PAY STRUCTURE DECISIONS : PAY STRUCTURE DECISIONS GROUP 4 objectives : objectives Main decision areas and concepts in employee compensation
Discuss the major administrative tools used to manage employee compensation
Importance of competitive labor market and product market forces in compensation decisions
The significance of process issues such as communication in compensation management.
Development in design of pay structures.
Regulatory framework for employee compensation. GROUP 4 INTRODUCTION : INTRODUCTION GROUP 4 Slide 4: What is pay structure?
The relative pay of different jobs (job structure) and how much they are paid (pay level).
What is pay level?
The average pay, including wages, salaries and bonuses, of jobs in an organization.
What is Job structure?
The relative pay of jobs in an organization. GROUP 4 Slide 5: Two types of employee social comparison of pay, relevant in making pay level and structure decisions;
External Equity pay comparison
Focus on what employee in other organization are paid for doing the same general job.
Administration tool-market pay survey.
Internal Equity pay comparisons
Focus on what employees within the same organization, but indifferent jobs are paid.
Job evaluation is the administrative tool. GROUP 4 Pay structure concepts and consequences : Pay structure concepts and consequences GROUP 4 DEVELOPING PAY LEVELS : DEVELOPING PAY LEVELS PRODUCT MARKET COMPETITION.
Organizations should compete efficiently in the product market. It must sell their goods and services at a quality and price that will bring a return on investment.
Price is the most important dimensions among other dimensions among other dimensions like quality, service etc.. GROUP 4 Cont… : Cont… The components of labor costs include:
a) Direct payment.(wages, salaries, unboundses)
Indirect payments(health insurance, social security, unemployment compensation)
b) Staffing level Ways of enhancing the organizational reduction.
Wages and salary freeze
Sharing benefits costs. GROUP 4 Slide 9: LABOR MARKET COMPETITION.
This is the amount an organization must pay to compete against other companies that hire similar employees. It includes product markets that hire similar types of employees.
Employee as resource.
Employee is a resource that company has to invest and from it expect valuable returns. GROUP 4 Slide 10: DECIDING WHAT TO PAY.
Efficiency wage theory :
It states that wage s influence worker productivity. It explains the circumstances in which benefits of higher pay outweigh the higher costs.
Market pay surveys.
To compete for talent organizations use benchmarking. Benchmarking is a procedure in which it compares it's own practices against those of the competition. GROUP 4 STRATEGIC USE OF HRM. : STRATEGIC USE OF HRM. RATE RANGES
Different employees in the same job may have different pay rates.
It permits a company to recognise differences in employees performance, seniority, training. For example, blue-collar jobs may have single rate of pay for all employees within the job.
KEY JOBS AND NONKEY JOBS
used in pay surveys, that have relatively stable content and are common to many organizations.
Jobs that are unique to organizations and that cannot be directly valued or compared through the use of market survey. GROUP 4 Developing A Job Structure : Developing A Job Structure Job structure: It is the relative worth of various jobs in the organization, based on internal comparisons. GROUP 4 Slide 13: Job structure decisions are made through the following:
a.) Job Evaluation
Is composed of compensable factors and a weighting scheme based on the importance of each compensable factor to the organization.
Compensable factors are the characteristics of jobs that an organization values and chooses to pay for GROUP 4 Slide 14: b) Point Factor System
After generating scores for each compensable factor on each job, job evaluators often apply a weighting scheme to account for the differing importance of the compensable factors to the organization. GROUP 4 Slide 15: Weight can be generated in two ways:
A prior weight- factors are weighted using expert judgments about the importance of each compensable factors.
Empirical derivation- weights can be derived empirically based on how important each factor seems in determining pay in the labor market. GROUP 4 Developing A Pay Structure : Developing A Pay Structure Use of three pay setting approaches;
Market survey data
Pay policy line
Pay grades GROUP 4 Slide 17: 1. Market Survey data.
An approach with the greatest emphasis on external comparisons (market survey data) is achieved by directly basing pay on market surveys that cover as many key jobs as possible
2. Pay Policy Line
Combining information from external and internal comparisons to derive pay rates for both key and non key jobs.
3. Pay Grades
This is to group jobs into a smaller number of pay classes or pay grades. Each job within a grade would have the same rate range. GROUP 4 CONFLICT BETWEEN MARKET PAY SURVEYS AND JOB EVALUATION : CONFLICT BETWEEN MARKET PAY SURVEYS AND JOB EVALUATION The relative worth of jobs is quite similar whether based on market pay survey or job evaluation.
However some inconsistence arise. These are usually indicated by jobs whose average survey pay is significantly below or above the pay policy line. GROUP 4 HOW THIS CONFLICTS CAN BE RESOLVED : HOW THIS CONFLICTS CAN BE RESOLVED An organization can resolve to use only the internal control
An Organization can formulate its own strategy by choosing to be a pay leader
There are no right answers. An organization should consider its strategy and what jobs and/or functions will be critical for success. GROUP 4 MONITORING COMPENSATION COSTS : MONITORING COMPENSATION COSTS A way to examine the difference between policy and practice is to compute a compa-ratio, which is an index of correspondence for actual and intended pay. GROUP 4 THE IMPORTANCE OF PROCESS ISSUES : THE IMPORTANCE OF PROCESS ISSUES a) Participation
Employee participation to their date, in pay level decisions remains fairly rare. But it is important to distinguish between participation by those affected by policies and those who must actually implement the policies. Line managers involvement in any change to existing pay practices is necessary. GROUP 4 Slide 22: b) Communication
It is important how an organization communicates pay cuts to it’s employees. Managers play the most crucial communication role because of their day to day interactions with their employees. Thus must be prepared to explain why the pay structure us designed as it is. GROUP 4 CURRENT CHALLENGES : CURRENT CHALLENGES Problems with Job-Based Pay Structures.
1. May encourage bureaucracy
Bureaucracy may encourage lack of flexibility and a lack of initiative on the part of employees.
2. Hierarchical nature reinforces a top down decision making
Structure's hierarchical nature reinforces a top down decision making and information flow as well as status differentials- prevent taking advantages of skills and knowledge of closet to production GROUP 4 Slide 24: 3.Becomes a barrier to change
Bureaucracy becomes a barrier to change because wholesale change to job descriptions involves a lot to time and cost.
4. It may not reward desired behaviors.
5.Encourages promotion seeking behavior
Emphasis on job levels and status differentials encourages promotion-seeking behavior but discourage lateral employee movement. GROUP 4 Responses To Problem With Job Based Pay Structure : Responses To Problem With Job Based Pay Structure 1. Delayering and Banding
Reducing number of job levels to achieve more flexibility in job assignments and in assigning merit increases. GROUP 4 Slide 26: 2. Paying the person: pay for Skill, Knowledge, & Competency
Moving away from linking pay to jobs and towards building structures based on individual characteristic such as skill and knowledge.
Skill-based pay systems seems to fit well with the increased breadth and depth of skill that changing technology continues to bring. GROUP 4 Government Regulation of Employee Compensation : Government Regulation of Employee Compensation Equal Employment Opportunity
EEO regulation prohibits sex, religion, nation of origin and race based differences in employment outcomes such as pay unless justified by business necessity. Organizations must deal with changing labor market and demographic realities. GROUP 4 NEW DEVELOPMENTS IN DESIGN OF PAY STRUCTURES : NEW DEVELOPMENTS IN DESIGN OF PAY STRUCTURES With globalization there is need for organizations to be competitive both in labor costs and productivity. The nature of pay structures is undergoing a fundamental change. One such change is the move to power pay levels to reduce labor costs and bureaucracy.
Some employers are shifting from paying employees for narrow jobs to giving them broader responsibilities and paying them to learn the necessary skills GROUP 4 SUMMARY : SUMMARY PAY DECISIONS CAN BE BROKEN INTO 2 AREAS:
- Pay structure
- Individual pay
THE PAY STRUCTURE TAKES INTO CONSIDERATION:
-Job structure GROUP 4 Slide 30: ADMINISTRATIVE TOOLS USED IN EMPLOYEE COMPENSATION MANAGEMENT
-Market pay survey
- Job evaluation
DEVELOPING PAY LEVELS
- Market pressure
- Employee as a resource
- Deciding on what to pay
-Market pay survey
DEVELOPING A JOB STRUCTURE
- Job evaluation
- The point-factor system GROUP 4 Slide 31: CURRENT CHALLENGES
-Problems with job-based structures
Response: Delayering & Banding
-Paying the person: pay for Skill, Knowledge, & Competency GROUP 4