External Competitiveness: Determining the Pay level<br />External competitiveness refers to the pay rates of an organization's jobs in relation to its competitors' pay rates.<br />“ External Competitiveness refers to the pay relationships among orgn’s – the orgn’s pay relative to its competitors”.<br /> Thus, unlike the concept of internal equity, external equity is concerned with relative pay rates among organizations. The conventional view is that the lower bound of a job‐specific pay rate is set by the labour market and the upper bound reflects product market competition.<br />
EXTERNAL COMPETITIVENESS IS EXPRESSED IN PRACTICE BY:<br /><ul><li>Selecting a pay level that is above, below or equal to competitors.</li></ul>[Pay level refers to the average of array of rates paid by an employer].<br /><ul><li> By considering the mix of pay forms relative to those of competitors.</li></ul>[Pay forms refer to the mix of various types of payments that make up total compensation]. <br />
PAY LEVEL AND MIX FOCUS ATTENTION ON TWO OBJECTIVES: <br />CONTROL LABOUR COSTS<br />ATTRACT AND RETAIN EMPLOYEES<br />
FACTORS SHAPING EXTERNAL COMPETITIVENESS<br />1. Labour Market Factors:<br /><ul><li>Nature of Demand
Nature of Supply</li></ul>2. Product Market Factors:<br /><ul><li>Degree of Competition
Level of Product Demand</li></ul>3. Organization Factors:<br /><ul><li>Industry, Strategy and Size
LABOUR DEMAND<br /><ul><li>The marginal product of labour is the additional output associated with the employment of one additional HR unit, with other production factors held constant.
The marginal revenue of labour is the additional revenue generated when the firm employs one additional unit of HRs, with other production factors held constant.</li></li></ul><li>CONSEQUENCES OF PAY LEVELS<br />CONTAINS OPERATING EXPENSES.<br /> INCREASE POOL OF QUALIFIED APPLICANTS.<br />INCREASE QUALITY AND EXPERIENCE.<br />REDUCE VOLUNTARY TURNOVER.<br />REDUCE PAY RELATED WORK STOPPAGES<br />.<br />COMPETITIVENESS OF TOTAL COMPETITION<br />
SALARY COMPRESSION<br />“Salary increases are necessary to attract and retain brightest and best”<br />
“Salary compression is an internal problem initiated by external market conditions and exacerbated by other factors”.<br />Two points of comparison are typically used to measure salary compression: salaries of junior employees versus<br />salaries of senior employees. When the salary differential between junior and senior employees is smaller than it should be (emphasis added), compression occurs. Further, because junior employees may be defined as those newly hired or newly promoted, salary compression can occur between ranks as well as within ranks.<br />
Pay Compression: What Is It?<br />Compression is when you have small differences in pay regardless of experience, skills, level, or seniority. You see this when the starting salaries for your new employees in a particular job title are too close to the wages of your existing workers. In really awful circumstances, the starting salaries might even exceed what your current employees are earning.<br />
Pay Compression: What Causes It?<br />There are two main causes of compression. The first is when supply and demand is out of sync, when the need for a particular skill set exceeds the availability. Nurses and software engineers come to mind as recent examples. The second cause can be when your internal compensation structure becomes stale and out of alignment with the external market data.<br />
How salary compression occurs?<br /> Pay imbalances can be caused in a professional services environment when firms need to find specialized talent - and must pay a high price for doing so. When staff come in at that higher rate, they may outpace even those at the level ahead of them.<br />Mergers are another instance that can create tension from salary compression, since it often happens that one merger firm‘s pay scales are just not as high as the other firm’s. And with the trend toward establishing non-partner track careers at many firms, there is likely to be a population of staff that "top out" in the pay ranges for their position if the firm can’t figure out other ways to reward these long-time staff.<br />
Pay freezes and reductions because of the recession can exacerbate the effects of salary compression. If your firm only gave raises to the stars this year, you need to look hard at salary compression issues. If the causes of compression are not addressed openly, and staff find out about pay differences, the situation can lead to emotional issues such as resentment, depression, and disengagement. Staff may feel their tenure and experience are not valued.<br />
Compression may also send the wrong message about performance. Even though a staff person may be a good worker, his or her salary may be eclipsed by a new hire or someone who comes in via a merger. It can also discourage staff from striving to excel if there’s not much incentive to advance. Another factor is that staff earning higher salaries may not respect their supervisors if they’re aware of salary compression<br />
Pay Compression: Consequences of Not Dealing With It<br />Productive employees whose salaries are compressed are likely to interpret the situation as the organization's lack of respect for their tenure, experience and contribution to the company.<br />The obvious problem with compression is the negative impact it has on the morale of your work force. <br />Jealousy among the employees will in increase.<br />They will feel they are of no importance to the organisation<br />
Pay Compression: How Do You Avoid It?<br />Forecast ahead and anticipate what your future hiring needs will be.<br /> Keep a regular eye on market changes by reviewing market surveys for your key positions and steadily adjust your pay ranges as needed.<br /> Usually annual is often enough, but your recruiters can give you early feedback on positions that are moving more quickly in the marketplace.<br /> Using job design as a tool may help reduce the number of positions that are influenced by compression, which won’t avoid it, but can limit its impact.<br />
PAY SECRECY<br />In simple terms it means keeping the salary secret among the employees.<br />
A policy of high secrecy about employee compensation is the norm in most companies,<br />though in most cases it is only communicated orally. The office grapevine ensures that<br />the message trickles down and the new employee understands from their boss and peers<br />not to inquire about others' salaries or volunteer details about his/her own compensation.<br />However, in some companies it is a formal policy.<br />
FOR<br />information to both parties involved. Organizations have been known to keep many secrets, namely manufacturing process, product formulas, new product research and market strategies. Moreover, many employees prefer to keep their paycheck details a secret because many people’s egos are tied to their paychecks.<br /> Pay secrecy diminishes the opportunity for comparison among employees, thereby reducing the organization’s exposure to perceived inequality.<br />
Even though they are perfectly justifiable, pay differences are complicated and difficult to explain, especially if people doing similar jobs are lined at different pay levels under different market conditions.<br /> Pay secrecy can prevent embarrassing situations by shielding underpaid and underperforming employees.<br />Managers enjoy more freedom in administering pay because the difference in pay need not be explained to others<br />
AGAINST<br />Open pay policies make good sense, especially for organizations in public sector units and top executives in government corporations.<br />Such pay policies open communication and build trust.<br /> In fact, some organizations believe that an open policy on a sensitive issue like pay makes employees believe that management can be trusted.<br />They are also perceived as fair and equitable employers.<br />
An employee's right to privacy needs to be balanced against his/her right to know.The right to the free flow of information includes the right to know what others in the organization earn.<br /> Pay secrecy is meant to prevent situations that are embarrassing to management. An open pay system drives the point home to employees that the management believes in fair and open policies. It also ensures instant corrective measures if inequalities creep in.<br /> Management believes that pay secrecy allows it to substitute favoritism for performance. Open pay policies do not just take power and control from the managers; they reduce office politics, resulting in merit getting rewarded more often.<br />
Maybe most importantly, pay secrecy camouflages the relationship between merit and pay raises. Unfortunately, when pay information is kept secret, employees often come to inaccurate conclusions. Further, those perceptions work against increasing Motivation. To maximize motivation, employees need to know how performance is defined, measured, and rewarded.<br />
COMPARABLE WORTH<br />Comparable worth is an extremely complicated social, political, and economic issue dealing with gender-related wage scales in the workplace. <br />Analogous to comparable worth is "equal pay for equal worth." This means that wage scales should be based on job evaluations and formulas that quantify or rate the "worth" of each job to the employer.<br />For egin a given company, a secretary (traditionally a job performed by women) and an electrician (a trade traditionally performed by men) would both merit equal pay if according to a rating formula the jobs were of equal worth to the employer. Jobs with equal ratings according to a worth evaluation formula should and must be paid equal wages. This is the crux of the comparable worth controversy.<br />
Proponents of comparable worth claim that this wage disparity is based on ages-old sex discrimination, and while the wage gap is generally narrowing, it is not narrowing fast enough.<br />Opponents of comparable worth, while readily acknowledging this wage disparity, argue that it is caused not by discrimination but rather by a combination of personal career-track decisions made by women, and natural and sustainable economic forces that should not be sacrificed on the altar of social engineering.<br />
JOB EVALUATION<br />“Job evaluation is a systematic and orderly process of determining the worth of a job in relation to other jobs.”<br />Edwin Flippo<br />“Job evaluation is a technique of assessing the worth of each job in comparison with all others throughout an organization.”<br />Maurice B. Cuming <br />
Objectives ….<br />Determine hierarchy & place the worth of each job.<br />Ensure fair & equitable wage structure.<br />Form a basis for fixing incentive & different bonus plans.<br />Provide a framework for periodic review of wages.<br />Ensure the competitiveness of the organization in the labour market.<br />Justify the existing pay structure to employees.<br />Provide a sound basis for merit or pay for performance systems.<br />Undergo organizational development in times of change.<br />
Issues of job evaluation<br /><ul><li> It is not concerned with the performance, potential or personal qualities of individual employees.
it is impersonal, concentrating on measuring work input rather than work output.
it promotes increase in number of grievances concerning wages.
it is susceptible bacause of human error & subjective judgement.
It leads to frequent & substancial changes in wages & salary structure.</li></li></ul><li>Job evaluation schemes simply accept that a job exists and then set out in various ways to measure the components of the job to which a grade or rank is assigned. There is really no attempt to critique the quality of the job and its contribution by asking:<br /> why does the job exist?<br /> should it exist?<br /> does it add value to jobs below it?<br /> is it making different decisions to the jobs above it?<br /> how is the specialist nature of the job assessed?<br />
Sometimes job evaluation forms part of a productivity deal, though it is hard to see just what the two things have in common. There are many instances where employees have literally been bribed to accept job evaluation in return for an increase in wages. This is typical of the confusion that exists between salary and job values.<br />
WHAT IS CTC?<br />CTC is a term used to describe an investment without return.<br />It can also be used to refer to the total cost that an organization is spending towards their employee including the Salary, Perks, Cost related to benefits, Cost related to hiring, Training, Retirals, Statutory Contributions etc.<br />
MEANS DIFFERENT FIGURES TO DIFFERENT PEOPLE.<br />For the Company, Cost to company is a term which essentially implies the amount of expenses the company will spend on an employee in a particular year. What may be an expense for the company need not necessarily be salary for the employee.<br />For employees, Cost to company is an amount projected by the company as salary but is never what is actually received by the employee in cash.<br />For the Finance Manager it is the total cost incurred to hire, maintain, retain the employees and may also include a part of overhead cost allocation.<br />
EXAMPLE…<br />CTC is a trick of a company and HR department, to show they are paying a big salary, but unfortunately it is just bubble.<br />Ex: salary is 6.00 lakhsp.a & Means ... you are getting 50,000/- per month. But actually person gets only 25,000/- per month<br />all other money is deducted for facilities.. Means we are paying for getting facilities, but company shows they are giving us good facilities in the organization.<br />
Thus, CTC is the amount that you cost your company. That is, it is the amount that the company spends – directly or indirectly – because of employing you.<br />Hence, it is the money given to you (your in-hand component), plus the money spent because of you.<br />
Difference Between CTC & Take Home Salary<br />Cost to company (CTC) is the total cost that an employee is incurring in a company. Gross Salary is the one which you see every month. But this is before any deductions. Net Salary is what an employee get to his/her hand after deductions<br />The relation between all three<br /> Gross = CTC - Other benefits<br /> Net = Gross - Deductions<br />
Components of CTC<br />Salary like Basic, DA, HRA, Allowances<br />Perquisites and Reimbursements given to employees (i.e.) - bonus, incentives, reimbursement of conveyance/medical/telephone/, benefits extended through various schemes like housing/vehicle/furniture/ Air-conditioners etc.<br />Contributions that the company makes for the employees like PF, Super Annuation, Gratuity, Medical Insurance, etc.<br />Reasonable estimates of Leave Encashment, Stock Option Plans and Non cash concessions <br />Tax Benefit on Stock Option plans only.<br />