COMPENSATION MANAGEMENT

Module Number: 02

Module: Compensation Planning and Managing

Employee Benefits
 Syllabus

Module: 2: Compensation Planning and Managing Employee Benefits [10 Sessions] [Blooms ‘level selected:
Application Level – 3]

• Developing a total compensation strategy – Competitive Advantage – Job evaluation systems, the compensation
structure- Wage and salary surveys, the wage curve, pay grades and rate ranges, preparing salary matrix, fixing
pay, significant compensation issues. Variable Pay: Strategic reasons for incentive plans, administering incentive
plans, individual incentive plans – group incentive plans – team compensation, Managing Employee Benefits.

HUMAN RESOURCE MANAGEMENT

Table of Contents
2. Compensation Planning and Managing Employee Benefits :
• Introduction to Compensation planning and managing employee benefits

• Developing a total compensation strategy

• Competitive Advantage

• Job evaluation systems

• The compensation structure- Wage and salary surveys

• The wage curve

• Pay grades and rate ranges

• Preparing salary matrix, fixing pay, significant compensation issues.

• Variable Pay: Strategic reasons for incentive plans, administering incentive plans, individual incentive plans –
group incentive plans – team compensation,

• Managing Employee Benefits.

HUMAN RESOURCE MANAGEMENT
 Developing a total compensation strategy
The steps to creating a compensation plan vary from company to company. These are
some of the steps you can start with when creating yours:
1.Determine your compensation philosophy
2.Outline job architecture by defining roles and levels
3.Create guidelines for performance evaluations
4.Define direct compensation (salary, bonus, and equity)
5.Add in benefits
6.Implement a pay equity process
7.Conduct post-hoc reviews
How to build Competitive Advantage
The competitive advantage can be built by using two general approaches:
1.General competitive position on the pay market
2.Competitive pay market position for key job positions
 Job Evaluation
• Job Evaluation
• The systematic process of determining the relative worth of jobs in
order to establish which jobs should be paid more than others
within an organization.
Objectives
1. To secure and maintain complete, accurate & impersonal
description of each distinct job or occupation in the entire plant
2. Standard procedure for determining the relative worth of each job
3. Fair and equitable rate of pay for each job with relation to other
jobs in the plant, community or industry
4. Ensure like wages paid to all qualified employees for like work.
5. Fair and accurate consideration – for advancement and transfer
6. Provide information for ‘work organization, employee’s selection,
placement, training and numerous other problems
 Compensable factors

Universal Factors Sub-factors

Knowledge Education
Experience
Skill
Problem-solving Interpretation
Compliance
Communication
Decision-making Interpersonal
Managerial
Asset
Basic procedure of Job Evaluation

The National Institute of Personnel Management, has laid down the following steps which
should be taken to install a job evaluation programme
1. Analyze and prepare Job Description
2. Select and Prepare a Job Evaluation Plan
3. Classify Jobs
4. Install the Programme
5. Maintain the Programme
 Different Job Evaluation Systems

SCOPE OF COMPARISON

JOB AS JOB PARTS

BASIS FOR A WHOLE OR FACTORS
COMPARISON (NONQUANTITATIVE) (QUANTITATIVE)

Job vs. job Job ranking Factor comparison

system system

Job vs. scale Job classification Point

system system
1. Job Ranking System/Grading method
• Oldest system of job evaluation by which jobs are arrayed on the basis
of their relative worth.

2. Job Classification system

• A system of job evaluation in which jobs are classified and grouped
according to a series of predetermined wage grades.
• Successive grades require increasing amounts of job responsibility,
skill, knowledge, ability, or other factors selected to compare jobs.
Eg: Description of Job Classification
Grades Description of Job Classification

Clerk Grade III Pure routine concentration

Speed and accuracy
Works under supervision
May or may not be held responsible for
supervision

Senior clerk Technically varied work

Occasionally independent thinking & action due
to difficult work which require exceptional clerical
ability and extensive knowledge of principles and
fundamentals of business
Not charged with the supervision of others
Works subject to a limited check
Dependable, resourceful and able to take
decisions
3. Point System
A quantitative job evaluation procedure that determines the relative value of a job by the
total points assigned to it.
Permits jobs to be evaluated quantitatively on the basis of factors or elements—
compensable factors—that constitute the job.
Point Manual
A handbook that contains a description of the compensable factors and the degrees to
which these factors may exist within the jobs.

Degree of Factor
Job Factor Weight 1 2 3 4 5
1. Education 50% 100 200 300 400 500
2. Responsibility 30% 75 150 225 300
3. Physical effort 12% 24 48 72 96 120
4. Working 8% 25 51 80
conditions
 Job Evaluation for Management Positions
• Hay Profile Method
• The most well known points scheme was introduced by Hay management
consultants in 1951. Job evaluation technique using three factors—knowledge,
mental activity, and accountability—to evaluate executive and managerial positions.
1. Know-How;
• Depth and Breadth of Know-How
• Planning and Organising
• Communicating/Influencing
2. Problem Solving and;
• The Thinking Environment
• The Thinking Challenge
3. Accountability
4. Physical and environmental factors
• Physical Effort and/or Strain
• Working Environment
4. Factor Comparison System or
Point Factor
• A job evaluation system
that permits the
evaluation process to be
accomplished on a factor-
by-factor basis by
developing a factor
comparison scale.
• The compensable factors
of a job evaluated are
compared against the
compensable factors of
key jobs within the
organization that serve as
the job evaluation scale.
 Collecting Survey Data

• Outside Sources of Data

• Bureau of Labor Statistics (BLS)
• National Compensation Survey
• State and local wage surveys
• Online survey data

• Conducting Employer-initiated Surveys

• Select key jobs.
• Determine relevant labor market.
• Select organizations.
• Decide on information to collect: wages/ benefits/ pay policies.
• Compile data received.
• Determine wage structure and benefits to pay.
 Collecting Survey Data

• Conducting Employer-initiated Surveys

• Select key jobs.
• Determine relevant labor market.
• Select organizations.
• Decide on information to collect: wages/ benefits/ pay
policies.
• Compile data received.
• Determine wage structure and benefits to pay.
 Freehand Wage Curve

Wage Curve
A curve in a
scattergram
representing the
relationship
between relative
worth of jobs and
wage rates.
Single Rate
Structure
Wage Structure
with Increasing
Rate Ranges

Red
circles,
flagged or
overrates
 The Wage Curve
• Wage Curve
• A curve in a scattergram representing the relationship between relative worth of jobs
and wage rates.
• Pay Grades
• Groups of jobs within a particular class that are paid the same rate.
• Rate Ranges
• A range of rates for each pay grade that may be the same for each grade or
proportionately greater for each successive grade.
• Competence-based Pay, (also skill-based pay or knowledge-based pay)
• Compensation for the different skills or increased knowledge employees possess
rather than for the job they hold in a designated job category.
• Red Circle Rates
• Payment rates above the maximum of the pay range.
• Broadbanding
• Collapses many traditional salary grades into a few wide salary bands.
Criteria for Wage Fixation
1. 1. Ability to
pay
2. Ability of
8. Living Wage
employee

Wage & 3. Productivity

Salary Criteria
7. Cost of Living 4. Collective
Bargaining

6. Supply & Demand 5. Job

Factor Requirements
The Chief Objectives of Benefits Programs

• Improve employee work satisfaction

• Meet employee health and security requirements
• Attract and motivate employees
• Reduce turnover
• Maintain a favorable competitive position
Requirements for a Sound Benefits Program
Strategic
Benefits
Planning

Communicating Allowing for

Employee Benefits Employee
Information Involvement

Providing Benefits for a

for Diverse
Flexibility Workforce
 Communicating Benefits Information

• In-house publications (employee handbooks and organizational newsletters)

• Group meeting and training classes
• Audiocassettes/videotapes
• Bulletin boards
• Payroll inserts/pay stub messages
• Specialty brochures
• Employee self-service systems (ESS)
 Benefits Issues

Management
ManagementConcerns
Concerns

Union
Uniondemands
demandsfor
foradditional
additionalbenefits
benefits

Benefits
Benefitsoffered
offeredby
byother
otheremployers
employers

Tax
Taxconsequences
consequencesof
ofbenefits
benefits

Rising
Risingcosts
costsof
ofproviding
providingbenefits
benefits

Benefits
Benefitscoverage
coveragefor
fordomestic
domesticpartners
partners
Strategic Reasons for Incentive Plans
• Variable Pay
• Tying pay to some measure of individual, group, or
organizational performance.
• Incentive Pay Programs
• Establish a performance “threshold” to qualify for incentive
payments.
• Emphasize a shared focus on organizational objectives.
• Create shared commitment in that every individual
contributes to organizational performance and success.
Types of Incentive Plans

INDIVIDUAL GROUP ENTERPRISE

Piecework Team compensation Profit sharing
Standard hour plan Scanlon Plan Stock options
Bonuses Rucker Plan Employee stock
Merit pay Improshare ownership plans
Lump-sum merit pay Earnings-at-risk plans (ESOPs)
Sales incentives
Incentives for
professional employees
Executive compensation
 Assessing Incentive Program Effectiveness

Source: Christian M. Ellis and Cynthia L. Paluso, “Blazing a Trail to Broad-Based Incentives,” WorldatWork
Journal 9, no. 4 (Fourth Quarter 2000): 33–41. Used with permission, WorldatWork, Scottsdale, Arizona.
1.Individual Incentive Plans - Piece Work
• Straight Piecework
• An incentive plan under which employees receive a certain rate
for each unit produced.
• Differential Piece Rate
• A compensation rate under which employees whose production
exceeds the standard amount of output receive a higher rate for
all of their work than the rate paid to those who do not exceed
the standard amount.

• Challenges – Difficult to develop, measure & apply.

2. Standard hour plan
• An incentive plan that sets pay rates based on the completion of a job
in a predetermined “standard time.”
• If employees finish the work in less than the expected time, their
pay is still based on the standard time for the job multiplied by
their hourly rate.
3. Bonus
• Incentive payment that is supplemental to the base wage for cost
reduction, quality improvement, or other performance criteria.
- Spot bonus
• Unplanned bonus given for employee effort unrelated to an
established performance measure.
 4. Merit Pay
4. Merit Pay Program (merit MERIT PAY GUIDE CHART
raise)
• Links an increase in base (POSITION IN RANGE),%

pay to how successfully an PERFORMANCE LEVEL 1 2 3 4 5

employee achieved some
objective performance Outstanding (5) 9 9 8 7 6
standard. Superior (4) 7 7 6 5 4
• Merit Guidelines Competent (3) 5 5 4 3 3
• Guidelines for awarding Needs improvement (2) 0 0 0 0 0
merit raises that are tied to Unsatisfactory (1) 0 0 0 0 0
performance objectives.
5. Lump-Sum Merit Pay
• Lump-sum Merit Program
• Program under which employees receive a year-end merit
payment, which is not added to their base pay.
• Advantages
• Provides financial control by maintaining annual salary
expenses and not escalating base salary levels.
• Contains employee benefit costs for levels of benefits normally
calculated from current salary levels.
• Provides a clear link between pay and performance.
 6. Sales Incentives a. Straight Salary Plan
Compensation plan that permits salespeople to be paid for
performing various duties that are not reflected immediately in
their sales volume.
Sales Incentive Plans Encourages building customer relationships, compensation
during periods of poor sales, May not provide sufficient
motivation for maximizing sales volume.
Straight Salary b. Straight Commission Plan
Compensation plan based upon a percentage of sales.
Straight Commission Disadvantages
Emphasis is on sales volume rather than on profits, Sales
Salary and
after service is neglected, Earnings tend to fluctuate widely
Commission
Combinations between good and poor periods of business.
c. Combined Salary and Commission Plan
A compensation plan that includes a straight salary and a commission
component (“leverage”).
Advantages
Combines the advantages of straight salary and straight
commission forms of compensation, greater design flexibility in
increase sales, Motivates sales force for sales volume
7. Incentives for Professional Employees

Managerial
Managerial and
and Executive
Executive Incentives
Incentives

Bonuses
Bonusesand
andmerit
merit increases
increases

Double-track
Double-trackwage
wagesystems
systems

Performance
Performanceincentive
incentivebonuses
bonuses

Profit
Profit sharing
sharingand
andstock
stockownership
ownership

Executive
Executiveperquisites
perquisites(perks)
(perks)
Types of Long-Term Incentive Plans
Stock Price Performance-Based
Appreciation Plans Plans
Stock Options Performance Units
Stock Appreciation Performance Shares
Rights (SARS) Dividend Units
Stock Purchase
Phantom Stock

Restricted
Stock/Cash Plans
Restricted Stock
Restricted Cash
Types of Long-Term Incentive Plans
Types of Long-Term Incentive Plans
(cont’d)
Types of Long-Term Incentive Plans
(cont’d)
Group Incentive Plans
• Team Incentive Plans
• Compensation plans where all team members receive an incentive
bonus payment when production or service standards are met or
exceeded.
• Establishing Team Incentive Payments
• Set performance measures upon which incentive payments are based
• Determine the size of the incentive bonus.
• Create a payout formula and fully explain to employees how payouts
will be distributed.
• Gainsharing Plans
• Programs under which both employees and the organization share the
financial gains according to a predetermined formula that reflects
improved productivity and profitability.
Bonus and Gainsharing Plans

• Scanlon Plan
• Employee and management committees cooperate in cost-
reduction improvements.
• Rucker Plan
• Bonus based on the relationship between the total earnings
of hourly employees and the production value created by the
employees.
• Improshare
• Gainsharing program for bonuses are based upon the overall
productivity of the work team.
Earnings-at-Risk Plans
• Profit Sharing
• Any procedure by which an employer pays, or makes available to all
regular employees, in addition to their base pay, current or
deferred sums based upon the profits of the enterprise.
• Agreement over division of profits between company and
employees.
• Possibility of no payout due to financial condition of company.
• Earnings-at-Risk Incentive Plans
• A portion of the employee’s base pay is placed at risk, but
employees are given the opportunity to earn income above base
pay when goals are met or exceeded.
Earnings-at-Risk Incentive Plans
• Stock Options
• Granting employees the right to purchase a specific number of shares of the
company’s stock at a guaranteed price (the option price) during a
designated time period.
• The value of an option is subject to stock market conditions at the time that
option is exercised.
• Employee Stock Ownership Plans (ESOPs)
• Stock plans in which an organization contributes shares of its stock to an
established trust for the purpose of stock purchases by its employees.
• The employer establishes an ESOP trust that qualifies as a tax-exempt
employee trust under Section 401(a) of the Internal Revenue Code
• Stock bonus plans are funded by direct employer contributions of its
stock or cash to purchase its stock.
• Leveraged plans are funded by employer borrowing to purchase its stock
for the ESOP.
Employee Stock Ownership Plans

Rewards
Rewards and
and Risks
Risks of
of ESOPS
ESOPS

Advantages
Advantages Disadvantages
Disadvantages
Retirement
Retirement benefits
benefits Liquidity
Liquidityand
andvalue
value
Pride
Prideof
of ownership
ownership Single
Singlefunding
fundingbasis
basis
Deferred
Deferredtaxes
taxes Not
Not insured
insured
Research Article:

• Daharwal, S. and Mishra, P. (2021), "Workforce Compensation and Productivity

Growth in the Indian Manufacturing Sector: Lessons for Human Resource
Management", Pal, M.K. (Ed.) Productivity Growth in the Manufacturing Sector,
Emerald Publishing Limited, Bingley, pp. 121-135.
https://doi.org/10.1108/978-1-80071-094-820211010
• Link: https://www.emerald.com/insight/content/doi/10.1108/978-1-80071-094-
820211010/full/html
HBS Case Study:

• Bisht, Nidhi S.(2021). British Broadcasting Corporation: Under Fire for Gender Pay

Inequality, W20676-PDF-ENG. Ivey Publishing

Podcast

Can we automate our way to better decision making?

• Link:https://www.hbs.edu/managing-the-future-of-work/podcast/Pages/
default.aspx
TEXT & REFERENCE BOOKS

• Text Book:

• T1: Bhattacharyya, Dipak Kumar (2014), Compensation Management, Oxford

University Press, 12th Edition, New Delhi.
• Reference Books:

• R1: Milkovich, George T., Newman, Jerry M & Ratnam, C S Venkata (2009).
Compensation, Ninth Edition, Tata Mc Graw Hill Publications.
• R2: Richard. I. Henderson (2008). Compensation Management in a Knowledge
Based World. Prentice Hall Publications.