Designing compensation system Part IV

1. Designing Compensation System: Part IV
Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor
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2. Building Pay Structure That Recognise
Individual Contributions
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3. Designing Merit Pay Systems
 Merit increase amounts
 Diminishing marginal returns
 Just-meaningful differences
 Increase as substantive (equity theory)
 Timing
 Common review date
 Anniversary date
 Recurring vs. non-recurring merit pay increases
 Present level of base pay
 Rewarding performance: Merit pay grid
 Performance and position in range
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4. Merit Pay Grid
Performance Rating
Above Below
Excellent Average Average Average Poor
Q3
$60,000
$55,000 7% 5% 3% 0% 0%
Current Annual Salary
$50,000
Q2 $45,000
$40,000 9% 7% 6% 2% 0%
$35,000
Q1
$30,000
$25,000 12% 10% 8% 4% 0%
$20,000

5. Merit Pay Grid
Higher Pay for Performance
Performance (1)Well (2) (3) (4) (5) Well
Above Above Average Below Below
Position in Range Average Average Average Average
High % Low %
Q4
(max pay) 7% 5% 3% 1% 0%
Q3 Lo% 8% 6% 4% 2% 0%
Q2 9% 7% 5% 3% 0%
Q1
(min pay) Hi% 10% 8% 6% 4% 0%
Percent increase already allocated: 6.3%

6. Sales Force as a Special Group
 High initiative needed, customer focus, feedback to
company
 Extended periods without supervision, need to stay
motivated regardless
 Incentives when willingness to work hard can make
the difference between success and failure

7. Designing Sales Incentive - Compensation
Plans
 Alternative sales compensation plans
 Salary only
 Salary-plus-bonus plans
 Salary-plus commission
 Commission-plus-draw
 Commission-only
 Determining fixed pay and the compensation mix
 Influence of salesperson on buying decision
 Competitive pay standards
 Amount of non-sales activities
 Noncash incentives

8. Designing Pay for Knowledge
Program
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9. Jobs vs Skills or Competencies
 Jobs
 Clear expectations
 Sense of progress
 Pay based on value of work
 Inflexible
 Skills or Competencies
 Continuous learning
 Flexibility
 Lateral movement
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10. Pay for Knowledge
 Competency Based Pay
 Skill Based Pay

11. Competency Based Pay
 Competency based pay
 Where the company pays for the employee’s range,
depth, and types of skills and knowledge, rather
than for the job title he or she holds
 Competencies
 Demonstrable characteristics of a person, including
knowledge, skills, and behaviours, that enable
performance

12. Competency Based Pay
 Depth of knowledge: Pay for having a deep level
of knowledge within a job, e.g. teachers pay
increases with amount of education: bachelors,
masters, doctorate degree
 Breadth of knowledge: Pay for generalist
knowledge
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13. Skill Based Pay
 Pay is tied to skills, abilities & knowledge that an
employee possesses
 Manufacturing jobs
 Flexibility to reassign people to where work is
needed

14. Skill & Competency Analysis
 Skill Analysis: Systematic process to identify skills to
perform work:
 What does the employee know
 Skills: basic unit of knowledge & expertise
 Competency Analysis: Systematic process to identify
competencies required for success
 What can the employee do
 Competencies: basic units of knowledge & abilities
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15. Skill or Competency Evaluation
 Person centered approach rather than job centered
 Determine the skill blocks that are valued: skill or skill
units, rather than jobs
 Quantify the value
 Develop certification procedures
 Mastery of skill units is measured and certified
 Pay changes do not necessarily accompany job changes
 There is little emphasis on seniority in pay determination
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16. Designing Pay-for-Knowledge Programs
 Establishing skill blocks
 Transition matters
 Skills assessment;
 Aligning pay with knowledge structure;
 Access to training
 Training and certification
 In-house or outsourcing training
 Expertise, timeliness;
 Size of employee population to be trained;
 Sensitivity or proprietary nature
 Certification and recertification

17. Top Twenty Competencies
• Achievement orientation • Developing others
• Concern of quality
• Team leadership
• Initiative
• Technical expertise
• Interpersonal
understanding • Information seeking
• Customer-service • Analytical thinking
orientation
• Conceptual thinking
• Influence and impact
• Self-control
• Organization awareness
• Networking • Self-confidence
• Directiveness • Business orientation
• Teamwork & cooperation • Flexibility
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18. Steps in Developing Competency
Based Compensation System
1. Developing a Competency model
2. Competency Mapping
3. Linking Competencies to Compensating factors
4. Designing compensation on the basis of actual
competencies
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19. Developing Competency Model
 Competency model identifies various competencies
required for performing a job
 Describe competencies in form of indicators
 Each competency can be quantified on a scale based
on its relative importance with respect to each job
 Serves as a reference for all competency management
activities in organization
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20. Procedure for Developing Standard Competencies
 Analyse job/role to identify competencies required
 Job descriptions & job specifications show competency
required for satisfactory performance of duties &
responsibilities
 Discuss with Job holders and immediate superiors to
identify critical competencies
 Validate the competencies and develop a standard
competency dictionary
 Validation can be done by opinion survey or interviewing
experts in related areas
 Rate each competency, known as ‘Critical Rating’ , on a
scale 1 to 5, based on its relative importance & contribution
to performance 20

21. Competency Mapping and Gap Analysis
 Design structured questionnaire for employee and his
immediate superior
 Ask employee to rate his/her own competency level in
the questionnaire
 Ask immediate superior to rate the competency level
of the employee
 Compute weighted average rating to get final score
 70% weight may be given to superior’s rating & 30% to
employee’s rating
 Analyse Gap in each competency level of the employee
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22. Gap Analysis Using Competency Mapping
Competency Criticality Employee Gap
Rating Rating
Production 5 2.24 2.76
Technical 4 2.1 1.9
Quality 5 2.31 2.69
Cost 5 2.24 2.76
Organising 3.7 2.1 1.6
Achievement 4 1.82 2.18
Communication 3.2 1.89 1.31
Maintenance 3.7 2.1 1.6
Safety 2 2.1
Discipline 4.6 2.1 2.5
Attitude 5 1.75 3.25
Reliability 5 2.1 2.9
Leadership 4.3 2.1 2.2
Interpersonal 4.6 1.82 2.78
Processing 4.7 2.38 2.32 22

23. COMPETENCY MAPPING FOR E.C.No.:878

24. Compensation Factor
 Compensation Factor is the weighted average of
competency ratings of an employee
 Compensation factor used
- to design compensation strategies
- to fine tune the policy and adjust for internal and
external equities
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25. Computing Compensation Factor F
Let us assume
 CR = Criticality Rating for each competency
 Cp = Summation of Criticality Ratings of all
Competencies = ΣCR
 ER = Employee Rating
 WR = Weighted Rating = CR*ER
 Compensation Factor, F = Σ(CR*ER)/Cp
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26. Compensation Factor Computation for Employees
Competency CR ER1 WR1 ER2 WR2 ER3 WR3 ER4 WR4 ER5 WR5
Production 5 2.24 11.2 3.46 17.3 2.9 14.5 3.61 18.05 2.83 14.15
Technical 4 2.1 10.5 3.39 16.95 3.55 17.75 3.76 18.8 3.39 16.95
Quality 5 2.31 11.55 3.31 16.55 2.58 12.9 3.3 16.5 2.31 11.55
Cost 5 2.24 11.2 3.6 18 2.85 14.25 3.65 18.25 2.74 13.7
Organising 3.7 2.1 10.5 3.09 15.45 3.25 16.25 3.15 15.75 3.01 15.05
Achievement 4 1.82 9.1 3.28 16.4 2.94 14.7 2.82 14.1 3.18 15.9
Communication 3.2 1.89 9.45 3.15 15.75 2.76 13.8 3.8 19 2.66 13.3
Maintenance 3.7 2.1 10.5 3.16 15.8 2.85 14.25 3.3 16.5 2.7 13.5
Safety 2 2.1 10.5 3.51 17.55 3.7 18.5 3.09 15.45 3.36 16.8
Discipline 4.6 2.1 10.5 3.46 17.3 3.2 16 3.18 15.9 3.46 17.3
Attitude 5 1.75 8.75 3.74 18.7 3.41 17.05 3.71 18.55 3.6 18
Reliability 5 2.1 10.5 3.51 17.55 2.88 14.4 3.3 16.5 3.6 18
Leadership 4.3 2.1 10.5 3.3 16.5 3.09 15.45 3.51 17.55 2.69 13.45
Interpersonal 4.6 1.82 9.1 3.9 19.5 3.09 15.45 3.6 18 3.39 16.95
Processing 4.7 2.38 11.9 3.61 18.05 3.12 15.6 3.48 17.4 3.47 17.35
Cp 63.8 F 2.441 4.034 3.618 4.017 3.636
CR = Criticality Rating, ER = Employee Rating, WR = Weighted Rating
= (CR * ER), F= Compensation Factor = Summation of (CR*ER)/Cp
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27. Determination of Basic Based on Percentage
Increment on Basic
Emp. No. Basic F F*10 Incr. New Basic
[Incr.= (F*10)%]
E1 8500 2.44 24.41 2075 10575
E2 8000 4.03 40.34 3227 11227
E3 8500 3.62 36.18 3075 11575
E4 8500 4.02 40.17 3414 11914
E5 8500 3.64 36.36 3091 11591
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28. Determination of Basic Based on Fixed
Increment Value
Emp. Basic F F*Incr. New Basic
No. (Incr. = 500)
E1 8500 2.44 1221 9721
E2 8000 4.03 2017 10017
E3 8500 3.62 1809 10309
E4 8500 4.02 2009 10509
E5 8500 3.64 1818 10318
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