Report on Building Pay Structures that Recognizes Employee Contributions PDF

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Building Pay Structures that Recognize Employee Contributions and help Organizations in building competitive rewards systems....

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Building Pay Structures That Recognize Employee Contributions (Chapter 8, Strategic Compensation)

Submitted to: Sir Bilal Khan

Submitted by: Muhammad Aghaz Imtiaz (MBHW-20-02) Syed Abdul Manan Naqvi (MBHW-20-29) Muhammad Hassan Sajid (MBHW-20-44) Muhammad Jibran Khan (MBHW-20-33)

MBA Human Resource Management (Weekend) 3rd Semester Session: 2020-2022

Institute of Banking and Finance

Bahauddin Zakariya University, Multan

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TABLE OF CONTENTS Chapter Review ........................................................................................................................................... 4 Constructing a Pay Structure .................................................................................................................... 5 Step 1: Deciding on the Number of Pay Structures ................................................................................. 5 Exempt And Nonexempt Pay Structures .................................................................................................. 5 Pay Structures Based on Job Family......................................................................................................... 5 Pay Structures Based On Geography........................................................................................................ 6 Step 2: Determining a Market Pay Line ................................................................................................... 6 Step 3: Defining Pay Grades ...................................................................................................................... 6 Step 4: Calculating Pay Ranges for Each Pay Grade .............................................................................. 6 Pay Compression......................................................................................................................................... 7 Step 5: Evaluating the Results ................................................................................................................... 7 Designing Merit Pay Systems..................................................................................................................... 9 Merit Increase Amounts ............................................................................................................................. 9 Timing .......................................................................................................................................................... 9 Present Level of Base Pay........................................................................................................................... 9 Rewarding Performance: The Merit Pay Grid ...................................................................................... 10 Table 8-2 .................................................................................................................................................... 10 Merit Pay Increase Budgets ..................................................................................................................... 11 Designing Sales Incentive Compensation Plans. .................................................................................... 12 Alternative Sales Compensation Plans.................................................................................................... 13 Salary-Only Plans ..................................................................................................................................... 13 Salary-Plus-Bonus Plans .......................................................................................................................... 13

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Salary-Plus-Commission Plans ................................................................................................................ 13 Commission-Plus-Draw Plans.................................................................................................................. 13 Commission-Only Plans ........................................................................................................................... 14 Determining Fixed Pay and the Compensation Mix .............................................................................. 14 Influence of The Salesperson on the Buying Decision ........................................................................... 14 Competitive Pay Standards within the Industry .................................................................................... 15 Amount of Nonsales Activities Required ................................................................................................ 15 Designing Person-Focused Programs ...................................................................................................... 15 Establishing Skill Blocks .......................................................................................................................... 15 Table 8-3 .................................................................................................................................................... 15 Transition Matters .................................................................................................................................... 16 In-House or Outsourcing Training.......................................................................................................... 16 Certification and Recertification ............................................................................................................. 16 Pay Structure Variations.......................................................................................................................... 17 Broad banding ........................................................................................................................................... 17 Two-Tier Pay Structures .......................................................................................................................... 17

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CHAPTER REVIEW Pay structures assign different pay rates for jobs of unequal worth and provide the framework for recognizing differences in individual employee contributions. Compensation professionals develop pay structures based on five steps: deciding on several pay structures, determining the market pay line, defining pay grades, calculating pay ranges for each pay grade, and evaluating the results Merit pay systems reward employees for past performance. The key considerations include merit increase amounts, timing of increases, recurring versus nonrecurring increases, present level of base pay, merit pay grid design, and merit pay increase budget. The main components of sales incentive compensation plans is the choice of commission, bonus, salary, and the mix of these elements. Person-focused pay programs require consideration of skill blocks establishment, transition matters from job-based plans, and training and certification. Two common pay structure variations include broad banding and two-tier pay structures. Broad banding consolidates existing pay grades and ranges into fewer, wider pay grades and broader pay ranges. Two-tier pay structures reward newly hired employees less than established employees

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CONSTRUCTING A PAY STRUCTURE Pay structures are developed based on five steps such as deciding on how many pay structures to construct, determining a market pay line, defining pay grades, calculating pay ranges for each pay grade, and evaluating the results.

• • • • •

Deciding on the number of pay structures Determining a market pay line Defining pay grades Calculating pay ranges for each pay grade Evaluating the results

STEP 1: DECIDING ON THE NUMBER OF PAY STRUCTURES The first step was deciding on the number of pay structures. Common pay structures include exempt and nonexempt structures, pay structures based on job families, and pay structures based on geography. Pay structures are defined on the basis of job family, which show a distinct pattern in the market like executive, managerial, professional, technical, clerical, and craft represent distinct job families. Pay structures based on geography includes companies with multiple, geographically dispersed locations such as sales offices, manufacturing plants, service centers, and corporate offices

EXEMPT AND NONEXEMPT PAY STRUCTURES Most exempt jobs are not subject to the overtime pay provisions in the Fair Labor Standards Act, earn pay in the form of a salary, and are generally supervisory, managerial, or executive in nature. Most nonexempt jobs are subject to the overtime pay provisions in the Fair Labor Standards Act, earn pay in the form of wages, at hourly pay rates, and are generally nonsupervisory, and the duties tend to be narrowly defined.

PAY STRUCTURES BASED ON JOB FAMILY Executive, managerial, professional, technical, clerical, and craft jobs represent distinct job families. Pay structures are also defined on the basis of job family, each of which shows a distinct salary pattern in the market

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PAY STRUCTURES BASED ON GEOGRAPHY Companies with multiple, geographically dispersed locations such as sales offices, manufacturing plants, service centers, and corporate offices may establish pay structures based on going rates in different geographic regions because local conditions may influence pay levels

STEP 2: DETERMINING A MARKET PAY LINE Market pay line is representative of typical market pay rates relative to a company’s job structure. Pay levels that correspond with the market pay line are market-competitive pay rates. These rates promote internal consistency because they increase with the value of jobs.

STEP 3: DEFINING PAY GRADES Pay grades group jobs for pay policy application based on similar compensable factors and value. Job groupings are influenced by other factors such as management philosophy, wider pay grades that include a relatively large number of jobs and less hierarchy, narrower pay grades tend to promote hierarchy and social distance. Pay grade widths are based on either absolute or percentage-based job evaluation points.

STEP 4: CALCULATING PAY RANGES FOR EACH PAY GRADE Pay ranges build upon pay grades. While pay grades represent the horizontal dimension of pay structures, pay ranges represent the vertical dimension. Midpoint generally represents the competitive market average or median.

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A range spread is the difference between the maximum and minimum pay rates of a given pay grade. It is expressed as a percentage of the difference between the minimum and maximum divided by the minimum. Companies generally apply different range spreads across pay grades. Most companies apply range spreads that vary typically between 20 percent and 80 percent.

PAY COMPRESSION Pay compression occurs whenever a company’s pay spread between newly hired or less qualified employees and more qualified job incumbents is small. It is caused by failure to raise pay range limits and scarcity of qualified applicants. It can threaten a companies’ competitive advantage when it results in dysfunctional turnover.

Compa-ratios Compa-ratios index the relative competitiveness of internal pay rates, based on pay range midpoints. They are calculated by dividing the employee’s pay rate by the pay range midpoint. Compa-ratio of 1 means that the employee’s pay rate equals the pay range midpoint, compa-ratio of less than 1 means the employee’s pay rate falls below the competitive pay rate for the job, and compa-ratio of more than 1 means that the employee’s pay rate exceeds the competitive pay rate for the job.

Green Circle Pay Rates Employees sometimes receive below-minimum pay rates for their pay ranges, especially when they assume jobs for which they do not meet every minimum requirement in the worker specification section of the job description. Below-minimum pay range rates are known as green circle rates

Red Circle Pay Rates On occasion, companies must pay certain employees greater than maximum rates for their pay ranges. Known as red circle rates, these higher pay rates help retain valued employees who have lucrative job offers from competitors. On the other hand, exemplary employees may receive red circle rates for exceptional job performance,

STEP 5: EVALUATING THE RESULTS After compensation professionals establish pay structures according to the previous steps, they must evaluate the results. They must specifically analyze significant differences between the

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company’s internal values for jobs and the market’s values for the same jobs. If discrepancies are evident, the company must reconsider the internal values they have placed on jobs. If their valuation of particular jobs exceeds the market’s valuation of the same jobs, they must decide whether higher-than-market pay rates will undermine attainment of competitive advantage. If a company undervalues jobs relative to the market, managers must consider whether these discrepancies will limit the company’s ability to recruit and retain highly qualified individuals. We’ve reviewed the elements of pay structures and the steps compensation professionals follow to construct them. Next, we will consider three popular pay structures that should be familiar to compensation professionals: • • •

Merit pay structure Sales incentive compensation structure Person-focused structure

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DESIGNING MERIT PAY SYSTEMS Companies must ensure that employees see definite links between pay and performance. Companies should use effective performance appraisal methods and should avoid poor communication when discussing appraisals. Companies must determine fair merit increase amounts and settle on base pay levels relative to the base pay of functionally similar jobs.

MERIT INCREASE AMOUNTS Merit increase amounts should reflect prior job performance levels and should motivate employees to perform their best. The minimal amount seen as meaningful is referred to as “justmeaningful pay increases” and the perception of a just-meaningful pay increase depends on an individual’s cost of living, attitude toward the job, and expectation of reward from the job. Compensation budgets are blueprints that describe the allocation of monetary resources to fund pay structures. Compensation professionals index budget increases that fund merit pay programs in percentage terms.

TIMING The vast majority of companies allocate merit increases, as well as cost-of-living and other increases, annually. At present, companies typically take one of two approaches in timing these pay raises. Companies may establish a common review date or common review period so that all employees’ performances are evaluated on the same date or during the same period (e.g., the month of June, which immediately follows a company’s peak activity period). Best suited for smaller companies, common review dates reduce the administrative burden of the plan by concentrating staff members’ efforts to limited periods. On the other hand, companies may review employee performance and award merit increases on the employee’s anniversary date (i.e., the day on which the employee began to work for the company). Most employees will thus have different evaluation dates. Although these staggered review dates may not monopolize supervisors’ time, this approach can be administratively burdensome because reviews must be conducted regularly throughout the year.

PRESENT LEVEL OF BASE PAY Pay structures specify acceptable pay ranges for jobs within each pay grade should fall within the minimum and maximum pay grade rates and should be consistent for new hires with

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similar qualifications. It should be within federal guidelines of Title VII, 1964 Civil Rights Act, Equal Pay Act of 1963, and ADEA of 1967.

REWARDING PERFORMANCE: THE MERIT PAY GRID Merit pay amounts are determined by two main factors such as performance ratings and the position of employees’ present base pay rates within pay ranges. Table 8-2 illustrates a typical merit pay grid that managers use to assign merit increases to employees. Managers determine pay raise amounts by two factors jointly: employees’ performance ratings and the position of employee’s present base-pay rates within pay ranges. Pay raise amounts are expressed as percentages of base pay.

TABLE 8-2 Merit Pay Increase Grid

In Table 8-2, employees whose current annual salary falls in the 2nd quartile of the pay range and whose performance rates an average score receive a 6 percent merit pay increase. Employees whose current annual salary falls in the 1st quartile of the pay range and whose job performance is excellent receive a 12 percent merit pay increase. The term cell (as in spre-

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adsheet software programs such as Microsoft Excel) is used to reference the intersection of quartile ranking and performance rating. Table 8-2 contains 20 cells.

MERIT PAY INCREASE BUDGETS Budgets limit the merit pay increase percentages in each cell. Expressed as a percentage of the sum of employees’ current base pay and varies according to performance level and position in the pay range. There are steps to ensuring that merit pay increases do not exceed the limit. Supervisors and managers determine how many employees fall within each performance category. The second step is to determine the percentage of employees whose pay falls into each quartile. Then they combine both sets of information to determine the percentage of employees who fall into each cell. In the next step, they calculate the expected number of employees in each cell to provide an estimate of the employees’ performance distribution. As the last step, compensation professionals ensure that the total amount is within budget.

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DESIGNING SALES INCENTIVE COMPENSATION PLANS. Sales compensation plans derive their objectives more or less directly from strategic marketing objectives, which, in turn, are derived from company competitive strategy. Particular sales objectives include: •

Improve sales productivity:

More volume and profit from current investment in sales resources. • • • •

•

New-customer sales volume New-product sales volume New balanced product-line sales Reduced “churn” among current customers

Improve sales coverage of current customers:

Regardless of industry, customers want flexibility, customization, faster response, and personalized service. To meet these requirements, market-leading companies improve the coverage of their current customers. This often means investments in new ways to interact with customers. • • • • •

•

Overall account volume Greater share of the account’s business Achievement of customer objectives More lines of business sold Account profitability

Grow sales overall:

Track the percentage of sales realized from the following: • • •

New direct customers New distribution channels New products

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ALTERNATIVE SALES COMPENSATION PLANS There are five main sales compensation plans that companies usually use. The type of plan appropriate for any given company will depend on the company’s competitive strategy. • • • • •

Salary-only plans Salary-plus-bonus plans Salary-plus-commission plans Commission-plus-draw plans Commission-only plans

SALARY-ONLY PLANS In salary-only plans, sales professionals receive fixed base compensation, which does not vary with level of units sold, increase in market share, and other indicators of sales performance. For employees it is a relatively risk-free compensation, however it is burdensome to employers.

SALARY-PLUS-BONUS PLANS Salary-plus-bonus plans offer set base pay with an incentive bonus. Bonuses usually are in single payments.

SALARY-PLUS-COMMISSION PLANS A commission is a form of incentive co...