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Total Rewards Strategy, Benefits & Perquisites, Compensation Systems,…
Total Rewards Strategy
Key points for potential questions
:warning:
'Remuneration' = compensation + benefits
Larger constituents
Compensation
Financial payments in terms of salary and allowances
Benefits
Tangible payments or services for supporting the employees
Perquisites/Perks
Compensation provided on individual basis in the form of goods or services (cars, mobiles)
Incentives/Premium
Payments in return for the achievement of specific, time-limited, targeted objectives. Often they are calculated as a percentage of base salary
Components
Compensation (direct):
Wages, commissions & bonus
Benefits (indirect):
Retirement income replacement programs, life insurance, short-term disability coverage, health insurance, dental insurance, vacations, noncash rewards, perquisites
Location
Flexibility:
Work attire, schedules, work-at-home opportunities
Social interaction: Friendly workplace, family picnics or outings
Stability: Employment and rewards packages that do not change dramatically in content or value from year to year
Status/recognition:
Respect and prominence due to work contributions
Work variety: Opportunities to experience different job tasks, responsibilities, and project opportunities
Workload: Work that can be accomplished in time allotted
Work importance: Value of work to organization or society
Authority/control/ autonomy: Ability to influence others and control one’s own destiny
Advancement: Opportunities for career progression
Work conditions: Hazard-free workplace
Development opportunities:
Formal and informal training to learn new knowledge/skills/ abilities related to the job
Personal growth: After-hours parenting classes, lunch-hour sessions for self-improvement
Compensation Philosophy:
:warning: The starting point for developing a total rewards strategy
Short (but broad) statement documenting the organization’s guiding principles and core values about employee compensation
Should precede development of the total rewards strategy
, because the philosophy essentially
serves as a mission statement
that informs the organization’s
compensation strategies
.
Generally, it should be concise yet convey
:warning: what the
organization values
(for example, teamwork and attainment of individual goals related to company objectives) and
:warning: how the organization plans to
pay and reward competitively
(for example, base pay, variable compensation, and benefits opportunities).
An effective Compensation Philosophy should pass the following:
Is the overall program
equitable
?
Is the overall program
defensible
and
perceived by employees as fair
?
Is the overall program
fiscally sensitive
?
Is the compensation philosophy
legally compliant
?
Can the organization effectively
communicate
the philosophy to employees and prospective candidates?
Are the
programs the organization offers fair, competitive, and in line with the compensation philosophy
and policies?
philosophy applied inconsistently can create disparities, erode employee morale, and, in some situations, result in legal challenge
Communicating a sound compensation philosophy transparently and consistently applying it creates a sense of fairness.
Developing Total Rewards Strategy
Senior management buy-in is critical for success
FOUR steps:
Assessment
Design
Implementation
Evaluation
1. Assessment
Evaluate the current compensation and benefits systems and their effectiveness
Employee surveys
Evaluate current policies & practices
examine the behaviors that are implicit in the organizational culture & whether they are being recognized in the philosophy
Who should be eligible for the rewards?
What kinds of behaviors or values are to be rewarded (within the organization’s reward and recognition system)?
What type of total rewards will work best?
How will the organization fund the new system?
2. Design
senior management team made up of HR and department representatives
Decisions are made about what will be rewarded and what rewards will be offered to employees for those achievements
3. Implementation
HR department implements the new rewards system and circulates materials that communicate the new strategy to employees
Training for department managers
4. Evaluation
how well the system achieves its goals—
cost-effectiveness,
affordability,
compliance with laws and statutory regulations,
compatibility with mission and strategy,
match with the organizational culture,
appropriateness for the workforce, and
equity.
Communication of Total Rewards Strategy
Objectives
Educating employees about the organization’s total rewards practices.
Achieving employees’ buy-in and making them aware of the overall value.
Supporting the organization’s strategic objectives.
Supporting the organization’s goals for performance management.
Pay Transparency:
Organizations may opt for a
middle ground
between total openness and complete secrecy, where some but not all pay information may be revealed (for example, pay ranges are communicated but individual salaries kept private).
Direct Communication:
Either HR or the employee’s manager
must take the time to meet with individual employees in a confidential setting to communicate compensation and benefits issues such as job grade changes, raises, individual benefits issues, new policies or procedures that directly affect the employee, or policy infractions (incorrect reporting of overtime, etc.).
Individualized total compensation statements:
total value of the base pay, incentives, and benefits package so employees can clearly see the value they receive
Self Service Technology:
ESS, in particular, gives employees a much more active role in maintaining their personal records. At the same time, it allows HR staff to spend time previously dedicated to administrative duties on activities with a more strategic focus.
Consistent Key Messages:
company- and culture-specific
Strategic Objectives and Global Considerations
Objectives
Strategic Alignment
Cultural alignment
Entitlement oriented (caring environment)
Contribution oriented (performance-based)
Alignment with Workforce Preferences
Equity (internal & external)
Lag
Match ("externally competitive")
Lead (higher productivity & quality will pay for itself)
:warning: 4. Lead-lag (lead in 1st half of fiscal year & lag in the 2nd)
using more than one pay strategy may cause morale issues and lead valuable employees to seek jobs in other organizations.
:warning: when deciding if external equity exists, employees may place more emphasis on benefits, job security, physical work environment, or the opportunity for advancement
Global Considerations
Legal Compliance:
HR practitioners must understand the employment laws, codes, and practices applicable in each of the countries and regions in which the organization operates.
HR is responsible for delivering programs and services to help ensure that the entire organization and its managers and supervisors remain compliant.
HR Must:
Research
local laws versus organizational practices.
Involve experts, internal or external,
to validate particularly complex local compensation and benefits practices and requirements in order to implement compliant and culturally accurate programs.
Financial and Accounting Knowledge
:warning:
HR Role:
Understanding finance and accounting terms and concepts and the basics of financial statements is important because the information provides HR professionals with key insights into their organization’s operations and performance and the drivers of revenue and costs
Financial analyses and HR decisions are always intertwined to varying degrees
Partnering with finance colleagues is always a viable way to develop an appreciation of requisite finance and accounting knowledge.
Benefits & Perquisites
Benefits
- indirect compensation
Tangible payments or services
provided to broad groups of employees to cover issues such as retirement, private health coverage, sick pay/disability schemes, life insurance, and paid time off.
Benefits programs are designed to
reward continued employment, promote loyalty, and enable employees to live healthier, less worrisome lives.
Legal requirement
Attract talent
Easy to administer
Needed by employees
Provide creative choices
Benefits Needs Assessment
to decide on a benefits package that will match the overall organizational strategies,
support the organization’s mission and vision, and
meet employee needs.
Steps
Review the organization’s strategy (lead/lag marter)
Review the organization’s compensation philosophy.
Analyze the demographics of the organization’s workforce.
Analyze the design and utilization data on all benefit plans.
Gap Analysis (compare org need & budget, emp needs & existing benefits)
:warning: HR professionals must be knowledgeable of the laws that apply in the organization’s home country and all countries, regions, or localities in which the organization operates.
Perquisites
are special incidental payments, benefits, or privileges given to individual employees, over and above their regular rewards.
When awarded to senior-level job positions, perquisites may also be called executive perks or fringe benefits.
Free/discounted products or services.
Mobile devices.
Professional organizations/certifications.
Training programs.
Education fees.
Less common Perquisites:
Housing.
Company car and/or cash car allowances.
Club memberships.
Meal allowances.
Compensation Systems
Methods for Compensating Employees
Base-pay systems
, which can be determined by rates, longevity, productivity, or other factors.
An hourly wage (for each hour worked) OR
A salary (the same amount no matter how many hours are worked)
1. Single- or Flat-Rate Systems
each incumbent of a job has the same rate of pay,
regardless of performance or seniority.
This flat rate is often set to
correspond to target market survey data
relating to the job.
2. Time-Based Step-Rate Systems
based on longevity in the job
Pay increases occur on a pre-determined schedule.
Automatic
Performance based variability
Requires
adequate resources to develop and administer a performance appraisal system
and
communicate it to employees
3. Performance- or Merit-Based Systems
Employee’s performance is the basis for the amount and timing of pay increases.
AKA
Merit Pay
Pay for Performance (p4p. pfp)
Employees are
typically hired at or near the pay range minimum
. Subsequent increases are tied to performance and the degree to which job mastery is attained.
performance appraisal methods need to be explained
4. Productivity-Based Systems
pay is determined by the employee’s output
Straight piece-rate
system, the employee receives a base wage rate and is awarded additional compensation for the amount of output produced.
Example: An employee earns minimum wage plus 10¢ per item produced.
Differential piece-rate
system, the employee receives one piece rate up to the standard and then a higher rate once the standard has been exceeded.
Example: An employee may be paid $8/hour plus 10¢ for each item up to 200, 11¢ for each item from 201 to 500, and 15¢ for each item over 500. If the employee worked a 40-hour week and made 1,000 items, the base pay would be $448.
5. Person-Based Systems
Pay determined by
employee characteristics
,
rather than how the job is performed
.
Two employees may perform similar tasks, but the person with superior knowledge or skill mastery receives more pay.
:warning: May reduce need for specialists.
:warning: Allows for work teams that are highly interdependent.
1. knowledge-based system:
pay is based on the level of knowledge the employee has in a field.
This approach is dominant for compensating learned professions such as scientists or teachers, although staff professionals may also be paid this way.
Skill-based systems
base pay on the number of different skills an employee is qualified to perform.
Employees increase their pay by acquiring new skills, even if they do not use the skills in their current assignment.
This type of system is most commonly used in a production environment.
Competency-based systems
set pay at the level at which an employee can operate in defined competencies (for example, directing or training others).
This type of system is commonly found when rewarding professional groups of employees.
Pay adjustments, or salary increases.
1. Method considering Performance appraisal & whether the employee is above or below the mid-point
2. Cost-of-Living Adjustments (COLAs)
without regard to organizational profitability, employee productivity, or other performance factors
to protect the employees’ purchasing power against rising inflation
3. General Pay Increase
given to all employees (or sometimes a class of employees such as office or production workers) based on
local competitive market requirements
.
This type of increase is awarded regardless of employee performance.
4. Seniority Increase
Employees may need to be employed for a certain period of time before they are eligible for pay increases.
Employees may receive pay increases automatically after a set time in the job.
5. Lump-Sum Increases (LSIs)
No impact on salary-linked benefits
6. Market-Based Increases
to be competitive in attracting new talent or to keep key employees.
Market-based salary increases are usually added to base pay and may also be called
equity increases.
Differential pay,
not added to base pay
may be affected by the type of work being performed or where and when the work is performed.
Time based differential pay
Shift pay
. Some employees receive extra pay when they work less-desirable hours, such as a second or third shift. Shift pay may be a flat amount per hour or a percentage of the base pay.
Emergency-shift pay
. Certain types of industries pay emergency-shift pay when employees work in response to an emergency.
Premium pay.
Some employers pay premium pay (extra pay), or overtime at a higher rate, for working any of the following:
Holidays or vacation days or weekends
For the sixth or seventh day of straight time
After eight hours in a day
On-call or call-back pay
. In some organizations employees earn pay when they are on call, even if they are not called in to work (on-call pay). Employees may also earn extra pay when they are called back for an extra shift in the same workday (call-back pay).
Reporting pay.
With reporting pay, employees are paid for reporting to work as scheduled even if upon arrival no work is available.
Travel pay
. Hourly employees receive travel pay for time spent traveling to work assignments, even if the travel time is outside of working hours.
Overtime pay.
In various countries the minimum amount to be paid for overtime is dictated by legislation.
Geographic Differential Pay
To attract talent from certain areas
To adjust for cost of living in different areas
For foreign countries.
Incentive pay,
to motivate performance.
sales-based commissions are perhaps the most well-known example of incentive compensation
Incentive program be related to aspects of the job that an
employee can influence
.
employees must believe that the goals are
achievable
.
Individual Incentive Plans
Aim: Boost individual performance.
:warning:
significant impact on productivity but may be counterproductive to teamwork
Examples:
Piece-rate: Pay based on output.
Commission: Percentage of sales.
Noncash rewards: Gifts, trips, awards for performance or service.
Group Incentive Plans
Aim: Encourage teamwork where individual performance is hard to isolate.
Examples:
Gainsharing: Employees and organization share productivity gains.
Team bonuses: Rewards based on group goals being met.
Organization-Wide Incentive Plans
Aim: Align employee efforts with company-wide success.
Examples:
Profit sharing and stock ownership.
Company goal-based bonuses: E.g., customer retention targets with fixed and variable payouts based on role.
For incentives to work, we need
Competitive base salaries
Fairly stable management presence and strategic direction
Good communication between management and employees
Reliable method for measuring the results linked to incentives
Commitment from the top down to communicate the plan and to provide ongoing training and coaching
Methods suited for particular types of work &
Special situations
Executive compensation
Key Differences from Regular Employee Pay:
Tied to organizational performance, not just individual performance.
Includes both financial (profit, revenue) and nonfinancial metrics (customer satisfaction, restructuring, etc.).
Incentives form a larger share of total compensation.
Compenents
Annual salary: This direct compensation is usually guaranteed, while other forms of executive compensation may be dependent on performance factors.
Stock option plans: Executives may be given the option to purchase company stock at a pre-determined price for a certain period of time, usually five to ten years.
Stock purchase plans: Broad-based plans often available to most or all of a public company’s employees, this type of plan allows executives the opportunity to purchase shares at a discount or without paying brokerage fees.
Restricted stock grants: The recipient cannot sell the stock from a restricted stock grant until a certain time period has passed. Typically the employee must remain with the company during this time period.
Phantom stock: This consists of cash awards designed to mimic shares of stock, without actually conveying equity via the granting of shares.
Restricted stock units: Often used to defer compensation of key executives until after they have retired, this amounts to a promise of a certain amount of stock once specified restrictions have been fulfilled.
Performance grants: This stock-based compensation is tied to organizational performance
HR’s Role in Executive Compensation
Executive compensation involves complex issues related to accounting, tax, regulation, cost, and documentation, often requiring external expert support.
HR plays a
critical communication role
, explaining benefits, costs, and options to various stakeholders such as management, executives, boards, consultants, media, and regulators.
HR is responsible for
identifying needed internal and external expertise,
managing the program’s design and execution.
HR also leads
ongoing evaluation
s of the program’s effectiveness, including assessing performance measurement methods and the adequacy of supporting technology.
Sales
Straight Salary
Least common for sales roles.
Suitable when:
Salespeople focus more on customer service than closing deals.
Sales performance is hard to measure.
Team efforts drive the sale.
Sales cycles are long.
Straight Commission
Pay is entirely based on sales performance.
Best when:
Driving sales volume is the priority.
Cost control is important.
Competitors use similar models.
May include a temporary guaranteed commission (draw) for new hires.
Salary + Commission/Bonus
Most common approach.
Benefits:
Aligns financial incentives with company strategy.
Provides flexibility to adapt to market changes.
Motivates performance and is widely used by competitors.
Sales roles often also include noncash perks like cars, club memberships, or allowances.
Complying with Wage & Hour Laws
:warning: Noncompliance with certain wage and hour requirements around the globe can result in significant
liability
as well as potential
criminal penalties.
Minimum wage and increases
Overtime pay and holiday pay
Equal pay
Exemption
Cap on hours worked
Special issues under local law:
Paid meals, beak times, etc.
Be mindful of
tax laws
as well - federal/national tax & social tax
Tools to Monitor Compensation Systems
Red-Circle & Green-Circle
Red-Circle Rate: Pay above range maximum
Causes:
Long-tenured employees maxed out
Demotion without salary cut
No promotion path for high performers
Risk: May indicate outdated pay structure
Green-Circle Rate: Pay below range minimum
Causes:
Promotion without full KSAs
Updated pay ranges with higher minimums
Action: Raise pay when employee meets job requirements
Pay Compression
Definition:
Small pay differences among employees regardless of experience, skills, or seniority.
Causes:
Higher starting salaries due to minimum wage increases or inflation.
Market rates rising faster than internal pay adjustments.
Flat pay structure, leading to overtime earners out-earning supervisors.
Solutions:
Align pay with market rates for all employees.
Offer non-monetary benefits and incentives.
Update pay ranges regularly using survey data.
Use merit pay, longevity bonuses, and more time off.
Monitor inflation and adjust accordingly.
Compensation System Design
2. Job Documentation
:warning:
Job Description
Documentation of
Essential functions & requirements +
KSART: knowledge, skills, abilities, responsibilities/reporting structure, tasks
:warning:
Job Specifications
Minimum Qualifications
Job Competencies
Behaviours needed to perform based on clusters of KSAs
useful for
Helps to set up evaluation criteria for job performance.
Provides data for comparing pay with that of other organizations.
Helps in assigning objective classifications or job titles to employees.
Communicates expectations to both supervisors and employees.
Improves an organization’s ability to defend unwarranted charges of discrimination.
Assists with addressing legal compliance requirements (for example, this might include reasonable accommodation under the Americans with Disabilities Act in the United States).
3. Job Evaluation
determines the
value and price of a job
in order to place and
compare it within an organization
as well as
attract and retain employees
in a competitive environment
1. Job-content-based (internal) job evaluation
Nonquantitative methods
strive to establish a relative order of jobs
often referred to as
whole-job methods
, as they evaluate the entire job and sequence jobs in hierarchical order based on their value to the organization (without a numeric value being assigned to each job).
The sequence will indicate that one job is more important than another job, but it will not specify how much more.
Job Ranking
:warning: Evaluates overall job rather than parts of it
:warning: fairly quick, inexpensive method of job evaluation and is easily explained to managers and employees
If there are
many jobs to evaluate
, a
paired-comparison
method may be used in which each job is compared with every other job being evaluated. The job with the largest number of “greater than” rankings is the highest-ranked job, and so on. A matrix is used to compare all possible pairs of jobs.
Shortcomings:
May not be easy for large number of jobs
There may not be large differential between 2 jobs
reasons for why one job is higher than another may not be clear
Best suited to
small organizations
where a hierarchical ordering of jobs will suffice and resources are lacking for a complex job evaluation system.
Job Classification
write descriptions for each class of jobs
Individual jobs are then put into the grade that best matches their class description, based on the judgment of the evaluator
Shortcomings:
Subjective - there is a wide variety of jobs and job descriptions, jobs could easily fall within more than one grade level.
Relies on job titles and duties, and assumes that the jobs are similar among organizations
Only as good as the grade descriptions
Best suited to
large organizations
with many jobs and
limited resources
to commit to the evaluation process.
Advantages
Understandable by employees.
Classifications can change as duties and responsibilities change.
Quantitative methods
try to establish how much more one job is worth than another job by using a scaling system.
evaluates specific factors - called Compensable Factors - on a scale
and provide a score that indicates how valuable one job is compared to another
Compensable factors reflect how much the job adds value to the organization
Compensable factors should
Reflect the actual work being done.
Be supported by documentation such as job descriptions.
Reinforce the organization’s strategic plan and culture.
Be valued by all affected parties (stakeholders).
Be reviewed annually.
Point Factor Method
:warning:
most commonly used
method of job evaluation
Compensable factors used
Skills.
Responsibilities.
Effort and physical demands.
Working conditions.
Supervision of others.
Can be done by HR independently
or through a committee of internal & external stakeholders
:warning: Best suited to
organizations desiring a
systematic procedure
for evaluating each job.
organizations with
time and resources
to develop a custom evaluation system.
conditions when
jobs are not greatly affected by inflation/market conditions
.
Disadvantages:
Complex and time-consuming.
Difficult to explain to employees.
Requires thorough job documentation, including job descriptions and job analyses.
Relies on some degree of judgment by evaluators.
Advantages:
Produces reasonably objective and defensible results.
Provides documentation and an audit trail.
Yields suitable results if used consistently.
2. Market-based (external) job evaluation
based on their market value or the going rate in the marketplace
Reliable market salary surveys (e.g., Hays Salary Guide) are essential for accurate comparisons across locations and industries
Once benchmark data is gathered, organizations slot their jobs into a market-based hierarchy and align pay according to company policy—at, above, or below market rates.
Advantages:
Ensures external competitiveness
Supports objective pay negotiations
Widely used in global and dynamic labor markets
Disadvantages:
Data gaps in emerging markets
Risk of poor job matching
Less legally defensible than job-content methods
Remuneration Surveys
1. Internal Survey
Advantage:
having the ability to shape the design, administration, data analysis, and reporting as needed by the organization
Disadvantages
Competitors may not be willing to cooperate and to share their pay structures.
Matching the positions may be difficult.
more common in developing markets
In Canada, the U.K., and the U.S., local professional groups shy away from conducting salary surveys.
They are concerned that sharing compensation data could be
illegal and considered collusion
because of the competitive nature of the markets—this could be considered as controlling your employees’ potential earnings.
Finding organizations that specialize in survey collection and information sharing is critical to the integrity of the survey.
External Survey
:warning: Survey data must first be verified and may need to be
aged, leveled,
and/or
factored for geography (location)
.
4. Pay Structure
Two Steps
1. grouping jobs into Pay Grades
Group jobs that have approximately the same relative worth
All jobs within a particular grade are paid the same rate or within the same pay range.
Point-factor method
The pay grade consists of jobs falling within a
range of points
.
Job ranking method
:
The pay grade will consist of all jobs that fall within
two or three ranks
.
Job classification method
Jobs are categorized into
classes or grades.
2. Setting Pay Ranges
For each pay grade, an organization creates a pay range that sets the upper and lower limits of compensation for employees whose jobs fit within that particular grade.
:warning: Range spread
Hourly positions—40%.
Salaried positions—50%.
Executive positions—60%.
Compa-ratio
(compensation ratio) metric can be used to determine how actual wages match, lead, or lag the target market
Pay Rate (divided by) midpoint
Broadbanding
When too many grades (with small midpoint differences between them) are established, the compensation system becomes overly complex and increasingly unmanageable.
Broadbanding (salary bands) combines two or more salary grades to create larger ranges and give people wide latitude to move within their job without outgrowing the pay scale.
:warning: for
large, hierarchical organizations
that have attempted to
flatten their structure and remove levels of management
Advantages
Provides wider ranges than the spread of a traditional pay range; generally permits the movement of individuals between jobs without being overly limited by pay ranges
Reduces the number of job grades (for example, from possibly 30 or more to as few as five)
Supports de-layering efforts; reduces the number of reporting levels within an organization
Provides more autonomy to line managers in salary and promotion decisions
Enhances employee mobility as employees can transfer without requiring a change in assigned pay range
Disadvantages
Reduces precision in pay setting – Broad ranges make it harder to set pay based on specific job levels.
Less organizational control – Limits how much control managers have over salary and promotion decisions.
Weak link to skills or growth – No clear connection between skill progression and salary increases.
Hard to explain pay differences – Similar roles in the same band can lead to perceived unfairness and legal risk.
Fewer promotions and title changes – Limited ranges reduce visible career progression, affecting retention.
May stray from market practices – Risk of underpaying (leading to turnover) or overpaying (raising costs).
1. Job Analysis
looks at the job, not of the person doing the job
Tasks, Responsibilities, Conditions & Personal Qualifications