Pay Structures

Dr. POONAM KAUSHAL

ASSISTANT PROFESSOR
ICFAI BUSINESS SCHOOL
fixed vs variable pay
Graded Pay Structures
Broad banding
Job family Modeling
Developing Pay Structures
Fixed pay is the fixed amount of salary
that an employee gets at the end of the
month whereas Variable pay is the
incentive paid to the employee- monetary
or non-monetary, based on their
performance for the month
Categories of Variable Pay Plans

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 Individual Incentives
• Piece-Rate Systems
– Straight piece-rate system
– Differential piece-rate system
• Bonus
• “Spot” Bonuses
• Special Incentive Programs
– Performance awards
– Recognition awards
– Service awards

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 Individual Incentives

Necessary Conditions For

Individual Incentive Plans

Individualism must
Individual Individual
be stressed in the
performance must competitiveness must
organizational
be identified be desired
culture
Purposes of Special Incentives

8
 Why Organizations Establish Variable Pay
Plans for Groups/Teams

Group/Team-
Based Variable
Pay Plans

Improve
customer Increase
Improve Tie pay to service or
team employee
productivity production
retention
performance quality
 Salary Structure /
Graded Salary Structure
• Salary structure of an organization comprises its
salary grades (or ranges) and its salary levels for a
single job or a group of job.

• Job evaluation plays an important role in designing

a salary structure into appropriately graded based
on their relative worth.

• Designing a salary structure –it is essential to

provide internal equity as well a maintaining
competitive rates of pay.
Salary progression System
•These refers to increase in salary in relation to merit or
performance .
•In it salary ranges are divided into defined zone through
which an employee passes while he/she progresses.

Administration and Control of salary Reviews

While salary policies are executed, it is also
necessary that salary costs against budgets are properly
controlled because control is a vital element of salary
administration.

Designing and operating other allowances:

These are various form of additional cash
payments employees over and above the basic salary
,order to seek their commitment and active participation
in the success of organization.
 Traditional Compensation Systems
• It was assumed that humans work for money, there was no space for
other psychological and social needs of workers

• Employees were expected to work hard and obey the bosses’

orders.

• In return they were provided with job security, salary increments and
promotions annually.

• The salary was determined on the basis of the job work and the
years of experience the employee is holding.

• Some of the organizations provided for retirement benefits such as,

pension plans, for the employees.
 Change in Compensation Systems
• With the behavioural science theories and evolution of labour and trade
unions, employees started asking for their rights.

• Maslow brought in the need hierarchy for the rights of the employees. He
stated that employees do not work only for money but there are other needs
too which they want to satisfy from there job, i.e. social needs,
psychological needs, safety needs, self-actualization, etc.

• Now the employees were being treated as human resource. Their

performance was being measured and appraised based on the
organizational and individual performance.

• Competition among employees existed. Employees were expected to work

hard to have the job security. The compensation system was designed on the
basis of job work and related proficiency of the employee.
 Modern Compensation Systems

• Today the compensation systems are aligned to the business

goals and strategies.
• The employees are expected to work and take their own
decisions.
• Authority is being delegated.
• Employees feel secured and valued in the organization.
• Organizations offer monetary and non-monetary benefits to
attract and retain the best talents in the competitive
environment.
• Some of the benefits are special allowances like mobile,
company’s vehicle; house rent allowances; statutory leaves, etc.
 Components of compensation
• Basic pay: is the minimum sum of earnings that an employee stands
to receive.
 Basic salary is a rate of pay agreed upon by an employer and
employee and does not include overtime or any extra compensation. 

For instance, if an employee has a gross salary of Rs. 40,000 and a basic salary
is Rs.18,000, he or she will get Rs.18,000 as fixed salary in addition to other
allowances such as House rent allowance, conveyance, communication,
dearness allowance, city allowance or any other special allowance.

 Gross salary, however, is the amount paid before tax or other

deductions and includes overtime pay and bonuses.

 Net salary is the remainder after statutory deductions such as taxes are
made from the gross salary. Net salary is the ‘take home’ salary of
an employee.
 Components of compensation CONTD…
• Allowances
 Dearness allowance: is cost of living adjustment allowance (calculation on
inflation)
 House rent allowance: paid by employer to employees for meeting the
accommodation expense of renting a place for residential purposes. HRA
forms an integral component of a person's salary. 
 City compensatory allowance is a privilege extended by an employer to
compensate the employees against the higher cost of living in a
particular city (employees staying in Tier 1 cities and in some cases Tier
2 cities)
 Transport allowance

• Incentives: According to Milton L. Rock, incentives are defined as

‘variable rewards granted according to variations in the achievement of
specific results’.
• Fringe benefits
 WAGE DETERMINATION PROCESS

Wage determination is a complex process, however, wage

determination process consists of the following steps:
Step 1. Job Evaluation
Step 2. Wage Survey
Step 3. The Wage Curve
Step 4. Pay Grades
Step 5. Rate ranges

Pay Survey (external)

Establish Determine
Development Pay Grades Pay for
Scatter gram and Ranges Specific
Jobs

Job Evaluation (internal)

1. Job Evaluation:

Job analysis offers valuable information for developing a

compensation system in terms of what duties and
responsibilities need to be carried out.

The relative worth of a job is being ascertained through job

evaluation. The worth of a job is then converted into
monetary terms to fix the basic wage for the job.

It tries to make a systematic comparison between jobs to assess

their relative worth for the purpose of establishing a
rational pay structure.
2. Wage Survey:

Wage or salary surveys are conducted to find out wage/salary levels

prevailing in the region or industry for similar jobs.

The survey could cover all the jobs within an organisation or limited
to only benchmark or simply key jobs that are used to anchor the
company’s pay scale and around which other jobs are plotted
based on their relative importance and worth to the organisation.

It shows the prevailing compensation in a given area, which may result

in employers making upward or downward wage adjustments
3. Wage Curve:
The relationship between the relative worth of jobs and their wage rates
can be depicted through a wage curve. The wage curve shows the
relationship between relative worth of jobs and wage rates.

• Develop Wage Curve or Scatter graph - using survey data and the
internal job evaluation a pay scatter gram is developed.
• Market Line – a trend line showing the relationship between job
value (resulting from job evaluation) and the pay survey rates.

This curve shows the rates currently paid for jobs within an
organisation, or the rates for similar jobs currently offered by other
organisation within the labour market. 
Market Line
4. Pay Grades:

In this step, similar jobs are

grouped into grades for
establishing the pay plan.
Instead of hundreds of pay
rates, the organisation can
work with 10 to 12 pay
grades.

A pay grade consists of jobs of

approximately equal
difficulty or importance as
determined by job evaluation.

If a point method is followed, the

pay grade consists of jobs
falling with a range of points.
ALTERNATIVES TO TRADITIONAL
PAY STRUCTURES
 1. COMPETENCY-BASED PAY

Competency-based pay is an alternative to pay based on job title and

position.

• Competency-based pay is a pay structure that compensates

employees on their skill set, their knowledge, and their experience.

• It helps a firm to reward employees who are versatile and continue

to develop their competencies from time to time

• It is meant to encourage employees to contribute to the company by

improving upon their skills.
1. COMPETENCY-BASED PAY contd...
• Several factors need to be integrated within an organization before
competency-based pay can be introduced:

 An employee appraisal process must already exist

 Managers have been trained to assess competencies

 Made staff aware of the competencies reqd. And how to

demonstrate them during appraisals
 All employees must give full commitment

 The system must be fair so that all employees are included

 1. COMPETENCY-BASED PAY contd...
• Methods of competency based pay structures: : broad banding
and job families.

i. Competencies within broad banded pay structures

 The band boundaries are defined using job evaluation and
market rates. The employees' position in the band is reflective
of their competency within their role.

 In some systems employers use market rate and job evaluation

factors to split the bands into zones. An employee’s position
within the band zone will depend upon their technical
competencies.
ii. Competencies within a job family
structure
 A Job Family is a group of jobs that involve similar work and require
similar training, skills, knowledge, and expertise.

 Jobs in a job family are similar in that they:

• Require similar knowledge, skills and abilities (competencies).
• Have a continuum of knowledge, skills and abilities that represent a career
path from the lowest to the highest level job.
• Possess associated and related key behaviors.
• Have similar market competitive pay characteristics and conditions.

 E.g. Job families

1. Administrative and Managerial
2. Information Technology
3. Law Enforcement and Public Safety
4. Information and Education
5. Human Services
 Example
Job family : Administrative and Managerial

Branch: Accounting

Banded class:
 Current class title Banded
title
Grade 59 $24,605 - $37,659
Accounting Technician I
Accounting Technician
Grade 63 $28,402- $44,121
Accounting Technician III $24,604- $52,400
(Example)
Grade 67 $32,965 - $52,374
Accounting Technician V
 ALTERNATIVES TO TRADITIONAL
PAY STRUCTURES

2. BROADBANDING

• Broadbanding is defined as a strategy for salary

structures that consolidate a large number of pay grades
into a few "broad bands.

• “Broadbanding (or 'broad grades') is the consolidation

of traditional pay structures, consisting of many, narrow
pay ranges into a few, wider ranges or bands.

• Broadbanding is intended to support agile, flatter,

faster-paced, de-bureaucratized organizational cultures
• In a broadband pay structure, the numbers of
salary grades are consolidated into fewer, but
broader, pay ranges.

• the spread of the pay ranges is wider and there is

less overlap with other pay ranges.

• Broadbanding evolved because organizations

want to flatten their hierarchies and move
decision-making closer to the point where
necessity and knowledge exist in organizations.

• General Electric (GE) was one of the first

organizations to have success with broadbanding
in the mid-90s by instituting seven broadbrands
• Companies employ broad banding to:
 facilitate change
 avoid multiple pay structures
 drive pay decision-making downward (empowering managers)
 provide greater latitude in management pay decisions
 promote lateral moves or in-grade promotions
 reduce use of promotions to increase pay
 promote career development / learning

 reduce the need for precise job analysis/evaluation

 promote fewer, broadly-defined jobs

 focus on the person instead of the job

 facilitate quick responses to changing goals and circumstances

Factors influencing Compensation Structure
Factors influencing Compensation Structure
THANK YOU