principal to motivate the agent to perform work to the satisfaction of the
employer
 It is desirable to operate a system of incentives to motivate and reward acceptable
behaviour
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 This process of ‘incentive alignment’ consists of paying for measurable results that are
deemed to be in the best interests of the owners
 Agency theory has been criticized by Gomez-Mejia and Balkin as ‘managerialist’
...

 The concept states that the task of management is to assess what level and type of
inducements it has to offer in return for the contribution it requires from its workforce
 The aim of workers is to strike a bargain about the relationship between what they regard
as a reasonable contribution and what their employer is prepared to offer to elicit that
contribution
FACTORS AFFECTING PAY LEVELS WITHIN ORGANIZATIONS
Intrinsic value
 The concept of intrinsic value is that jobs have value because of the impact they make on
organizational results and by reference to the levels of responsibility and skill required to
perform them
...

Internal relativities
 This is the concept of internal equity, which is achieved when people are rewarded
appropriately in relation to others according to the value of their contribution
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Mr
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Pay systems must not cost
more than the organization can afford, and this will influence the level of pay that can be
offered to employees
Pay stance
 Policy decisions on an organization’s pay stance – whether it should be a high, medium or
even low payer – will depend partly upon what it can afford but will also be affected by the
extent to which it believes that it must be competitive in the labour market
...

The minimum wage
 Minimum wage legislation sets minimum rates of pay
 The amount is increased from time to time
...
The development of a performance
culture is a typical aim of reward strategy
...
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 Motivation theories provide essential guidance on the practical steps required to develop
effective reward systems
 Motivation theory is concerned with what ‘moves’ people to do something – what
influences people to behave in certain ways
...

 People are motivated when they expect that a course of action is likely to lead to the
attainment of a goal – a valued reward that satisfies their particular needs
...

How motivation works

 This model suggests that the process of motivation is initiated by the conscious or
unconscious recognition of unsatisfied needs
...

 Goals are then established that it is believed will satisfy these needs and a behavior
pathway is selected that it is believed will achieve the goal
...

 If the goal is not achieved, the same action is less likely to be repeated
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Individual differences
 Some common needs headings have been established by theorists such as Maslow and
Herzberg, But it cannot be assumed that these are present at any moment to the same
extent or even present at all in all the members of a population such as the employees of
an organization
...
It takes place when people feel that the work they do is intrinsically interesting,
challenging and important and involves the exercise of responsibility, autonomy, and use
and develop skills and abilities and opportunities for advancement
...
This includes
rewards such as increased pay, recognition, praise or promotion, and punishments such
as disciplinary action, withholding pay, or criticism
 Extrinsic motivators can have an immediate and powerful effect, but it will not necessarily
last long
...
If rewards
are worth having and attainable and people know how they can attain them, they can act
as motivators
...

 Incentives are designed to encourage people to achieve objectives
...
Incentives are
generally financial but they can promise non-financial rewards such as recognition,
promotion or a particularly interesting assignment
MOTIVATION THEORIES
Instrumentality, behaviorist and reinforcement theories
 ‘Instrumentality’ is the belief that if we do one thing it will lead to another
 It assumes that people will be motivated to work if rewards and penalties are tied directly
to their performance
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 Instrumentality theory is based on the principle of reinforcement, which states that, with
experience in taking action to satisfy needs, people perceive that certain actions help to
achieve their goals while others are less successful
...
Nor does it take account of the fact that the formal control system can
be seriously affected by the informal relations between workers
Needs or content theories
 The basis of this theory is the belief that an unsatisfied need creates tension and
disequilibrium
...

 All behavior is therefore motivated by unsatisfied needs
...
Some may constitute a
more powerful drive towards a goal than others, depending on the individual’s background
and situation
...
It is
sometimes called the motivation–hygiene theory
...
They have been replaced by more relevant
approaches
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 The term ‘cognitive theories’ is used because they refer to people’s perception of their
working environment and the ways in which they interpret and understand it
...

 The processes covered by the most relevant theories are:
o Expectancy theory (Motivation is likely only when a clearly perceived and usable
relationship exists between performance and outcome, and the outcome is seen as
a means of satisfying needs
...
People need money and therefore want
money
...

 Money can serve the following reward functions:
o It can act as a goal that people generally strive for although to different degrees
o It can act as an instrument that provides valued outcomes
o It can be a symbol that indicates the recipient’s value to the organization
o It can act as a general reinforce because it is associated with valued rewards so
often that it takes on reward value itself
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o Gupta and Shaw (When certain behaviors are followed by money, then they are
more likely to be repeated
...
An
effective job evaluation system can help determine the best rate of pay for a position and
develop a broad job description that easily adapts to the company’s needs as they change
over time
...

Aims of Job Evaluation:
1
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Produce information required to design and maintain equitable grade and pay structures
3
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4
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Be transparent
6
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Based on factual evidence
2
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Concerned with the job and not the person
4
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 Stage 2: Select the scheme
 Stage 3: Consider computerization
 Stage 4: Select an approach to the introduction of the scheme
 Stage 5: Draw up a project plan
o Develop and test scheme
o Determine the number of benchmark
o Establish the resources available to carry out analyses and evaluations
o Calculate the time taken for analysis of the benchmark jobs
o Calculate the time for evaluating the benchmark jobs
o Estimate the time taken to design a grade structure

Mr
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Appoint and brief the project team
 Stage 7: Develop and implement the scheme
POINT METHOD OF JOB EVALUATION
 In the point method (also called point factor) of job evaluation, the organization identifies
the compensable factors and breaks them down into degrees
...

 The result is that the evaluator assigns a numeric score to a job for each factor based on
how much of that factor appears in the job
...

 This procedure, when conducted across all jobs, will result in a relative ordering of jobs
based on the number of points that each job earns
...

o First, it is difficult to identify one set of compensable factors that is applicable for all
jobs
...
Different operational definitions would be
needed for the same compensable factor for different clusters of jobs
...
In an equity sense, comparison with job families (clusters) within
an organization may be less relevant than comparison with a job family in the
relevant labor market
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o With point methods of job evaluation, organizations usually have a series of job
evaluation plans
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 STEPS IN THE POINT METHOD
o Identify and define the factors:


Job evaluation factors are the characteristics or key elements of jobs that are
used to analyse and evaluate them in an analytical job evaluation scheme

o Define factor levels to produce the basic factor plan:


A decision has to be made on the number of levels (often four, five, six or
seven), which has to reflect the range of responsibilities and demands in the
jobs covered by the scheme

o Select and analyse test jobs:


A small representative sample of jobs should be identified to test the basic
factor plan
...
The draft
definitions must be tested on actual jobs

o Develop a scoring model:


The ‘arithmetic’ or linear approach



Geometric scoring

o Decide on factor weighting:


Explicit weighting



Implicit weighting

o Produce full factor plan:


The outcome of Steps 5 and 6 is a draft fully scored and weighted factor plan

o Test factor plan
o Computerize
o Select and evaluate benchmark jobs:


Benchmark jobs are a sample of typical jobs representing the different
occupations and levels in the organization

o Grade the remaining jobs

Mr
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o Can be applied to a wide range of jobs
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 Disadvantages
o The pay for each factor is based on judgments that are subjective
...

Ranking of a single factor method:
-

The simplest and most common technique for job evaluation employs a system whereby
human resources associates or consultants rank jobs in an organization based on a single
factor, such as difficulty or education required to effectively perform the job
...
This least expensive method of job evaluation works well for smaller businesses with
tight budgets
...


Factor Comparison
-

Factor comparison, a sophisticated, yet time-consuming method, utilizes the techniques
found in several job evaluation schemes
...
Next, evaluators analyze their findings against the market rate of pay for
the compensation factors ranked in the first step
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benchmark jobs that they use to compare to the job and its compensable characteristics to
determine rate of pay
...
The groups are commonly called grades
...
The
characteristics may include level of responsibility required, competencies required and
physical exertion necessary to perform the job
...


Market pricing
-

Over the last few decades, market pricing has become the primary job evaluation method
in most organizations, likely because of increased competition in the labor market
...


-

Market pricing is a formal process for determining the external value of jobs
...


-

In economics, market price is the economic price for which a good or service is offered in
the marketplace
...
Market value
and market price are equal only under conditions of market efficiency, equilibrium, and
rational expectations
...
It is important to understand both the internal value
and external value of a job
...


Mr
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This is often, but not exclusively, a gender issue
...


-

Equal pay for equal work is the concept of labor rights that individuals doing the
same work should receive the same remuneration
...


-

The Equal Pay Act of 1963 is a United States federal law amending the Fair Labor
Standards Act, aimed at abolishing wage disparity based on sex (see Gender paygap)
...
e
...

 The pay ranges can be starting by the highest salary according to the markets prices or
through the newest salaries according to the market prices or government regulations
the determination of the pay grades:
 there are no fixes rules that should be applied by its each organization, companies should
decide how many grades that they would have, which would be identified based on the [1]
size of the organization, [2] the vertical distance between the highest and lowest levels,
[3] the definition of and differences between the jobs, and [4] the policies of the
organizational regarding the increase of the payments and promotion
 for the measurement of the pay grades, they should be assessing for the:
o Span is measuring of difference between highest and lowest point in one pay grade
o The Reference Point is the highest point to reach if you are fully competent
o the Differential is the difference between the midpoint at each level
o the Overlap between the different pay ranges

Mr
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Granting Overlap provides managers with flexibility to shift employees to higher
grades when promoted without an overly generous pay rise, however too much overlap
will lead to pay unfairness
...

 Contingent pay can apply to individuals (individual contingent pay) or teams, or it can
operate on an organization-wide basis
...


Mr
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 Contingent pay is concerned with answering the two fundamental reward management
questions: 1) what do we value? and 2) what are we prepared to pay for?
 Contingent pay schemes are based on measurements or assessments
...
Alternatively,
there may be no formal ratings and pay decisions are based on broad assessments rather
than a formula
...

● But it is simplistic to assume that it is only the extrinsic motivators in the form of pay that
create long-term motivation
...

Argument for contingent pay
The most powerful argument for contingent pay is that those who contribute more should be paid
more
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Arguments against contingent pay
The main arguments against contingent pay are:


The extent to which contingent pay schemes motivate is questionable – the amounts available
for distribution are usually so small that they cannot act as an incentive



Money by itself it will not result in sustained motivation



The requirements for success are difficult to achieve



People react in widely different ways to any form of change



Financial rewards may possibly motivate those who receive them but they can de-motivate those
who don’t



They can create more dissatisfaction than satisfaction if they are perceived to be unfair



They depend on the existence of accurate and reliable methods of measuring performance,
competency, contribution or skill, which might not exist



Contingent pay decisions depend on the judgement of managers, which, in the absence of
reliable criteria, could be partial, prejudiced, inconsistent or ill-informed



The concept of contingent pay is based on the assumption that performance is completely under
the control of individuals, when, in fact, it is affected by the system in which they work



Contingent pay, especially performance-related pay schemes, can militate against quality and
teamwork

What is the distinction between financial incentives and rewards?
● Financial incentives are designed to provide direct motivation
...
’ A shopfloor payment-by-result scheme or a sales representative's commission system are
examples of financial incentives
...
Rewards can be
retrospective: ‘You have achieved this, therefore we will pay you that
...
’

Mr
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● Rewards are worth having
...

● People must be able to influence their performance
...

Assess readiness
Consider the extent to which contingent pay:
● will benefit the organization;
● can be based on reliable methods of measuring performance and/or competency;
● can be managed effectively (by line managers and HR);
● will be accepted by trade unions and employees
...
Assess readiness
...
Analyse requirements
...
Decide on most appropriate approach
...
Define aims
...
Communicate aims
...
Design scheme
...
Develop assessment processes
...
Pilot-test
...
Provide training
...
Launch and evaluate the scheme
...


Mr
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Bonuses
are often referred to as ‘variable pay’ or ‘pay-at-risk’
...

Organization-wide bonus schemes
These include profit sharing, gainsharing and employee share schemes
...

● The alternative to individual contingent pay is team pay
...

● Bonuses may be paid in addition to or as an alternative to consolidated pay and individual
bonuses can be combined with team or organizational bonus schemes
...
Assess readiness
...
Analyse culture, strategy and existing processes, including the grade and pay structure,
performance management and methods of progressing pay or awarding cash bonuses
...
Decide which form of contingent pay is most appropriate
...
Set out aims that demonstrate how contribution-related pay will help to achieve the
organization’s strategic goals
...
Communicate aims to line managers and staff and involve them in the development of the
scheme
...
Determine how the scheme will operate
...
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7
...

8
...

9
...

10
...

What is contribution-related pay?
 Contribution-related pay is a process for making pay decisions based on assessments of
both the outcomes of the work carried out by individuals and the inputs in terms of levels
of competency that have influenced these outcomes
...

Performance-Related Pay
 Pay increases are related to the achievement of agreed results defined as targets or
outcomes
...

 Alternatively or additionally, high levels of performance or special achievements may be
rewarded by cash bonuses that are not consolidated and have to be re-earned
...

 Broadbanding (or 'broad grades') is the consolidation of traditional pay structures,
consisting of many, narrow pay ranges into a few, wider ranges or bands
...
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Mr
...
Job analysis
provides information to organizations which helps to determine which employees are best
fit for specific jobs
...
The process of job analysis involves the
analyst describing the duties of the incumbent, then the nature and conditions of work, and
finally some basic qualifications
...

 Compensation: Job analysis information is crucial for estimating the value of each job
and its appropriate compensation
...
-all factors which can be assessed through job analysis
...
Job analysis provides the information to determine the relative worth of each
job and its appropriate class
...
This list contains the functional or
duty areas of a position, the related tasks, and the basic training recommendations
...
The outcomes
of job analysis are key influences in designing learning, developing performance
interventions, and improving processes
...

 One of the main purposes of conducting job analysis is to prepare job descriptions and job
specifications which in turn help hire the right quality of workforce into an organization
...
Job and task analysis is performed as a basis for later improvements,

Mr
...
The human
performance improvement industry uses job analysis to make sure training and
development activities are focused and effective


In the fields of human resources (HR) and industrial psychology, job analysis is often
used to gather information for use in personnel selection, training, classification, and/or
compensation

Job analysis aims to answer questions such as:
1
...
What physical and mental activities does the worker undertake?
3
...
Where is the job to be performed?
5
...
What qualifications are needed to perform the job?

Mr

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