1. 1. Strategic Business Management Prepared & Presented By Dr. Hesham Hemaya Private property do not duplicate with out authorization
2. 2. By the end of this course delegates will be able to: Understand the objectives of Total Rewards Corporate culture and compensation structure Organization strategy affecting pay policy Job evaluation methods How to measure the Central Tendency How to develop pay structure Objectives Human Resources Management2
3. 3. What is Total Rewards ? Types of compensation Total rewards refers to all forms of financial and nonfinancial returns that employee receive from their employers. Human Resources Management3 Direct Base pay (salary) Differential pay (over time) Short-term incentive pay Long-term incentive pay Pay programs for selected employees Recognition and achievement awards (cash) Indirect Legally required benefits Income replacement programs Disability insurance Medical benefits Pay for time not worked Unpaid leave (vacations) Recognition and achievement awards (noncash)
4. 4. Note that the total rewards system an organization offers goes beyond financial issues and incorporates all aspects of work environments. Human Resources Management4 Reward Examples Compensations (direct) Wages, commissions, bonuses Benefits (indirect) Life insurance, disability coverage, health insurance, vacations, noncash rewards Location City. Nearness to transportation, restaurants Flexibility Work attire, work at home, scheduled times Stability Rewards packages do not change dramatically Work variety Opportunities to experience more skills Advancement Opportunity to get ahead Work conditions Hazard-free work place
5. 5. Objectives of Total Rewards system Human Resources Management5 Org. income must be spread over a variety of needs, such as R&D, taxes, raw materials, marketing, and compensation. HR professional must realize that there is no much money available for pay systems, benefits, recognition programs. So assuming that the total rewards system is legal and affordable then its basic objectives is to provide both employer and employees with a system that is: -Compatible with Org. mission and strategy -Compatible with corporate culture -Appropriate with the work force -Internally equity -Externally equity -Effective in recruiting and retaining employees
6. 6. Human Resources Management6 Org. strategy drive the balance for these elements as followed : Organization mission and strategy The developing of Total Rewards system must support the Org. business plan which designed on the behalf of org. mission and strategy. HR must consider other indicators such as where is the org. in it's life cycle is it down sizing or expanding, acquiring, or being acquired, profitable or not. A total reward system should attract the right people to the right jobs. An employee must generate sufficient revenue to cover expenses, generally if the demand exceeds supply, this puts upward pressure on pay levels.
7. 7. Human Resources Management7 Corporate culture Compensation system must fit the org. culture about employees which approach two basic ways: Entitlement-Oriented Some org. caring, paternalistic feeling and want employees to feel that they are a part of family then employees a entitled to benefits such as: Health care Disability insurance Employee assistance (development) Contribution-Oriented Other org. see employees as contributors. Their compensation program are more performance-driven such as: Performance-based pay Incentives Profit share
8. 8. Human Resources Management8 Contribution margin ratio Contribution Margin Ratio = (Contribution Margin / Sales) 100 The CM ratio is extremely useful since it shows how the contribution margin will be affected by a change in total sales. Total Per Unit Percent of Sales Sales $100,000 $250 100% Variable expenses 60,000 150 60% ------------ ------------ ----------- Contribution margin $40,000 $100 40% - ------------ ----------- Less fixed expenses 35,000 ------------ Net operating income $5,000
9. 9. Human Resources Management9 Profit= (Sales CM ratio) Fixed Cost Sales Volume Percent of SalesPercent Expected Increase Sales $100,000 $130,000 $30,000 10% Less variable expenses 60,000 78,000 18,000 60% --------- -------- -------- ------ Contribution margin 40,000 52,000 12,000 40% Less fixed expenses 35,000 35,000 0 ====== --------- -------- -------- Net operating income 5,000 17,000* 12,000
10. 10. Human Resources Management10 Work Force The rewards program must also fit the work force. An org. with entry level or unskilled workers should have a different rewards package than a company with experienced highly education workers. One way to keep in touch with the employees needs is by conducting surveys to assess their attitude and current and long-term needs.
11. 11. Human Resources Management11 External Equity Another consideration when developing a total rewards program is to maintain external equity to attract and retain employees. The correct pay strategy will depends on how critical employees to the org. success and the degree to which the org. can afford to fund to that strategy. Companies compete for employees with others who shares -Industry have similar product or service -Occupation same experience or skills -Location same geographical; area
12. 12. Human Resources Management12 Internal Equity Internal equity means that unique jobs are fairly compensated which helps the employer to: Meet employees needs for fair wage and adequate benefits Recognize employees contributions to the org. Reward equal work with equal pay Not discriminate against protected classes An org. cannot effectively recruit or retain employees without internal equity
13. 13. Human Resources Management13 Recruitment and Retention If org. finds that its turn-over ratio is above normal or unable to attract suitable talents then the org. total rewards program must be reviewed, taking into consideration there is also some factors affecting this issue such managerial stuff, physical location,
14. 14. Human Resources Management14 Develop a Pay Policy (Lead the market) Increases ability to attract & retain employees Can be more selective in hiring (Lagging behind the market) Reduces ability to select Reduces labor expenses Increase turnover ratio (Match the market) Reduces ability to select Reduces labor expenses Note: Some org. uses mixed pay policies according to positions
15. 15. Human Resources Management15 Compensation structure Job Evaluation Job evaluation is a determination of the relative worth and its value to the org. which done after job analyses. Job Evaluation Methods 1- Non-quantitative establish a relative order of jobs 2- Quantitative establish how much job is worth compared to another job by using scaling system In both methods jobs are compared to each other or to an outside standards. Non-Quantitative Quantitative Job-to-Job comparison Job ranking Factor comparison Job-to-predetermined standard comparison Job classification Point-factor method Comparison of Job evaluation methods
16. 16. Human Resources Management16 Non-Quantitative methods It is evaluate the entire jobs and place them in order without a numeric value, so one can tell Job A is more important than Job B but not how much important. Job ranking method It is refer to establishing a hierarchy of jobs from lowest to highest based on job overall importance to the org. In this method a paired-comparison method may be used in which each job is compared with every other job being evaluated, then the job with largest number of greater than ranking is the highest-ranked job, and so on. To make the comparison you would: 1- Select the jobs to be rated 2- Compare each job with the other jobs 3- Total favorable comparisons 4- Rank jobs 5- Compare ranking Job ranking is an easily fairly quick, inexpensive method for small org.
17. 17. Human Resources Management17 Job classification method Job classification involves in grouping jobs into predetermined number of grades or classifications, each have a class description to use for job comparisons. (SHRM) It is also a system for defining and evaluating the duties, responsibilities, tasks, and authority level of a job. without regard to the knowledge, skills, experience, and education of the job holder. Classes may be described by naming benchmark jobs that jobs fall into each class and are defined as reference points. The benchmark jobs must have the following characteristics: 1- The contents are well known, relatively stable 2- They represent the entire range of jobs to be evaluated 3- a sizable portion of the work force is employed in these jobs 4- External pay rates for these jobs are acceptable basis for setting wages Job classification is good for large no. of jobs i.e. Large organizations
18. 18. Human Resources Management18 Quantitative methods Quantitative job evaluation methods evaluate specific factors, use a scale and provide a score indicates that how valuable one job when compared to another. Point-factor method It is the most common used job evaluation method which involving using compensable factors to evaluate relative job worth Compensable factors reflects which jobs are add value to the org. and aligned to the strategic direction and culture of the business. The Hay plan compensable factors The Hay system assigns three factors to determine the relative value of a particular job to other jobs. The knowledge required (Know how) Problem solving required Level of accountability
19. 19. Human Resources Management19 The Factor Evaluation System (FES) Developed by US. Government and it includes factor such as: The knowledge required (Skills) Supervisory control (Responsibility) Complexity Scope and effect Personal contacts Physical demand (Effort req.) Work environment (working conditions) Compensable evaluation factors selected may vary among org. The compensable factors should: Reflect the actual work being done. Supported by documents (job description) Reinforce the org. strategy and culture Be valued by all affected parties (stakeholders) Being reviewed annually
20. 20. Human Resources Management20 FACTOR POINTS % TOTAL LEVELS Knowledge 50-1850 41.3 9 Supervisory Control 25-650 14.5 5 Guidelines 25-650 14.5 5 Complexity 25-450 10.0 6 Scope/effect 25-450 10.0 6 Personal Contact 10-110 2.5 4 Purpose Of Contact 20-220 4.9 4 Phys Demand 5-50 1.1 3 Work Environment 5-50 1.1 3 Total Points 4480
21. 21. Human Resources Management21 As an example for just one compensable factor skill it may have many degrees which is reflected by the assigned points. Degree Levels points 1 Knowledge of simple, routine tasks. Skills to operate simple equipment req. no previous training or experience 60 2 Knowledge of basic procedures . Skills to operate equipment req. moderate degree of experience or previous training 120 3 Knowledge of standardized, moderately complex. Skill to operate varied equipment req. training and experience 180 4 Knowledge of technical or special procedures to perform assignments req. considerable training and experience 240 5 Knowledge of an extensive body of procedures which req. special skills based on extensive training and experience 300
22. 22. Human Resources Management22 example for Job, C Factor Degree/Points for Job C 1 2 3 4 5 Factor Totals Skill 60 120 180 240 300 120 Responsibility 60 120 180 240 300 240 Effort 50 100 150 200 -- 150 Working Conditions 30 60 100 -- -- 60 Supervision 20 40 60 80 100 40 Total 0 220 150 240 0 610
23. 23. Human Resources Management23 220 300 400 500 600 700 800 900 1000 Job A Job B Job C Job B Job E Based on the assigned points Job C relative worth can be compared to the other jobs in the range which is the goal of point-factor analysis. The total points also assign the pay grade for example if an org. define that grade 4 jobs is located between 520 to 619 points, then job C (610 points) would be a grade 4 which determine the pay range.
24. 24. Human Resources Management24 Factor comparison method This method is more complex and rarely used, it involves the ranking of each job by each selected compensable factor and then identify dollar value for each level of each factor to develop pay rate for a job. Skill Responsibility Effort Working condition Supervision 5.40 $/h A A A 4.80 $/h A A 4.20 $/h B B B B 3.90 $/h B From this example Job A = 5.40+4.80+5.40+4.80+5.40 = 25.80 $/h Job B = 4.20+4.20+4.20+4.20+3.90 = 20.70 $/h This method is best use when wages are not frequently changed and the org. uses a flat rate for each job.
25. 25. Human Resources Management25 Market-Based Evaluation Evaluating the jobs on their market values is not true evaluation system, market rates can be used to developed a Job-worth hierarchy around benchmark rates. The key points of comparison when matching jobs with compotators are duties, scope, reporting relationship not titles the mach must be Focused on industry or specific job With in markets of same size, profitability, sales, geographical area Local, regional, or national Advantages Considering external competition leading to internal equity Suited to org. where its vital to maintain competitive market position Disadvantages Needs available data for a significant no. of org. Jobs Do not recognize internal job importance Less defensible than job content approach
26. 26. Human Resources Management26 Pay surveys collect a valuable information on market rates which includes: -Incentive plans -Overtime pay -Stating wage rates -Base pay -Pay ranges -Shift differentials -Vacations system
27. 27. Human Resources Management27 Internal Vs. External Surveys Once the org. decided that a pay survey is needed a decision must be made as to how the survey should be conducted. Internal survey External survey When org. have the resources and expertise and want to maximize the control over the survey they may choose to develop their own internal survey (in- house) The advantage of in-house survey is the ability to control the design, data analysis and reporting specifically as needed. Org. may contract w out side consultant while the org. still maintain control. If org. choose to use external survey it must be certain about how the data was generated and when it was collected. Tow sources of data are available 1- Published compensation survey 2- Professional out source such SHRM, Hay, ..
28. 28. Human Resources Management28 Choosing between Internal & External surveys Choosing can be determined by several factors such as: The internal time and expertise req. The relevance/match of external survey to the org. jobs The availability of the data survey The expense associated with the survey type Data Analysis Survey data analysis must based on the circumstances of their market, products, and employees. First survey data must be verified and may need to be aged/or leveled. Aged data Assume that market rates movement is 3% per year so if we used a data aged by one year we have to increase the rate by same percentage. Non identical jobs If the data survey is similar but not identical the job can be waited or leveled to better mach
29. 29. Human Resources Management29 Measure of Central Tendency CT Measures of CT are another way for analyzing pay survey data, there are three measures of CT mean, median, mode, weighted average along with quartiles and percentiles. Mean/Average Un weighted average Gives equal weight to every company's salary in the survey with no regards for other factors (such as the No. of incumbents) so it provides only the average salary data for a particular job rather than the actual. Weighted average Gives another picture of the data taken into account the number of incumbents who receive that salary.
30. 30. Human Resources Management30 Company Incumbents Salary Total salary A 2 55,000 $ 110,000 $ B 1 60,000 $ 60,000 $ C 2 65,000 $ 130,000 $ D 5 70,000 $ 350,000 $ E 1 75,000 $ 75,000 $ Total 11 325,000 $ 725,000 $ Salary data for weighted and un-weighted average Un-weighted average is 65,000 $ (325.000 / 5) Weighted average is 65.909 $ (725,000 / 11)
31. 31. Human Resources Management31 Median Median is the middle number in the salary range. Salaries 55.000 55,000 60,000 65,000 65,000 70,000 70,000 70,000 70,000 70,000 75,000 Salaries 55.000 55,000 60,000 60,000 65,000 65,000 70,000 70,000 70,000 70,000 70,000 75,000 Median is 70,000 $ Median is 67,500 $ Mode Mode is the most frequently occurring wage Mode is 70,000 $
32. 32. Human Resources Management32 Quartiles and Percentiles 0 % Q1 Q2 50% Q3 Q4 First quartile Second quartile Third quartile Fourth quartile $ 55,000 Entry wage $ 60,000 $ 65,000 Midpoint $ 70,000 $ 75,000 Max wage Job grade Quartiles
33. 33. Human Resources Management33 Pay Structure Pay Grades Pay Ranges Once survey data are collected and relative internal job values are established, the pay structure can be developed involving pay grades and ranges. It is used for grouping all jobs that have same relative internal worth and paid with in the same pay range. The number of pay grades varies with -Size of the organization -Vertical distance between lowest and highest level jobs (Span of Control) -Pay increases and promotion policy -The slope of pay policy line -Administrative efficiency concerns It sets the upper and lower limits of possible compensation for individuals whose jobs fall in the same pay grade, the data survey is used to establish the maximum, minimum and midpoint of the pay range.
34. 34. Human Resources Management34 Pay range spread Range spread = Max - Min Min X 100 Ex: Range spread = = 44% 65,000 45,000 45,000 X 100 Typical range spreads are: -Nonexempt position ----- 40% -Exempted position ----- 50% -Executive position ----- 60%
35. 35. Human Resources Management35 To be noticed, lower-level jobs have a narrow pay range while the salary range for higher-level jobs will be wider. This is because employees in entry-level jobs have more promotion possibilities there for they tend to stay at entry-level shorter time than higher- level , also the learning time to achieve the job rate competencies (midpoint) is less for lower-level. There should be an overlap between pay ranges, which makes it possible for an experienced person in lower-level grade to be paid more than an inexperienced person in the next higher grade. Grade Minimum Midpoint Maximum Range Spread Midpoint Difference 34 3,519 $ 4.398 $ 5,278 $ 50% 14% 33 3,087 $ 3,858 $ 4,630 $ 50% 14% 32 2,708 $ 3,384 $ 4,061 $ 50% 14% 31 2,375 $ 2,969 $ 3,563 $ 50% 14% 30 2.083 $ 2,604 $ 3,125 $ 50% 14% Typical Exempt Pay Structure
36. 36. Human Resources Management36 Compa-ratio It is an indicator as to how actual wages match, lead or lag behind the market. Compa-ratio = X 100 Pay level Midpoint Market rate A compa-ratio is below 100% may occur when: New employee to the job or org. A poor performer Org. that adapt a lag pay strategy A compa-ratio is above 100% may occur when an employee is: Employees are long-tenured/high performed Managers are not following salary increase pol Org. that adapt a lead pay strategy
37. 37. Human Resources Management37 Broad banding It is a way to combine several salary grades or job classifications with narrow pay ranges into one band with wider salary spread. It is suitable for large hierarchical org. that try to flatten their org. and remove levels of management Ex: org. w 8 managing levels could eliminate 4 levels, widen the salary ranges of the remaining 4 levels and simply slot each manager into one of those ranges. Service Experts Management SupervisoryTechnical 68,000$22,000$ 105,000$50,000$ 38,000$17,000$ Broad banding
38. 38. Do you have any questions ? Human Resources Management38 The End