Establishing Strategic Pay Plans

2005 Prentice Hall Inc. All rights reserved.

111

Introduction
 Employee compensation
All forms of pay or rewards going to employees and arising from their employment.

 Direct financial payments

Pay in the form of wages, salaries, incentives, commissions, and bonuses.

 Indirect financial payments

Pay in the form of financial benefits such as employer paid insurance, paid sick leaves, and paid vacations, fringe benefits like PF, Gratuity, canteen facilities etc.
2005 Prentice Hall Inc. All rights reserved. 112

Ways to make direct financial payments

 Time Based
Hourly wage Salaries

 Performance Based
Piecework (calculated rate per piece) Sales commission

 Combination
Sales
2005 Prentice Hall Inc. All rights reserved. 113

Factors determining the design of any pay plan

 legal factor,  union factor,  company policy and  equity

2005 Prentice Hall Inc. All rights reserved.

114

1. Legal factor

 Non managerial workers:

1. 2. 3. 4. The Minimum wages Act, 1948 The Payment of wages Act, 1936 Equal remuneration Act, 1976 The Payment of Bonus Act, 1963

2005 Prentice Hall Inc. All rights reserved.

115

Contd

 Top management remuneration:  The Companies Act, 1956: An upper ceiling of 15000/month(1991) Sec. 198: shouldnt exceed 11% of net profits Sec. 309(1): Remuneration Committee

2005 Prentice Hall Inc. All rights reserved.

116

Union Influences on compensation decision

 Formal collective bargaining  Negotiations at Industry level : Common pay agreement  Negotiation at company level  In U.S.:  The National Labor Relations Act,1935  Fair Labor standards Act  40hours, 1.5 overtime pay rate, $7.25/hr, $6$12/hr in hazardous occupations

2005 Prentice Hall Inc. All rights reserved.

117

Corporate Policy
 Aligned reward strategy
a total reward package Compensation strategy has an impact on companys productivity E.g. Oracle, Microsoft Various issues like Seniority based pay or performance based pay Salary Compression: 5th and 6th pay scales, outcome of inflation Geography: e.g. Motif in Ahmedabad
2005 Prentice Hall Inc. All rights reserved. 118

Methods to Address Equity Issues

 Salary surveys (Salary.com)
To monitor and maintain external equity.

 Job analysis and job evaluation

To maintain internal equity.

 Performance appraisal and incentive pay

To maintain individual equity.

 Grievance mechanisms, and employees surveys

To help ensure that employees view the pay process as transparent and fair.

2005 Prentice Hall Inc. All rights reserved.

119

Process of Establishing Pay Rates

1. Conduct a salary survey (external equity) 2. Determine the worth of each job in your organization (internal equity job evaluation) 3. Group similar jobs into pay grades 4. Price each pay grade by using wave curves 5. Fine-tune pay rates

2005 Prentice Hall Inc. All rights reserved.

1110

Establishing Pay Rates

 Step 1. The salary survey
Prevailing wage rates. Formal written questionnaire surveys telephone surveys newspaper ads are also sources of information.

Price Benchmark jobs with the help of surveys Place 20% or more positions directly in the market place Collect data on Insurance, sick leave, vacation
2005 Prentice Hall Inc. All rights reserved. 1111

Sources for Salary Surveys

 Consulting firms (Hay Associates, Hewitt Associates)  Government agencies (US Dept. of Labors Bureau of Labor statistics)  Internet

2005 Prentice Hall Inc. All rights reserved.

1112

Some Pay Data Web Sites

2005 Prentice Hall Inc. All rights reserved.

1113

Establishing Pay Rates (contd)

 Step 2. Job evaluation
A systematic comparison done in order to determine the worth of one job relative to another

 Compensable factor
Skills, effort, responsibility, and working conditions (Equal Pay Act) Knowledge, Problem Solving, Accountability (Hay Consulting firm, Wal-Mart)
2005 Prentice Hall Inc. All rights reserved. 1114

Establishing Pay Rates (contd)  Step 3. Group Similar Jobs into Pay Grades
A pay grade is comprised of jobs of approximately equal difficulty or importance as established by job evaluation.
Point method: the pay grade consists of jobs falling within a range of points. Ranking method: the grade consists of all jobs that fall within two or three ranks. Classification method: automatically categorizes jobs into classes or grades.

2005 Prentice Hall Inc. All rights reserved.

1115

Establishing Pay Rates (contd)

 Step 4. Price Each Pay Grade Wage Curve
Shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation.

2005 Prentice Hall Inc. All rights reserved.

1116

Plotting a Wage Curve

2005 Prentice Hall Inc. All rights reserved.

1117

Establishing Pay Rates (contd)  Step 5. Fine-tune pay rates

Developing pay ranges
Flexibility for performance differences Seniority

Correcting out-of-line rates

Raising underpaid jobs to the minimum of the rate range for their pay grade. (i)Cut pay rates for overpaid (red circle) jobs to maximum in the pay range for their pay grade (ii)freeze the rate till general salary increases bring the other jobs into line

2005 Prentice Hall Inc. All rights reserved.

1118

Wage Structure

Note: This shows overlapping wage classes and maximumminimum wage ranges.

2005 Prentice Hall Inc. All rights reserved.

1119

CTC
 The total expenditure company would incur to employ the employee  Includes monetary and non monetary benefits such as monthly pay, Accommodation, canteen facilities, telephone, medical reimbursements etc.

2005 Prentice Hall Inc. All rights reserved.

1120

Components of salary
 Basic salary  Allowances :  DA  HRA  Conveyance allowance  Reimbursements:  Meal Coupons  Mobile and Telephone bills  Medical reimbursements
2005 Prentice Hall Inc. All rights reserved. 1121

Contd
 Retirement benefits:  PF  Gratuity  Other Benefits and Perks  LTA  Medical allowance (health facilities)  Insurance  Miscellaneous benefits (servants, furnishings, company car etc.)
2005 Prentice Hall Inc. All rights reserved. 1122