mohan madgulkar-compensation management/2006 compensation management mohan madgulkar

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Mohan Madgulkar-Compensation Management/2006 Compensation Management Mohan Madgulkar

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Mohan Madgulkar-Compensation Management/2006

Compensation Management

Mohan Madgulkar

Mohan Madgulkar-Compensation Management/2006

Introduction to Compensation and rewards

management

Mohan Madgulkar-Compensation Management/2006

Compensation

• Cash and non-cash rewards employees receive in exchange for their work

• Effective compensation management– Employees more likely to be satisfied and motivated

• Compensation perceived to be inappropriate– Performance, motivation and satisfaction may decline

dramatically

– Employee turnover may occur

– Dissatisfaction with absolute or relative pay

Mohan Madgulkar-Compensation Management/2006

Total Reward

Financial

rewards

Base pay

Variable pay

Share owner-ship

Benefits

Total remuneration

Non-

financial

rewards

Recognition

Skills

Development

Current opportunities

Quality of working life

Total Reward

Mohan Madgulkar-Compensation Management/2006

Reward management defined

• “Reward management is concerned with the formulation and implementation of strategies and policies the purposes of which are to reward people fairly, equitably and consistently in accordance with their value to the organisation and to help the organisation to achieve its strategic goals”

Mohan Madgulkar-Compensation Management/2006

Objectives of Compensation

EffectiveCompensation

LegalLegalcompliancecompliance

AdministrativeAdministrativeefficiencyefficiency

ControlControlcostscosts

RetainRetainemployeesemployees

AcquireAcquirepersonnelpersonnel

EnsureEnsureequityequity

RewardRewardbehaviourbehaviour

Mohan Madgulkar-Compensation Management/2006

Pay & Organizational Strategy

Areas that impactAreas that impactpay systemspay systems

Attract &Attract &retainretain

Identifying Identifying valued rewardsvalued rewards

MotivatingMotivatingdevelopmentdevelopment

Relating toRelating toperformanceperformance

SettingSettinggoalsgoalsConsequencesConsequences

MotivatingMotivatingperformanceperformance

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The concept

• Wages and salaries constitute the greatest single cost of doing business.

• Establishing equitable and competitive pay structure is important from attracting point of view . the organization can also hold out the possibility of varying compensation, the payment of which is dependant on specific behavior. Supplementary pay plans ( fringe benefits ) can retain the employees in the organization on a long term basis

Mohan Madgulkar-Compensation Management/2006

The concept

• Development, implementation, maintenance , communication and evaluation of reward processes

• Assessment of relative job values, the design and management of pay structures, performance management, paying for performance, competence or skills , the provision of employee benefits and pensions, management of reward procedures

Mohan Madgulkar-Compensation Management/2006

Aims of Compensation and reward management

• Support the achievement of organizations strategic and short term objectives

• Support culture management and change• Drive and support desired behavior• Encourage value added performance • Promote continuous development • Compete in employment market • Motivate all members of the organization • Promote teamwork• Promote flexibility • Provide value for money • Achieve fairness and equity

Mohan Madgulkar-Compensation Management/2006

The Reward Management Context

• The cultural environment – Values ( what is believed to be important ) – Norms ( accepted way of behavior )– Management style ( how managers manage their staff )

• The organizational structure • Employee relations • Technology• Operational processes and working methods• Management practices as a function of business strategy,

culture, technology and operations• Employment practices • External environment

Mohan Madgulkar-Compensation Management/2006

Significant factors affecting compensation policy

• Supply and demand

• Labor unions

• Ability to pay

• Productivity

• Cost of living

• Government

Mohan Madgulkar-Compensation Management/2006

• Statutory minimum wage – Wage determined in accordance with the provisions of the Minimum Wages Act, 1948

• Minimum Wage

• Living Wage

Mohan Madgulkar-Compensation Management/2006

Compensation issues

• Wage and salary levels

• Wage and salary structures

• Individual wage determination

• Incentive payments

• Fringe benefits

• Compensation of mangers and professionals

• Control

Mohan Madgulkar-Compensation Management/2006

Strategic compensation policies

Mohan Madgulkar-Compensation Management/2006

Compensation strategy defined

• The deliberate utilization of the pay system as an essential integrating mechanism through which the efforts of various sub-units and individuals are directed towards the achievement of an organizations’ strategic objectives

• The business strategy in particular, serve as a critical guide in designing organizations’ systems, because it specifies what the company wants to achieve, how it wants to behave, and the kind of performance and performance levels it must demonstrate to be effective. The strategy should strongly influence an organization’s design and management style, both of which should drive the design of reward system. These reward systems in turn, help to drive performance by influencing important individual and organizational behavior.

Mohan Madgulkar-Compensation Management/2006

Compensation strategies & corporate goals

• The compensation strategy will be mainly concerned with the direction the organization should follow in developing the right mix and levels of financial and non financial rewards in order to support the business strategy

• It should be backed up by a realistic action plan .

Mohan Madgulkar-Compensation Management/2006

How reward strategy contributes to the achievement of corporate goals?

• Provides for the integration of reward policies and processes with key strategies for growth and improved performance

• Underpins the organizations’ values, especially those concerned with innovation, teamwork,flexibility , customer service and quality

• Fits the culture and management style of the organization as it is or as it is planned to be.

• Drives and supports desired behaviors at all levels by indicating to employees what type of behavior will be rewarded, how this will take place and how their expectations will be satisfied.

• Provides the competitive edge required to attract and retain the level of skills the organization needs

• Enables the organization to obtain value for money from its reward practices

Mohan Madgulkar-Compensation Management/2006

Characteristics of reward strategy

• The demand of the business strategy including cost constraints • How performance can be driven by influencing important individual and organizational

behaviors • Helping to achieve culture changes • Meeting objectives for ensuring the organization gets and keeps high quality employees • Aligning organizational core competence and individual competence• Underpinning organizational change • Development of competitive pay structure • Ensuring that reward policies are used to convey messages about the expectations and values

of the organization• Achieving the right balance between reward for individuals, team and organizational

performance • Evolving total reward processes which incorporate the best mix of financial rewards and

employee benefits • Achieving the flexibility required when administering rewards processes within fast changing

organizations in highly competitive or turbulent environments• Fitting reward processes to the individuals needs and expectations of employees

Mohan Madgulkar-Compensation Management/2006

Pay and motivation

• Maslow

• Herzberg

• Mclelland

• Adams

• Vroom

• Pay is a flexible reward which can satisfy a number of needs

• Primarily a hygiene factor

• For high achieving individuals pay a form of feedback; for high affiliation, group targets can motivate; high power, pay confirms status

• Pay is one of the most important ‘yardsticks’; based on individual assessment, work effort may be altered accordingly

• If individual believes that improved performance will lead to more pay, higher levels of motivation will result; if extra effort required to attract more pay (expectancy) individual can make a decision whether or not to work harder.

Mohan Madgulkar-Compensation Management/2006

• Pay has a strong impact on the employees’ standard of living, it is a status symbol and important in comparisons to others

• Employer: – Critical in attaining strategic goals

• Impact on employee attitudes and behaviours• Significant organisational cost

• Areas of compensation decisions– Pay Structure– Pay Level– Job Structure – Pay policies

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Compensation Challenges

CompensationCompensationChallengesChallenges

PrevailingPrevailingwage rateswage rates

UnionUnionpowerpower

ProductivityProductivity

GovernmentGovernmentconstraintsconstraints

Wage & salaryWage & salarypoliciespolicies

Mohan Madgulkar-Compensation Management/2006

Changing Compensation Systems

TraditionalTraditional ModernModern

Entitlement-baseEntitlement-baseincreases increases

Performance-drivenPerformance-drivengains gains

Pay = 100% basePay = 100% basesalarysalary

Variable componentVariable componentaddedadded

Few incentive/bonusFew incentive/bonusplans, restricted toplans, restricted toexecutives executives

Many kinds of plans, Many kinds of plans, extended throughout extended throughout

the organizationthe organization

Mohan Madgulkar-Compensation Management/2006

Compensation Management

Phase IPhase IJob AnalysisJob Analysis Identify and study jobs

• Position descriptions

• Job descriptions

• Job standards

Mohan Madgulkar-Compensation Management/2006

Compensation Management

• Determine relative worth or value of jobs

• Provides for internal equity

• Job evaluation methods:• Job ranking

• Job grading

• Point system

Phase IPhase IJob AnalysisJob Analysis

Phase IIPhase IIJob EvaluationJob Evaluation

Mohan Madgulkar-Compensation Management/2006

Compensation Management

• Discover what other employers are paying for specific key jobs

• Provides for external equity

• Sources of data:HRDC• Consultants• Canada HR Centres• Associations• Self-conducted surveys

Phase IPhase IJob AnalysisJob Analysis

Phase IIPhase IIJob EvaluationJob Evaluation

Phase IIIPhase IIISalary SurveysSalary Surveys

Mohan Madgulkar-Compensation Management/2006

Compensation Management

• Establishing the pay level for each job• Combines job evaluation

ranking, survey wage rates, and other considerations e.g. organization’s pay policy

• Wage-trend line developed

• Grouping the different pay levels into a structure that can be managed• Job classes and rate ranges

Phase IPhase IJob AnalysisJob Analysis

Phase IIPhase IIJob EvaluationJob Evaluation

Phase IIIPhase IIISalary SurveysSalary Surveys

Phase IVPhase IVPricing JobsPricing Jobs

Match

Mohan Madgulkar-Compensation Management/2006

Job Evaluation

Mohan Madgulkar-Compensation Management/2006

Some conceptual clarity

• What is a job ?– Collection of tasks, duties , responsibilities which are regarded as a

regular assignment of an employee• What is a job design ?

– It is the deliberate attempt to structure the technical and social aspects of work. It comprises of both organizing the components of the tasks to be done and the interaction patterns among the workgroup members in order to get the job done.

• What is a job description?– Clear, concise and understandable description of each job. It describes

n sufficient details each of the main duties and responsibilities and indicates the extent of directions received and supervision given

• What is job specification? – Statement of minimum acceptable human qualities necessary to

perform a job properly

Mohan Madgulkar-Compensation Management/2006

Job analysis

• The process of collecting, analyzing and setting out information about jobs in order to provide the basis for a job description or role definition and the data for job evaluation , performance management and other HR management purposes

• Detailed and systematic study of information related to the operations and responsibilities of a particular job.

• Anatomy of the job

Mohan Madgulkar-Compensation Management/2006

Points covered in Job analysis

• What is the job title • To whom is the position responsible to ?• Who is responsible to the position• What is the purpose of the job? What is the position expected to do?• To achieve the purpose, what are the main areas of responsibility?What you have to

do and why.• Dimensions of job in terms of output• Hoe does the job fit in with other jobs in the department or elsewhere in the

company• Flexibility requirements in terms of having to carry out a range of different tasks• How work is allocated and how it is reviewed and approved • Decision making authority • Contacts with others- inside or outside the company , equipment, tools used • Other features like traveling, unsocial hours or unusual physical conditions • Knowledge and skills required to do the work

Mohan Madgulkar-Compensation Management/2006

Job Analysis in Practice

• Job analysis gets the facts about a job from the job holder, the job holder’s manager and the job holders team mates. These facts can be obtained by interviews or by asking the job holders and / or their managers to write information about the jobs in a structured format.It is essential to provide guidance on how the analysis should be carried out and expressed on paper. Alternatively questionnaires can also be used – either universal questionnaires or those designed for job families

Mohan Madgulkar-Compensation Management/2006

Role analysis

• Role analysis covers the collection of information about the job contents and job demands as in job analysis ,but goes beyond these details to look at the part people play in carrying out their roles rather than the tasks they carry out. It is concerned not only with the job content, but also the broader aspects of behavior expected of role holders in achieving the overall purpose of their roles

Mohan Madgulkar-Compensation Management/2006

What is job evaluation?

• Job evaluation can be defined as “a systematic procedure designed to aid in establishing pay differentials among jobs…”

• Job Evaluation is a systematic process for ranking jobs logically and fairly by comparing job against job or against a pre-determined scale to determine the relative size of jobs in an organisation.

• “A systematic process or set of techniques used to assess the relative worth of jobs within the organisation” (Wright, 2004:46)

Mohan Madgulkar-Compensation Management/2006

Job evaluation

• The purpose of job evaluation is to– Provide a rational basis for the design and

maintenance of an equitable pay structure– Help in the management of existing relativities– Enable consistent decisions to be made on grading

and rates of pay– Establish the extent to which there is comparable

worth between jobs

Mohan Madgulkar-Compensation Management/2006

Job evaluation

• A comparative process

• A judgmental process

• An analytical process

• A structured process

Mohan Madgulkar-Compensation Management/2006

Job evaluation relearned

• Job evaluation should reinforce critical behaviors that the the organization needs to demonstrate for overall effectiveness. Traditional job evaluation systems however focus on characteristics representative of organizations of the past

Mohan Madgulkar-Compensation Management/2006

A new paradigm

Today’s business environment

Traditional JE JE requirements for today’s organizations

Role based. Employees required to do what is needed rather that what is prescribed and to manage themselves

Flatter organizational structures , little vertical advancements, need for employees to gain broader perspective

Self managed teams

More knowledge workers

Job based. Work is valued based on narrow job descriptions which are defined and strict boundaries of authority and accountability are delineated

Communicate values of hierarchy and bureaucracy by driving empire building behavior , rewarding vertical , rather than horizontal growth. Employees may be reluctant to accept new positions when the new job has fewer points

Focus on individual contribution

Measure task size

Flexible enough to evaluate job contents and or role content. The system should communicate and encourage required new behaviors

Encourage employees to gain broader organizational perspective through lateral moves

Ability to rank teams

Measure intangible processes

Mohan Madgulkar-Compensation Management/2006

JE – basic methodology

• Benchmark jobs– For internal assessment and external matching

• Job evaluation factors– Characteristics common to the range of jobs

• Job and role analysis

• Job evaluation process

• Develop a pay structure

Mohan Madgulkar-Compensation Management/2006

Meeting the Needs

Non-

Analytical

Analytical

Basis of

Comparison

Job-job Simple ranking

Internal benchmarking

Paired comparison

Market pricing

Factor comparison

Job-scale Classification Point

Factor

Rating

Mohan Madgulkar-Compensation Management/2006

Non-analytical job evaluation – job ranking

• Steps– Analyse and describe jobs– Identify key or benchmark jobs– Rank all other jobs around these– Divide ranked jobs into grades

• Advantages– Quick and cheap

• Disadvantages– Does not measure differences between jobs, not acceptable

in determining equal worth in an equal value case

Mohan Madgulkar-Compensation Management/2006

Job classification

• Steps– Decide on number and characteristics of grades– Compare whole job with grade definition and allot

jobs to grades

• Advantages– Easy, cheap, easily understood

• Disadvantages– Cannot cope with complex jobs or borderline cases– Not acceptable in equal value cases

Mohan Madgulkar-Compensation Management/2006

Analytical JE – point factor schemes

• Break down jobs into factors such as knowledge, skill, responsibility, dealing with people, working conditions

• Give each factor a range of points or percentage weighting• Maximum points for each factor are divided between levels or

degrees for that factor• Select and analyse benchmark jobs• Allocate points to each job under each factor• Add together points to give a total score which represents job

size• Design grade structure• Analyse, evaluate and grade non-benchmark jobs• Price job grades

Mohan Madgulkar-Compensation Management/2006

Point-Factor Plans

• The most commonly used type of job evaluation method

• Make the criteria for comparisons explicit, unlike ranking and classification

• The criteria for classification (the compensable factors) are related to the strategy of the business; they are the factors valued by or of high worth to the firm

Mohan Madgulkar-Compensation Management/2006

Point-Factor Plans

• Point factor plans all include three elements:– Compensable factors are defined– Degrees or level of each factor are given numerical rankings– Factors weighted as to their relative value to the organization

• Job worth is measured by the total number of points• The steps to follow:

– Job analysis– Determine compensable factors– Scale the factors– Weight the factors– Communications and documentation– Apply the plan

Compensable Factors“Characteristics in the work that the organization values, that help it pursue its strategy and achieve its objectives”

Mohan Madgulkar-Compensation Management/2006

Selecting and Weighting Compensable Factors

• These should be:– Based on the work performed– Based on the strategy and values of the organization– Acceptable and considered to be fair by all concerned parties

• As a result, compensable factors should be developed by each organization, rather than using an off-the-shelf plan

• Basic group of compensable factors:– Skill– Effort– Responsibility– Working conditions

• Weighting compensable factors

Mohan Madgulkar-Compensation Management/2006

Point-Factor: Pro and Con

• Point-factor systems orderly, rational, and make criteria for evaluating jobs explicit

• Time consuming to set up (and they do need to be periodically updated), but very simple to add new jobs

• Job evaluations may still be affected by what the evaluator already knows or believes the market value of the job to be

Mohan Madgulkar-Compensation Management/2006

Example factor planLevels/

factors

1 2 3 4 5 6

Knowledge and skills

50 100 150 200 250 300

Responsibility 50 100 150 200 250 300

Decision making

40 80 120 140 180 220

Complexity 25 50 75 100 125 150

Contacts 25 50 75 100 125 150

Mohan Madgulkar-Compensation Management/2006

Issues in the selection of factors

• Factors express the values of the organisation

• Factors influence the extent to which the scheme constitutes a fair basis for assessing relative values

• Consider the whole range of jobs in choosing factors

• Avoid double counting

Mohan Madgulkar-Compensation Management/2006

Hay Guide Chart-Profile Method©

• Officially known as the Hay Guide Chart-Profile Method of Job Evaluation©, this system utilizes three factors to arrive at a job’s evaluation. The job’s content is the sole basis for the job evaluation.

• The Hay method of job evaluation is generally understood to be a point plan, although Hay itself does not define the guide chart-profile method as a variation of the point method.

• The Hay guide charts have been in existence since 1951 and have been used in over 5,000 different organizations worldwide.

Mohan Madgulkar-Compensation Management/2006

How are jobs evaluated using the Hay System?

• Job description questionnaires are completed and signed by the jobholder, the supervisor, and other managerial staff who have responsibility for the position.

• The job description questionnaire is given to each member of the job evaluation committee for his/her initial evaluation.

• The committee meets with the jobholder and supervisor to explore questions and clarify content.

• The committee members then compare their individual evaluations and resolve differences that might exist.

Mohan Madgulkar-Compensation Management/2006

The Hay Methodology Background

• Most widely used method for total job populations• Adopted by a large number and range of

organisations• Manageable and coherent number of factors used• Successfully used for a huge range of jobs• Relies on simple job descriptions and contextual information• Methodology combined with process aids equal value• Manageable process in relation to resources required• Facilitates:

– external pay comparison– pay structure development– analysis of organizational and career structures

Mohan Madgulkar-Compensation Management/2006

Jobs Exist to achieve an end

result

Accountability Accountability Accountability

Problem Solving

Therefore, the job holder requires a level of knowledge

and experience commensurate with the scale and complexity

of the deliverable

Know-How

Problem Solving

To achieve this endresult, job holders must

address problems, create, analyse and apply

judgement

1 32

The Underlying Principle of the Hay Methodology

Mohan Madgulkar-Compensation Management/2006

Elements of Job Size

TechnicalKnow-How

Planning and Organising

Communicating and Influencing

Freedomto Act

Area of Impact

Nature ofImpact

ThinkingEnvironme

nt

ThinkingChallenge

PROBLEM SOLVINGKNOW-HOW ACCOUNTABILITY

}

Mohan Madgulkar-Compensation Management/2006

Hay System Factors

• KNOW-HOW– The sum total of every kind of skill, however acquired,

needed for acceptable job performance. – This sum total which comprises the overall “fund of

knowledge” has three dimensions – the requirements for:• Practical procedures, specialized techniques, and learned

disciplines.• Active, practicing skills in the area of human relationships. • Know-how of integrating and harmonizing the diversified

functions involved in managerial situations (operating, supporting, and administrative). This know-how may be exercised consultatively as well as executively and involves in some combination the areas of organizing, planning, executing, controlling, and evaluating.

Mohan Madgulkar-Compensation Management/2006

Hay System Factors

• PROBLEM SOLVING– The original “self starting” thinking required by the job for

analyzing, evaluating, creating, reasoning, arriving at and making conclusions. To the extent that thinking is circumscribed by standards, covered by precedents, or referred to others, problem solving is diminished and the emphasis correspondingly is on know-how.

• Problem solving has two dimensions:– The environment in which the thinking takes place.

– The challenge presented by the thinking to be done.

Mohan Madgulkar-Compensation Management/2006

Hay System Factors

• ACCOUNTABILITY• The answerability for an action and for the

consequences thereof. It is the measured effect of the job on end results. It has three dimensions in the following order of importance:– Freedom to Act – the degree of personal or procedural

control and guidance the jobholder has.– Job Impact on End Results – ranges from direct to indirect

impact on end results by auxiliary, contributory, shared, or primary effects.

– Magnitude – indicated by the general dynamic dollar size or accountability area(s) most clearly affected by the job.

Mohan Madgulkar-Compensation Management/2006

• A guide chart is used for each of the three factors containing descriptive scales for each element and a numbering pattern based on a 15 % step difference , which is an important building block in making comparisons between jobs. Job size is the sum of the results from the three factors. In addition , an explicit judgment is made about the balance between the factors in each job – the profile – which provides a valuable consistency check.

Mohan Madgulkar-Compensation Management/2006

The Hay MethodologyChecks and Balances

• Profiles – how do the elements fit together

• Step differences – internal relativities

• ‘Sorethumbing’ – common sense

• Panel process – challenge perceptions

• Focus on jobs – not people or performance

Mohan Madgulkar-Compensation Management/2006

Compensation structure

Mohan Madgulkar-Compensation Management/2006

• A pay structure provides framework within which an organization defines the different levels of pay for jobs or groups of jobs on the basis of their relative internal value and of external relatives.

Mohan Madgulkar-Compensation Management/2006

Criteria for pay structures

• Be appropriate to the characteristics and need of the organization

• Flexible in response to market rates and skill shortages• Facilitate operational and role flexibility • Scope for rewarding performance • Ensure that consistent decisions are made on pay in relation to

job size, contribution, skill and competence • Clarify career ladders• Logically and clearly constructed • Enable the organizations to exercise control over the

implementation of p[ay policies and budgets

Mohan Madgulkar-Compensation Management/2006

Principles of pay structure design

• Is in accordance with the organization's philosophy and policies concerning differentials, relationships with market rates, and the scope for and methods of progressing the pay in jobs.

• Designed on a logical basis and helps in the application of equitable and consistent reward management process.

• Assist the management and maintenance of appropriate internal and external relativities

• Flexible enough to enable the organization to respond to change• Reward competence and performance• Can be implemented with minimum amount of efforts and cost. • Is likely to be acceptable to management and every other member of the

organization

Mohan Madgulkar-Compensation Management/2006

Methodology of developing pay structures

• Analyze present arrangement • Set objectives and timetable • Decide who is going to conduct the review • Estimate the likely cost of conducting and implementing the review• Decide the extent of employee involvement • Brief employees • Make preliminary decision about the type of structure required • Analyze and evaluate jobs • Make a final decision on the type of structure (s) required and the main design and

operational features• Prepare a detailed design for the structure and how it will be managed and

maintained. • Communicate with the staff the details of the structure and how it will affect them• Train managers on hoe to operate the structure • Monitor the implementation of the structure• Evaluate the application and impact of the structure.

Mohan Madgulkar-Compensation Management/2006

Three important types of pay structures

• Graded

• Job family

• Broad banded

Mohan Madgulkar-Compensation Management/2006

Graded pay structure

• A graded pay structure consists of a sequence of job grades to each of which is attached a pay range.

• A pay grade is a grouping of different jobs that are considered substantially equal for pay purposes. Grades enhance the organizations’ ability to move people among jobs that are within a pay grade without changing their pay.

• Jobs are allotted to grades on the basis of their relative size. • A pay range is attached to each grade. This defines the

minimum and maximum rate payable to any job in a grade and indicates the scope provided for job holders to progress through the range

Mohan Madgulkar-Compensation Management/2006

Job family structures

• Market rate pressures operate differently on particular occupations or categories of employees

• There are significant variations in the type of work carried out and the competencies required by different occupational groups , which can not be easily centered for in a single pay structure

• A job family structure consists of separate graded pay structures for each of the job families which have been identified for this purpose. These structures are aligned individually to market rates and contain a number of pay ranges which reflect the particular levels of work within the job family.

Mohan Madgulkar-Compensation Management/2006

What are job families?

• A job family consists of jobs in a function or discipline such as research scientists, development engineers or personnel specialists. The jobs will be related in terms of fundamental activities carried out and the basic skills required , by they will be differentiated by the level of responsibility, skill or competence involved.

• A job family is a group of jobs. Their essential nature and purpose is similar but the work is carried out at different levels. Job families may be functional, in that they cover specific work groups within a function such as marketing, finance or personnel. Or they may be generic , in that they cover similar types of work across functional boundaries e.g. administrators, managers or team leaders

Mohan Madgulkar-Compensation Management/2006

Broadbanding

• Collapse narrow salary grades into wide bands.– 20 grades reduced to 4 to 5 bands.– 40-60% ranges increased to 100-250%

• Increased emphasis on market pricing jobs

• Decreased emphasis on job evaluation

Mohan Madgulkar-Compensation Management/2006

Broadbanding

• Compressing a hierarchy of pay grades or salary ranges into a number of wider bands

• Typically no more than five or six bands

• Wide pay spans

• Market pricing used to define reference points

• Focus on lateral career development and competence growth

Mohan Madgulkar-Compensation Management/2006

Broadbanding

• What are the advantages and disadvantages of broadbanding?

Mohan Madgulkar-Compensation Management/2006

Technical Band

160%

Broadbanding

Salary gradesfor Engineers

I

II

III

IV

$35K

$85K

40%

40%

40%

40%

Mohan Madgulkar-Compensation Management/2006

Advantages of Broadbanding

• Facilitate Lateral career moves– Enhanced flexibility for transfers– Cross-functional teams with fluid duties

• More flexible pay decisions– Few control points such as midpoints or salary

caps.– More pay opportunities based on skills

Mohan Madgulkar-Compensation Management/2006

Salary Surveys

Mohan Madgulkar-Compensation Management/2006

Why Conduct Salary Surveys?

• To create and adjust pay structure

• Adjust actual pay in response to the market

• Monitor other forms of pay, such as shift differentials, bonuses, incentives, overtime practices

Mohan Madgulkar-Compensation Management/2006

What Is The Market?

• Who?

– Employers who compete for the same occupations and skills

– Employers who compete for employees in the same geographic area

– Employers who compete with the same products

• How to determine this?

– Who are our competitors?

– Where do we recruit?

– Where are employees going?

• Interaction of skill/place/product

– If labor market is rich in a particular skill, may recruit/price locally

– If labor market does not include skills, recruiting and pricing are on a wider scale

– Commuting time within a market may also be a factor

Mohan Madgulkar-Compensation Management/2006

Guidelines for Salary Surveys

• Make or buy?

• How many firms to include

• Price fixing issues

• What jobs to survey

• What data to collect

• How to survey

Mohan Madgulkar-Compensation Management/2006

Putting it Together: The Pay Regression Line

• Job evaluation (internal equity) gives us relative value of jobs within the organization

• Salary surveys (external equity) gives us value of selected jobs outside the organization

Mohan Madgulkar-Compensation Management/2006

Contingent Pay

Mohan Madgulkar-Compensation Management/2006

• Contingent pay covers the various methods of providing additional rewards for individuals or teams

Mohan Madgulkar-Compensation Management/2006

Types of contingent pay

• Contingent pay for individuals • Service related pay: provides fixed increments which

are usually paid annually to people on the basis of continued service either in a job or in a grade

• Competence related pay: Links pay to an assessment of competence achieved

• Contribution related pay: Links pay both to performance as measured by results and competence

• Skill based pay: Which provides additional payments that reflect the level of skill attained

Mohan Madgulkar-Compensation Management/2006

Types of contingent pay contd.

• Contingent pay for teams – Payments to members of a formally established team or the provision

of other forms of non-financial reward which are linked to the performance of that team. The rewards are shared by the team members in accordance with a published formula.

• Contingent pay based on organizational performance: – Profits sharing: Provides a cash payment related to the level of profits– Profit related pay:Provides for a proportion of pay to go up or down in

line with profits – Gain sharing :Shares gains in terms of added value or some other

measure between the company and its employees , and includes various forms of its involvement

Mohan Madgulkar-Compensation Management/2006

Performance related pay

• Provides individuals with financial rewards in the form of increases to basic pay or cash bonuses which are linked to an assessment of performance , usually in relation to agreed objectives.

Mohan Madgulkar-Compensation Management/2006

Reasons for introducing performance related pay

• To attract the right type of applicant and to send strong messages to those employees the organization wanted to loose as well as those they wanted to retain

• To achieve organizational transformation by promoting values suggesting that the company was performance-driven , cost conscious and flexible , and by encouraging commitment- locking individuals in through objectives cascading from the company’s business plan.

Mohan Madgulkar-Compensation Management/2006

Stages in development of PRP program

• Define the objectives • Analyze the existing situation • Decide on the involvement of line managers, team leaders,

employees , trade unions.• Consider alternative designs• Consider process elements • Produce overall design • Prepare implementation program • Implement communication and training programs • Implement the plan • Evaluate the impact of the plan

Mohan Madgulkar-Compensation Management/2006

Advantages and disadvantages of PRP

Advantages Disadvantages

Motivates

Is a lever of change

Links rewards to results

Delivers message that performance is important

Helps to attract and retain staff

Meets basic human need-to be rewarded for achievement

Is not the only motivator

Is not an effective motivator

Can demotivate

May deliver the wrong message

Problems of measuring performance

Relies on managerial judgment which may be partial

Emphasizes quantity at the expense of quality

Is prejudicial to teamwork

May be discriminatory

May not deliver value for money

May not be appropriate

Is too often taken on trust

May be right in principle but is hard to make work in practice

Mohan Madgulkar-Compensation Management/2006

Advantages and disadvantages of Competence related pay

Advantages Disadvantages

Encourages competence development

Fits de-layered organizations by facilitating lateral career moves

Helps to integrate role and organizational core competence

Forms part of an integrated, competence based approach to people management

Delivers message that competence is important

Relies on appropriate relevant and agreed competence profile

Assessment of competence levels may be difficult

Might pay for irrelevant competencies

Link to pay may be arbitrary

Costs may escalate if inappropriate or unused competencies are rewarded

Mohan Madgulkar-Compensation Management/2006

Competence related pay

• Method of rewarding people wholly or partly by reference to the level of competence they demonstrate in carrying out their roles. It is a method of paying people for the ability to perform.

Mohan Madgulkar-Compensation Management/2006

Process of competence related pay

• Competency analysis

• Agreeing competency requirements in a particular role

• Assessing levels of competence for individuals against the requirements

• Relating pay of individuals to the assessment

Mohan Madgulkar-Compensation Management/2006

Appropriateness

• Well researched competency framework exists

• Criteria are available for the measurement/assessment of competencies

• The organization is concerned with the development of competence levels

• Managers and staff are properly briefed and trained on the assessment of competence

Mohan Madgulkar-Compensation Management/2006

Performance Management

• A business process intended to ensure alignment of group and individual efforts for achievement of continuous business improvement

• How much and how??

Mohan Madgulkar-Compensation Management/2006

Critical success factors

• Ongoing tracking • Direct linking to company’s mission • Timely communication and skills training • Connection between reward and performance • Objective feedback and review • Employee ownership – I own the direction in

which I go • Senior leadership involvement

Mohan Madgulkar-Compensation Management/2006

Mission Why does the company Exist ?

Vision of future Where is it going?

Strategic organizational goals

How will it Get done? Esp. Focusing on Values.

Core Organizational

Capabilities

Performance Development & planning

Mohan Madgulkar-Compensation Management/2006

Four stages of performance

• Contribute by following direction – Contribute demonstrating individual competency

• Contribute through people – Contribute by shaping the organization

Mohan Madgulkar-Compensation Management/2006

Performance management at a glance

Business strategy & goals

Unit performance Goal setting

Individual / team goal setting And planning

Write performance goals/ plans Write development plan for current Performance goal and future interest Select coaches

Ongoing progress review And coaching

Formal assessment And pay link

1

2

3

Mohan Madgulkar-Compensation Management/2006

Performance management & rewards

• Not purely for what you DO but also HOW you do it.

• Integration of demonstrated development , performance , results and competitive market to determine total compensation

• Performance and incentive compensation linked to business results

Mohan Madgulkar-Compensation Management/2006

Productivity linked incentive schemes

Mohan Madgulkar-Compensation Management/2006

Objectives

• Achieve competitiveness through pay increases which are more related to productive measures as a way of absorbing increased labor costs, while at the same time rewarding and motivating employees

Mohan Madgulkar-Compensation Management/2006

Types

• Individual based

• Profit sharing

• Gain sharing

• Employee share ownership

Mohan Madgulkar-Compensation Management/2006

Elements

• Adequate criteria to measure performance which is understood communicated and accepted

• Appropriate performance appraisal system • Regular feedback of performance • Appropriate quantum of pay which is subjected to

performance criteria • Periodic evaluation • Recognition to factors outside the control of

employees

Mohan Madgulkar-Compensation Management/2006

Benefits of productivity linked incentive

• The benefits to management and employees are:  • where performance/profits increase, higher pay is an incentive

to employees • where profits reduce, the reduction in the performance-related

pay can cushion employees against redundancies • employee identification with the success of the business is

enhanced • variations in pay lead to employees becoming more familiar

with the fortunes (or misfortunes) of the business. This would depend on the information-sharing practices of the management.

Mohan Madgulkar-Compensation Management/2006

Guidelines

• A performance pay system should be designed to promote the kind of performance an organization needs. In order to do so

• an analysis should first be made of the objectives and results sought

• the principles/policies and practices needed to obtain the results (e.g. team work) should be established

• these policies and practices should form part of an overall human resource management strategy.

• Employees should be consulted in the formulation of the plan (to ascertain the type of rewards most likely to have motivational effect), in regard to its operation and distribution of rewards, and in monitoring the scheme.

Mohan Madgulkar-Compensation Management/2006

Guidelines ( contd.)

• The criteria for the determination of performance pay should be • objective • measurable and measure only what is important • that it is operated along with an appraisal system which measures

performance appropriately • designed to feed back information to employees, and not only to

management • easily understood • related to what is controllable, so as to exclude what is beyond the control

of employees. • The intrinsic reward system should be strengthened if need be, e.g. through • consultation, communication, participatory systems • training • job satisfaction and responsibility • reorganization of work processes

Mohan Madgulkar-Compensation Management/2006

Guidelines ( Contd.)

• How the performance pay is shared is as important as the quantum, because the manner of sharing affects employees' perceptions as to whether the scheme is equitable.

• The impact of the scheme also depends on the frequency of the payment. Therefore the reward should follow the performance as soon as possible.

• The scheme should be given wide publicity within the enterprise. • The performance level should be achievable or else the scheme will have

no motivational impact. • The quantum of pay on account of performance which is placed at risk (i.e.

the amount that can be lost due to poor performance) should be carefully determined. At the same time the scheme should be sufficiently flexible to absorb downturns and adequately reward when performance is good.

Mohan Madgulkar-Compensation Management/2006

Paying for Contribution

Mohan Madgulkar-Compensation Management/2006

Rewarding Contribution

• What do we really mean by Contribution related pay and how is it different from PRP?

• What are the key building blocks?

• What do you have to do to get this right?

Mohan Madgulkar-Compensation Management/2006

What Do We Mean By Contribution Related Pay?

• ‘a new concept in contingent pay design which links pay both to performance, as measured by results, and competence’

Mohan Madgulkar-Compensation Management/2006

How Much Of It Is There About? (2)

‘Paying for contribution will be the most popular method of rewarding managers and staff. Such an approach reflects a general dissatisfaction with flat rate market rises ……. but it also reflects problems experienced with pay progression linked solely to individual performance (outputs) with no appreciation of how they are achieved, and with progression exclusively linked to skills or competencies (inputs) with no recognition of results.’

CIPD Reward Management Survey 2004

Mohan Madgulkar-Compensation Management/2006

A New Direction?

• People as costs• Tends to focus on individual• One Dimensional results focus• Rewards immediate past performance• Little recognition of motivation

research• Or the key role of line managers• Simplistic• Tends to be controlled by HR• Pay links usually a fixed formula

• Discretionary effort-people as assets

• Focus on team and individual

• Investment in skills/behaviours for the future

• Results matter too – but look at interdependencies

• Draws on commitment/ engagement/motivation research

• Capability is crucial

• Tends to be owned by users

• Variety of reward methods

FROM

Pay for performance

TO

Pay for Contribution

Mohan Madgulkar-Compensation Management/2006

Key Elements

• Constructive focus• Clear rules of the game on personal and pay progression• Based on:

– an agreement on deliverables/results– and– acquisition and use of competences required for current role e.g. IT

skills– behaviours acknowledged as key to success (e.g. customer orientation,

respect for others, partnership working, developing others)– base pay progression and variable pay – best fit for level/role

• Performance management as the key vehicle for continuing dialogue on delivery and development

Mohan Madgulkar-Compensation Management/2006

• Establishing individual/team objectives• Describing job expectations• Describing competencies and planning

improvements• Describing tasks• Training and development planning• Agreeing performance standards

• Coaching• Counselling• Feedback and day-to-day planning

meetings• Self monitoring• Monitoring training & development

activities

• Formal review of performance• Performance measurement• Formal team feedback sessions• Individual self-review• Peer group and upwards appraisal• 360 degree

• Praise• Promotion/Job enrichment• Links to individual and/or team pay• Prizes• Special Awards• Other forms of recognition

ManagingPerformance

ReviewingPerformance

PlanningPerformance

RewardingPerformance

AA‘‘Virtuous Cycle’Virtuous Cycle’

A Reminder About Performance Management

Mohan Madgulkar-Compensation Management/2006

High

High

Impact on theOrganisation

Low

An ongoing Management Process

(2)

Competency Based (‘Mixed Model’)

(3)

Organisation/CultureChange Process

(5)

Level of Intervention

Degree of integration with otherHR and related processes/Management Capability

‘A once a YearEvent

(1)

HolisticProcess

(4)

The Impact of Performance Management

AIMS

Feature of PM Process

‘We want to improve our skills in objective setting/appraising’

‘Once a year event’

• Not integrated

• Little managing of performance

‘We want to improve our appraisal scheme’

‘We want to integrate competencies and/or skills in our appraisal process’

‘We want to ink up our PM process to other initiatives/ processes e.g. Investors in People, Business Process Re-design, Business Planning, EFQM

‘We want to transform how we operate’

Business Process Re-engineering

‘An integrated management process covering four phases – Planning, Managing, Reviewing and Rewarding

A competency-based integrated PM process

A holistic process with explicit links to other initiatives/ processes

360 feedback usually involved

PM process part of an integrated HR project – Pay, Work Definition, Organisation Change, Benefits Management

Mohan Madgulkar-Compensation Management/2006

And The Impact On Pay ….

NotRelevant

ManageExceptionsOnly

Decisionson Rating

Ratingand Pay

TotalOwnership

FixedIncrements

Flexible Increments

Paymatrix

FlexibleGuidelines

Line Management held Budget

Strengthof Message

Management Capability

HIGH

HIGH Pay Progression Mechanism

LOW

Mohan Madgulkar-Compensation Management/2006

Making Contribution related pay work requires:

• Clarity about organisational strategy and plans and requirements they will make on:– Departments, teams and individuals

• Values that recognise that ‘how’ can be as or more important as ‘what’

• Skill/competence frameworks that support delivery and are well understood

• Learning and development resources• Sound performance management processes• Clear pay progression rules linked to roles/levels (often in job

families)• Capable managers who praise achievement and confront

contribution shortfalls

Mohan Madgulkar-Compensation Management/2006

Getting The Detail Right (1)

• Are your skill/competence/competency frameworks good enough? i.e.– specific to role/job or career family

– linked to skills/behaviours associated with high quality delivery

– designed and used to support learning and development, recruitment AND assessment of contribution

– supportive of your organisation’s change and transformation agenda

– Clearly communicated and understood

Mohan Madgulkar-Compensation Management/2006

Competencies – A Reminder

Social RoleHow I see my job

Self ImageWhat I value in myself

My TraitsMy non-conscious patterns of behaviour

My MotivesWhere my excitement comes from

Expert

Best in field

Aloof

Achievement

Helps people get better

Healer

Sitting by bed

Power

OutcomesMore re-admissions Earlier discharge

Dr Sharpe Dr Hart

2.2/8

SameSame

SkillsWhat I can do

KnowledgeWhat I know

Social RoleHow I see my job

Self ImageWhat I value in myself

My TraitsMy non-conscious patterns of behaviour

My MotivesWhere my excitement comes from

Expert

Best in field

Aloof

Achievement

Helps people get better

Healer

Caring

Power

OutcomesMore re-admissionsMore re-admissions Earlier dischargeEarlier discharge

Dr Sharpe Dr HartDr Sharpe Dr HartSameSame

SkillsWhat I can do

KnowledgeWhat I know

Mohan Madgulkar-Compensation Management/2006

Getting The Detail Right (2)

• Performance Management• ‘Just in time’ Training/Communication, Competence – Confidence – Trust

– Engagement.• Focus on coaching/regular feedback.• Appreciative enquiry –’what would be happening if this area of

contribution was going well – what would you/others be doing to create success?

• Focus on raising rather than rating contribution (a besetting sin of PRP).• Recognition that managers and their people raise contribution levels – pay

systems and performance management forms/systems cannot do this.• It is the quality of dialogue not the elegance of the paperwork that matters.• Reward should support this.

Mohan Madgulkar-Compensation Management/2006

Contribution Rating• Rating is only important where contribution level is directly linked to pay decisions.

• The approach to “rating” depends on the purpose and emphasis of the performance management process:-

Organisational Contribution

Individual Development

Quantitative Judgments

Qualitative Indicators

Individual Remuneration

A 1 + 2 Outstanding Exceptional contributionB 2 + 1 Superior Consistently high level of contributionC 3 0 Fully Acceptable A good year’s workD 4 - 1 Incomplete Acceptable contribution, some shortcomingsE 5 - 2 Marginal/Not Proven Contribution less than acceptable/learner/ achiever

• Where rating is judged essential, a 5-point scale is often used. This may be expressed in numbers, letters and descriptors e.g.

• Words and psychology matter a lot!

Mohan Madgulkar-Compensation Management/2006

Pulling It All Together

• Capability building will be key especially for line managers.

• Decide how this approach fits with the current culture, strategy and existing processes.

• Start paying for personal contribution as soon as this makes sense.

• Consult, involve and put ‘L plates’ on what you do – everyone stands to learn.

• Communicate early and often.• Top team clarity & commitment is crucial.

Mohan Madgulkar-Compensation Management/2006

Team Based Pay

Mohan Madgulkar-Compensation Management/2006

Team-based Pay

• Team Definition (Katzenbach & Smith, 1993)

• Group of employees whose members are mutually accountable to each other for common goals.

• Team members interact on a regular basis.

• There is the possibility of synergy between team members.

• Size of team is between 2 and 25 members.

Mohan Madgulkar-Compensation Management/2006

Types of Teams (Cohen & Bailey, 1997)

• Work Team – Controls a business process such as customer service or

manufacturing. Product or service quality is a key criteria.

– Permanent work assignment and full-time commitment.

• Project Team– Project is limited by completion time such as new product

design or construction project. Delivery time, budget variance and design quality are some criteria.

– Full-time commitment; after project team members are reassigned to different projects.

Mohan Madgulkar-Compensation Management/2006

Types of Teams (Cont’d)

• Parallel Teams– Used to solve specific problems such as quality,

safety, employee grievances or impact of technology change.

– Used in parallel to functional units where employees spend most of their work time.

– Requires only a part-time commitment as team member.

Mohan Madgulkar-Compensation Management/2006

Why Use Team Pay?

• To Encourage Behaviors such as…• Peer Cooperation• Information Sharing• Unselfish behavior supportive of team

– Sacrifice personal interest for good of team such as giving up leisure time on weekend to work for an important team goal.

• Mutual Monitoring– Provide performance feedback to team members.

Mohan Madgulkar-Compensation Management/2006

Monetary Team Rewards(Gomez-Mejia & Balkin, 1992)

• Team Bonus - Cash payment to tied to achieving major team performance outcome and allocated on non-recurring basis.

• Team Merit Pay - Cash adjustment to salary tied to achieving team behavioral and performance outcomes.

• Skill-based Pay - Adjustment to base pay rate of team members tied to team competence level.

• Gainsharing - Share gains of unit/department with interdependent teams.

• Spot Cash Rewards - Discretionary basis.

Mohan Madgulkar-Compensation Management/2006

Non-monetary Team Rewards

• Team Recognition Reward - Public ceremony or announcement in company newsletter.

• Team Celebration - Celebrate team “win”; includes special dinner, ticket to sports event,etc.

• Merchandise - Team jacket, pin, emblem to build team identity and “espirit de corps.”

• Travel - Team members (and possibly spouses) travel to resort for relaxation and fun - often used for sales teams after successful marketing “push.”

Mohan Madgulkar-Compensation Management/2006

Team Pay: Design Issues

• Eligibility - full or part time? managers? Newcomers?

• Size of Reward - large or small?

• Individual’s shares - equal or equitable shares?

• Frequency of rewards - one time only? recurring?

• Criteria for Reward - performance metric? Outcome? Milestone? Behavior/

• Funding the reward - self-funding: costs savings, profits, customer goodwill.

• Administration of rewards - team? managers? HR? customers?

Mohan Madgulkar-Compensation Management/2006

Team Pay: Controversies

• Dealing with Free Riders

• Inhibiting High Individual Performers

• Interdependent Teams may Compete rather than Cooperate with each other.

Mohan Madgulkar-Compensation Management/2006

Benefits and perquisites

Mohan Madgulkar-Compensation Management/2006

Meaning of fringe benefits

• Those benefits which are supplied by an employer to or for the benefits of an employee and which are not in the form of wages, salaries and time rates payment

• Any wage cost not directly connected with the employees productive effort, performance or sacrifice.

• Benefit is primarily a means in the direction of ensuring, maintaining and increasing the income of the employee. It is a benefit which supplements ordinary wages and which is of value to them and their families in so far as it materially increases their retirement.

Mohan Madgulkar-Compensation Management/2006

Meaning of perquisites

• An element of compensation provided in addition to cash which can directly facilitate more effective performance for the job, as well as augmenting the total value of compensation

• The term perquisites should be reserved for those benefits which are not fundamentally catering personal security and personal needs.

Mohan Madgulkar-Compensation Management/2006

Objectives of benefits

• To increase the commitment of the employees to the organization

• To provide for the actual or perceived needs of employees

• To demonstrate that the company cares for its employees

• To ensure that an attractive remuneration package is provided which attracts and retains high quality staff

• To provide tax-efficient method of remuneration which reduces tax liabilities with those related to equivalent cash payments

Mohan Madgulkar-Compensation Management/2006

Goals of fringe benefits

• Social goal

• Human relations goals

• Macro economic goals

Mohan Madgulkar-Compensation Management/2006

Benefits policies

• Range of benefits to be provided • Scale of benefits provided • Proportion of benefits to total remuneration • Allowing choice• Allocation of benefits• Harmonization • Market considerations • Government policy• Trade unions

Mohan Madgulkar-Compensation Management/2006

Major categories

• Payment for time not worked

• Hazard protection

• Employee services

• Legally required payment

Mohan Madgulkar-Compensation Management/2006

Cost to the company

• Cost to the company includes the value of all the perks and benefits one gets from the company in addition to ones salary. All the components of the salary may not be always apparent. In order to arrive at a comprehensive figure one has to carefully add the value of all components or their cash equivalent.

Mohan Madgulkar-Compensation Management/2006

Tax considerations

• A tax efficient remuneration package can benefit both employers and employees. From the employees perspective it can enhance the benefits of working for that employer, from the employers point of view, it can mean reduced costs.

• In the past , tax efficiency was one of the main reasons for the proliferation of benefits, but it has become progressively less important as governments have tightened up the fiscal rules relating to employee benefits.

• Because fiscal regulations are constantly changing, it is essential to update the information related to tax law for salaried persons.