2. This Section Will Cover
⢠What is Compensation and Benefits?
⢠Why Compensation is paid?
⢠What are the constituents of
Compensation & Benefits?
⢠What determines compensation?
⢠What are the various methods of paying
compensation?
3. Compensation and Benefits
Compensation and benefits refer to the rewards a
firm provides to its employees in exchange for their
labor. E.g. Overtime pay, stock options, 401k
matches, pension plans, days off, and even free
lunches
Benefits cover indirect pay. E.g. health insurance,
stock options, or any myriad of things offered to
employees.
Two jobs that offer identical salaries may vary wildly in the
benefits category, making one a better financial proposition than
the other.
4. Difference Between
Compensation and Benefits
Compensation Benefits
Compensation is an umbrella term used
to describe anything that an employer
gives an employee in exchange for their
labor.
Benefits form a subset of compensation.
Compensation is a way for an
organization to attract the best talent.
Benefits are used as a means to
motivate employees to perform better.
Compensation can be monetary or non-
monetary.
Benefits are always non-monetary.
Compensation is a direct payment for
the work an employee performs at a
company.
Benefits are an indirect payment for
their work.
Compensation is usually fully taxable,
or a part of it can be exempt from
taxation.
Benefits can be tax-free or partially
exempted from taxation.
5. Reason for Paying Compensation
⢠To keep Employees Motivated
1.It is a hygiene factor (Herzbergâs Two
Factor Theory, Vroomâs Expectancy
Theory, Adamâs Equity Theory,
Organizational Justice, etc.)
⢠To attract the best talent
6. Organizational Justice and
Compensation
⢠Distributive Justice: refers to the perceived
fairness of the amount of compensation the
employee receives, Procedural justice: refers to
the perceived fairness of the means used to
determine those amounts
⢠Distributive justice and Procedural justice lead
to higher employee retention.
⢠Procedural justice is more important for
employee engagement & predicts employee
motivation (Research)
7. Components of Compensation
Plan
⢠Fixed Pay: basic salary plus other fixed components
⢠Variable Pay: additional compensation paid to employee
based on employeeâs performance, company
performance etc.
⢠Equity: are awarded shares of the company, often at a
discounted price
⢠Medical : includes the health insurance, free checkups,
medical facilities on campus etc.
⢠Insurance:
⢠Accommodation
8.
9. Basic = 40 % of gross pay
Rs. 41150 x 40%= Rs. 16460
This is rounded off to Rs. 16500
Supplementary Allowance/Other Allowances/ Special
Allowance: is the extra allowances in the salary after calculating
the employee basic wage, HRA, conveyance, & medical
allowances, etc. from gross salary.
Employers do not have any statutory obligation to pay it and
they cannot be used for tax exemption as well.
Supplementary allowances = Gross wage â (basic wage + house
rent allowances + conveyance allowances + medical
allowances, etc.)
Superannuation Benefits: a type of retirement pension
provided by a company to its employees.
It is basically a superannuation scheme designed for the welfare
of an organisationâs workers in the form of a pension plan.
10. Calculating Various
Components of Salary
Basic Pay:
⢠is a fixed amount paid to employees by their
employers in return for the work performed does not
include bonuses, benefits or any other compensation
from employers.
⢠is a fixed part of the compensation structure of an
employee and generally depends on her or her
designation.
If the appointment of an employee is made on a pay
scale, the basic salary may increase every year.
12. Calculating Various
Components of Salary
S
no
Earnings Deductions
1 Basic Wage (40-50% of Gross Wage)
EPF (12% of basic
wage)
2
HRA (30% of the basic wage for metro
cities & 15 % for nonmetro)
Professional Tax
3
Conveyance Allowances ( 1600 Rs in urban
areas)
TDS
4 Medical Allowances (1250 Rs)
Health Insurance /
TDS
5
Other(Special) Allowances (Balance
allowances)
13. Useful Salary Slip Information
1 Net salary Total Earnings â Total Deductions
2 Gross Wage
Basic wage + HRA + Conveyance + Medical +
Special allowances
3 EPF 12% of the basic wage of the employee.
4 ESI*
0.75% of employee gross wage. ( ESI applicable if
gross is upto 21,000âš)
5 CTC
Gross wage + Employer PF Contributions + Other
Benefits Given by Employer
* Discussed in next slide
14. ESI Calculation
The rates of the ESI contribution are
calculated on the wages paid.
Currently, the employee contribution is
0.75% of wages paid/payable, and employer
contribution is 3.25% of wages paid/payable.
15. ESI Calculation (Example)
Mr Hardeep with wages of Rs. 18,000 works
in a factory unit.
The contribution will be as follows:
Employee Contribution â 0.75%*18,000 = 135
Employer Contribution â 3.25%*18,000 = 585
So a total contribution of Rs. 720 will be
made
16. ESI Calculation
The onus of deducting the contribution and depositing the
same is on the employer.
The employer must deposit the amount within 15 days of the
end of the calendar month in which the deduction is made.
The same can be deposited online or to authorised designated
branches of SBI or other designated branches
The ESIC has facilitated the payment of ESI contributions
online via the payment gateway of 58 banks in addition to the
SBI.
The employees who receive a daily average wage of up to
Rs.176 are exempt from paying their share of contribution.
However, the employers will contribute their share in respect of
the employees having a wage of up to Rs.176 per day.
17. ESI
The ESI contributions cover the following benefits-
⢠Medical benefits
⢠Sickness benefit
⢠Maternity benefit
⢠Disablement benefit, including temporary
disablement benefit and permanent disablement
benefit
⢠Dependantâs benefit
⢠Funeral expenses
18. Understanding take home
salary
An organization guarantees a CTC of Rs. 8
lakhs. A bonus of Rs. 50,000 is paid for a FY.
Professional Tax is Rs. 2,400 a year.
Employee insurance is Rs. 3000. Calculate
the EPF deduction and the total take home
salary.
19. Understanding Take home
Salary
CTC= Rs. 8 lakh
The employer gives you a bonus of Rs. 50,000 for the financial year.
Gross salary = Rs. 7.5 lakh (Rs. 8 lakh â Rs. 50,000).
Professional tax= Rs. 2,400 a year (This is the professional tax in Delhi
for the present financial year).
EPF contribution= 12% of Rs. 15,000
(maximum salary limit of Rs. 15,000 per month, which is i.e Rs. 1,800 a
month or Rs. 21,600 a year. Now you have Rs. 21,600 as yearly
contribution made by the employee towards EPF and a similar
contribution of Rs. 21,600 made by the employer)
Deduct Employee Insurance= Rs. 3,000 deducted as .
Total deductions= Rs 2,400 + Rs 21,600 + Rs 21,600 + Rs 3,000 = Rs
48,600.
TAKE HOME SALARY= GROSS PAY â TOTAL DEDUCTIONS= Rs.
7,50,000 â Rs. 48,600 = Rs. 7,01,400
20. Preparing Salary Slip
M/s Alpha Ltd pays to its employees the salary on the basis of Basic
pay. The Gross salary of an employee consists of Basic Pay, Dearness
Pay (D.P) and House Rent Allowance (H.R.A). The components of
salary are computed according to the following terms of contract of
service:
Dearness Allowance is paid @10% of basic pay subject to a maximum of
Rs. 5400
HRA is computed as per the following scale:
Basic Pay HRA(Rs.)
Up to 10,000 5,000
From 10,001 to. 25,000 7,000
More than 25,000 9,000
Prepare payroll of the employee whose basic pay is Rs, 10,000/-, Rs.
25,000/-, Rs. 35,000
21. Preparing Salary Slip
M/s Alpha Ltd pays to its employees the salary on the basis of Category. The Gross salary
of an employee consists of Basic Salary + Dearness Pay + DA +HRA + TA+CCA. The GPF
and IT are the two Deductions. The components of salary are computed according to the
following terms of contract of service: Rules for payment of Basic Salary, TA, and CCA
are as under:
Category Basic Salary TA CCA
A 25000 5000 1000
B 20000 4000 800
C 15000 3000 500
Rules for payment of DP, DA, and HRA are as under:
DP 40% of Basic
DA 41% of (Basic +DP)
HRA 25% of (Basic +DP)
Rules for Deduction of GPF, and IT are as under:
GPF 12% of Gross
IT 8% of Gross
Contd..
22. Preparing Salary Slip
You are required to prepare a payroll statement for the financial year
2016-17 in the given format making maximum use of cell referencing
facility
Month Nam
e
Cat Is
HRA
is to
be
Paid
Basic DP DA HRA TA CCA Gross IT GPF Total
Ded
Net
24. What is Job
⢠Job is sum total of work performed by an
individual
⢠A âjobâ is a construct that relates elements
of what jobs are believed to consist of
(role, requirements and responsibilities) to
critical organizational outcomes.
⢠The idea of a job helps us understand how
organizations work
25. Job Evaluation
⢠Job evaluation is the process of comparing
a job against other jobs within the
organization to determine the appropriate
pay rate.
⢠Job evaluation takes place early in the
process of creating a compensation system
for the organization.
(Note: focus is the job, not the person doing
a job.)
26. Job Evaluation Methods
1. Internal Job Evaluation Methods
i. Quantitative Approach
a. Point Factor
b. Factor Comparison
c. Custom Factor Comparison
ii. Qualitative Approach
a. Job Ranking
b. Job Classification
2. External Job Evaluation Methods
a. Market Pricing
27. Job Evaluation Methods
Point Factor Method
⢠Are based on major core competencies that are
assigned points.
⢠Core competencies
â Know-How: Technical, Managerial, People Interaction
â Problem Solving: Thinking Environment and
Challenge
â Accountability: Freedom to Act, Magnitude, Impact
⢠Special charts and scales are used to calculate the
jobâs value. The compensation structure is
developed around points.
28. Point Factor Method
The most typical compensable factors are skill,
knowledge, responsibility, and working conditions.
30. Point Factor Method
Advantages:
⢠Because it has points that are quantifiable, it gives
the impression that itâs more accurate and defensible
⢠A total fixed score is determined that rates a job
higher or lower than another
Disadvantages:
⢠Requires that factors be defined
⢠Values need to be assigned to each factor
⢠Challenges are often made by employees/managers
as to why one job got rated higher or lower than
another
⢠Complex and resource intensive to administer
31. Paired Comparison
Job Title Job A Job B Job C Job D Total Score
Job A 0 0 0 0
Job B 0 1 1 2
Job C 0 0 1 1
Job D 1 1 1 3
32. Factor Comparison Method
This method is a combination of both ranking and
point methods in the sense that it rates jobs by
comparing them and makes analysis by breaking
jobs into compensable factors.
This system is usually used to evaluate white collar,
professional and managerial positions.
33. Factor Comparison Method
1. The key or benchmark jobs are selected as standards. The
key jobs selected should have standards contents, well
accepted pay rates in the community, and should consist of
a representative cross-section of all jobs that are being
evaluated-from the lowest to the highest paid job, from the
most important to the least importantâand cover the full
range of requirements of each factor, as agreed upon by a
Committee representing workers and management.
2. The factors common to all jobs are identified, selected and
defined precisely. The common factors to all jobs are
usually five, viz., mental requirements, physical
requirements, skill requirements, working conditions and
responsibility.
34. Factor Comparison Method
3. Once the key jobs are identified and also the
common factors are chosen, the key jobs are, then,
ranked in terms of the selected common factors.
4. The next step is to determine a fair and equitable
base rate (usually expressed on an hourly basis)
and, then, allocate this base rate among the five
common factors as mentioned earlier.
35. Factor Comparison Method
Key Jobs Base Rate
(Daily)
Mental
Require
ments
Physical
Require
ments
Skills Working
Conditio
ns
Responsi
bility
Electrician 60 13 12 5 12 18
Welder 50 10 19 5 4 12
Mechanist 80 25 5 23 24 3
Job: Toolmaker
Skills similar to electrician (5)
Mental Requirements similar to welder (10)
Physical requirements similar to electrician (12)
Working conditions to mechanist (24)
Responsibility similar to mechanist (3)
Daily Wage rate= Rs 54 (Rs. 5+ Rs 10+ Rs 12+ Rs 24 +Rs 3)
36. Factor Comparison Method
Merits
⢠It is more objective method of job evaluation.
⢠The method is flexible as there is no upper limit on
the rating of a factor.
⢠It is fairly easy method to explain to employees.
⢠The use of limited number of factors (usually five)
ensures less chances of overlapping and over-
weighting of factors.
⢠It facilitates determining the relative worth of
different jobs
37. Factor Comparison Method
Demerits
⢠It is expensive and time-consuming method.
⢠Using the same five factors for evaluating
jobs may not always be appropriate because
jobs differ across and within organisations.
⢠It is difficult to understand and operate.
38. Custom Factor Comparison
The custom factor comparison method is
specific to the organization, but it is time-
consuming to establish and maintain.
In addition, the organization must monitor
market rates to maintain the system's
integrity.
39. Qualitative Approach to Job
Evaluation
Qualitative approaches use observations or
descriptions to define jobs.
1.Job Ranking
2.Job Classification
40. Qualitative Approach to Job
Evaluation
Job Ranking (Simplest Method)
⢠Job ranking places jobs in a hierarchy of their value to the
company.
⢠The 'worth' of a job is usually based on judgements of skill, effort
(physical and mental), responsibility (supervisory and fiscal), and
working conditions.
⢠This method is best suited to smaller organizations that can
reduce the number of positions to be reviewed to no more than
100 specific jobs.
⢠Job ranking generates an estimate of the correct job hierarchy, not
the exact hierarchy found in the point-factor system.
⢠Job ranking should be facilitated by a skilled compensation
specialist who can address favoritism by managers and evaluate
other subjective input.
41. Qualitative Approach to Job
Evaluation
Job Ranking
Advantages
⢠Simple.
⢠Very effective when there are relatively few jobs to be evaluated
(less than 30).
Disadvantages
⢠Difficult to administer as the number of jobs increases.
⢠Rank judgements are subjective.
⢠Since there is no standard used for comparison, new jobs would
have to be compared with the existing jobs to determine its
appropriate rank. In essence, the ranking process would have to
be repeated each time a new job is added to the organization.
42. Qualitative Approach to Job
Evaluation
Description Example
Job families
Group of jobs that involve similar work and
require similar training, skills, knowledge, and
expertise. The family is based on function and
not on organizational structure. Career
progression is most often seen within the job
family.
Finance
Job function
Specific occupational area within a family. A
job function is a category of work that can be
grouped based on similar characteristics or
skills.
Accounting
Job
Collections of tasks, duties, and
responsibilities as defined in the job
description.
Jr. accountant
Sr. accountant
Accounting manager
Accounting director
Role
A role describes the part played by an
individual employee carrying out their work.
One job can have multiple roles.
Bill, Jr. accountant Jane,
Jr. accountant
43. Qualitative Approach to Job
Evaluation
Job steps Hierarchy Example job title
1 CEO, Managing director Chief Executive Officer
2 Other C-level executives Chief Operating Officer
3 President President manufacturing
4 Vice President (VP) Vice President HR
5 Director Director Consulting Services
6 Manager Sales manager
7 Team leader
Technical Support Team
Leader
8
Operator, associate,
representative
Customer success specialist
Job Classification on the basis of Hierarchy
44. Korn Ferry (Hay) Classification
System
⢠The Hay job classification system assigns points
to evaluate job components to determine the
relative value of a particular job to other jobs.
⢠Measures three components in all jobs:
â the knowledge required,
â the problem solving required, and
â the level of accountability.
⢠The Hay method compares the relative value of
comparable jobs to maintain parity across an
organization.
45. Korn Ferry (Hay) Classification
System
⢠For the purposes of larger organizations with many
departments and locations, union-represented jobs, and
organizations with hierarchical rigid pay or salary
grades and needed internal equity, a system such as Hay
is appropriate.
⢠An evaluator uses a job evaluation instrument or
questionnaire that is filled out by the department
requesting the job or evaluation. Trained to assign points
appropriately, the evaluator assigns points to determine
where to place a job in the job classification system. The
placement of the job determines the pay or the salary
grade within the organization's compensation system.
46. Korn Ferry (Hay) Classification
System
Accountability
Freedom to act: The degree of organizational
empowerment to take action and the guidance
provided to focus on decision-making.
Nature of impact: The nature of the jobâs impact and
influence on organizational results.
Magnitude (area of impact): The business
measure(s) the job is designed to positively impact
(measured on an annual basis, typically in financial
terms, to achieve consistency across jobs).
47. Korn Ferry (Hay) Classification
System
Know-how
To achieve the accountabilities of a job
requires âknow-howâ (or inputs), which is
the sum total of every capability or skill,
however acquired, needed for fully
competent job performance.
48. Korn Ferry (Hay) Classification
System
Know-how Dimensions
Practical/technical knowledge: Depth and breadth of technical
or specialized knowledge and skills needed to achieve desired
results.
Planning, organizing, and integrating (managerial)
knowledge: The requirement to undertake managerial functions,
such as planning, organizing, staffing, directing, and controlling
resources. This knowledge is applied in an integrated way to
ensure organizational results are achieved.
Communicating and influencing skills: The active requirement
for interpersonal skills that are needed for successful interaction
with individuals and groups, inside and outside the
organization.
49. Korn Ferry (Hay) Classification
System
Problem Solving
Problem solving measures the requirement
to use know-how conceptually, analytically,
and productively.
50. Korn Ferry (Hay) Classification
System
Problem Solving Dimensions
Thinking environment (freedom to think):
The jobâs context and the degree to which
problems and solutions are organizationally
guided and defined through strategy, policy,
precedents, procedures, and rules.
Thinking challenge: The nature of addressable
problems and the degree to which thinking is
required to arrive at solutions that add value.
51. External Job Evaluation Method
Market Pricing
⢠Market-pricing the external value of individual jobs
enables employers to create effective competitive pay
plans and allocate compensation costs wisely.
⢠The most common source for such market data is third-
party compensation surveys.
⢠Market pricing emphasizes external competitiveness;
however, employers may have insufficient or unreliable
market data for all the organization's jobs. Additionally,
an internal job evaluationâeven a simple approach,
such as rankingâis required to maintain internal equity.
53. Understanding Pay for Performance
(PFP)
Pay-for-performance (or performance related pay; PRP) schemes
are reward systems where some part (conceivably all) of an
employeeâs remuneration depends on an assessment of
performance against predetermined criteria (Armstrong, 2002).
The basic tenant of pay-for-performance (PFP) is that higher
performance is rewarded with higher pay.
One type of PFP strategy is bonuses, which are easy to hand out
and motivate employees to accomplish short-term goals.
PFP can be used with all types of employees and at all levels of
the organization, from CEOs to managers to entry-level workers.
54. Pros and Cons of Pay-for-Performance for
Nonexecutives
The Good The Not-so-Good
Considered best practice in the strategic HR
literature
Applicants may be more attracted to firms with
fixed compensation practices
Can attract and retain high performers to the
organization while encouraging low
performers to voluntarily leave
The presence of PFP leads to more voluntary
and involuntary turnover
Increases productivity and motivation for
individuals
Lower paid employees may experience feelings
of inequity, relative deprivation, and injustice
Bonuses are easily administered and linked to
short term performance goals
Unequal distribution of rewards can lead to
turnover in lower level managers
Without PFP, employees may be inclined to
shirk responsibility or free ride
May weed out high performers who avoid risk
PFP in managers may reduce underperforming
employees through involuntary turnover
Employees donât really consider short term
incentives when deciding to join or leave a
company
55. Piece Rate System
⢠Payment made on the basis of individual output
⢠Applicable only when output is observable and measurable and
output is directly correlated to individual output
⢠May encourage employees to work very fast, but may also
increase the number of errors made. Therefore, rewarding
employee performance minus errors might be more effective.
56. Individual Bonus
⢠Bonuses are one-time rewards that follow specific
accomplishments of employees.
⢠For example, an employee who reaches the quarterly goals set
for her may be rewarded with a lump sum bonus.
⢠Employee motivation resulting from a bonus is generally
related to the degree of advanced knowledge regarding bonus
specifics.
57. Merit Pay
⢠Merit pay involves giving employees a permanent pay raise based
on past performance.
⢠Companyâs performance appraisal system is used to determine
performance levels and the employees are awarded a raise, such as
a 2% increase in pay.
⢠Potential Problem: In companies that give annual merit raises
without a different raise for increases in cost of living, merit pay
ends up serving as a cost-of-living adjustment and creates a sense
of entitlement on the part of employees, with even low performers
expecting them.
⢠Making merit pay more effective depends on making it truly
dependent on performance and designing a relatively objective
appraisal system.
58. Sales Commission
⢠At times the paycheck of sales employees is a combination of a base
salary and commissions.
⢠Sales commissions involve rewarding sales employees with a
percentage of sales volume or profits generated.
⢠Sales commissions should be designed carefully to be consistent
with company objectives.
⢠Example:
⢠Employees who are heavily rewarded with commissions may neglect
customers who have a low probability of making a quick purchase.
⢠If only sales volume (as opposed to profitability) is rewarded, employees may
start discounting merchandise too heavily, or start neglecting existing
customers who require a lot of attention.
59. Team Bonuses
⢠In situations in which employees should cooperate with each
other and isolating employee performance is more difficult,
companies are increasingly resorting to tying employee pay to
team performance.
⢠Example: In 2007, Wal-Mart gave bonuses to around 80% of
their associates based on store performance.
⢠If employees have a reasonable ability to influence their teamâs
performance level, these programs may be effective.
60. Gain Sharing
⢠Gainsharing is a companywide program in which employees are
rewarded for performance gains compared to past performance.
⢠These gains may take the form of reducing labor costs compared to
estimates or reducing overall costs compared to past yearsâ figures.
These improvements are achieved through employee suggestions and
participation in management through employee committees.
⢠Example: Premium Standard Farms LLC, a meat processing plant,
instituted a gainsharing program in which employee-initiated changes
in production processes led to a savings of $300,000 a month. The
bonuses were close to $1,000 per person.
⢠These programs can be successful if the payout formula is generous,
employees can truly participate in the management of the company, and
if employees are able to communicate and execute their ideas.
61. Profit Sharing
⢠Involve sharing a percentage of company profits with all
employees.
⢠These programs are companywide incentives and are not very
effective in tying employee pay to individual effort, because
each employee will have a limited role in influencing company
profitability.
⢠At the same time, these programs may be more effective in
creating loyalty and commitment to the company by
recognizing all employees for their contributions throughout
the year.
62. Stock Options
⢠A stock option gives an employee the right, but not the
obligation, to purchase company stocks at a predetermined
price.
⢠Example: A company would commit to sell company stock to
employees or managers 2 years in the future at $30 per share. If
the companyâs actual stock price in 2 years is $60, employees
would make a profit by exercising their options at $30 and then
selling them in the stock market.
⢠The purpose of stock options is to align company and employee
interests by making employees owners.
63. Designing Pay for Performance
Added to Base
Not Added to Base
(a)
Merit Plans
(c)
Small group incentives
(b)
Piece Rates
Commissions
Bonuses
(d)
Profit sharing
Gain sharing
Bonuses
CONTRIBUTION
TO BASE
SALARY
LEVEL OF PERFORMANCE
Individual Group
64. Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Before you create your salary increase matrix, consider the following
as you determine your budget:
⢠What is the goal of your merit increase program?
⢠Does your organization pay below market, at market or above
market?
⢠If you are below market, do you want to make your organizationâs
compensation program more competitive?
⢠If you are at market, do you want to continue the status quo?
⢠If you are above market, are you trying to hold down salary
growth?
⢠What is your organizational philosophy toward excellent
performers? What about your substandard performers?
65. Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Once your merit increase budge is aligned with your compensation
philosophy and strategy, consider using one of the two approaches
outlined below in determining salary increases:
1. Broadband approach
2. Compa-ratio approach
66. Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Broadbanding
⢠is the combination of a number of related job classifications into
a single pay band, for which a broad range of compensation
levels is allowed.
⢠gives management a wider pay range within which to pay
employees.
⢠This approach tends to reduce the pressure for someone to be
promoted, since broadbanding allows a person to be paid more
without a promotion.
68. Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Calculating Salary of Assistant Prof. with Rs. 6000 AGP
1 Basic 15600
2 AGP 6000
3 Total (A) 21600
4 DA @ 167% of 21600 13176
5 HRA @ 30% Basic + AGP 6480
6 DA @167% on HRA 10821.60
7 Conveyance 3200
8 DA @ 167% on Conveyance 5344
9 Total (B) 60621.60
69. Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Compa-Ratio Approach
⢠A compa-ratio divides an individualâs pay rate by the midpoint of a
predetermined salary range.
⢠A compa-ratio of 1.0 means that the employee is paid at the exact
midpoint of the range, whereas values higher or lower than 1.0
indicate how they are paid relative to the midpoint.
Example:
If the midpoint of a salary range is $27,000, and an individual within
that range is paid $25,000, that individual is compensated at 94
percent of the midpoint (($25,000)/($27,000) = .94, or 94 percent). But
what does a .94 compa-ratio really tell us about how well this
employee is being compensated? Is this ratio appropriate for this
particular individual?
70. Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Salary Assessment through Compa-ratio
1. Assessing Individual Progression Through a Pay Range
One common use for a compa-ratio is determining where an employee
should fall on a standard pay range.
In many cases, institutions assign positions to a pay grade that has a
pre-defined minimum, maximum and midpoint.
A typical range of 80 percent to 120 percent is set around a midpoint
target for a given pay grade.
New or inexperienced employees are typically paid closer to 80
percent of the midpoint, whereas the most outstanding or longest-
tenured employees are paid more, up to the 120 percent end of the pay
range.
71. Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Salary Assessment through Compa-ratio
Benchmarking Your Institutionâs Salaries Against Market Salaries
You donât need a pay range as a basis for comparison to benefit from compa-
ratios â you could also compare your employeesâ salaries to appropriate
benchmarks from market data.
Comparing the salary of your chief compliance officer, for example, to the
median salary for institutions with the same classification or affiliation can
help you determine how your institutionâs pay compares to your peers. Is
your salary range competitive, or is it time to review your compensation
plan?
Low compa-ratios compared to the market might help you identify
inadequate pay as a contributing factor to high turnover, or to pinpoint
positions in which your institution is paying much higher salaries than are
necessary.
72. Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Salary Assessment through Compa-ratio
Identifying Areas of Inequity
Compa-ratios can compare salaries by any characteristic you choose,
including for a group of positions.
The average pay of one sub-group of employees can be divided by the
average pay of the larger category of employees to create a compa-
ratio that works the same as for individuals.
The possibilities are limited only by your goals.
Do administrative personnel in one unit get compensated less than
those in another unit on your campus for similar work? Are salaries
commensurate across gender or racial/ethnic groups within a position
or set of positions?
