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Sources of Compensation Data

The wage survey data works as a benchmark that organizations tend to work with. There are several ways to gain access to this data - It can be obtained from the government; who conducts similar surveys in all major areas. They can also be purchased from agencies that specialize in compiling such data. It can also be attained from employer associations of which the organization is a member.

These surveys however, do not allow for comparisons between similar organizations. They are only provided as a benchmark based on which organization must determine their own wage scales. However, sometimes even matching job titles can be misleading. Some positions may have entirely different job descriptions, and so pay rates must differ. Organizations must also keep an eye out for what other firms of their genre are doing in the labor market in order to remain competitive.

Survey Procedures

To overcome the limited use of obtained surveys, some organizations conduct their own. These are generally done for key jobs only, and wage rates for the rest are then derived from the results obtained. A sample of organizations is selected, who are then contacted for information on pay scales. It is important that similar job roles are contrasted and not only job titles, as the work that is required from a role is what determines the wage rate.

In international scenarios, a survey may not be effective at all. as there are only limited comparisons available. Most firms general;-, pay a similar wage rate for an overseas position adding on a relocation premium.

Thus, all jobs are ranked according to their worth and surveys then help determine pay scales for similar role in the labor market. What now remains is the final element: the important aspect of compensation - pricing the jobs.

Pricing Jobs When setting wage rates - that is, the price of a job, it must be matched to its value in the labor market.

Pay Levels

It is the pay level for any job that reflects its worth. This is determined by its ranking set by a team of specialists and then by looking a: what similar jobs are being paid in the job market.

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To set the right pay level, the internal rankings and the survey wage rates are combined through the graph called a Scattergram. As Figure 3-5 shows, the vertical axis is for pay rates. If the point system is used to determine the ranking of jobs, the horizontal axis is for points.

This is created by plotting the total points and wage level for each key job. Thus, each dot represents the intersection of the point value and the wage rate for a particular key job. For example, key job A, in is worth 500 points, and is paid PKR 60 an hour. Through the dots that represent key jobs, a wage trend line is drawn as close to as many points as possible.

The wage-trend line helps determine the wage rates for non-key jobs that are those jobs that have not been surveyed for. To do so, a point value for the non-key job is located on the horizontal axis. A line is then traced vertically to the wage-trend line, then horizontally to the rupee scale. The amount on the vertical is the appropriate wage for the non-key job.

For example, non-key job B is worth 700 points. By tracing a vertical line up to the wage-trend line and then across to the vertical (rupee) scale, it can be seen in Figure 3-5 that the appropriate wage rate for job B is PKR 70 per hour.

The Compensation Structure

Since most organizations tends to have over a hundred employees, some of whom don’t have any significant differences in their workloads or pay scales, it would be extremely complex to determine the pay rates for every single role individually.

Thus, what analysts generally do is group jobs together into classes. When grading jobs, they are then awarded points and pay scales accordingly. Compensation analysts find it more convenient to lump jobs together

Figure 3-5: The development of Wage - Trend line

Non-key Job Key Job ^ Wage Trend Line

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s and Gain Sharing

into job classes. Thus, all jobs in the same class receive the approximately the same wage rate.

However, a problem with this approach is that exceptional performance cannot be rewarded. In order to be able to do so, workers must be moved into a higher job class. This then also affects all other employees working within the same class. A solution used is when organizations adopt a set of rate ranges for each class.

These ranges are simple pay ranges within each job class. So this means, there is no single flat rate to be paid to all employees within the same class, but there is actually a range based on which some can outperform the rest and actually earn more based entirely on merit.

There is a range between which employees can compete, but once they reaches the top of the rate range, no more wage increases will be forthcoming. It is at this point where the organization will decide to reward them with either a promotion, or increase the range for the job class in general.

This is a method that employers use to link compensation with employee performance and its contribution in the organization. The costs of compensation, bonus, etc all fluctuate based on the organizations overall performance.

Ahmed Electronics hasn’t laid off a worker in more than three decades. Even during the severe recession of 2007, when the company’s sales plummeted by 40%, employment stayed steady. Workers reduced their hours, and bonus payments fell from a total of PKR 25million in 2005 to PKR io.2million in 2007. The combined result: the average production worker’s pay fell from PKR 50,000 in 2005 to 25,000 in 2007

Although it for allows a lot more flexibility in managing the cost of labor, there are still issues that need considering before this method is adopted into the overall compensation plan. The HR should taken into consideration the purpose, payout levels and the overall administration of this approach Some of these issues are summarized in Figure 3.6 on the following page.

134 Human Resource Management and Organizational Behavior | Reference Book 2 Figure 3-6: Key considerations in designing Incentives and Gainsharing approaches

Incentives Gain sharing are compensation approaches that reward specified outcomes. Incentives are linked to individual performance and reward them accordingly. Gain sharing is meant to target groups (or classes) of employees simultaneously, and reward them for their overall performance and contribution.

Such methods have over the years boosted employee morale and motivation levels. They are also a way to build upon employee loyalty. Many different incentive systems exist, and they take into consideration several criteria before allowing employees to qualify for the additional benefits they can receive as a form of compensation.

Other incentive methods that can be used are merit raises, piece-work, production bonuses, commissions, maturity curves, pay-for-knowledge compensation, and non-monetary and executive incentives.

Gain sharing is a means of sharing the additional earnings of the organization and a boost in its performance by rewarding the employees who have contributed to it. These approaches include production- and profit-sharing plans. Also popular are cost-reduction methods such as Scanlon, Rucker, and Improshare.

The Purpose of Non-traditional Compensation

Incentive systems link compensation and performance and reward employees for their actual results, and not for the hours they clock in and the years they have worked for. Employees then realize that is their level of productivity and their performance that determines their income, it is a more efficient and frequent way of boosting employee productivity, as rewards can be reaped on pay day every month.

Since workers gets to see how they can improve their pay scales, they are bound to remain motivated and productive. It is also beneficial for the employer, as rewards are given out when the organization is performing better and not for extra hours worked, regardless of the outcome.

As one economist observed:

“With fixed wages individual workers also have little incentive to cooperate with management or to take the initiative in suggesting new ideas for raising productivity. At the level of the individual worker, higher productivity has no immediate payoff as wages are fixed for the length of the contract. The immediate effect of higher productivity is, in fact, negative. Less labor is needed, and the probability of layoffs rises.”

Purpose of non- Why is non-traditional compensation under consideration?

traditional compensation What are the key goals of this non-traditional compensation program?

Eligibility Who will he covered under the non-traditional compensation program?

Coverage Where will non-traditional compensation be applied? All facilities?

Payout standard

What will trigger an incentive or gainsharing bonus? When will it be paid?

Administration

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The idea behind this method is improving employee performance and increasing efficiency levels. However, it must also be understood by the management what exactly they want to achieve and what are their reasons for taking onboard this method of compensation. Does management seek to increase sales? Reduce costs? Improve quality? Spur innovation?

Ahmed Electronics, for example, strives to be a low-cost, high-quality producer. Piece rates for most hourly paid employees provide incentives for fast, low-cost production. Quality is maintained by returning reworks to those who produced defective products and adjusting the bonus ’’points” earned by workers because of high or low quality.

Eligibility and Coverage

The management must also determine who exactly is eligible to qualify for these forms of compensation. This is a crucial aspect as it will affect employee motivation and productivity. Eligibility may differ for different incentives and gain sharing programs, even in the same firm.

As is' the case at Lincoln Electric, hourly paid workers get individual incentives (piece rates), while managers and workers share in the profits. Individual incentives, such as sales commissions, work best with cooperation and teamwork.

System Incentive methods are used in all types of job roles. They can either make up all of the compensation that is earned, or a part of it in addition to salaries. The more common incentives are discussed in the following pages.

Piece-Work

Piece-work rewards employees for every single unit of output produced. Wags can then be rewarded by a fixed amount added on for each unit. Total wage is that fixed rate multiplied by the total produced in a period.

Production Bonuses

These are additional wages that are rewarded to employees who produce over the desired quantities that were expected off them.

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Commissions

In sales positions, a certain percentage of every sale made or a fixed amount is paid to the sales person who makes the deal from every unit sold. This may or may not make up the employees full wage for the period. Real estate agents and automobile salespeople are often on this form of “straight commission.”

Maturity Curves

Some employees can end up reaching the top end of their rate range. In such situations, they can either be promoted further as a form of reward or they can be placed on a maturity curve. These make adjustments for people who are top of the rate range in selected job roles. Employees are rated on productivity and experience, and the best performers are placed on top of the curve, as shown in Figure 3-7.

The relatively less outstanding workers are then placed below them, and so on. It is by this method, that all high performers can be continuously rewarded for their dedication and motivation even after reaching the top of their rate range.

Merit Raises

The most commonly used form of reward in the incentive system is « merit raise. These are pay rises given to employee based on a performance evaluation. These are normally decided by the line manager, in consul'

with other members of the management. They are rewarded to high performing individuals, but are not restricted to any standards or limits.

Their limitation is in their execution - wrhich can be affected by bias. In such scenarios, exceptional performance can go unrewarded, and average performance might just be rewarded. It also communicates to the workers that instead of quality, quantity is what is expected of them. Also, if almost the entire workforce is rewarded with a merit raise at the same time, it loses its meaning and can be seen as a general pay rise instead. Dissatisfaction by those who have not received a merit increase can also be a source of a Figure 3-7: Maturity curves for professionals with varying degrees of performance

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problem, especially if it is due to bias.

Pay-for-Knowledge Compensation

This is mode of compensation that provides employees an incentive to learn more. For each skill they master, or new task they learn, they are rewarded for the knowledge gained. So it is not about what they do, it I more about what they know. These rewards are beneficial to the employer, because those with a larger variety of skills can be moved around flexibly based on the organizations requirements. This may also lead to a reduction in the total workforce size, saving compensation costs to the firm instead. The higher the pay rate is, and the more diverse each work role is, the lower dissatisfaction is expected to be. There should also then be a low employee turnover rate as well as decreased absenteeism, as employee morale is expected to be high.

ABC Station facility makes electronic assemblies for military radar. Each worker averages 12 assemblies a day, compared with a more traditional operation in Dadu where employees average 1.5 assembly per day. Although part of the difference stems from ABC Station plant’s investment in automated equipment and its use of teamwork, some of the difference can be attributed to the plant’s pay-for-knowledge compensation system. Under this site’s pay-for-knowledge approach, employees can increase their annual salaries by 60 percent in three years, depending on how many jobs they master. As each new job is mastered, the employee receives a pay increase.

Non-monetary Incentives

There can also be forms of incentive that are not tied with monetary compensation. This can be in the form of employee recognition, sponsored holidays, giveaways and so on. These are commonly used to motivate sales staff, besides the monetary compensation that they may be receiving.

Some job roles are also popular because of the benefits associated with them. Beyond the financial gain, there might be certain non-monetary

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Gainsharing Approaches

“The new reward systems are being built around performance measures that will constantly propel managers to obtain long-term benefits for the companies.”

According to compensation experts, a top manager’s salary should be based on:

■ Company size

■ Profitability

■ Return to shareholders of the company

■ The complexity and importance of the job

Due to the volatile nature of the stock market, incentives might be more effective if they are linked to improvements in aspects of the organization that executives do control. For example, weighted incentive systems reward executives on the basis of improvements in multiple areas of business performance.

Deferred stock incentive systems award stock to executives over a period of time. This not only acts as an incentive for the executive to stay onboard until the stock is owned, but its value is also derived from what the executive has contributed in improving the company’s performance during this time.

Gain sharing matches an improved company performance with some sort of financial distribution amongst the employees. For increased feelings of equality, gainsharing also tends to include supervisors and managers. Employers with gainsharing are also much more likely to share their financial and non-financial information with employees, thus making them feel more involved.

In recent times, the use of this method is rapidly increasing - as it can be customized based on individual plans or specific groups. Most gainsharing tends to falls into four broad categories:

Employee Ownership

This is the most motivating, as employees begin to own a share in the company they work for. Many companies now have stock purchase plans that allow workers to purchase shares in the company. This results in these employees “owning” a stake in the company, and thus sharing in its achievements dividends and stock appreciation.

An approach that is now company used by organizations is called ESOP—employee stock ownership plan. These can be formulated in several ways, with the main idea that employees can buy or hold stock in

Human Resource Management and Organizational Behavic'

the company. Stock may be “sold” to employees, who may “pay” for the stock by accepting stock shares instead of pay or pay raises. Sometimes employees might just buy stock as a way of helping a company pay off a debt.

ESOPs can be used in other ways that can be called creative financing. The ESOP as a separate legal entity may:

Buy the stock with borrowed money secured by the stock and employee pledges

■ Buy the stock with the funds from a tax-deductible contribution made by the company (an owner wanting to sell his or her interests may authorize a tax- deductible contribution to the ESOP so it can buy the stock, leaving the owner with cash)

* Create a new employee benefit when a company contributes new stock issues to the plan

■ Make public companies private, spin off or divest subsidiaries, or even save failing