HUMAN RESOURCE
MANAGEMENT
COMPENSATION
MANAGEMENT
CHAPTER NO. 8
AFTER STUDYING THIS CHAPTER YOU SHOULD BE ABLE TO:
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Understand and differentiate between performance management
and performance appraisal.
Identify the factors that effect performance.
Narrate performance management cycle.
Describe two major purposes of performance management.
Understand three job criteria and information types.
Discuss the pros and cons of using different raters to appraise a
person’s performance .
Develop, Evaluate, and administer at least four appraisal
methods to measure performance
Explain several rater errors by giving examples of them.
Perform an effective appraisal interview.
Design Appraisal form to measure employee performance
effectively.
WHAT IS COMPENSATION
COMPENSATION
Compensation is what employee receives in exchange for
their contribution to the organization.
WHAT IS COMPENSATION
MANAGEMENT
COMPENSATION
MANAGEMENT
Compensation management help the
organization to obtain, maintain and
retain a productive Workforce.
OBJECTIVES OF
COMPENSATION MANAGEMENT
 Legal compliance with all appropriate laws and regulations.
 Cost effectiveness for the organization.
 Internal, external, and individual equity for employees.
 Performance enhancement for the organization.
TYPES OF COMPENSATION
Types of
Compensation
1. Intrinsic
Compensation
2. Extrinsic
Compensation
TYPES OF COMPENSATION Cont . . .
1. INTRINSIC
COMPENSATION
Rewards once receives from
job itself such as pride in
One’s work, a feeling of
accomplishment, or being a
part of a team.
2. EXTRINSIC
COMPENSATION
Rewards one gets from
employer usually money, a
promotion or benefits
FINANCIAL Vs. NON
FINANCIAL REWARDS
Individual
Financial
Rewards
Group
Organization Wide
Non
Financial
Rewards
Fringe Benefits
TYPES OF VARIABLE PAY PLANS
 Piece Rate
 Sales Commissions
 Bonuses
 Special Recognition
INDIVIDUAL
ORGANIZATION
WIDE
 Profit Sharing
 Employee Stock Options
 Executive Stock Options
GROUP
 Gain Sharing
 Labor Cost Reduction
PHASE WISE MODEL OF
COMPENSATION MANAGEMENT
Phase 1
Identity and Study jobs
Job Analysis
Position Description
Phase 2
Internal Equity
Job Standard
Job Evaluation
Job Ranking
Phase 3
External Equity
Dept. Of Labor
Job Description
Job Grading
Factor Comparison
Point System
Salary & Wages Survey
Employee Associations Professional Association Self Conducted Survey
Phase 4
Matching Internal and
External Work
Pricing Job
Job Evaluation Worth Match Rate & Range for Each Job
Labor Market Worth
PHASE WISE MODEL OF
COMPENSATION MANAGEMENT
Job Analysis
Position
Description
Job
Description
Job
Standard
Phase 1
Identity and
Study jobs
JOB ANALYSIS
JOB ANALYSIS
A Systematic way of gathering and analyzing
information about the Content, Context, and
the Human Requirements of jobs for the
purpose of developing Job description, Job
specification & Job evaluation.
PHASE WISE MODEL OF
COMPENSATION MANAGEMENT
Job Evaluation
Job
Ranking
Job
Grading
Factor
Comparison
Point
System
Phase 2
Internal
Equity
JOB EVALUATION
Systematically determining the relative
worth of the jobs to create job structure.
Or
Determining the worth of job for reward,
benefits & compensation system.
JOB EVALUATION METHODS
1. Job Ranking
Method
4. Point System
2. Job Grading /
Classification
Method
3. Factor
Comparison
Method
1. JOB RANKING METHOD
DEFINITION
Arrangement of job in a simple rank order form
highest to lowest or form lowest to highest.
Raters examine the JD of the each job.
Arrange in order according to value.
e.g. starting from lowest
to highest
 Janitor ranked 1
 Secretary gets 2
 Office manager gets 3
2. JOB GRADING METHOD
Assigned a grade or class for each job.
Step 1
• These classification are created by
identifying a number of job related factors
such as, education, experience and
responsibilities with the goal to determine
classes or grades of Job.
Step 2
• After classifications, jobs are ranked
in an overall order of importance
according to criteria chosen and each
job is placed in its appropriate grade
Step 3
• The standard description that most
nearly matches the JD determines
the job’s grading/classification.
3. FACTOR COMPARISON METHOD
The each compensable factor such as
responsibility, skill, mental effort, physically effort and
working conditions is compared one at time with the
same factor for other key job and then evaluated.
i. Determine the
Compensable Factor
ii. Determine Key Jobs
Steps Of
Factor
Comparison
Method
iii. Apportion Present
Wages for Key Jobs
iv. Place Key Jobs on a
Factor Comparison Chart
v. Evaluate Other Jobs
4. POINT SYSTEM METHOD
An approach to job evaluation in which numerical values are assigned to
specific job factors and the sum of those values provides a quantitative
assessment of a job’s relative worth.
1
2
Steps Of
Point System
Method
3
4
5
6
Determine the Critical factor
Determine Sub-factor
Determine the levels of factors
Allocate points to factor
under each level
Develop a point manual
Apply the point system
Factors
1st
Degree
2nd
Degree
3rd
Degree
4th
Degree
5th
Degree
SKILL
•
Education
15
30
45
60
75
•
Experience
20
40
60
80
100
•
Initiative and Ingenuity
15
30
45
60
75
EFFORT
•
Physical demand
10
20
30
40
50
•
Mental or visual demand
5
10
15
20
25
RESPONSIBILITY
•
Equipment or process
5
10
15
20
25
•
Material or product
5
10
15
20
25
•
Safety of others
5
10
15
20
25
•
Work of other job conditions
5
10
15
20
25
JOB CONDITIONS
•
Working conditions
10
20
30
40
50
•
Unavoidable hazards
5
10
15
20
25
A Point Manual Description of “Responsibility:
Equipment and Material”
1.
RESPONSIBILITY
b.
Equipment and materials: each employee is responsible for conserving
the company’s equipment and material. This includes reporting mal
functioning, equipment or defected material, keeping equipment and
material clean or in proper order, and maintaining , repairing, or
modifying equipment and materials according to individual job duty.
The company recognizes that the degree of responsibility for
equipment and material varies widely through out the organization
Level1: Employee reports mal functioning equipment or defective materials to immediate
superior.
Level 2: Employee maintain the appearance of equipment or order of materials and has
responsibilities for the security of such equipments and materials
Level 3: Employee performs preventive maintenance and minor repairs on equipment or
corrects minor defects in materials
Level 4: Employee performs major maintenance or overhauls of equipment or is
responsible for deciding type, quantity, and quality of material to be used.
PHASE WISE MODEL OF
COMPENSATION MANAGEMENT
Wage & Salary
Survey
Department of
Labor
Employee
Associations
Professional
Association
Self-Conducted
Surveys
Phase 3
External
Equity
WAGE AND SALARY SURVEY
A collection of data on existing compensation rates for workers
performing similar jobs in other organizations.
Steps in Wage And
Salary Survey
i. Identifying Key Jobs
ii. Selecting the Organizations
to Survey
Department of Labor
Employee
Associations
Professional
Association
iii. Data Collection Sources
Self-Conducted
Surveys
iv. Interpreting the Data
On live Surveys
PRICING JOB
Allocate the Value to the job After matching the job evaluation
worth with the market worth.
Establishing Pay
Structure
Establishment of Pay Grades
Establishment of Pay Ranges
Phase 4
Matching
Internal and
External Work
ESTABLISHING PAY STRUCTURE
Wage
Curve
Market
Line
Pay
Grades
Broad
Banding
Pay
Ranges
• Used for tying pay survey information to job
evaluation data.
• The line on a graph showing the relationship
between job value, as determined by job
evaluation points, and pay survey rates.
• A grouping of individual jobs having
approximately the same job worth.
• It involves collapsing multiple salary grades and
ranges into a few wide levels known as bands.
• Using the market line as a starting point, the employer
can determine maximum and minimum pay levels for
each pay grade by making the market line the midpoint
line of the new pay structure.
ESTABLISHING PAY STRUCTURE
Establishing
Pay Structure
Pay Scatter
Gram
Pay Grades &
Pay Ranges
INCENTIVE SYSTEMS &
GAIN SHARING
Incentive
System
• links compensation and
performance by rewarding
performance instead of seniority
or hours being worked.
• Incentive system could be
individual based
Gain
Sharing
• Matches an improvement
(gain) in performance with a
distribution (sharing) of the
benefits with employees.
INCENTIVE SYSTEMS & GAIN SHARING
INCENTIVES
DESCRIPTION
Piece Work
Compensates the worker for each unit of output
Production
Bonuses
Paid to workers for exceeding output goals
Commissions
The seller may be paid a percentage of selling price or a
flat amount for each unit sold
Merit Raises
Pay increases given after an evaluation of performance
Pay for
knowledge/pay
for Skills
Compensation
Rewarding employees with higher pay as an incentive
for increased knowledge or skills they acquire.
Non Monetary
Incentive
e.g. recognition programs in which employee receives
certificates, time off, vacations etc
Executive
Incentive
Stock option: the right to purchase the company’s stock
at a predetermined price.
Weighted incentive systems: reward executives on the
basis of improvements in the multiple areas of business
INCENTIVE SYSTEMS & GAIN SHARING
GAIN
SHARING
Employee
Ownership
DESCRIPTION
Many company have stock purchase plans that
allow workers to buy shares in the company, so
owing the fractional part of the firm and sharing
its success
Production
Sharing
Plans
Profit
Sharing
Plans
Allow groups of workers to receive bonuses for
exceeding predetermined levels of output.
Cost
Reduction
plans
Scanlon Plan: Employees aim to reduce costs and
then share in the savings that result.
Bonuses on improvements in quality of labor costs
compared with the historical norms
Share profits with the employees
EQUITY FACTOR APPROACH
The perceived fairness of the relation between what a
person does (inputs) and what the person receives
(outcomes).
EQUITY FACTOR APPROACH Cont . . .
PERSON
COMPARISON
OTHER
My Rewards (Outcomes)
Other’s Rewards
My Contributions (Inputs)
Other's Contributions
My Rewards
Other’s Rewards
My Contributions
Other's Contributions
My Rewards
Other’s Rewards
My Contributions
Other's Contributions
Equity
Inequity
(UnderRewarded)
Inequity
(OverRewarded)
EQUITY FACTOR APPROACH Cont . . .
PROCEDURAL JUSTICE
The perceived fairness of the process used to determine the
distribution of rewards.
DISTRIBUTIVE JUSTICE
Perceived fairness of the amount and allocation of rewards
among individuals.
PHASE WISE MODEL OF
COMPENSATION MANAGEMENT
Pricing Job
Pay above the
Market Rate
Pay Market Rate
Pay below the
Market Rate
MARKET RATE & COMPENSATION
PLANS
1. Pay Above the Market Rate
Advantages
Disadvantages
 Attracts better employees.
 Additional Compensation Cost
 Minimize voluntary turnover.
 Sense of entitlement
 Fosters Strong culture &
competitive Superiority
MARKET RATE & COMPENSATION
PLANS
1. Pay Market Rate
Advantages
 Higher
quality
of
Disadvantages
Human  Does not attract huge factor
Resource at midrange of market- forever
driven Compensation.
 Turnover will vary with labor
demand of competitively firms.
MARKET RATE & COMPENSATION
PLANS
1. Pay Below Market Rate
Advantages
Disadvantages
 Lower Compensation Costs
 Lower Quality Employee
 Useful in labor Market where
 Low Moral / Job Satisfaction
Unemployment rate large
 High Turnover, Especially
wage
CHAPTER 8
Intrinsic
Compensation
Types of
Compensation
Financial Rewards
Vs. Non Financial
Rewards
Extrinsic
compensation
Financial
Rewards
Non Financial
Rewards
Wages &
Salaries
Incentives
Gain
Sharing
Fringe
Benefits
Phases of
Compensation
Management
COMPENSATION
MANAGEMENT
PHASE
Scientific1
Job
Analysis
Management
(Identify & Study the Job)
Scientific
Management
• Position Description
• Job Description
• Job Standard
Market Rate &
Compensation
Plans
Scientific2
PHASE
Job
Evaluation
Management
(Internal Equity)
Scientific
• Job Ranking
Management
• Job Grading
• Factor Comparison
• Point System
• Pay Above the
Market Rate
• Pay Market
Rate
• Pay Below the
Market Rate
PHASE
Scientific3
External
Equity
Management
(Salary & Wages Survey)
Scientific
• Department
of Labor
Management
• Employee Associations
• Professional Associations
• Self Conducted Survey
PHASE
Scientific4
Pricing
Job
Management
(Matching Internal & External
Equity)
Scientific
• Job Evaluation
Worth
Management
• Match Rate & Range for
each Job
• Labor Market Worth
Management Quality
Circle
THOUGHT OF THE DAY
If you pick the right people and give them
the opportunity to spread their wings and
put compensation as a carrier behind it
you almost don't have to manage them.
“Jack Welch”