The document discusses compensation systems and employee behavior. It outlines the bases of traditional and modern pay systems. The traditional system bases pay on cost of living, seniority, and individual performance. The modern system uses variable pay based on business and individual/team performance. It emphasizes variable pay over base salary. The purpose of compensation is to attract talent, ensure equity, motivate staff, and reward valued behavior. Companies establish pay plans by linking compensation philosophy and activities to business goals, strategy, and objectives. The plans are periodically reevaluated.

1. Compensation and Employee
Behaviour: Part I
Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor
1

2. Bases for Traditional Pay System
Based on cost of living and labour market
Base wage or salary
Evenly distributed between employees
Correlated with seniority
Based on individual performance daily, weekly,
monthly
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3. Bases for Modern Pay System
Variable pay
Based on business performance
Differentiated
Based on individual performance
Based on team and organisational performance
Used as a means of communicating values
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4. Traditional Pay System
Sets pay levels in a narrow band with regular increase
May be 3 to 4 percent pay increase annually
Increases meant for promotions, merit, cost of living
Less distinction betn. merit & cost of living increase
 Most merit raises perceived as little more than cost
of living increases due to low levels (3 to 4 percent)
Often, it includes a set salary or wage, a set schedule
for merit increases, and a set benefits package
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5. Modern Pay System
It pays greater emphasis on variable pay
Base wage seen as job worth in open market,
merit pay - reward for results by employee each year
An employee can get a raise either by increasing his
job's value or by performing well
Some companies use three-way system to determine
annual increases:
- Did the employee accomplish his goals?
- Did the company reach its targets?
- Did the employee act in accordance with established
competencies for his job?
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6. Modern Pay System
Some companies create broader bands in salary
structures
In past, large companies had many salary levels in
each department, making it difficult for employees to
move to different jobs
Employees can seek more opportunities now without
penalty with 5 large bands, instead of 25 narrow bands
Incentives available, like bonuses, team based
incentives/gain sharing, profit sharing, quality
awards, stock purchase options, etc.
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7. Purpose of Compensation
Contribution based Ensure Equity
Remuneration
Attract talent
Co Effec
Administratively
m
Efficient Legal
pe tive
Institutionalized Compliance
ns
Processes
ati
on
Motivate &
Retain Staff Reward Valued
Behavior
Thursday, September 20, 2012 7

8. Establishing Pay Plans
Business Goals
Compensation
Compensation
Philosophy/ activities
Philosophy/ activities
CEO
serve Business
Business serve Business
Objectives
Strategy Objectives
Business Strategy – This defines the direction in which
organization is going in relation to its environment in order
to achieve its objectives.
Compensation Philosophy – Consists of a set of beliefs
which underpin the reward/compensation strategy of the
organization and govern the reward policies that determine
how reward processes operate
Thursday, September 20, 2012 8

9. Establishing Pay Plans
Compensation activities
Compensation activities
Business Goals serve Business Objectives
serve Business Objectives
CEO
Business Compensation strategy is
Compensation strategy is
Strategy periodically reevaluated and
periodically reevaluated and
the Compensation plan
the Compensation plan
periodically developed
periodically developed
Compensation
HR Head
Strategy
Org.Structure Non-Financial
Rewards
Compensation
Plan
Compensation Strategy – defines the intentions of the
organization on reward policies, processes and practices
required to ensure that it has the skilled, competent and
well-motivated workforce it needs to achieve its business
goals
Thursday, September 20, 2012 9

10. Establishing Pay Plans
Business Goals
Compensation
Compensation
activities serve
activities serve
CEO
Business Objectives
Business Business Objectives
Strategy
Compensation strategy
Compensation Compensation strategy
HR Head
is periodically
Strategy is periodically
reevaluated and the
reevaluated and the
Non-Financial
Org.Structure Compensation plan
Rewards Compensation plan
periodically developed
periodically developed
Compensation
Plan
 A strategic perspective on compensation takes the
position that how employees are compensated can
be a source of sustainable competitive advantage
Thursday, September 20, 2012 10

11. Establishing Pay Plans
Business Goals
Compensation
Compensation
activities serve
activities serve
CEO
Business Objectives
Business Business Objectives
Strategy
Compensation strategy
Compensation Compensation strategy
HR Head
is periodically
Strategy is periodically
reevaluated and the
reevaluated and the
Non-Financial
Org.Structure Compensation plan
Rewards Compensation plan
periodically developed
periodically developed
Compensation
Plan
C & B/S M
Performance Job Evaluation Market Surveys
Management
Unit Inputs
Pay levels /
structures Compensation
Contribution Compensation
Manager, along with
Employee
/outputs Manager, along with
team is responsible for
Total team is responsible for
carrying out
remuneration carrying out
compensation related
compensation related
activities
Performance activities
linked Pay
Individual Pay
Internal Equity External Equity
Thursday, September 20, 2012 11

12. Establishing Pay Plans
Compensation
Plan Design
Job Analysis
Job
Description
Market Wage Job
Survey Evaluation
Pay Structure
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13. Job Analysis
• Process to identify & determine particular job duties and
requirements
• Relative importance of duties
• Judgments are made about data collected on job
• Used in compensation to identify or determine:
•skill levels
•compensable job factors
•work environment
•responsibilities
•required level of education
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14. Job Description
- Output from job analysis used to develop job
description and its specification
- Summarize job analysis information in readable
format
- Provide basis for job-related actions
- Identify individual jobs by providing
documentation
- Identify tasks, duties and responsibilities of a job
- Describes what is done, why it is done , where it is
done, and how it is done .
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15. Job Evaluation
The methods and practices of ordering jobs or
positions with respect to their value or worth to
the organization.
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16. Market Wage Surveys
- Goal of market wage surveys is to find data from
employers with whom organization competes for
employees
- Data collected & analyzed
- Simplest analysis involves comparing going market
rate & approximating this rate within organization's
own pay structure
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17. Methods of Wage Surveys
Generally three methods are employed for
wage surveys;
• Personal Interviews
• Mailed Questionnaires
• Telephone Inquiries
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18. Pay Structure
-Basis for establishing pay plan is pay
structure
- Hierarchy of jobs with pay ranges and/or
rates assigned
- Pay structures designed so that greater the
worth of a job, higher the pay grade and range
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19. Objectives of Pay Plans
• Internal equity.
• External equity (or competitiveness),
• Individual equity,
• Process equity,
• Performance or productivity incentives,
• Maximum use of financial resources,
• Compliance with laws and regulations, and
• Administrative efficiency
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20. Aligning Compensation Strategy with HR
Strategy
HR Strategy Compensation Strategy
– Attract staff – Total reward approaches that help to make the
– Retain effective organisation a great place to work
performers –
– Support change Competitive pay structure that helps to retain high
management process quality employee
– Establish positive – Variable pay schemes that
corporate reputation contributes to the motivation of the people
– Administer reward
management to maximise – Performance management process that
positive impact promotes continuous improvement
– Enhance purchasing –
power of employees Performance management processes that identify
– Make Compensation learning needs and how they can be satisfied
package simple
– Develop human resources
– Career family
structure that defines knowledge and skills 20

21. Aligning Compensation Strategy with
Business Strategy
Business Strategy Compensation Strategy
– Achieving competitive advantage – Provide financial incentive/reward and
through innovation recognition for innovation
– Achieving competitive advantage – Link reward to quality performance
through quality
– Achieving competitive advantage – Review all reward practices to ensure
through low costs they provide value for money
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22. Seniority & Longevity Pay
Salary or wages based on seniority or length of service
with an organization
The greater the length of service, the greater the
longevity pay
It may also be used as a bonus for remaining on a job
beyond a certain period
These systems reward employees with periodic
additions to base pay according to employees’ length
of service in performing their jobs
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23. Design of Seniority Pay and Longevity
Pay Plans
Seniority Pay Longevity Pay
To reward job tenure or To reward employees who
employees’ time as have reached pay grade
members of a company maximum and who are not
explicitly through likely to move into higher
permanent increases to grades
base pay
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24. Advantages of Seniority Pay
To Employees To Employers
Perceive they are treated It facilitates the
fairly because they earn administration of pay
pay increases according to programs
seniority, which is an Employers are less likely
objective standard to offend employees by
showing favouritism to
others
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25. Fitting Seniority Pay with Competitive
Strategy
Seniority pay does not fit well with the imperatives of
competitive strategies because employees can count
on receiving same pay raises for average and
exemplary performance
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26. Thank you