Rewards Management: Traditional Pay System

REWARDS MANAGEMENT
Reward management is concerned with the formulation and implementation of

strategies and policies that aim to reward people fairly, equitably and consistently in
accordance with their value to the organization . The term rewards in US can be
considered as compensation.
Different pay systems

Bases for Traditional Pay System and Modern pay system
Traditional Pay System

i. Cost of living and labor market
ii. Base wage and salary
iii. Evenly distributed between employees
iv. Correlated with seniority
v. Individual performance
Bases for Modern Pay System

i. Variable pay
ii. Based on business performance
iii. Differentiated
iv. Based on individual performance
v. Based on team and organization performance
vi. Used as a means of communicating value
Traditional Pay System sets pay levels in a narrow bound with regular annual increases.
There may be 3% to 4% pay increases annually.
Increases are meant for
i. Promotion
ii. Merit
iii. Cost of living
Modern Pay System

Modern pay system, pay greater emphasis on variable pay rather than an automatic
increase each year
Types of Pay Systems

1. Skill-based pay.
With a skill-based pay system, salary levels are based on an employee’s skills, as
opposed to job title.
2. Competency-based pay.
Rather than looking at specific skills, the competency-based approach looks at
the employee’s traits or characteristics as opposed to a specific skills set. This
model focuses more on what the employee can become as opposed to the skills
he or she already has.
3. Broad banding.
Broad banding is similar to a pay grade system, except all jobs in a particular
category are assigned a specific pay category. For example, everyone working in
customer service, or all administrative assistants (regardless of department), are
paid within the same general band.
4. Variable pay system.

This type of system provides employees with a pay basis but then links the
attainment of certain goals or achievements directly to their pay. For example, a
salesperson may receive a certain base pay but earn more if he or she meets the
sales quota.
Different types of Compensation/Pay System

i. Base pay
ii. Commission
iii. Overtime
iv. Bonus, profit sharing, merit pay
v. Stock options
vi. Travel/Meal/Housing allowance
vii. Benefits include

 Dental
 Insurance
 Medical
 Vocational
 Leave
 Retirement
 Taxes…….
Designing Pay System

Developing a formal pay plan doesn't have to cost you a lot of time and money. One of
the most important things to consider when setting up your pay administration plan is
to get the acceptance, understanding, and support of your managers and supervisors.
The basic steps to setting up a pay plan are:

1. Defining the Positions
2. Evaluating the Jobs
3. Pricing the Jobs
4. Implementing the Plan
5. Telling Employees about the Plan
6. Employee Performance Appraisals
Step 1: Defining the Positions

The first step to installing a formal plan is to prepare a job description for each position.
You may be able to write these descriptions yourself, but you can also ask employees to
describe their jobs and review those descriptions.
Job Descriptions Usually Include:

 Job title
 Reporting relationships
 Specifications
 Job responsibilities
 Job requirements (formal education or training, experience and background,
unusual working conditions).
Once completed, the job descriptions can also be used for:

 Hiring and training employees
 Realigning duties in the organization
 Complying with various employment practice and pay rate laws
 Evaluating job performance based on assigned duties
Step 2: Evaluating the Jobs

A good evaluation method for businesses with 100 or fewer employees is a basic
ranking system. When using this type of system, job descriptions are compared against
each other and ranked according to difficulty and responsibility.
After you rank the job descriptions, the next step is to group jobs that are similar in
scope and responsibility into the same pay grade. After sorting the job types, you can
arrange these groups in a series of pay levels from the highest to lowest.
The number of pay levels depends on the total number of jobs and types of work in
your organization. A company with less than 100 jobs wills usually only need 10 or 12
pay levels.
Step 3: Pricing the Jobs

I. Pay Rates
To put a dollar value on each of your pay levels, you can look at the current rates for
similar work in your area.
Note:
When you are studying pay rates in your area, make sure you compare job
descriptions, not just job titles. Job titles can be misleading and there are usually
differences between how one organization and another will define similar jobs.
II. Pay Ranges

Based on the average pay rate, you can establish a midpoint rate and develop a pay
range. Typically, the minimum rate in a level is 85 percent of the midpoint rate, and the
maximum rate is 115 percent of the midpoint.
Step 4: Implementing the Plan

Once you have a general plan, you will want to consider how it will be administered to
provide for individual pay increases.
You can use several approaches:

i. Merit increases, granted to recognize performance and contribution
ii. Promotion increases for employees assigned to different jobs in higher pay levels
iii. a progressive scale of wages for employees who are below the minimum hiring
rate/pay level
iv. Probationary increases of newer employees who have attained the necessary
skills and experience
v. Tenure increases for time with the company
vi. General increases, granted to maintain real earnings as economic factors require
and to keep pay competitive
Most annual increases are made for cost of living, tenure, or employment market
reasons. You might use several, all, or a combination of the various increase methods in
your business.
Step 5: Telling Employees about the Plan
After you implement your pay administration plan, you should consider how you will
tell employees about it. Setting up a good program is your first priority, but clearly and
honestly communicating that plan to your employees is also important.
Step 6: Employee Performance Appraisals

The final element of a pay administration plan is performance appraisals. The majority
of employees are under merit increase pay systems, which require periodic review and
appraisal of how well employees perform their assigned duties.
An effective employee appraisal plan:

i. achieves better two-way communications between the manager and the
employee
ii. links the employee’s pay to their job performance
iii. provides a standardized approach to evaluating performance
iv. helps employees understand job responsibilities and expectations
v. sets targets for employees to work towards
Performance reviews help the employee whose work is being appraised, but they also
help the manager gain insight into the business. An open exchange between employee
and manager can show the manager where improvements are needed in equipment,
procedures, training or other factors that might affect employee performance.
When you are designing an appraisal system, it is a good idea to develop a formal
process.
A typical evaluation for job performance includes factors like:

i. Results achieved
ii. Quality of performance
iii. Volume of work
iv. Effectiveness in working with others
v. Effectiveness in dealing with customers, suppliers, etc.
vi. Initiative
vii. Job knowledge
viii. Dependability
You can design your own form for performance evaluations using examples from books
on personnel administration, but ensure that the forms that you design match the job
you are reviewing.
Updating the Plan

Review your pay plan annually, and ask yourself: are you getting the kind of employees
you want? What are your turnover rates? Do employees seem to care about the
business? By keeping your plan up to date, you can make adjustments where necessary
and help your business succeed.
Question –Group Assignment

Discuss various Pay systems as preferred by government/private/local and
international organizations.

Rewards Management: Traditional Pay System

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REWARDS MANAGEMENT

Reward management is concerned with the formulation and implementation of

Different pay systems

Traditional Pay System

Bases for Modern Pay System

Modern Pay System

Types of Pay Systems

4. Variable pay system.

Different types of Compensation/Pay System

vii. Benefits include

Designing Pay System

The basic steps to setting up a pay plan are:

Step 1: Defining the Positions

Job Descriptions Usually Include:

Once completed, the job descriptions can also be used for:

Step 2: Evaluating the Jobs

Step 3: Pricing the Jobs

II. Pay Ranges

Step 4: Implementing the Plan

You can use several approaches:

Step 6: Employee Performance Appraisals

An effective employee appraisal plan:

A typical evaluation for job performance includes factors like:

Updating the Plan

Question –Group Assignment

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