HRMG 5000
Fall 2007
Compensation Management
Main Principles
Michel de Tymowski
TyM
Work
p. 1
Compensation management principles
 Compensation basic principles
 Job Evaluation
HRMG 5000
Fall 2007
 Pay for Performance
p. 2
HRMG 5000
Fall 2007
COMPENSATION BASIC PRINCIPLES
p. 3
Society
 Most employers believe that how people are paid
• affects people’s behaviors at work
• which affect an organization’s chances of success.
HRMG 5000
Fall 2007
Compensation systems can help an organization
achieve and sustain competitive advantage.
 Sometimes differences in compensation among
countries are listed as a cause of loss of jobs from
more developed, higher-wage economies to less
developed ones.
Therefore, understanding productivity differences
among international locations is crucial.
p. 4
Society
(cont’d)
 Some consumers may view increases in
compensation as the cause of price increases.
They may not believe that higher labor costs are
to their benefit.
HRMG 5000
Fall 2007
 Economic realities are relevant to compensation
management.
– an organization’s capacity to pay
– its industrial sector
– as well as geographic location
 are all key factors that must be considered.
p. 5
Society
(cont’d)
 An organization’s economic reality is not static
– Today’s decisions about compensation will have an
impact on the organization’s financial health for many
years and, generally, this impact is difficult to reverse.
HRMG 5000
Fall 2007
 Employees have varied needs and view them
differently
– The challenge for the organization therefore is to
adopt compensation policies and programs that
maximize employee motivation.
 Compensation is also status, both within the
organization and in society.
p. 6
Society
(cont’d)
 Supervisors consider it important to be paid
more than their subordinates, and on a different
basis.
HRMG 5000
Fall 2007
 The same applies to the various perquisites an
organization provides to certain employees.
– Often, what counts with such benefits is not their
monetary value but rather the prestige and status
they confer.
 Organization and individuals pursue different
objectives by means of compensation.
p. 7
Society
(cont’d)
 For the organization
– the exchange is designed to recruit and retain
the necessary labor, and to elicit employees
behavior that will enable it to fulfill its mission.
HRMG 5000
Fall 2007
 For individuals
– the objective may come down to satisfying
needs. These may differ considerably from one
individual to another and may also change with
time.
 Compensation is a contribution for the
organization, a reward for the individual.
p. 8
HRMG 5000
Fall 2007
The Elements of Compensation
p. 9
The Elements of Compensation
 Organizations regularly adjust pay. This
is done by taking into account many
factors, such as :
HRMG 5000
Fall 2007
– changes in the economy
– the amount of the changes made by other
organizations in the community or similar labor
market
– the organization’s ability to pay
– as well as any increase in an employee’s
performance or year of service
p. 10
Cash Compensation – Base
HRMG 5000
Fall 2007
 Base wage is the cash compensation that
an employer pays for the work
performed.
 Base wage tends to reflect the value of
the work or skills and generally ignores
differences attributable to individual
employees.
 The base wage represents the “no risk”
part of the total wage. The individual
performance will represent the “risky”
part by impacting the level of total wage.
p. 11
Cash Compensation – Merit Pay/COL adjustments
 Merit pay increases are given as increments to the base
pay in recognition of past work behavior.
– Some assessment of past performance is made, with
or without a formal performance evaluation program,
and the size of the increase is varied with
performance.
HRMG 5000
Fall 2007
– Thus, outstanding performers could receive an 5 to 7
percent merit increase 8 months after their last
increase,
– whereas an average performer may receive, say, a 2
to 3 percent increase after 12 or 15 months.
 In contrast to merit pay, cost-of-living adjustments give
the same percent increase across the board to
everyone, regardless of performance.
p. 12
Cash Compensation – Incentives
 Incentives tie pay increases directly to
performance
 However, incentives differ from merit
adjustments.
HRMG 5000
Fall 2007
– First, incentives do not increase the base wage, and so
must be re-earned each pay period.
– Second, the potential size of the incentive payment
will generally be known beforehand.
 Whereas merit pay programs evaluate
– past performance of an individual
– and then decide on the size of the increase
the performance objective for incentive
payments is called out very specifically ahead of
time.
p. 13
Cash Compensation – Incentives
 Incentives can be tied to :
–
–
–
–
the performance of an individual employee
a team of employees
a total business unit
or some combination of individual, team, and unit
HRMG 5000
Fall 2007
 The performance objective may be :
–
–
–
–
–
–
expense reduction
volume increases
customer satisfaction
revenue growth
return on investments
or increases in total shareholder value
 the possibilities are endless.
p. 14
HRMG 5000
Fall 2007
Compensation Management Model
p. 15
Policies
Four Policies
 Every employer must address the policy
decisions :
HRMG 5000
Fall 2007
–
–
–
–
(1)
(2)
(3)
(4)
internal alignment
external competitiveness
employee contributions, and
management of the pay system.
These policies are the foundation on which pay
systems are built. They also serve as guidelines for
managing pay in ways that accomplish the system’s
objectives.
p. 16
Policies - Internal Alignment
Internal Alignment
 Internal alignment refers to comparisons
HRMG 5000
Fall 2007
among jobs or skill levels inside a single
organization
 Jobs and people’s skills are compared in
terms of
their relative contributions to the
organization’s business objectives
p. 17
Policies - External Competitiveness
External Competitiveness
 External competitiveness refers to compensation
relationships external to the organization:
HRMG 5000
Fall 2007
– comparison with competitors.
 Increasingly, organizations claim their pay
systems are market-driven, that is, based almost
exclusively on what competitors pay
p. 18
Policies - External Competitiveness
Employee Contributions
– How much emphasis should there be on paying
for performance?
HRMG 5000
Fall 2007
– Should one programmer be paid differently from
another if one has better performance and/or
greater seniority?
– Or should there be a flat rate for programmers?
– Should the company share any profits with
employees?
– With all employees?
p. 19
Policies - Management
Management
HRMG 5000
Fall 2007
 Ensuring that the right people get the right pay
for achieving objectives in the right way. The
system will not achieve its objectives unless it is
properly managed.
•
Are we able to attract skilled workers?
•
Can we keep them? Do our employees believe our pay
system is fair?
•
Do they understand what is expected of them?
•
Do they understand how their pay is determined?
•
How do the better-performing firms, with better financial
returns and a larger share of the market, pay their
employees?
•
Are the systems used by these firms different from those
used by less successful firms?
•
How do our labor costs compare to those of our
competitors?
p. 20
Techniques - Internal Consistency
Internal Consistency
 An organization trying to ensure internal
consistency in compensation must :
HRMG 5000
Fall 2007
• first analyze and describe its jobs, then either
:
– evaluate the jobs
– do a competency & skill job assessment
– a maturity curve approach (applicable for certain
group of professionals)
p. 21
Techniques - Competitiveness
Competitiveness
 An organization interested in making its pay
competitive must first define its labor market
Domestic and international for senior
management).
HRMG 5000
Fall 2007
 Having selected the market or markets, the next
step is to collect information about the various
elements of compensation.
–
–
–
–
–
–
Base salary?
Total Cash?
Working time?
Time off?
Benefits?
Other perks and allowances?
 Once the survey or surveys have been done, the
organization must determine the level of
p. 22
compensation in relation to the market.
Techniques - Employee Contribution
Employee Contribution
HRMG 5000
Fall 2007
 An organization that wishes to recognize the
contribution of its employees may use
techniques and practices that vary according to
what contribution it wishes to emphasize
–
–
–
–
individual performance
group performance
years of services
training
 The organization must develop an employee
performance appraisal system and determine
criteria for measuring individual performance
p. 23
Market Sector
 Salary aggressiveness
HRMG 5000
Fall 2007
Salary levels
Financial/Trading
Pharma/Bio medical
Oil/Chemicals
Fast Consumer Goods
High Tech/Telecom
Industrial Goods
Services
+++++
++++
++++
++++
+++
++
++
p. 24
How to motivate employees
 To remunerate managers in a competitive
way based on their responsibilities as well as
their individual performance
HRMG 5000
Fall 2007
• Establish a coherent salary structure (external
equity)
• Create an internal equity within a competitive
market environment
• Establish a link between individual performance and
the job requirement
p. 25
Reward System
Reward System
Job Analysis
Benefits
Job Description
Managing Base
Pay
Job Evaluation
HRMG 5000
Fall 2007
Variable Pay
Recruitment
Selection & Hiring
Training & Dev’mt
Career planning
Working
conditions
Long-term
Incentives
Recognition
Awards
Perf. evaluation
HR Planning
p. 26
HRMG 5000
Fall 2007
JOB ANALYSIS
p. 27
Job Analysis
INTERNAL STRUCTURE
Job Based
Person Based
PURPOSE
HRMG 5000
Fall 2007
Collect, summarize
Work information
Job analysis
Job descriptions
Determine what
to value
Job Evaluation
Classes/Comp
factors
Assess value
Factor degrees
& weighting
Translate into
structure
Job-Based
structure
Skills
Competencies
p. 28
Writing Job Descriptions
 It is a written record of the duties and responsibilities
of a specific job compiled through job analysis
HRMG 5000
Fall 2007
 It consists of statements which identify and describe
the scope and contents of a job
 It provides an outline of the essential functions and
major duties of a job
 It does not describe all details of a job
p. 29
Writing Job Descriptions
HRMG 5000
Fall 2007
 Typical Problems with Job Descriptions
• Often poorly written, providing little guidance.
• Often not updated as job duties and specifications
change
• May violate the law by including specifications
unrelated to the job
• Job duties written in vague rather than specific terms
• Could limit the scope of the job-holder
• Could restrict ability to cope with change
• Creates significant administrative workload
• Not always linked to other HR activities or processes
but generally supervisors have a good feel for the job !
p. 30
HRMG 5000
Fall 2007
JOB EVALUATION
“Job evaluation is the process of arranging jobs
within an organization into a hierarchy based on
their relative requirements, so that employees are
paid in proposition to the requirements of their job.”
p. 31
Job Evaluation
 The Importance of Value Systems
Job evaluation
– means an assessment of the work, not the incumbent
– involves establishing a hierarchy of job based on requirements
HRMG 5000
Fall 2007
– to pay the incumbents of a position in proportion to the requirement
of their job, and not to determine pay levels or specific pay
differentials
– to create internal pay equity based on the various job requirements
– technical characteristics are less important than the use made of
them
– Success is measured by the results it achieves, not the method used
p. 32
What Approach?
INTERNAL STRUCTURE
Job Based
Person Based
HRMG 5000
Fall 2007
Skills
Job Ranking
General ranking
Paired ranking
Classification
Job-to-predetermined- standard comparison
Job Slotting
Market Pricing
Competencies
Job to Job
Comparison
Qualitative driven
Reporting basis
Based on external competitive salary data
Quantitative driven
Point Method
Job-to-factor Evaluation
p. 33
Job Evaluation Alternatives
Less Complexity
Strengths
CLASSIFICATION
MARKET PRICING
AND SLOTTING
Greater Complexity
POINT FACTOR
COMPETENCYBASED
Jobs ranked using
general criteria of worth
to Company (e.g.,
importance or
complexity)
Grades/bands defined
through description of
roles and major
accountabilities; jobs
assigned to grades/
bands
Market rates established
for benchmark jobs; nonbenchmark jobs slotted in
salary structure based on
defined process
Point assigned to jobs
based on factors, levels
and factor weights
Jobs grouped according
to behaviors, skills and
knowledge required for
success
Simple
Easy to explain
Closely tied to market
values
Captures organizational
values
Easy to communicate
Easy to modify
Can compare jobs across
functions if criteria are
broadly pertinent
Easy to maintain
Adaptable to job families
Credible
Easy to communicate
Potential for bias
Limitations
HRMG 5000
Fall 2007
Description
JOB RANKING
ALTERNATIVES
May over-emphasize a
single factor
May be viewed
negatively if seen as
defining ŅvalueÓ to
Company
Is perceived to be
objective and consistent
Unusual jobs may need
to be ŅforcedÓ into
definition
Interpretation needed to
slot jobs
Considerable effort
required to develop
factors
May be viewed as
discretionary unless
definitions are clear and
specific
Difficult in fast-changing
market
Much effort to administer
and implement
Requires good market
data
Single program may not
be effective in all
divisions/job families
May not be effective
unless institution focuses
on ŅrolesÓ versus ŅjobsÓ
Strong basis for other HR
programs
Much effort to develop
and implement
Requires training
infrastructure
Most appropriate in
organizations where
peopleÕs capabilities
define their job (e.g.,
consulting)
p. 34
What Approach?
HRMG 5000
Fall 2007
 Market Pricing
•
Uses the labor market to determine the value of jobs
•
Readily comprehensive
•
Easily applicable
•
Simple
Issues
•
Overlooks the question of internal pay equity
•
Hierarchy is based solely on market price
•
Ignores the fact that pay is only one component of compensation
•
Does not consider the specific characteristics of organizations
p. 35
What Approach?
 Market Pricing (continued)
• Structure developed on competitive market practices
• Based on market surveys
• The competitive market data drives the salary structure
50 ’000
40 ’000
Euro
HRMG 5000
Fall 2007
Compagny XYZ
30 ’000
20 ’000
5
6
7
8
9
10 11 12 13 14 15
Grades
p. 36
What Approach?
 Job Slotting
• structured around the organization chart
• Job positioned following the organization charts
• Usually defined by departments/type of activities
30 ’000
20 ’000
Marketing
40 ’000
Euro
Euro
HRMG 5000
Fall 2007
40 ’000
Finance
30 ’000
20 ’000
p. 37
What Approach?
 Point Method
• Classical position evaluation (Hay type)
– Position profile/responsibilities & challenge
• Computer aided job evaluation
HRMG 5000
Fall 2007
– Multiple choice questionnaire approach based on weighted
factors
• Mix evaluation
– Similar to the classical evaluation plus individual skills &
competencies
• Competency evaluation
– Individual profile (competencies, aptitudes, and know-how)
p. 38
Classical Evaluation (Hay type)
• Based on the profile, responsibilities & challenge of the
position
HRMG 5000
Fall 2007
• Job descriptions essential for the exercise
• Structured around factors such as:
Know-How
– Education, experience, management responsibilities,
supervision/motivation of subordinates/employees
Problem Solving
– Challenge and thinking environment
Accountabilities
– Freedom of action and accountabilities on
revenues/budgets
p. 39
Classical Evaluation (Hay type)
• Assigns point values based on compensable factors.
• Each job receives a total point value, and relative worth
can be compared.
HRMG 5000
Fall 2007
• Is also known as Hay plans, from the consulting
company at the origin of this method
p. 40
Computer aided evaluation (NetComp)
• Based on the profile/responsibilities & challenge of the
position evaluated through a defined position
questionnaire (multiple choice)
• Structured around factors such as:
– Know-How (education, experience, international
HRMG 5000
Fall 2007
dimension)
–
–
–
–
–
Communication (internal & external to the organization)
Dimension (revenue/budget, number of employees)
Effectiveness (reporting, contribution et impact of error)
Leadership (level of decision and management)
Challenge (level of autonomy, creativity and working
environment)
p. 41
Reward System
Reward System
Developing a
Salary Structure
Job Analysis
Benefits
Job Description
Managing Base
Pay
Jpb Evaluation
HRMG 5000
Fall 2007
Variable Pay
Recruitment
Selection & Hiring
Training & Dev’mt
Career planning
Working
conditions
Long term
Incentives
Recognition
Awards
Perf. evaluation
HR Planning
p. 42
Some Definitions
 External competitiveness
• The pay relationships among organizations - the
organization’s pay relative to its competitors
 Salary Structure
HRMG 5000
Fall 2007
• Refers to the range of pay rates for different jobs within
a single organization
 Pay Level
• The average of the array of rates paid by the employer
 Pay Forms
• The various types of payments, or pay mix, that make
up total compensation
p. 43
Pay Mix
 Different Mixes
HRMG 5000
Fall 2007
Base
Options
Bonus
Benefits
Base
Options
Bonus
Benefits
p. 44
Pay-Mix Policy Alternatives
Market Match
Performance Driven
Base
Options
Bonus
Benefits
Base
Options
Bonus
Benefits
Security
HRMG 5000
Fall 2007
Work/Life Balance
Base
Options
Bonus
Benefits
Base
Options
Bonus
Benefits
p. 45
Pay Mix and Structure
Pay Mix varies within the Structure
Internal Job Structure
100%
75%
50%
HRMG 5000
Fall 2007
25%
0%
Entry
Level
Mid-Level
Manager
Executive
Base Salary
Cash Incentive
Stock Incentive
p. 46
Factors Influencing Pay levels
Business Sector
Legislation
Labor Supply &
Demand
HRMG 5000
Fall 2007
Location
Size
Market productivity
Market
Pay Levels
p. 47
Factors Influencing Organization Comp Policy
Business Strategy
Union Influence
Prestige & Tradition
HRMG 5000
Fall 2007
Other HR mgmt
policies &
practices
Capacity to Pay
Compensation factors
The Organization
Compensation
Policy:
-Lead
-Lag
-Follow
Competition
p. 48
The Pay Model
 Three important contributions to keep in mind
HRMG 5000
Fall 2007
• There is no “going rate” and so managers make
conscious pay level and mix decisions influences by
several factors
• There are both product market and labor market
competitors that impact the pay level and mix
decisions
• Alternative pay level and mix decisions have
different consequences
p. 49
Salary Structure
 Over engineered structure
• Rigid
• Heavy administrative burden
• Sometimes inefficient
HRMG 5000
Fall 2007
 Simple structure
•
•
•
•
Easily adaptable
Flexible
Suitable for small organization
Can easily be manipulated
 Find the right mix
p. 50
Structure Approach
 Corporate structure for Worldwide Mgmt
HRMG 5000
Fall 2007
•
•
•
•
•
Employee rotations within countries/regions
Many senior positions compete at international level
Facilitate transfer/expatriate policy design
Facilitate management incentive design
Ease-up perquisites and benefits implementation
 More local structure for professional, sales
and mainstream employees
• Better data at local level
• Better local understanding of the job content
p. 51
What Criteria to be used to Evaluate the
Management
 To remunerate managers in a competitive
way based on their responsibilities as well as
their individual performance
HRMG 5000
Fall 2007
• Establish a coherent salary structure (external
equity)
• Create an internal equity within a competitive
market environment
• Establish a link between individual performance and
the job requirement
p. 52
Development of a Salary Structure
Points
Accountant
125
Mktg assistant
158
Financial Analyst
210
Project Mgr
250
Product Mgr
300
IT Director
335
HR Director
380
Finance& Admin Dir.
420
HRMG 5000
Fall 2007
Position
market value
23,000
25,000
28,000
35,000
41300
46,960
53,900
59,200
Development of a
salary structure
Grade
5
6
7
8
9
10
11
12
regression
22,700
26,900
29,100
34,900
40,500
45,900
54,600
60,700
120
160
200
240
280
320
360
400
min
18,000
20,700
23 805
27,376
31 482
36,200
41,635
47 880
Analysis of
evaluated jobs
against
competitive
market values.
midpoint
22 500
25,900
29,800
34,200
39 400
45 300
52,000
59 900
max
27 000
31 050
35 710
41 060
47 220
56 570
65 050
74 810
p. 53
Percentiles
Sample
14
9
7
5
3
2
1
Q1
1/3
MEDIAN
Q3
2/3
D1
D9
10%
10%
50%
25%
25%
80%
HRMG 5000
Fall 2007
25 ile
Median
Mean
75 ile
90 ile
2.5
5
5.9
8
11
33%
33%
33%
100%
Terminologies :
ABS
ATR
D1
Q1
Md
Avg
Q3
D9
Annual Base Salary
Annual Total Remuneration
lower decile (= 10th ile)
first or lower decile (25th ile)
median
Average/mean
Third or upper quartile (75th ile)
upper decile (90th ile)
p. 54
Salary Curve
Salary Structure
60 000
50 000
40 000
$
Smooth
Actual
HRMG 5000
Fall 2007
30 000
20 000
0
200
400
600
800
Points/Grade
p. 55
Development of a Salary Structure
 Salary Structure
50 ’000
Compagny XYZ
Euro
HRMG 5000
Fall 2007
40 ’000
30 ’000
20 ’000
5
6
7
8
9
10 11 12 13 14 15
Grades
p. 56
Min, Max, Range: Spread & Overlap
 Set pay ranges
• Determine minimum and maximum compensation for
each grade.
HRMG 5000
Fall 2007
• Determine the spread for each grade
• Set the overlap between pay ranges.
p. 57
Min, Max, Range: Example
Range
Overlap
Max
Range
Sprea
d
Midpoint
Spread
Midpoint
50 ’000
Min
40 ’000
Euro
HRMG 5000
Fall 2007
Compagny XYZ
30 ’000
20 ’000
5
6
7
8
9
10 11 12 13 14 15
Grades
p. 58
HRMG 5000
Fall 2007
Pay for Performance
p. 59
Employees Performance
 Three general factors driving employees
performance :
• Skills & ability to perform task
HRMG 5000
Fall 2007
• Knowledge of facts, rules, principles and procedures
• Motivation to perform
p. 60
Does Compensation Motivate Behavior?
Person Characteristics
Preferred reward Characteristics
Materialistic
Relatively more concerned about pay level
Low self-esteem
little
Want large decentralized organization with
HRMG 5000
Fall 2007
pay for performance
Risk takers
Want more pay-based on performance
Risk averse
Want less performance-based pay
Individualists
performance,
Want pay plans based on individual
not group performance
p. 61
What is expected from a Reward System
 Rewards must :
• Help organizations attract and retain employees
HRMG 5000
Fall 2007
• Must make high performance an attractive option
for employees
• Must encourage employees to built new skills and
gradually foster commitment to the organization
p. 62
Merit Pay
Merit Increase Matrix
Overall Salary increase budget 2006
Country : France
Average market increase :
:
Cost-of-living
:
Merit increase
3.0%
1.5%
.
1.5%
Pay positioning
Pop.
Distrib.
P10
2006/07
Q1
Q3
P90
HRMG 5000
Fall 2007
P
8%
>>>>
E
R
A
5.0%
-
5.8%
4.2%
-
5.0%
3.8%
-
5.0%
3.0%
-
3.8%
B
4.2%
-
5.0%
3.8%
-
5.0%
3.4%
-
3.8%
2.6%
-
3.0%
C
3.4%
-
3.8%
3.0%
-
3.1%
2.8%
-
3.0%
0.7%
-
0.9%
D
0.4%
-
0.5%
0.2%
-
0.3%
0.0%
-
0.0%
0.0%
-
0.0%
F
37%
>>>>
44%
>>>>
O
R
M
L
V
11%
>>>>
L
p. 63