chapter 4 compensation and performance appraisal.pptx

chapter 4 compensation and performance appraisal.pptx

1. Compensation, Performance Management & Appraisal

2. Compensation Employee compensation includes all forms of pay or rewards going to employees and arising from their employment . Two main components are 1. Direct financial payments – in the form of wages, salaries, incentives , commissions and bonuses. 2.Indirect financial payments - in the form financial benefits such as employer paid insurance Compensation is an integral part of HRM which helps in motivating the employees and improving organizational effectiveness

3. Components of compensation have to be devised in such a way that, it focuses on the growing demands of employees while retaining the competitiveness and profitability of the company

4. Objectives of Compensation Planning Important objectives of any pay system is fairness or equity The terms equity has three dimensions Internal Equity –refers to how fair the job’s pay rate is when compared to other jobs within the same company External Equity- refers to how a job’s pay rate in one company compared to the job’s pay rate in other companies

5. 3.Individual Equity – refers to the fairness of an individual ‘s pay as compared with his or her coworkers earning for the same or similar jobs within the company , based on each person’s performance

6. Components of a Compensation Package Base pay structure (Fixed component) Variable pay programs Benefits

7. Base Pay Structure Basic Component Normally 40% of the base pay is basic and rest of the base pay falls under various other categories . This breakage is governed by the tax laws of the land. HRA (House Rent Allowance) - Calculated as a percentage of basic. If a company pays HRA component then it must collect proofs of rent-paid from the employee

8. DA ( Dearness Allowance) The payment of dearness allowance, which may be a fixed percentage on the basic wage , enables the employees to face the increasing prices. Leave Travel Allowance, Mobile Expenses Medical Allowance/Reimbursement, etc

9. Basic Factors in Determining Pay Rates Several factors influence an organization’s pay plan’s design and they are 1. Aligning Total Rewards with Strategy Creating an compensation package that produces the employee behaviors the firm needs to achieve its competitive strategy.

10. 2. Equity and its impact on Pay Rates - External equity, Internal equity , individual equity and procedural equity are the equity issues in compensation - Managers use various means to address the equity issues 3. Legal Considerations in Compensation - Employers do not have free reign in designing pay plans. - Various laws specify things like minimum wages, benefits etc

11. 4 . Union Influences on Compensation Decisions - Union and labor relations law also influence pay plan design 5. Pay Policies Pay policies can influence the employers performance and profitability Managers need pay policies on range of issues like whether to emphasize seniority or performance , distinguishing high performers and low performers, how to award salary increase , promotion

12. Job Evaluation Methods Employers use two basic approaches to set the pay rates Market based approaches Job evaluation methods Market based approaches Smaller firms use market based approach It Involves conducting formal or informal salary surveys to determine what others in relevant job markets are paying for particular jobs.

13. Job Evaluation It is a formal and systematic comparison of jobs to determine the worth of one job relative to another Basic principle of job evaluation is - job that requires greater qualifications , more responsibilities , more complex duties should receive more pay than jobs with lesser requirements

14. Combining the information from the job evaluation and from the salary survey , one can create market – competitive pay plan – where your pay rates are equitable both internally and externally The job evaluation committee evaluates the worth of each job using compensable factors. These compensable factors includes elements of the job such as skills, effort , responsibility etc

15. Job Evaluation Methods- 1) Ranking- simplest & easiest method of job evaluation that involves ranking each job relative to all other jobs based on overall factor like “job difficulty” Obtain job information-job description of each job are prepared Select and group jobs-the usual procedure is to rank jobs by department or in clusters Select compensable jobs

16. 4. Rank jobs-each rating person gets a t of index cards, each of which contain brief description of the job. 5. Combine ratings-usually, several raters rank the jobs independently. Then the rating committee or the employer can simply average the rater’s rankings 6.Compare current pay and what others are paying based on salary survey 7. Assign a new pay scale

17. 2) Job Classification Job classification is a simple, widely used job evaluation method in which raters categorize jobs into groups. All the jobs in each group are of roughly the same value for pay purposes. These groups are called as classes if they contain similar jobs And they are called as grades if they contain jobs that are similar in difficulty but otherwise different

18. 3) Point Method It identifies several compensable factors for the jobs , as well as the degree to which each factor is present in each job 4) Computerized Job Evaluations They have two main components Structured questionnaire Statistical models which allows to price the jobs , by assigning points based on the questionnaire response

19. Competency-based Pay Here the company pays the employee for the skills and knowledge he or she is capable of using rather than for the responsibilities or title of the job currently held. It is also referred as knowledge or skill based pay The competence are based upon demonstrable personal characteristics like skills , knowledge and personal behaviors like leadership - They encourage employees to get and to use the skills required to rotate among jobs

20. Most such pay programs contain five elements. Employer defines specific required skills for the job They choose a method for basing the person’s pay on his or her skills A training system lets employees acquire the skills Formal competency testing system are used to assess The work is designed so that employees can easily move among jobs of varying skill levels

21. Money’s Role in Motivation Financial incentives – financial reward paid to the workers whose production exceeds some predetermined standards This was popularized by Fredrick Taylor in late 1800s Taylor made three contributions Fair day’s work – formulated precise output standard for each job Scientific management movement – improving work through observation and analysis

22. 3. Incentive pay- reward employees who produce more than the standard. Incentive pay plan All incentive pay plans are pay for performance plans . Profit sharing plans (Variable pay )- Incentive plan that ties a group’s or teams’ pay to some measure of the firms or unit’s overall profitability Variable pay as a term is also used to include incentive plans for individual employees

23. Motivation and Incentives Several motivation theories have relevance to designing the incentive plans. Herzberg theory He says that best way to motivate someone is to organize the job so that it provides the challenge and recognition we all need to help satisfy “Higher level “ needs for things like accomplishment.

24. Doing things to satisfy a worker’s “lower level” needs for better pay and working conditions just keeps the person from becoming dissatisfied He says that Hygiene factors that satisfy lower level needs are different from those Motivation factors that satisfy higher level needs If hygiene factors are inadequate , employees become dissatisfied

25. However adding more of these hygiene factors to the job is an inferior way to motivate employee because lower level needs are quickly satisfied. Managers inclined to create motivated workforce should emphasize on the “ Job Content “ or motivational factors They need to make the job intrinsically motivating Intrinsic motivation means that just doing the task provides motivation

26. Herzberg points out that relying exclusively on financial incentives is risky . Employers should provide recognition and challenging work to their employees 2. Demotivators and Edward Deci theory He proposed that extrinsic rewards could at times detract from the person’s intrinsic motivation Hence incentive plan for highly motivated employees should be cautiously devised

27. 3. Expectancy Theory and Victor Vroom He says that a person’s motivation to exert some level of effort depends on three things The person’s expectancy that his or her effort will lead to performance Instrumentality – the perceived relationship between successful performance and obtaining reward Valence- perceived value the person attaches to the reward

28. Motivation = E x I x V E - expectancy I – Instrumentality V- Valence If E or I or V is zero there will be no motivation

29. Implications of this theory are Managers must ensure that their employees have the skills to do the job , and believe they can do the job. Thus, training, job descriptions, support are important in using incentives. Employees must believe that successful performance in fact will lead to getting reward The reward itself must be of value to the employee. Mangers should consider individual performance into account

30. 4. Behavior Modification and B.F Skinner Behavior modification means changing behavior through rewards or punishment Managers need to apply this behavior modification principles Behaviors that appears to lead to a positive consequences (rewards ) tend to be repeated and that leads to negative consequences (punishment ) tends not to be repeated.

31. Employee Incentive & Recognition Program Incentives for Individual Employees Piecework A system of pay based on the number of items processed by an individual worker in a unit of time, such as items per hour or items per day. Standard hour plan - A plan by which a worker is paid a basic hourly rate but is paid an extra percentage of his or her rate for production exceeding the standard per hour or per day.

32. Advantage Simple to calculate and easily understood by the employees Incentive value can be powerful since they tie pay directly to the performance Disadvantage Employers may raise the production standards whenever they found their workers earing “excessive wages”

33. Employees become preoccupied with producing the number of units needed that they may become less focused on quality and may resist switching jobs Attempts to introduce new process may more likely fail as they require adjusting engineered standard Equipment maintenance tend to decline as employees focus on maximizing quality

34. Merit Pay Salary increase awarded to an employee based on his or her individual performance It becomes part of the employee’s base salary hence it is different from bonus

35. Incentives for Professional Employees Incentive pay decisions for professional employees is challenging Employers need to maintain competitive incentives for professionals Dual career ladders are another way to manage professionals’ pay.

36. Nonfinancial and recognition based awards Recognition program refers to formal program like employee of the month, star of the team Social recognition program refers to informal manager-employee exchanges such as praise, approval or appreciation for job well done Performance feedback provides qualitative or quantitative information on task performance so as to change or maintain performance

37. Incentives for Managers and Executives Managers get short term or long term incentives in addition to salary Shot terms incentives are usually provided in cash . And long term incentives are offered as stock options Short term incentives and the annual bonus Most organizations are shifting away from long term incentives to put more emphasis on short term performance and incentives

38. Firms have annual bonus plans for motivating managers Three factors influence one’s bonus- eligibility , fund size and individual performance Stock options- right to purchase a specific number of shares of company stock at a specific period. Executives and managers thus hope to profit by exercising his or her option to buy shares in the future but at today’s price