COMPENSATION AND

REWARD
MANAGEMENT
Basic Factors in Determining Pay Rates
Employee Compensation: It refers to all forms of pay going to employees and arising from their
employment

Employee
Compensation

Direct Financial Indirect Financial

Payments like Payments like
wages, salaries, employer paid
incentives, insurance,
bonuses etc. vacations etc.
Ways to make direct financial payments
◦ Time based pay : Hourly wages, Daily Wages

◦ Performance based pay: In production depends on the number of pieces a

worker turns out.
Factors determining pay rates
◦ Legislations and acts such as companies act 1956, minimum wages act 1948

◦ Union and labor relation laws

◦ Strategic aims of the organization

◦ Geography of the organization

Aligning total rewards with strategy
◦ Compensation package should be aimed at aligning it with firm’s strategic
aims.

◦ The employer’s basic task:

◦ To create a bundle of rewards—a total reward package—that specifically

elicits the employee behaviors that the firm needs to support and achieve its
competitive strategy.

◦ The HR or compensation manager along with top management creates pay

policies that are consistent with the firm’s strategic aims.
Developing an aligned reward strategy
◦ Questions to ask

◦ What must the organization do, to be successful in fulfilling its mission or

achieving its desired competitive position?

◦ What are the employee behavior or actions necessary to successfully

implement the strategy?

◦ What compensation programs should be used to reinforce those

behaviors?

◦ What measurable requirements should each compensation program meet

to be deemed successful in fulfilling its purpose?
 Equity and its impact on pay rates
EQUITY THEORY OF MOTIVATION : People are strongly motivated to maintain a balance
between what they perceive as their input or contributions and their rewards.

With respect to compensation, Managers should address four forms of equity:

1. External Equity: Comparison of job rates among other organizations
2. Internal Equity: How fair job’s pay rate is when compared to other jobs in the same
company.
3. Individual Equity: Fairness of an individual’s pay as compared to what her co workers are
earning for the same or similar jobs
4. Procedural equity: Perceived fairness of the processes to make decisions regarding
allocation of pay

Is it important to address equity issues??

 Addressing Equity Issues
• External equity: Salary surveys

• Internal equity: Job analysis, job evaluation

• Individual equity: Performance appraisal and equity pay

• Procedural equity: Communication, grievance mechanism

and employee participation
Step 1: The Salary Survey
Uses of a salary
survey

Decide market price Make decisions

Benchmarking Jobs
wages for jobs about benefits
 Step 2: Determining worth of a job
Job Evaluation: Formal and systematic comparison of jobs to determine the worth of
one job relative to another.

PRINCIPLES OF
JOB EVALUATION

WORKING
SKILL EFFORT RESPONSIBILTY
CONDITIONS

Compensation Management specialist call these factors as compensable factors

Terminology

Key or Benchmark Jobs – jobs whose pay can be compared to

corresponding external jobs

Unique Jobs – jobs that have no external comparison

Job Evaluation Methods: Ranking Method
• Ranking each job relative to all other jobs, usually based on some overall
factor.
• Steps in job ranking:
1. Obtain job information: Job analysis is the first step. JD and JS are required to
obtain information about the job.
2. Select and group jobs: e.g. Clerical jobs or factory jobs
3. Select compensable factors: depending upon job difficulty
4. Rank jobs: Rank from highest to lowest ( each rater ranks the jobs)
5. Combine ratings: Using several raters rank the jobs independently and then
average the raters’ rankings
Ranking of jobs according to ranking
method
Ranking Order Salary

Chief Manager Rs. 2,00,000

Senior Manager Rs. 1, 50,000

Manager Rs. 1, 20,000

Assistant Manager Rs. 1,00,000

Senior Executive Rs. 60,000

Executive Rs. 40,000

Job Evaluation Methods: Job classification
• 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 classified by the amount or level of compensable factors they contain.
Job classification: Based on class of jobs

• Class I -Executives: Further classification under this category may be

Office manager, Deputy office manager, Office superintendent,
Departmental supervisor, etc.

• Class II -Skilled workers: Under this category may come the Purchasing
assistant, Cashier, Receipts clerk, etc.

• Class III -Semiskilled workers: Under this category may come Steno typists,
Machine-operators, Switchboard operators, etc.

• Class IV -Semiskilled workers: This category comprises File clerks, Office

boys, etc.
 Job evaluation method: point method
A quantitative technique that involves:

✓ Identifying several compensable factors ( skill , responsibility etc.) , each

having several degrees
✓ 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.
 Steps: point method
1. Determine cluster of jobs to be evaluated (clerical jobs, sales jobs etc.)
2. Collect job information through JD and JS
3. Select compensable factors like problem solving, physical requirement etc.
4. Define compensable factors: This is done to ensure consistency among job
evaluation committee members ( The top definition defines the factor)
5. Define Factor degrees
6. Determine relative values of factors
7. Assign point values to factors and degrees
8. Write job evaluation manual
9. Rate the jobs
Job Complexity: Refers to the amount of judgement, initiative, ingenuity and complex data
analysis that the job requires. To what extent does the person doing this job confront unfamiliar
problems, deal with complex decisions and have to exercise discretion?
Degree Job Complexity: Degree definitions

First

Second

Third

Fourth

Fifth
Relative value of factors

◦ For instance we choose following three factors important for a job

◦ Job complexity 100%

◦ Effort 85%

◦ Working Condition 60%

◦ Total percentage = 100+85+60= 245%

◦ Relative value :

◦ Job Complexity= 100/245= 40.8%

◦ Effort = 85/245= 34.7%

◦ Working Conditions = 60/245= 24.5%

 Point value to factors and degree

Suppose it is decided to use 500 points in the point plan. As decision making had 40.8%
therefore it will have total of 40.8*500 = 204 total points

First Degree Second Third degree Fourth Fifth degree

degree degree

Job 41 82 123 164 204

complexity

Effort 35 70 105 140 174

Working 24 48 72 96 123
Conditions

Once the manual is complete, raters can now evaluate the jobs using the manual. Each job is
evaluated based on JD and JS to determine the number of points. According to the point the
worth the job is decided.
 Pros
◦ Quantitative

◦ Easy to explain

◦ Minimized human judgement

Cons
o Difficult to develop
o Time consuming
o Expensive
o Not suitable for managerial jobs where work is not measurable in
quantitative terms
Job evaluation method: Factor method
▪ It is one of the most accurate, complex and a widely used job evaluation
method.
▪ It is a refinement of ranking method, however each job is ranked several times
depending upon different compensable factors
▪ For instance, jobs may be first ranked in terms of factor “skill”; “mental
requirement”; “responsibility” etc.
▪ Then these rankings are combined for each job into an overall numerical
rating for the job
 STEPS
◦ Step 1. Obtain job information : Careful Job analysis is required

◦ Step 2. Select key benchmark jobs (15-25): These jobs will be representative

benchmark jobs for full range of jobs

◦ Step 3. Rank key jobs by factor (on all five factors) i.e. mental, physical, skill

requirement, responsibility and working conditions

◦ Step 4. Distribute wage rates by factors : slightly tricky as the committee members

have to use their judgement and allocate wage rate

 STEPS
◦ Step 5. Rank key jobs according to wages assigned to each factor

◦ Step 6. Compare the two sets of rankings to screen out unusable key jobs

◦ Step 7. Construct the job-comparison scale

◦ Step 8. Use the job-comparison scale: Take a job and compare the factor

requirement and subsequently allocate wage

Ranking jobs by factors (Step 3)
Jobs Mental Physical Skill Responsibility Working
requirements requirements requirements Conditions

Welder 1 4 1 1 2
Crane 3 1 3 4 4
operator
Punch 2 3 2 2 3
press
operator
Security 4 2 4 3 1
Guard

Let us rate on a scale of 1-4 where 1 is high and 4 is low

 Ranking jobs by factors (Step 4)
Jobs Hourly Mental Physical Skill Responsibilit Working
Wage requireme requirement requiremen y Conditions
nts s ts

Welder 980 400 (1) 40 (4) 300 (1) 200 (1) 40 (2)
Crane 560 140(3) 200 (1) 180 (3) 20 (4) 20(4)
operator
Punch 600 160 (2) 130 (3) 200 (2) 80 (2) 30(3)
press
operator
Security 400 120 (4) 140 (2) 40 (4) 40 (3) 60 (1)
Guard

Judgmental allocation of wages. Then we rank the jobs according to the wage rates
Comparison of factor and wage ranking
Job Mental Physical Skill Responsibility Working
Requirement requirement Requirement Conditions
factor wage factor wage factor wage factor wage factor wage
Welder 1 1 4 4 1 1 1 1 2 2
Crane 3 3 1 1 3 3 4 4 4 4
Operator
Punch 2 2 3 3 2 2 2 2 3 3
press
operator
Security 4 4 2 2 4 4 3 3 1 1
Guard

Ranking of factor and wage should be similar, otherwise key jobs might be unusable
Construct a job comparison scale
wage Mental Physical Skill Responsibility Working
requirement requirement requirement conditions

20 Crane Crane
Operator Operator
30
40 Welder Sec Guard Sec Guard Welder
50
60 Security
guard
70
80 Punch press
operator
90
100
110
◦ Use the Job comparison Scale : Once the job comparison scale is made, other jobs

can be evaluated. For eg. we choose a job of an inspector and decide that the job

requires responsibility in between crane operator and security guard. Therefore with

the help of job comparison scale the wages can be evaluated.

Pros
◦ Accurate

◦ Systematic

◦ Quantifiable

Cons
o Complex
o Difficult
o Time consuming
Once the relative worth of each job is determined, the next task is to assign pay
rates to each job

A pay grade is generally comprised of jobs of approximately equal difficulty or importance

as established by job evaluation.
ESTABLISHING PAY RATES CONTINUED….
The next step is to assign pay rates to pay grades

Step 4. Price Each Pay Grade—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.

We plot pay rates on vertical axis and pay grades along the horizontal axis.
Plotting a wage curve
ESTABLISHING PAY RATES CONTINUED….
Step 5. Fine-Tune Pay Rates : Employers don’t pay same salary to employees from the
beginning of the service to long tenure. Thus, pay range seem to help
–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 jobs to maximum in the pay range

for their pay grade.

Rewards
Financial Rewards/
Transactional
Rewards

Base Pay Contingent Employee

Pay benefits
Transactional Rewards
◦ Base pay : The basic amount of money that someone is paid for doing a job, not including any
extra amounts such as overtime payments or bonuses.

◦ Contingent Pay ( variable pay): workplace arrangements where some or all of employees'
remuneration are dependent on some measure of performance

◦ Employee benefits: Over and above fixed and contingent pay. Includes statutory benefits
include Employees' Provident Fund; Employees' State Insurance Scheme; statutory
leaves; Gratuity; and Maternity Leave. Common employee perks include vehicle or
transportation allowance, meal vouchers or subsidized cafeteria, reimbursement of internet and
mobile phone charges.
 Relational rewards
Include non financial rewards

1. Work Itself: It includes the job characteristics

2. Work Experience: the experience an employee gains while working in a job, particular
field or profession
3. Recognition: Acknowledgement of an employee for exemplary performance.
4. Achievement: Accomplishment of an employee with great effort or skill
5. Personal Growth: Activities involving individual development
6. Work Environment : Comprise the setting in which employees work and impact
them