PRESIDENCY UNIVERSITY

COURSE CODE HRM 408 SECTION- 2 COURSE INSTRUCTOR- DR. TARUN TAPAN DHAR SUMMER 2011

Compensation Management: Managing Living Standards for Employees

Md. Abul Hasnat

6/14/2011

ID# 081091025

Introduction
As part of the effort to develop and maintain a quality workforce, public sector organizations must position themselves as employers of choice and recognize the value of their human capital. The methods, by which employees are recruited, trained, retained, measured, and compensated are under scrutiny to ensure that goals can be accomplished and that future needs can be met. It is not enough to develop and implement programs to recruit, train, retain, measure and compensate in the face of global competition, organizations must develop strategies to manage these important human resource functions. In today s market a number of organizations are continuously seeking new strategies to meet both organizational and employee needs. From a global perspective there are still substantial differences in the way people get paid. However, organizations are finding that their human resource strategy can be structured using similar philosophies to reward people regardless of where there are located. The logic of market-based economies suggests that the differences are narrowing as employers worldwide cope with similar pressures. All are affected by intense competition for critical skills; or are influenced by global financial markets. Public sector organizations need to develop aggressive pay policies to compete successfully for well-qualified employees. Compensation levels must be high enough to attract a strong applicant pool and retain the best among current employees. Morale is enhanced if employees know they are being paid at least as much as comparable employees are being paid by other employers. Classification and compensation systems should therefore not only classify positions on the basis of uniform criteria, but also allocate positions to salary grades that reflect their relative worth and market value. An increasing number of organizations are trying to link pay to performance, through programs such as variable or incentive pay, where a percentage increase in pay depends on the employee s achievement of predetermined measurable goals; skill-based pay, where employees are paid for the number of skills they possess; and most recently, competency-based pay, in which an employee is paid for the range, depth and types of skills and knowledge he/she is capable of using in the job rather than for the position they hold. This paper will address the trend toward developing long-term classification and compensation strategies that are linked to organizational goals, as well as examine various pay systems and structures. Best practices in implementing pay strategies will also be discussed.

WHAT IS A COMPENSATION SYSTEM Allocation, conversion, and transfer of a portion of the income of an organization to its employees for their monetary & in-kind claims on goods & services A Monetary claims are wages or salaries paid to an employee in the form of money / or a form that is easily and quickly transferable to money at the discretion of the employee

1. Wages & salaries in the form of money could be 2 types: present payments (earned & acquired at present time) & deferred payments (earned but not acquired until some future time) 2. Coins / paper money / cheques, credit cards 3. Stock option plans / pension plans / post retirement income Adjustments B In-kind claims are claims on goods & services made available & paid for either totally or in some percentage by the employer In lieu of money provide an equivalent value for what has been offered & received little or no immediate monetary gain Organizations purchase the usually desired goods & services to take advantage of 1. Economies of scale available through group purchasing 2. The benefits available through tax laws & regulations 3. Government laws requiring certain services NON-COMPENSATION SYSTEM Situation related rewards, related to the physical & psychological well being of each employee, these rewards satisfy the emotional & intellectual demands - Impact on the intellectual, emotional, & physical well-being of the employee

Long-term Strategies
Compensation and reward systems can become an important signal of an organization s culture and values. When considered from a strategic perspective, organizations could customize classification and compensation systems to help create a culture and attract a workforce that possesses the values, knowledge, skills, and abilities that support the organization s strategic goals and objectives. The guiding principles for a successful classification and compensation program should ensure that: Employees doing similar work should receive comparable wages Variations in pay must be based on significant differences in responsibilities and required knowledge, skills, and abilities (KSAs) on salaries paid by other employers in the marketplace.

The process for classifying and evaluating the relative worth of positions must be fair. In addition, a classification and compensation plan that is continuously maintained results in: Fewer requests for reclassifications, Fewer grievances arising out of disputed job requirements, Fewer pay inequities and morale problems, and A solid basis for evaluating work performance. One of the most fundamental and difficult tasks in the management of any personnel system is determining the comparative worth of each position. Employees are acutely aware of what they are paid, how much responsibility they are assigned, and the status of their positions in relation to other positions. Perceived inequities in pay or status can be a source of intense dissatisfaction, which translates into declining morale, lost productivity, absenteeism, grievances, and chronic bickering. It is impossible to eliminate all feelings among employees that inequalities exist in the pay system, but every effort can be made to achieve fair job groupings and an equitable pay level for all positions in the workforce. In recent years, organizations have responded to changes in the economy and shortages of employees with specific skills by taking a short-term approach that addresses the immediate need. Changes made to increase the flexibility of current classification and pay systems have allowed organizations to be more responsive to the changes in the external climate and internal needs. The broadening of job classes, allowing for higher pay maximums, is just one way that flexibilities have been introduced. Those types of initiatives have been generally successful in the public sector, and will be discussed later in greater detail. It is clear that most public sector employers have at least considered making tactical changes to classification or pay plans. Organizations that develop long-term pay strategies recognize the important role that compensation can play in achieving business objectives. Pay strategy looks at using pay to motivate employee behavior towards the achievement of employer goals, and bases salary levels and salary increases on the value employees bring to their work. Cary Randow, Compensation Manager for the State of Washington in the United States, discusses in a recent IPMA-HR report, Compensation Strategies in the Public Sector, five important elements that make up the foundation for pay strategy: Pay Philosophy: The organization s concept of how employees will be compensated. It communicates the employer s direction and intent about employee s salaries. An organization s pay philosophy must be simply stated, practical in its approach and application, and clearly communicated. It is a vitally important component in preparing management to understand and apply employee salaries and salary changes in ways and circumstances that consistently support the employer s strategic goals. Pay philosophy is the core element in developing a successful pay strategy.

Pay Competitiveness: Easy to understand but difficult to achieve and communicate. The main reason, for most public sector employers, is the general unpredictability of operating budgets, which often negatively impact the organization s ability to fund employee salary increases. Most employers address pay competitiveness issues from only a tactical perspective, focusing on the individual situation as the issue presents itself. However, most public sector employers will never achieve total salary competitiveness if they continue with a short-term approach. Employers focused on pay strategy, however, have a much better chance to succeed by managing and defining it on their terms. Competitiveness from the perspective of a pay strategy suggests that the organization prioritize based on both the position and the person. Salary dollars are directed to those positions most critical to the employer s operating mission(s) while also addressing retention of critically skilled employees and those employees performing at high levels. This approach to pay competitiveness, while unlike the approach typically taken in the public sector, can be very effective in achieving business results. Paying competitively also does not necessarily mean paying the market average. Pay strategy focuses on total compensation (salaries and benefits) and ranges of pay as opposed to specific pay levels to attract and retain employees. Pay Delivery in the public sector has traditionally been through rigid and inflexible systems. Traditional pay structures with pre-determined pay steps and timing intervals are still common in many jurisdictions, and are the most frequently used structure for delivering base salary and salary increases to employees. High performing organizations are often those that recognize and reward achievement in as many ways and circumstances as possible. Allowing managers greater discretion in pay structure can be very beneficial in positioning the organization as an employer of choice. Public sector employers who are able to use compensation to attract and retain high performers will experience the most success in the accomplishment of their business mission. Pay Practices are the systems an organization uses to deliver pay and pay increases. Pay practices play an important role in the application of pay strategies in the public sector; from the way a pay increase is granted (i.e. base pay or lump sum) to increases for special skills, job hazards, or geographic work location. Public jurisdictions can maximize long-term pay strategies by adopting flexible and innovative pay structures and systems that integrate well with each other and accomplish their purpose. Communication is an important, but often worst applied component of personnel system change. Typically, information is shared with employees on a just in time basis, and oftentimes knowledge is typically uneven throughout the management structure and messages and timing usually are out of synch. Developing a strategic approach to communicating your pay strategy helps assure that the right messages are delivered and received in the right time and in the right manner. A well developed communications plan will support an important strategic objective of achieving employee understanding of the organization s compensation plan.

Successfully Developing and Implementing a Classification and Pay System

Hold orientation meetings with government officials and employees to explain project activities and objectives. If they are not already available, draw organizational charts of the whole administration and of individual agencies. Determine job duties and responsibilities (essential functions) using trained observers, on-site interviews, position analysis questionnaires, or work logs. Develop draft and final job descriptions. Rate positions and assign them to pay grades on the basis of an objective evaluation system. Establish salary schedule(s) using comparative salary data. Provide guidelines for maintaining and updating the position classification and compensation plan. Review requests for reclassification, rate positions using a standard rating system, and adjust the classification accordingly. If needed, update organizational charts to reflect changes in positions and ranks. Update salary schedules to reflect annual cost-of-living increases. Periodically collect and analyze comparable salary data to make sure positions are being paid competitively in comparison to the labor market.

Compensation Structures and Systems

Pay for Performance In pay for performance systems, a percentage increase in pay depends on the employee s achievement of predetermined measurable production, operations, or other goals. Pay for performance systems can measure individual, group or organizational performance, and different types of systems are often used together. Incentive Pay Incentive pay is given to employees in addition to their base wage, and is intended to induce action or provide motivation. Rather than rewarding employees for their performance, incentive pay can be provided to encourage behaviors and outcomes. Incentive pay can be used as a management tool as well as a compensation scheme. Broadbanding In a broadbanded pay structure, combinations of job classifications are grouped into pay bands. This system differs from a conventional grading system because of the greater pay range within each band and the smaller number of bands. Pay progression through each band is normally related to employee competency,

performance, and contribution or market rates of pay. Broadbanding is often introduced as a means of enabling an organization to comprehensively redesign its salary structure. Gainsharing/Team-based Pay Gainsharing or team-based pay is a method of linking the pay of employees to the level of performance that they have achieved in a team, and rewarding the group for improving productivity and meeting organizational goals. By reinforcing group performance through the recognition of successful teamwork, an organization can harness the collective potential of employees. Team-based pay can be applied on the basis of how well employees have performed across the whole organization or it can be based on departmental activity or project. Goalsharing (sometimes called winsharing) - An incentive plan that measures the achievement of predetermined goals, objectives and then shares the gains from productivity, process and/or service improvements with the employees who have made them. Measurement can include qualitative data, such as information from customer surveys. It relies on a system of employee involvement to maintain a strong link between group performance and rewards. A simple version might cover managementdetermined or collectively negotiated goals Competency and Skills-based Pay Competencies are the knowledge, skills and abilities that are needed to accomplish a job effectively. When used in a pay system, they provide a basis for individual assessment to reward individuals who can positively contribute to the overall values and objectives of an organization. Competency- and skills-based pay reward the way people work -- pay based on competencies recognizes the behaviors needed, while pay based on skills recognizes the knowledge. Contribution and Hybrid Pay Systems Contribution pay combines elements of performance and competency-based pay schemes by recognizing the employee s performance and results, as well as the competencies that they have used to achieve them. Unlike strict pay for performance schemes, contribution or hybrid pay does not solely provide a direct incentive for achieving a defined set of targets. In conjunction with a competency-based pay reward system, it also emphasizes the developmental needs that are required of employees to achieve success. Contribution pay systems are best suited to a broadbanded pay structure because this allows the necessary flexibility to effectively reward the results employees are expected to achieve through the acquisition of defined skills and competencies. Condition-based Pay Examples of this are pay increases that are awarded because of working conditions or situations that have little or nothing to do with employee performance. Hazardous duty pay is often awarded as an incentive to endure physical hardship or other hazardous working conditions. Locality pay can be provided to encourage an employee to submit to undesirable working conditions, or in recognition of the high cost of living in a particular area. Longevity pay is offered in some situations in recognition of an employee s tenure, not related to their performance.

Compensation Best Practices

More and more public jurisdictions are introducing the systems mentioned above, as well as other types of pay flexibilities and innovations. Several recent benchmarking studies conducted by IPMA-HR, show that the use of variable pay approaches in the public sector is increasing. In the 2001 Benchmarking study, slightly less than half of the respondents surveyed said they use some form of variable or flexible pay system. Of the 45 percent who reported using variable pay programs, pay for performance was by far the most popular, with 80 percent participation. Employers who used pay for performance plans typically provided rewards based on individual performance (99 percent), and most often distributed them as an addition to base pay (52 percent). When asked how they determine appropriate compensation, participants cited three main sources of comparison: jurisdictions in the same geographic region (89 percent); jurisdictions of comparable size in the same geographic region (73 percent); and the private sector (53 percent). A recently released Compensation Best Practices report stemming from the 2001 IPMA benchmarking survey highlights how six public jurisdictions in the United States use pay strategies and creative compensation practices as tools to recruit and retain a highperforming workforce. The jurisdictions selected by the Benchmarking Committee for the Best Practices report vary in size, political structure, and employee makeup; and each has its own unique environment and culture. In screening the benchmarking survey respondents, the committee looked at whether: The organization has a defined pay philosophy. The organization uses variable pay approaches such as pay for performance, skillbased pay, gainsharing, competency-based pay, etc. The respondents believe variable pay has helped improve performance to a moderate, great or very great extent. As with all best practice identification, the committee also looked for programs that: Have been successful over time. Have quantitative and/or qualitative results. Achieved recognized or recognizable positive outcomes. Are innovative. Are replicable and transferable. The best practices jurisdictions met the above criteria and also had the following core elements: Approaches that are non-traditional and innovative,

Systems that create incentives for employees to perform better, Systems that produce better organizational performance, Systems in which pay is variable (everyone does not get the same amount) to make distinctions between employees, and Approaches that are linked to organizational goals/strategy/mission.

Conclusion
To ensure successful implementation, organizations should develop classification and pay strategies that are in alignment with the organizations mission. To do this, an organization must first recognize the importance of developing pay practices within a framework that ultimately comes down to rewarding employees appropriately for the skills, intellect, innovation, energy and commitment that they bring to the organization. When it comes to strategic compensation design, there are additional factors that are fundamental to achieving a Best Practice pay plan: Rewards must be linked to organization strategy. Plan objectives must be clearly articulated (participants must know what is being rewarded and why). Behaviors motivated by the plan must support the organization s culture and values. Plan design must be adaptable to changing business conditions. All elements of the plan, including expected performance and results, must be clearly communicated and fully understood by participating employees. Participating employees must be involved in the design process. Participants must believe the plan has value.

Successful organizations meet the challenge of competition for human capital by developing new strategies that allow them to recognize and respond to changing conditions. Because more and more organizations are moving toward the use of teams to do most of the work, a shift in the way that workers are being compensated are in order. No longer is it appropriate to reward employees strictly on how they perform individually when they are no longer performing individually. Their performance is based solely on how the team performs. Therefore, organizations need to start compensating individuals based on how their team performs through team-based rewards. Under whatever circumstances, the compensation plan must be one that can be communicated easily to the employees. Another consideration that must be taken into account is fairness. Fairness is subjective, but it can be remedied by having employees participate in the design of the compensation plan.