Human Resource Management
EMPLOYEE COMPENSATION
Chapter 12
1
Strategic Compensation
• Compensation is one of the most important HRM functions.
• It can help to reinforce the organisation’s culture and key
values and facilitate the achievement of its strategic
business objectives.
• If there is any significant mismatch between compensation
and organisational strategy, it is likely to result in major
barriers to the achievement of strategic business objectives.
2
Compensation Philosophy
• An organisation’s general approach to compensation must
be consistent with its overall strategic business objectives.
• The HR manager must change the emphasis from
immediate questions - how much do we need to pay? How
should it be packaged? - to more strategic questions - what
does the organisation want in return for its pay? How can
compensation policies and practices achieve these
objectives?
• If an organisation’s stated objective is to attract, retain and
motivate the ‘best’ people in its industry, then it is pointless
to compensate employees at below-market rates.
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A Formal Compensation Policy Should:
• reflect the organisation’s strategic business
objectives and culture
• articulate the objectives that an organisation wants
to achieve via its compensation programs
• be communicated to all employees
• provide the foundation for designing and
implementing compensation and benefit programs.
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REWARDS
FINANCIAL
DIRECT
(cash)
•Wages
•Salaries
•Commissions
•Bonuses
INDIRECT
(benefits)
•Insurance
•Holidays
•Medical and
health
•Child care
•Employee
assistance
•Flexible work
schedule
NON-FINANCIAL
JOB
•Interesting
work
•Challenge
•Responsibility
•Recognition
•Advancement
ENVIRONMENT
•Good policies
and practices
•Competent
supervision
•Congenial
coworkers
•Safe and
healthy work
environment
•Fair treatment
Types of employee rewards
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Compensation Program Objectives
For the organisation
• Attract and keep the desired quality and mix of employees
• Motivate employees to continually improve their performance
and to strive to achieve the organisation’s strategic business
objectives
• Reinforce the key values and the desired organisational culture
• Drive and reinforce desired employee behaviour
• Ensure compensation is at the desired competitive level
• Ensure optimum value for each salary dollar spent.
• Comply with legal requirements
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Compensation Program Objectives
For the employee
• Give the employee equitable treatment
• Accurately measure and appropriately reward the
employee’s performance and contribution to the
achievement of the organisation’s strategic business
objectives
• Provide appropriate compensation changes based on
performance, promotion, transfer or changing
conditions
• Provide regular compensation and performance reviews
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Compensation Program Components
Inadequate compensation planning is characterised by:
• Failure to link compensation strategies to organisation’s
strategic business objectives
• A haphazard approach in the reward of performance
• Lack of control over salary costs
• Gross overpayment or underpayment
• Disjointed internal relationships, with junior positions being
paid more than senior positions (especially seniority rather than
performance is rewarded)
• The granting of salary increases on the ‘squeaky wheel’
principle, leading to further anomalies, dissatisfaction and demotivation among employees.
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A Systematic Compensation Program Should Include:
• job analysis - accurately identifies job duties and
responsibilities (job description) and the employee
characteristics needed to successfully perform the job (job
specification)
• job evaluation - accounts for each job’s relative value to the
organisation
• salary survey - establishes the overall competitive level of
salaries being paid compared with those of other organisations
• performance evaluation - determines the level of performance
of each employee
• pay for performance - relates pay increases to performance and
desired employee behaviour.
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Job Evaluation
• Job evaluation is a systematic method of
determining the worth to the organisation of each
job in relation to the worth of other jobs.
• It is concerned with ‘how big’/‘how small’ a job is.
• The aim is to ensure that jobs of different sizes are
paid proportionately different salaries.
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Job Evaluation Systems
JOB RANKING
• The evaluator ranks the jobs from ‘biggest’ to ‘smallest’.
Rank
1
2
3
4
5
6
7
8
9
Job
General manager
Marketing manager
Production manager
Accounting manager
Plant engineer
Accountant
Sales representative
Plant supervisor
Paymaster
Example of job
ranking
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Job Grading or Job Classification
• The first step is to use a number of job-related
factors such as education, experience and
responsibilities to determine classes/grades of job.
• Then to create generic or ‘benchmark’ job
descriptions for each grade or class. To establish
the relative worth of an individual job, the job is
compared with the benchmark description for each
of the grades or classes and is then assigned to the
appropriate one.
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Point System
• An approach to job evaluation in which numerical
values are assigned to specific job factors (i.e
education, experience, responsibility and working
conditions) and the sum of those values provides a
quantitative assessment of a job’s relative worth.
• Typically, each factor is divided into a number of
levels, each with a specific definition.
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Factor Comparison System
• The factor comparison system is a refinement of the ranking
and point systems, jobs are ranked as whole jobs..
• Job evaluation technique that involves comparing (ranking)
jobs on a range of factors such as known-how, education,
experience, responsibilities and working conditions, and
allocates points to quantify these factors.
• The basic principle is that all jobs should be compared and
evaluated independently against each of the job factors.
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‘Pre-packed’ or Proprietary Job Evaluation
Systems (commercially available)
• HayGroup
• Cullen Egan Dell
• Watson Wyatt
• Weighted job
questionnaire
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Which System?
• Objectives. What are the organisation’s strategic business
objectives in introducing job evaluation?
• Size of the organisation. The smaller the organisation, the
easier it is to use a simple system such as job grading.
• Organisational resources. Are the personnel and expertise
available to develop an internal plan?
• Plan users. Which organisations use which type of plans?
• Corporate culture. The job evaluation plan selected must
reflect the organisation’s culture.
• Employee attitudes. Perceptions of fairness
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Job Description
• A necessary prerequisite to the introduction of
any job evaluation scheme is a comprehensive
job description.
• ‘Ninety per cent of job descriptions are created
to justify the change in salary differentials,’
says Reddin.
• They are used as pseudo scientific means of
saying that this job is worth relatively more
than that job.
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Salary Surveys
• The salary survey is the vehicle for relating an
organisation’s salaries to those for similar jobs in
other organisations.
• Salary surveys are a key plank in the design of an
organisation’s compensation program.
Does the organisation want to compare itself with:
• organisations in the same or related industries?
• organisations in the same geographic area?
• ‘best practice’ companies?
• domestic companies?
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• multinationals?
Job Evaluation and Salary Survey
• Job evaluation determines the relative worth
of each job to the organisation - that is, job
evaluation is concerned with internal equity.
• The salary survey makes it possible to
assign appropriate salary ranges to each job
- that is, the salary survey helps to ensure
that external equity is achieved and
maintained.
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Salary Structure
• Presents all salary ranges over the whole spectrum of job
sizes.
• Job size is established by job evaluation and performance
is measured by employee appraisal.
• Once job sizes have been established, each job level is
given a salary range showing the minimum and maximum
salary to be paid.
• The salary structure presents all salary ranges over the
whole spectrum of job sizes and is an essential tool in
salary administration.
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Salary Line Or Curve
• The purpose of the salary line is to show
the relationship between the size of a job
and the average salary paid for it.
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Standard Range
• The most generally accepted salary range
for professional and managerial positions
is plus or minus 20 per cent from the
midpoint.
• The minimum may be $40,000, the
midpoint may be $50,000 and the
maximum may be $60,000.
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Broadbanding
• Broadbanding involves the clustering of numerous
individual pay grades into a few broad pay grades.
• The collapsing of multiple pay grades into fewer pay
grades creates much broader pay ranges.
• Broadbanding may be an attractive pay system for
organisations wanting to restructure and flatten, redefine
career paths and encourage personal growth through lateral
job movement - it can support both the new strategy and
culture.
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Market Posture
An organisation can adopt one of the 3
market postures:
• Pay above market average
• Pay market average
• Pay below market average
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Pay Secrecy
• Equity in compensation is a major concern of
employees. Where inequities are perceived to exist,
the impact on morale and motivation can be
devastating.
• Management can try to avoid this problem by
maintaining pay secrecy, especially in organisations
which do not have an objective and defensible
compensation program.
• However, research by Lawler suggests that secrecy
over pay can generate mistrust of the compensation
program, reduce employee motivation and inhibit the
organisation’s effectiveness.
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Pay Compression
• Pay compression occurs when employees feel that the
difference is too small between their pay and that of
other employees in jobs above or below them.
• Unions sometimes have industrial power to win large
pay increases for unskilled or semi-skilled employees,
producing pay rates which are better than those of
supervisors or employees performing jobs requiring far
more knowledge, skill and responsibility.
• Whatever its cause, pay compression generates
dissatisfaction and makes employees reluctant to acquire
new skills, competencies or knowledge or to strive for
promotion.
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Setting Pay Rates
SENIORITY
• Pay increases based on seniority are determined not by
performance but by the employee’s length of time on the
job.
Organisational membership, not individual achievement, is
the prime criterion for the allocation of pay increases.
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Pay-for-performance
(the use of merit increases)
• The objective ‘is to develop a productive, efficient,
effective organisation that enhances employee
motivation and performance’.
• A problem is that merit increases for outstanding
performance traditionally have not been much
greater than those for poor performance. Owing
to this, it has had little incentive value.
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Merit Plans Often Do Not Reward
Performance Because:
• employees fail to make the connection between
pay and performance
• other employees perceive the secrecy of the
reward as inequitable
• the size of the merit increase has little effect on
performance
• the performance evaluation system is inadequate.
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To Establish an Effective Pay-for-performance
or Merit Plan, Managers Need to Ensure That:
• the plan creates a link between reward and performance
• the plan provides fair and equitable compensation
• the plan reflects the organisation’s strategic business
objectives and culture
• the cost of the plan is consistent with the financial state
of the business
• the plan is based universally accepted criteria that
motivate employees to contribute to the achievement of
the the organisation’s objectives
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To Establish an Effective Pay-for-performance
or Merit Plan, Managers Need to Ensure That:
• the plan uses accurate performance appraisals which
have the confidence of employees and management
• there is a minimum time lapse between performance
appraisal and the pay increase
• there is effective feedback
• managers are trained in performance appraisal and the
administration of the merit plan
• the plan has top management and employee support
• employee reward needs are compatible with the plan and
the organisation’s compensation philosophy
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Skill-Based Pay
• Skill-based pay, or pay for competencies or
knowledge, compensates employees on the basis
of the job-related skills, competencies and
knowledge they possess.
• The purpose of this system is to motivate
employees to gain additional skills,
competencies and knowledge that will increase
their personal satisfaction and value to the
organisation.
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Advantages of Skill-based Pay System:
• It recognises the discrete job is becoming obsolete, given
technological change, downsizing, re-engineering, and
increasing teamwork. Rather than paying for the job,
companies must now pay people for their skills.
• It fits the strategic business focus on core competencies
• It gives management greater flexibility in rostering
• It gives employees additional job security, job mobility, and
the chance to increase earnings without being moved
permanently to a higher level job
• It allows for multiskilling, which reinforces a highinvolvement management style
• It results in a better trained work force
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Traditional versus Competency-Based Pay
TRADITIONAL PAY
Emphasises:
COMPETERNCY-BASED
PAY: Emphasises:
the 'what' of the job.
salary
The 'what' of the job, but also
includes 'how' the job is
performed.
the 'what' of the job
salary
increases
the 'how' and 'what' of the
job.
the 'results' of the job.
variable
pay
the 'results' of a job, but may
also include 'how' the job is
done.
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Relating Pay To Performance
• Compa Ratio or Salary Index
• Performance Index
• The Merit Grid
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Salary Increases
Merit Increase Size
• In most organisations, merit increases are a
composite of payments for merit, cost of
living and inflation.
• Whatever the figure, the merit increase must
be seen as significant by employees, or its
motivational impact will be negated.
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Promotional Increases
• A promotion involves a change to a bigger job with a
higher salary range.
General Adjustments
• If pay for performance is a compensation objective, then
across-the-board increases should be avoided.
Automatic Progression
• Automatic progression or incremental salary scales are
not concerned with relating salary increases to
performance and should be avoided.
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Blue And Red Circle Salaries
• Blue circle salaries are individual anomalies which are
adjusted because the salary is below the minimum of the
salary range, or within the salary range but considered too
low in relation to the employee’s performance and
experience.
• Increases to fix underpayment should not be given to
marginal or unsatisfactory employees unless the
organisation wishes to retain them for some special
reason.
• Red circle salaries are those above the range maximum
for the job. Generally, organisations do not cut such
salaries but rather freeze them until the salary range
moves up and can accommodate them.
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Salary Reviews
There are 3 main types of salary review.
1. Fixed-date reviews
The standard fixed-date review applies from 1 January
of each year.
2. Anniversary reviews
Salaries are reviewed at twelve-month intervals from
the employee’s date of hire.
3. Flexible-date reviews
These reviews generally operate within a time span of
nine to eighteen months, based on the employee’s
anniversary date of hire.
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