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CompensationManagement
Basic Introduction
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Module 1 - Introduction To CompensationA. Definition of CompensationB. The Pay ModelC. Strategic Pay Policies
Module 2 - Strategic Perspectives in Compensation ManagementA. Strategic Perspectives of PayB. Strategic Pay DecisionsC. Best Practices vs. Best Fit Options
Module 3 - Defining Internal AlignmentA. Definition of Internal AlignmentB. Internal Pay StructuresC. Strategic Choices In Internal Alignment DesignD. Which Internal Structure Fits Best?
Module 4 - Job AnalysisA. Why Perform Job Analysis?B. Job Analysis ProceduresC. Job Analysis Data Collection ProcessD. Job Descriptions
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Module 5 - Job EvaluationA. Definition of Job EvaluationB. Major Decisions In Job EvaluationC. Job Evaluation MethodsD. Final Result Pay Structure
Module 6 - Determining External CompetitivenessA. Definition of CompetitivenessB. Pay Policy AlternativesC. Wage Surveys
D. Interpreting Survey ResultsE. Pay Policy LineF. Pay Grades
Module 7 - Employee Contributions: Pay For Performance (PFP)A. Rewarding Desired BehaviorsB. Does Compensation Motivate Performance?C. Designing PFP PlansD. Merit Pay/Variable PayE. Individual vs. Group IncentivesF. Long Term Incentives
Module 8 - Pay and Performance AppraisalsA. Role of Performance Appraisal In CompensationB. Common Errors In Performance AppraisalC. Measuring Job PerformanceD. Training RatersE. Contextual Issues In Appraisal
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Module 9 - BenefitsA. Benefits Determination ProcessB. Value of BenefitsC. Legally Required BenefitsD. Retirement, Medical , & Other Benefits
Module 10 - Legal & Administrative Issues in Compensation
A. Legal IssuesB. Pay DiscriminationC. Comparable WorthD. Budgets and Administration
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Grading Structure
Grading % of Final Grade
2 Quiz 30%
Case Analysis/Project 30%
Class Presentations 10%
Attendance 20%
Class Participation 10%
100%
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Purpose of Compensation
Motivate &
Retain Staff
Attract talent
Contribution based
Remuneration
Administratively
Efficient
Reward Valued
Behavior
Effective
Compensation
Ensure Equity
Institutionalized
Processes
Legal
Compliance
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Business GoalsBusiness Goals
BusinessStrategy
BusinessStrategy
CEO
CEO
Compensation
Philosophy/ activities
serve BusinessObjectives
Compensation
Philosophy/ activities
serve BusinessObjectives
The Pay Model
Business Strategy This defines the direction in
which organization is going in relation to itsenvironment in order to achieve its objectives.
Compensation Philosophy Consists of a set of
beliefs which underpin the reward/compensationstrategy of the organization and govern the rewardpolicies that determine how reward processesoperate
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Business GoalsBusiness Goals
BusinessStrategy
BusinessStrategy
Compensation
Plan
Compensation
Plan
Compensation
Strategy
Compensation
Strategy
Non-Financial
Rewards
Non-Financial
RewardsOrg.StructureOrg.Structure
CEO
CEO
HRHead
HRHead
Compensation
activities serve
Business Objectives
Compensation
activities serve
Business Objectives
Compensation strategy
is periodically
reevaluated and the
Compensation plan
periodically developed
Compensation strategy
is periodically
reevaluated and the
Compensation plan
periodically developed
The Pay Model
Compensation Strategy defines the intentions ofthe organization on reward policies, processes and
practices required to ensure that it has the skilled,competent and well-motivated workforce it needs
to achieve its business goals
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Business GoalsBusiness Goals
BusinessStrategy
BusinessStrategy
Compensation
Plan
Compensation
Plan
Compensation
Strategy
Compensation
Strategy
Non-Financial
Rewards
Non-Financial
RewardsOrg.StructureOrg.Structure
CEO
CEO
HRHead
HRHead
Compensation
activities serve
Business Objectives
Compensation
activities serve
Business Objectives
Compensation strategy
is periodically
reevaluated and the
Compensation plan
periodically developed
Compensation strategy
is periodically
reevaluated and the
Compensation plan
periodically developed
The Pay Model
A strategic perspective on compensationtakes the position that how employees are
compensated can be a source of sustainablecompetitive advantage
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Employment Relationship
TRANSACTIONAL Emphasizing the Cash &Benefit Forms
RELATIONAL Emphasizing the Family /culture / Bonding Aspects
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Employment RelationshipHIGH PAY LOW
COMMITMENT
Hired Guns(Lehman Brothers)
HIGH PAY HIGHCOMMITMENT
Cult Like (Microsoft)
LOW PAY LOWCOMMITMENT
Workers as commodity
LOW PAY HIGHCOMMITMENT
Family (Starbucks)TRA
NSA
CTIO
NAL
Low
----
-H
igh
RELATIONAL
Low ----- High
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End of Part I Module 1 & 2
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Definitions
Job -Consists of a group of tasks that must beperformed for an organization to achieve itsgoals
Position - Collection of tasks andresponsibilities performed by one person; thereis a position for every individual in an
organization
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o na ys s: as cTool
Tasks Responsibilities Duties
Job
Analysis
JobDescriptions
Job
Specifications
Knowledge Skills Abilities
Human Resource
Planning
Recruitment
Selection
Training and
Development
Performance Appraisal
Compensation and
Benefits
Safety and Health
Employee and Labor
Relations
Legal Considerations
Job Analysis for Teams
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Job Analysis
The systematic, formal study of theduties and responsibilities that
comprise job content.
The process seeks to obtain importantand relevant information about the
nature and level of the work performed
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Job Description A summary of the most important features of
a job, including the general nature of the workperformed (duties and responsibilities) andlevel (i.e., skill, effort, responsibility and
working conditions) of the work performed.
Typically includes job specifications thatinclude employee characteristics required forcompetent performance of the job.
Should describe and focus on the job itself andnot on any specific individual who might do thejob.
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Job Specification
A section of the job description thatdefines what worker characteristics(i.e., the knowledge, skills and abilities)are required to perform the job for it tobe carried out competently.
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Types Of Job AnalysisInformation
Considerable information is needed,such as:
Worker-oriented activities
Machines, tools, equipment, and workaids used
Job-related tangibles and intangibles
Work performance Job content
Personal requirements for the job
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Types of Data Collected ThroughJob Analysis
Work Activities work activities andprocesses; activity records (in film form,for example); procedures used; personalresponsibility
Worker-oriented activities humanbehaviors, such as physical actions andcommunicating on the job; elemental
motions for methods analysis; personaljob demands, such as energy expenditure
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Types of Data Collected ThroughJob Analysis
Machines, tools, equipment, andwork aids used
Job-related tangibles andintangibles knowledge dealt with orapplied (as in accounting); materials
processed; products made or servicesperformed
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Work performance error analysis; workstandards; work measurements, such as timetaken for a task
Job context work schedule; financial andnonfinancial incentives; physical workingconditions; organizational and social contexts
Personal requirements for the job personal attributes such as personality andinterests; education and training required;work experience
Types of Data CollectedThrough Job Analysis
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Job Evaluation
Methods
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Job Evaluation Methods
Comparison Method Analysis Method
Entire Job Job Factors
Job Against Scale
Job Against Job
Classification Point Method
RankingFactor
Comparison
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Ranking Method
Straight ranking
Alternation Ranking
Paired Comparison
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Paired Comparison
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Classification Method
Advantages
Uses jobfamilies/groupsinstead of individual
jobs
May produce sameresults as PointMethod, but is less
costly
Disadvantages
Not useful when jobsare very different fromeach other
May be confusing toemployees about whyjobs are included in aclass
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Compensable Factors
Must be present in all jobs
Factor must vary in degree
Should not overlap in meaning
All stakeholders viewpoints must bereflected
Should be demonstrable by the actual
work
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Factor Comparison
Compensable Factors used
Mental requirements,
Physical requirements,
Skill requirements,
Responsibility, and
Working conditions
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Factor Comparison Method
Analyze Jobs
Select Key/Jobs
Rank Key Jobs
Distribute Wage Rates Across Factors
Compare Vertical and HorizontalJudgments.
Construct the Job-Comparison Scale Use the Job-Comparison Scale to Evaluate
the Remainder of the Jobs
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Hay Profiling Know How
procedures and techniques
breadth of management skills
person-to-person skills
problem solving thinking environment
thinking challenge
Accountability freedom to act impact on results
magnitude
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Factor Comparison MethodAdvantages
Customized to theorganization
Relatively easy to use
once its set up Results in ranking of
jobs and a specificrupee value for eachjob, based on
allocating part of thejobs total wage toeach factor
Disadvantages Using rupee values
may bias evaluatorsby assigning more
money to a factorthan a job is worth Hard to set up Not easily explained to
employees
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Point Method
Advantages
Highly stable overtime
Perceived as valid byusers and employees
Likely to be reliableamong committee thatassesses the jobs
Provides good data toprepare a response toan appeal
Disadvantages
Time, money, andeffort required to setup
Relies heavily on key(benchmark) jobs, soif key jobs and correctpay rates dont exist,
the point method maynot be valid
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What is a Degree Level? It is ascale that reflects differing quantity or
quality of the factor
It is used to differentiate jobs on the
factor It is a definition that is clear and
unambiguous
It contains explicit language thatspells out
the behaviors, skills, or performanceexpectations for that factor at differentlevels of the factor
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Degrees?from Otis and Leukarts (1948) Rules
1. Degrees should be selected so that each job falls at only onelevel. Note:
1. you can include some degrees that do not apply to the currentjobs if you feel there is too much of a jump between levels.
2. Another reason to create "empty" levels is if you think new jobswill be created that will require that level in the factor.
3. The number of degrees selected should be no more than areneeded to differentiate adequately and fairly between all thejobs being rated.
2. Each degree should be clearly defined in terms the workerscan understand.
3. Avoid the use of ambiguous terms, e.g., strong skills,excellent.
4. Definitions of degrees should be written in objective terms.
5. In writing degree definitions, use examples as much aspossible.
Values to the Entire
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Values to the EntireSystem?1. The maximum number of points assigned is a fairly
arbitrary judgment (500-3000 is common)
2. The number must be large enough to allow sufficientdifferentiation among the jobs to be evaluated.
3. If there is a very wide spread between the currentwages of the highest paid job and the lowest paid job,the maximum number of points will need to be higher
4. If you choose more than one pay system, the numberof points or the actual factors themselves do not haveto be the same in each one.
5. SUGGESTION /THUMB RULE: Have no fewer than1000 points and no more than 2000.
Values to the Degree
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Values to the DegreeLevels? First, determine the number of points for
each main factor (e.g., 2000 total pointsfor the system would result in 200 pointsfor a factor weighted at 10%). Then use The straight-line method, which simply
takes the maximum points for a given factorand divides it by the number of degrees. Note:this method assumes that the degrees should
be viewed as equidistant from each other
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Position: Engineering Manager
Grade: 7
MAXIMUMFACTOR
POINTS FACTOR JE Points
DEGREE
LEVEL
FACTOR
WEIGHTS
250 Communication & Interpersonal Skills 250 4 10%
250 Education & Training 250 5 10%
500 Problem Solving & Decision Making 400 4 20%500 Responsibility & Accountability 500 4 20%
250 Specialized Knowledge & Application 200 4 10%
250 Supervision & Leadership 250 4 10%
125 Internal Impact 125 3 5%
125 External Impact 75 1 5%
125 Planning & Organizing 125 4 5%125 Innovation 90 2 5%
2500 2265 100%
Values to the Degree
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Values to the DegreeLevels?
Or the accelerating method, where differences indegrees are seen as greater as you move up in thatfactor, and so the point differences reflect that jump,e.g., 27, 80, 160, 267, 400
Or the decelerating method,where differences indegrees are seen as smaller as you move up in thatfactor, and so the point differences reflect it, e.g., 133,240, 320, 373, 400
Rememberthe highest level of a factor is alwaysassigned the full number of points allocated to thatfactor, and the lowest level of a factor has to have somepoints assigned to it, i.e., 0 points is not permitted!
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Anatomy of a PayStructure
Pay Grades, elements,width
Factors Affecting Pay
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Factors Affecting PayStructures
Corporate culture and value
Management Philosophy
External Economic Environment
External Socio-political environment
(Unions)
Anatomy of a Pay
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Anatomy of a Paystructure Pay Structure consists of a series of
Pay Ranges, or grades, each with aminimum and maximum pay rate
Pay Range - Has a minimum pay value,maximum pay value and a midpoint
Midpoint of a range represents thecompetitive market value for the job orgroup of jobs.
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Market Pricing Comparing salaries w.r.t the market salaries
for the same role/s
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Range Spread
Difference between maximum and
minimum pay value
- Usually expressed as a % of the diff. betthe max and min divided by the minimum
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Anatomy of a Pay structure
Spread on either side of midpoint :
Midpoint Minimum Maximum Midpoint Minimum Midpoint
Midpoint = Max + Min
2
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Minimum Midpoint Maximum
200000 350000 612500
Range Spread (Width) = 206 %
-75%
75%
Example Use 50% Range
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Example Use 50% RangeSpread
Using A 50% Range Spread :
Maximum = Minimum*(1+Range Spread)
Midpoint = Max + Min
2
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Range Spread
Vary based on level and sophistication of
skills required for a given position
Entry level positions (skills that are quickly
mastered) have narrower pay ranges
Managerial positions will have broader pay
ranges
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Typical Range Spreads
20 25 % - Lower-level service, production
30 40 % - clerical, technical
40 50 % - professional, administrative,
middle management
These range spreads have reached 300% ormore with Broad banding
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Compa - Ratios A Statistic that expresses the
relationship between base salary andthe midpoint, or between the midpointand the market average
Compa-Ratio = Base Salary
Midpoint
Most companies strive to have the overallworkforce paid at or around a compa-ratioof 100 %
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Compa - Ratios
Individual C-R vary according to
how long the individual has been in the
job Previous work experience
Job performance
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Compa - Ratios
22500
25000
90%
25000
25000
100%
27500
25000
110%
25000
25000
100%
24500
Mkt Av
25000
Mkt Av
98%
Person 1 Person 3AveragePerson 2Base Salary
Midpoint
Compa-Ratio
Base SalaryMidpoint
Base SalaryMidpoint
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Market Saurveys
Standard vs. Custom
Apples to Apples comparison
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Range Penetration
Range Penetration = Incumbent salary Range Minimum
Range Maximum Range Minimum
Refers to how far into the range aparticular individuals salary haspenetrated
It is a measure of penetration in the range
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ReviewMercersJob-MatchingGuide
Reviewall JobDescriptions astheyrelate toRB
Match eachcore job of RBwith the jobsgiven in theMercer list.
Determine thecore levelusing thevariationsfrom corelevel table ortheaccompanyingdecision tree
Establish AllCore levels
Matchremainingroles in RBwith theadditional joblist provided
by Mercer.
Determine thecore levelusing the
variations fromcore level tableor theaccompanyingdecision tree
Preparation
Match CoreJobs
Match AddlMercer Jobs
Submit Data
Complete thedata inputsheet.
Instead of a
representativeposition foreach job,provide a minof 5-10 jobholder data.
Submit the jobdata sheet toMercer