Compensation (HRM)

Compensation: Establishing Strategic Pay Plans
Akash Tilokani
121420006
Human Resource Management
College Of Engineering , Pune
Forerunners in technical education

Rings of the Presentation

Compensation
• All forms of pay going to employees and
arising from their employment.
• Two Components: Direct financial and Indirect
financial.
• Direct financial can be based on time or on
performance.
• Scope: Direct financial payments based on
time and the related things.

Factors Determining Pay Rates
• Legal
• Unions
• Company Strategy and Policy
• Geography
• Equity

Legal Factors
(Acts, Commissions, Statutory Provisions)
• Minimum Wages Act, 1948: Wages are fixed for scheduled
employment, specified in the act.
• Companies Act, 2013: Framework for remuneration of top
management of Indian companies.
• Working Journalists and Other Newspaper Employees and
Miscellaneous Provisions Act, 1955
• MNREGA, 2005: Minimum wages for 100 days of financial
year.
• Pay Commissions: For government employees
• Payment of Wages Act, 1936 & Equal Remuneration Act,
1976
• The Unorganized Workers Social Security Act, 2008

Unions
• Formal collective bargaining agreements between
trade unions and employers form the foundation
of pay plans.
• Restricted to public sector employment or formal
private sector employment.
• Involvement, may be at industrial level, multi unit
company level or at plant level.
• Representatives of government employees – Pay
Commission – Government
• Example, of IIT and IIM faculty members and
Armed forces

Company Strategy and Policy &
Geography
• Compensation plan should help in achieving the
Company objectives.
• Need to produce Aligned reward strategy.
• Examples of few companies.
• Geography affects the pay rates: for this IT companies
have established units in smaller cities.
• Various allowances are given to adjust effects
geography: Hardship allowances, Relocation
allowances
• Various ways to adjust the effect: Raising the salaries,
Differentials for on going costs, lump sump, etc.

Equity
• Equity theory of motivation postulates that people are
strongly motivated to maintain a balance between what
they perceive as inputs and their rewards.
• External: Pay rates in one company compared to other
companies.
• Internal: Pay rates of a job as compared to other jobs in
the same company.
• Individual: Individual’s pay compared with co worker’s
pay.
• Procedural: Perceived fairness of the processes while
making decision of allocations.

Establishing Pay Plans
Following are the steps involved in establishing
pay rates:
1. Salary Surveys
2. Job Evaluation
3. Group Similar Jobs into Pay Grades
4. Price Each Pay Grade
5. Fine Tune Pay Rates

Salary Surveys
• Survey of what others are paying
• Helps in ensuring external equity
• Can be informal, newspaper or internet salary
survey
• Three ways to use: price benchmark jobs, price
20% or more directly in market place, other
information on benefits
• Examples, Paycheck India, William M.
Mercer, Inc.

Job evaluation
• Formal and systematic comparison of jobs to
determine the worth of one job relative to
another.
• Helps in ensuring internal equity.
• Principle is simple, job which has greater
requirements should be allocated more as
compared to job which has lesser requirements
• Two basic approach: Intuitive approach and
comparison based on common factors.

Continued…
• Focus on second approach, common factors
are called compensable factors.
• Compensable factors: developed (Wal Mart
uses its own CFs) or used as given the equal
pay act.
• Choice of appropriate CFs is necessary.
• Three steps in preparing job evaluation:
identifying the need, getting cooperation and
formation of evaluation committee.

Continued…
Following are the methods used in job
evaluation:
1. Ranking Method
2. Classification Method
3. Point Method
4. Factor Comparison Method

Ranking Method
Based on some overall factors like ‘Job
difficulty.’
Involves following steps:
1. Obtain job information
2. Select and group jobs
3. Select compensable factors
4. Rank jobs
5. Combine ratings

Classification Method
• Simple, widely used method in which raters
categorize jobs into groups; all jobs are roughly of
same value in a group.
• Groups are called classes if they contain similar
jobs and grades if they contain jobs that are
similar in difficulty but otherwise different.
• Ways of classification: write class or grade
description and place jobs into classes or grades
based on how well they fit these description.
Second is to write a set of compensable factors
based rules for each class and then categorize.

Point Method
• It is a quantitative technique.
• Involves: identifying several compensable
factors, each having several degrees and a
degree to which these factors are present in the
job.
• The result is a quantitative point rating for
each job.
• Most widely used method.

Factor Comparison Method
• Also a widely used method
• Refinement of ranking method
• Ranking is done for each job, several times –
each for the compensable factor
• After the above is done, combination of
rankings is done and one single numerical
rating is generated for each job.

Grouping jobs into Pay Grades
• Assigning the pay rates could be the next step
after job evaluation; suitable for small scale
works but not for large scale entities like
government; thus, the need of grouping
• Involves grouping of similar jobs (in terms of the
job evaluation method) into Pay Grades
• Depends on the method used for job evaluation
• If point method is used, jobs within some range
will be grouped together into pay grades.

Pricing Each Pay Grade
• Formal step of assigning the pay rates to each
pay grade
• If organization is small, it directly comes after
job evaluation and opposite is true for a big
organization
• Use of wage curves is made to assign pay rates
to each pay grade

Continued…
• Wage curve shows the pay
rates currently paid for jobs in
each pay grade relative to the
points or rankings assigned to
them in the job evaluation.
• Purpose; draw a relationship
between points obtained and
pay rates
• Steps; find out average pay for
each pay grade – plot pays and
points – fit a line through
plotted points – wages along
the line are target wages

Fine Tune Pay Rates
• It may not be possible to give all the jobs in a
grade same pay rate.
• Method to develop vertical pay ranges for all
horizontal pay grades and the graph so
obtained is called as a wage structure.
• Choice of going for the range in pay rates may
be done arbitrarily or with respect to specific
issues of the organization

Continued…
• Some rates may not fall
in the range; would go
above or below the
range established for a
particular grade.
• Suitable adjustments are
done for the conditions
above.

References
• Dessler, G., Varkkey, B., Human Resource
Management, 12th edition, Pearson
Publications, 2012.
• Aswathappa, K., Human Resource
Management, Tata McGraw-Hill Publications,
2010.
• en.m.wikipedia.org/wiki/Job_evaluation

Thank You

Compensation (HRM)

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