School of Management Studies , Cusat , Kochi

1. PowerPoint Presentation by Charlie Cook
The University of West Alabama
Chapter 11
Establishing
Strategic Pay Plans
Part Four | Compensation
Copyright © 2011 Pearson
Education, Inc. publishing as

2. Rewarding Employees: Four Aspects
•What to Pay (Internal vs. external equity)
•How to Pay (e.g., Piece rate, merit based, bonuses,
profit sharing, gain sharing, ESOPs, skill-based pay)
•What Benefits to Offer (e.g., Flexible benefits)
•How to Recognize Employees

3. • Paycheck India
• www.paycheck.in

4. • Minimum wages Act,1948
• Equal remuneration act
• Companies Act,1956- Executive compensation
not greater than 11% average company net
profit
• Employee provident Fund
• Gratuity- 4 yrs and 240 days
• Bonus Act

5. Practices at Google
Google culture based on the philosophy: “To create the happiest,
most productive workplace in the world”
Chief culture officer/ culture czar-Stacey Savids Sullivan-
To keep Googlers happy-Happiness survey
The most appreciated perk – Food !!!
150 feet from food rule

6. • money makes a significant
difference to the poor
(where basic needs are not
yet met), but has a greatly
diminished effect once one
reaches middle class
• One study found money
ceased to aid level of
happiness after a person
makes over US $75,000 a
year, and people
overestimate the influence
of wealth by 100%

7. Overview of Expectancy Theory- Vroom
Effort
Expectancy Instrumentality
Valence of
reward
Performance Reward
MOTIVATION
Role perceptions
and opportunities
Abilities
and traits
JOB
PERFORMANCE
X X

8. Equity Theory
Referent
Comparisons:
Self-inside
Self-outside
Other-inside
Other-outside

9. Equity Theory (cont’d)
E X H I B I T 6-7

10. Equity Theory: A Summary and Example-Adam
INEQUITABLE RELATIONSHIP
Andy is
overpaid
compared to Bill
Bill is
underpaid
compared to Andy
Bill’s outcomes
($25,000/year)
Bill’s inputs
(40 hours/week)
Andy’s outcomes
($30,000/year)
Andy’s inputs
(40 hour/week)
Andy feels guilty Bill feels angry
EQUITABLE RELATIONSHIP
Andy’s outcomes
($30,000/year)
Andy’s inputs
(40 hour/week)
Andy is equitably paid
compared to Bill
Bill’s outcomes
($30,000/year)
Bill’s inputs
(40 hours/week)
Bill is equitably paid
compared to Andy
Bill feels
satisfied
Andy feels
satisfied

11. Equity Theory (cont’d)

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11–12
Equity and Its Impact on Pay Rates
External
equity
Procedural
equity
Internal
equity
Individual
equity
Forms of Compensation
Equity

13. Sources of inequity
• Salary compression: Salary inequity problem
caused by inflation resulting in longer-term
employees in a position earning less than workers
entering the firm today
• Geographic differences in cost of living
• HRA
• City compensatory allowance
• Expatriate compensation –home country base
pay and allowances like relocation and hardship
allowance

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11–14
Addressing Equity Issues
Area wage and salary surveys
Job analysis and job evaluation
Performance appraisal and incentive pay
Communications, grievance mechanisms,
and employees’ participation
Methods to
Address Equity
Issues

15. • 7th Pay Commission: Modi Govt ready to
implement 'salary increment'
recommendations

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Establishing Pay Rates
1
2
3
4
5
Steps in Establishing Pay Rates
Determine the worth of each job in your organization through job
evaluation (to ensure internal equity).
Conduct a salary survey of what other employers are paying for
comparable jobs (to help ensure external equity).
Group similar jobs into pay grades.
Price each pay grade by using wave curves.
Fine-tune pay rates.

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Step1: The Salary Survey
To price
benchmark jobs
To make
decisions about
benefits
Uses for Salary Surveys
To market-price
wages for jobs

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Sources for Salary Surveys
Self-
Conducted
Surveys
Government
Agencies
Consulting
Firms
Sources of Wage and
Salary Information
Professional
Associations
The
Internet

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11–19
Step 2: Job Evaluation
Skills Effort Responsibility
Identifying Compensable Factors
Working
conditions

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How to Evaluate Jobs
Ranking
Job
classification
Point method
Methods for Evaluating Jobs
Factor
comparison

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Job Evaluation Methods: Ranking-
Qualitative
• Ranking each job relative to all other jobs,
usually based on some overall factor.
• Steps in job ranking:
1. Obtain job information.
2. Select and group jobs.
3. Select compensable factors/single factor
4. Rank jobs.
5. Combine ratings.

22. Compensable factors
• Skills, effort, responsibility and working
conditions-Equal pay act
• Know-how, problem solving and
accountability- Hay consulting firm

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TABLE 11–3 Job Ranking by Olympia Health Care
Ranking Order Annual Pay Scale
1. Office manager $43,000
2. Chief nurse 42,500
3. Bookkeeper 34,000
4. Nurse 32,500
5. Cook 31,000
6. Nurse’s aide 28,500
7. Orderly 25,500

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Job Evaluation Methods:
Job Classification/Job grading-
Qulaitative
• Raters categorize jobs into groups or classes
of jobs that are of roughly the same value for
pay purposes.
– Classes contain similar jobs.
• Administrative assistants
– Grades are jobs similar in difficulty but otherwise
different.
• Mechanics, welders, electricians, and machinists
– Jobs are classed by the amount or level of
compensable factors they contain.

25. US govt. compensable factors
• Difficulty and variety of work
• Supervision received and exercised
• Judgement exercised
• Originality required
• Nature and purpose of interpersonal work
relationships
• Responsibility
• Experience
• Knowledge required

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FIGURE 11–4 Example of a Grade Level Definition
This is a summary chart of the key grade level criteria for the GS-7 level of clerical and assistance work. Do
not use this chart alone for classification purposes; additional grade level criteria are in the Web-based
chart.

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Job Evaluation Methods: Point Method
• A quantitative technique that involves:
– Identifying the degree to which each compensable
factor is present in the job.
– Awarding points for each degree of each factor.
– Calculating a total point value for the job by
adding up the corresponding points for each
factor.

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FIGURE 11–A1 Sample Definitions of Five Factors Typically
Used in the Factor Comparison Method
1. Mental Requirements
Either the possession of and/or the active application of the following:
A. (inherent) Mental traits, such as intelligence, memory, reasoning, facility in verbal expression,
ability to get along with people, and imagination.
B. (acquired) General education, such as grammar and arithmetic; or general information as to sports, world events,
etc.
C. (acquired) Specialized knowledge, such as chemistry, engineering, accounting, advertising, etc.
2. Skill Requirements
A. (acquired) Facility in muscular coordination, as in operating machines, repetitive movements, careful
coordinations, dexterity, assembling, sorting, etc.
B. (acquired) Specific job knowledge necessary to the muscular coordination only; acquired by performance of the
work and not to be confused with general education or specialized knowledge.
It is very largely training in the interpretation of sensory impressions.
Examples
1. In operating an adding machine, the knowledge of which key to depress for a subtotal would be skill.
2. In automobile repair, the ability to determine the significance of a knock in the motor would be skill.
3. In hand-firing a boiler, the ability to determine from the appearance of the firebed how coal should be
shoveled over the surface would be skill.
3. Physical Requirements
A. Physical effort, such as sitting, standing, walking, climbing, pulling, lifting, etc.; both the amount exercised and the
degree of the continuity should be taken into account.
B. Physical status, such as age, height, weight, sex, strength, and eyesight.

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FIGURE 11–A1 Sample Definitions of Five Factors Typically
Used in the Factor Comparison Method (cont’d)
4. Responsibilities
A. For raw materials, processed materials, tools, equipment, and property.
B. For money or negotiable securities.
C. For profits or loss, savings or methods’ improvement.
D. For public contact.
E. For records.
F. For supervision.
1. Primarily the complexity of supervision given to subordinates; the number of subordinates is a secondary feature.
Planning, direction, coordination, instruction, control, and approval characterize this kind of supervision.
2. Also, the degree of supervision received. If Jobs A and B gave no supervision to subordinates,
but A received much closer immediate supervision than B, then B would be entitled to a higher rating than A in
the supervision factor.
To summarize the four degrees of supervision:
Highest degree—gives much—gets little
High degree—gives much—gets much
Low degree—gives none—gets little
Lowest degree—gives none—gets much
5. Working Conditions
A. Environmental influences such as atmosphere, ventilation, illumination, noise, congestion,
fellow workers, etc.
B. Hazards—from the work or its surroundings
C. Hours

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TABLE 11–A1 Ranking Key Jobs by Factors1
11 is high, 4 is low.
Mental
Requirements
Physical
Requirements
Skill
Requirements Responsibility
Working
Conditions
Welder 1 4 1 1 2
Crane operator 3 1 3 4 4
Punch press operator 2 3 2 2 3
Security guard 4 2 4 3 1

31. Group similar Jobs into paygrades
• A pay grade is comprised of jobs of
approximately equal difficulty

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• The Wage Curve
– Shows the pay rates paid for jobs in each pay
grade, relative to the points or rankings assigned
to each job or grade by the job evaluation.
– Shows the relationships between the value of the
job as determined by one of the job evaluation
methods and the current average pay rates for
your grades.

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FIGURE 11–5 Plotting a Wage Curve

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Step 5: Fine-Tune Pay Rates
• Developing Pay Ranges
– Flexibility in meeting external job market rates
– Easier for employees to move into higher pay grades
– Allows for rewarding performance differences and
seniority
• Correcting Out-of-Line Rates
– Raising underpaid jobs to the minimum of the rate
range
for their pay grade
– Freezing rates or cutting pay rates for overpaid (“red
circle”) jobs to maximum in the pay range for their
pay grade

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FIGURE 11–6 Wage Structure

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Special Topics in Compensation
• Broadbanding
– Consolidating salary grades and ranges into a few
wide levels or “bands,” each of which contains a
relatively wide range of jobs and salary levels.
– Pros and Cons
• More flexibility in assigning workers to different job grades
• Provides support for flatter hierarchies and teams
• Promotes skills learning and mobility
• Lack of permanence in job responsibilities can be
unsettling to new employees.

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Comparable Worth
• Concept:
– Employers should be required to pay men and
women equal wages for dissimilar jobs that are of
comparable (rather than strictly equal) value to
the employer.
• Basis:
– Seeks to address the issue that women have jobs
that are dissimilar to those of men and those jobs
are often consistently valued less than men’s jobs.
• Question at Hand:
– Who will get to make final decisions on the
comparability of jobs?
• Employers
• Courts

38. Buffer
• Social media company
• Formula to determine salaries
• Non-negotiable
• Posted online for anyone to see

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Pricing Managerial and Professional
Jobs
Base
pay
Executive
benefits/perks
Short-term
incentives
Long-term
incentives
Compensating Executives
and Managers

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HR in Practice:
Developing a Workable Pay Plan
• Simplified Approach:
– Conduct a wage survey
– Conduct a job evaluation
– Conduct once-a-year job
appraisals
– Compile the compensation
budget for upcoming year

41. Variable Pay Programs
Profit Sharing Plans
Organization-wide programs that distribute compensation
based on some established formula designed around a
company’s profitability
Gain Sharing
An incentive plan in which improvements in group
productivity determine the total amount of money that is
allocated.
Piece Rate Pay Plans
Workers are paid a fixed sum for each
unit of production completed.

42. Rewarding Employees
Employee Stock Ownership Plans (ESOPs)
Company-established benefit plans in which employees
acquire stock as part of their benefits.

43. Flexible Benefits
Flexible Spending Plans
Allow employees to use
their tax-free benefit dollars
to purchase benefits and
pay service premiums
Modular Plans
Predesigned benefits
packages for specific
groups of employees
Core-Plus Plans
A core of essential benefits
and a menu-like selection
of other benefit options
Employees tailor their
benefit program to
meet their personal
need by picking and
choosing from a menu
of benefit options.

44. Employee Recognition Programs
• Intrinsic rewards: Stimulate Intrinsic
Motivation
– Personal attention given to employee
– Approval and appreciation for a job well done
– Growing in popularity and usage
• Benefits of Programs
– Fulfill employees’ desire for recognition
– Inexpensive to implement
– Encourages repetition of desired behaviors
• Drawbacks of Programs
– Susceptible to manipulation by management

45. Executive Compensation
• Golden parachute- Vijay Mallya given Rs. 515
crores to exit United Spirits
• Infosys- 50 % increase to CEO and severance
packages ( Rajiv Bansal-17.38 Crore and David
Kennedy).

46. E X H I B I T 7–2
From the Wall Street Journal, October 21, 1997. Reprinted by permission of Cartoon Features Syndicate.