Compensation Benchmarking & Wage Differentials
Benchmarking
Benchmarking is a skill that every human resource practitioner involved in the compensation process should perform efficiently and correctly.
Accurate benchmarking is the foundation of appropriate salary assessments and market comparisons.
If one benches internal positions incorrectly it may result in selecting the wrong market salary data and setting an inappropriate salary which in turn creates employee dissatisfaction and a higher turn over rate. Clearly, this is a skill that impacts the organization. * The definition of benchmarking for salary survey purposes is “matching an internal job to an external job of similar content”. The goal is to match each job being performed in your company to the survey benchmark job that most closely resembles the essential functions of that job. Once this is accomplished one can then review the market salary data to determine market rates.
Steps in Compensation Benchmarking * Identify compensation goals and objectives
Specify what is to be accomplished through the company’s compensation system (e.g., retain high-performing employees, reward individuals who add significant value, support and encourage flight crew team performance), and then set objectives accordingly. * Assess desired compensation mix
Determine the proportional relationship between base salary, short-term incentives and long-term incentives. The mix reflects how much “risk” the company is willing to build into the compensation package and how performance-oriented it chooses to be. * Determine competitive levels for each part of the compensation package
Within the bounds of the company’s target marketplace, consider what competitive level is relevant for each piece of the compensation picture. Depending on the company’s human resource requirements, financial condition and operating performance, it is possible to decide to focus on one level for base salary (e.g., median or market), another for short- and long-term incentives and yet another for benefits (e.g., average). * Compare and adjust job descriptions
A rule of thumb is that if 80% of more of a job’s scope and activities are the same as the survey position description, it is a good match. If the job is smaller than the survey position, consider adjusting the survey data downward, generally between 5% and 15%. If the job is larger than the survey position, consider adjusting the survey data upward by 5% to 15%. If an adjustment of 20% or more seems necessary, the job is probably not a correct match for the survey position. * Age data to account for market adjustmentssss
The steps for aging data to a common point in time are as follows: (1) divide the number of months that have passed since the survey’s effective date (January 1, 2012) by 12, and (2) multiply the results by the assumed market movement. For example, aging six-month-old data, assuming a 5% annual salary growth, would require increasing the published salary rates by 2.5%. * Select target market criteria (industry group, department size, type of aircraft flown, etc)
Select one or several criteria, depending on what is most important to the company in determining pay levels. * Weight criteria
When choosing multiple criteria, weight according to the importance of each criterion. Weights may be assigned in any proportion as long as the total weights equal 100 percent. * Determine pay level to be used
The level selected should be consistent with the company’s compensation philosophy and target marketplace. If you want to pay at or near market levels, consider choosing the median. To pay above market levels, target the 75th percentile. A common strategy in performance-driven organizations is to target base salary at or slightly below the median, but choose the 75th percentile for targeting total compensation (base plus bonus).
COMPENSATING WAGE DIFFERENTIALS: * Different wages paid to different workers or in different markets that adjust for differences in the jobs or in the productivity of the workers. Wage differentials occur for many reasons. Quite often they are the result of the personal preferences of workers. In some cases workers are willing to "buy" leisure-time or other types of household production by taking lower wages. Differences in job risks, education, and location are also reasons for the persistence of wage differentials. * Wage differentials observed in the labor market are often compensating wage differentials. Some employers find it necessary to pay higher wages to compensate workers for dirty, dangerous, and generally undesirable working conditions. Other employers can pay less for comparable work because conditions are more pleasant.
Three reasons for compensating wage differentials are : * Risk and Hazardous Conditions: Jobs that are riskier, more dangerous, and have a greater likelihood of injury, typically pay higher wages. For example, coal miners, deep sea divers, and security guards are likely to be paid higher wages than similar jobs due to the hazardous nature of their duties. * Education and Skill: Jobs that require more education, skill, and training also tend to pay higher wages. Higher wages compensate for greater productivity and provide returns on investment in education and training. * Location: Jobs that are at undesirable, more distant, or hard to reach locations also pay higher wages. Firms in cities that have high living costs, inhospitable climates, high crime rates, or other "disseminates" find it necessary to offer higher wages to attract workers.
Compensating wage differentials have an important function for the economy for two reasons: * First, they provide incentives for people to undertake less desirable work. If society decides that resources need to be allocated to production that involves undesirable work, then compensating wage differentials are necessary. Without extra wages, this work is not done. * Second, they provide incentives for employers to reduce the undesirable nature of the work. If otherwise identical firms have different working conditions, then one is forced to pay higher wages to attract workers. Higher labor cost encourages employers to improve working conditions to remain competitive. * While wage differentials can enhance efficiency, they can also inhibit efficiency. When caused by discrimination, union market power, or government policies, wage differentials create inefficiencies in the economy.

Performance Appraisal: * Merit rating is also termed as PA, it is a process of evaluating an employee’s performance of a job in terms of its requirements. * Edward Flippo- PA is the systematic, periodic & an impartial rating of an employee’s excellence in matters pertaining to his present job & his potential for a better job.
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Objectives of PA Work related objectives * To assess the work of employees in relation to job requirements * To improve efficiency * To carry out job evaluation Career related objectives * To assess the strengths & weaknesses of employees & providing remedial training * To determine career potential * To plan promotions, transfers, layoffs etc
Communication
* To provide feedback to employees * To clearly establish goals * To enhance superior-subordinate relation & reduce grievances.
Organisational Objectives * Serves as a basis for promotion or demotion * To consider pay increases & increaments * To plan suitable T&D
Benefits of PA * It facilitates HRP, Career planning & succession planning * It builds confidence among employees * Provides legal documentation.

Attributes measured in Performance Appraisal: * Job knowledge Communication * Interpersonal * Team work * Innovativeness * Responsiveness to change * Cost & Time consciousness * Planning & Organising ability * Leadership * Decision making * Commitment & Dedication * Initiativeness

* Graphic rating scale method:- The graphic rating scale method is the simplest and most popular technique for appraising performance. A graphic rating scale list traits (such as quality and reliability) and a range of performance values (from unsatisfactory to outstanding) for each trait. Subordinates are rated by circling of checking the score that best describes his or her performance for each trait. Then the total of assigned value is calculated. There are two types of rating scales continuous & discontinuous or discrete scale * Alternate ranking method:- This method involves ranking employees from best to worst on a particular trait, choosing highest, then lowest until all are ranked. Since it is easier to distinguish between the worst and best employees and alternate ranking is quite popular. First, list all subordinates to be rated. Then indicate the employee who is the highest on the characteristic being measured and also the one who is lowest. The process continues till all the employees are ranked on similar fashion. * Paired comparison method:- Paired comparison method helps make the ranking method more precise. For every trait (quality of work, quantity etc), Pairs are made and every subordinate is compared with every other subordinate. * Forced distribution method:- Forced distribution method is similar to grading on a curve. With this method, manager place predetermined percentage or rates in to performance categories. For example you may decide to distribute employees as follows: * 15% high performance * 20% High average performance * 30% average performance * 20% low average performance * 15% low performance * Forced distribution means two things for employee: Not everyone can get an A; and ones performance is always rated relative to ones peers. One practical, way to do this is to write each employee’s name on a separate index card. Then for each trait (quality of work, creativity etc.) managers place the employee’s card in the appropriate performance category. * Critical Incident Method:- Critical incident method involves keeping a record of uncommonly good or undesirable examples of an employee’s work related behavior and reviewing it with the employee at predetermined time. The manager maintains logs on each employee, whereby he periodically records critical incidents of the workers behavior. At the end of the rating period, these recorded critical incidents are used in the evaluation of the workers’ performance. An example of a good critical incident of a sales assistant is the following: * July 20 – The sales clerk patiently attended to the customers complaint. He is polite, prompt, enthusiastic in solving the customers’ problem. On the other hand the bad critical incident may appear as under: * July 20 – The sales assistant stayed 45 minutes over on his break during the busiest part of the day. He failed to answer the store manager’s call thrice. He is lazy, negligent, stubborn and uninterested in work. * This method provides an objective basis for conducting a thorough discussion of an employee’s performance. This method avoids recency bias (most recent incidents get too much emphasis). This method suffers however from the following limitations: * Negative incidents may be more noticeable than positive incidents. * The supervisors have a tendency to unload a series of complaints about incidents during an annual performance review session. * It results in very close supervision which may not be liked by the employee. * The recording of incidents may be a chore for the manager concerned, who may be too busy or forget to do it. * Most frequently, the critical incidents technique of evaluation is applied to evaluate the performance of superiors rather than of peers of subordinates. * Annual confidential reports- In most of the govt departments & public enterprises PA is done through ACRs. The report is subjective ,it is used for evaluating the employee than developing them as the report is kept confidential. The employee never knows his weaknesses & opportunities. In recent years, due to pressure from courts and trade unions, the details of a negative confidential report are given to the appraisee. * Checklists and weighted checklists: Another simple type of individual evaluation method is the checklist. A checklist represents, in its simplest form, a set of objectives or descriptive statements about the employee and his behavior. If the rater believes strongly that the employee possesses a particular listed trait, he checks the item; otherwise, he leaves the item blank. A more recent variation of the checklist method is the weighted list. Under this, the value of each question may be weighted equally or certain questions may be weighted more heavily than others. The following are some of the sample questions in the checklist. * Is the employee really interested in the task assigned? Yes/No * Is he respected by his colleagues (co-workers) Yes/No * Does he give respect to his superiors? Yes/No * Does he follow instructions properly? Yes/No The checklist method has a serious limitation. The rater may be biased in distinguishing the positive and negative questions. He may assign biased weights to the questions. Another limitation could be that this method is expensive and time consuming * Essay Method:- Essay evaluation is a non-quantitative technique. This method is advantageous in at least one sense, i.e., the essay provides a good deal of information about the employee and also reveals more about the evaluator. The essay evaluation method however, suffers from the following limitations: * It is highly subjective; the supervisor may write a biased essay. The employees who are sycophants will be evaluated more favorably then other employees. * Some evaluators may be poor in writing essays on employee performance. Others may be superficial in explanation and use flowery language which may not reflect the actual performance of the employee. It is very difficult to find effective writers nowadays. * The appraiser is required to find time to prepare the essay. A busy appraiser may write the essay hurriedly without properly assessing the actual performance of the worker. On the other hand, appraiser takes a long time, this becomes uneconomical from the view point of the firm, because the time of the evaluator (supervisor) is costly. MODERN MEYHODS * ASSESSMENT CENTRES - * An assessment centre typically involves the use of methods like social/informal events, tests and exercises, assignments being given to a group of employees to assess their competencies to take higher responsibilities in the future. Generally, employees are given an assignment similar to the job they would be expected to perform if promoted. The trained evaluators observe and evaluate employees as they perform the assigned jobs and are evaluated on job related characteristics. * The major competencies that are judged in assessment centres are interpersonal skills, intellectual capability, planning and organizing capabilities, motivation, career orientation etc. assessment centres are also an effective way to determine the training and development needs of the targeted employees. * BEHAVIORALLY ANCHORED RATING SCALES

Behaviorally Anchored Rating Scales (BARS) is a relatively new technique which combines the graphic rating scale and critical incidents method. It consists of predetermined critical areas of job performance or sets of behavioral statements describing important job performance qualities as good or bad (for eg. the qualities like inter personal relationships, adaptability and reliability, job knowledge etc). These statements are developed from critical incidents.

In this method, an employee’s actual job behaviour is judged against the desired behaviour by recording and comparing the behaviour with BARS. Developing and practicing BARS requires expert knowledge. * A specific deficiency is that the behaviors used are activity oriented rather than results oriented. * Further, it is time consuming and expensive to create BARS. They also demand several appraisal forms to accommodate different types of jobs in an organization.

* HUMAN RESOURCE ACCOUNTING METHOD

Human resources are valuable assets for every organization. Human resource accounting method tries to find the relative worth of these assets in the terms of money. In this method the Performance appraisal of the employees are judged in terms of cost and contribution of the employees. * The cost of employees include all the expenses incurred on them like their compensation, recruitment and selection costs, induction and training costs etc whereas their contribution includes the total value added (in monetary terms). The difference between the cost and the contribution will be the performance of the employees. Ideally, the contribution of the employees should be greater than the cost incurred on them * 360 degree feedback, also known as 'multi-rater feedback', is the most comprehensive appraisal where the feedback about the employees’ performance comes from all the sources that come in contact with the employee on his job.

360 degree respondents for an employee can be his/her peers, managers (i.e. superior), subordinates, team members, customers, suppliers/ vendors - anyone who comes into contact with the employee and can provide valuable insights and information or feedback regarding the "on-the-job" performance of the employee.
360 degree appraisal has four integral components:

1. Self appraisal
2. Superior’s appraisal
3. Subordinate’s appraisal
4. Peer appraisal.

Self appraisal gives a chance to the employee to look at his/her strengths and weaknesses, his achievements, and judge his own performance. Superior’s appraisal forms the traditional part of the 360 degree performance appraisal where the employees’ responsibilities and actual performance is rated by the superior.

Subordinates appraisal gives a chance to judge the employee on the parameters like communication and motivating abilities, superior’s ability to delegate the work, leadership qualities etc. Also known as internal customers, the correct feedback given by peers can help to find employees’ abilities to work in a team, co-operation and sensitivity towards others. *
Self assessment is an indispensable part of 360 degree appraisals and therefore 360 degree Performance appraisal have high employee involvement and also have the strongest impact on behavior and performance. It provides a "360-degree review" of the employees’ performance and is considered to be one of the most credible performance appraisal methods. *
360 degree performance appraisal is also a powerful developmental tool because when conducted at regular intervals (say yearly) it helps to keep a track of the changes others’ perceptions about the employees. A 360 degree appraisal is generally found more suitable for the managers as it helps to assess their leadership and managing styles. This technique is being effectively used across the globe for performance appraisals. Some of the organizations following it are Wipro, Infosys, and Reliance Industries etc. *

* Management by Objectives (MBO): MBO represents a modern method of evaluating the performance of personnel. There is a growing feeling nowadays that it is better to make the superior work with subordinates in fixing goals. This would inevitably enable subordinates to exercise self-control over their performance behaviors. The concept of management by objectives is actually the outcome of the pioneering works of Drucker & McGregor. * It is “a process whereby the superior and subordinate managers of an organization jointly identify its common goals, define each individuals’ major areas of responsibility in terms of results expected of him and use these measures as guides for operating the unit and assessing the contributions of each of its members” * The principle behind Management by Objectives (MBO) is to create empowered employees who have clarity of the roles and responsibilities expected from them, understand their objectives to be achieved and thus help in the achievement of organizational as well as personal goals PROMOTION * Promotion refers to advancement of an employee to a higher post carrying greater responsibilities, higher status and better salary. It is the upward movement of an employee in the organization's hierarchy, to another job commanding greater authority, higher status and better working standards. Transfer: A transfer refers to a horizontal or lateral movement of an employee from one job to another in the same organization without any significant changes status and pay. It has been defined as “ lateral shift causing movement of individuals from one position to another usually without involving any marked change in duties, responsibilities, skills needed or compensation” Need and purpose of Transfers

. To meet organizational needs
2. To satisfy employee Needs
3. To better utilization of Employees
4. To make the Employee More versatile
5. To adjust the work force
6. To provide Relief
7. To Punish Employees

What is career? * Job vs. Career * Job – “What can I do now to make money?” * Career – Chosen Profession for one’s life. Requires a willingness to get the training needed to build one’s skills for the future. * Flippo-A career is the work a person does. It is the sequence of jobs that an individual has held throughout his or her working life. It comprises of a series of work related activities that provide continuity, order & meaning to a person’s life. E.g. occupation of nursing. * Career planning what’s that? * Career planning consists of activities and actions that one take to achieve their individual career goals” * An organisation should assist the employees in achieving a better match between personal goals & opportunities of the organisation.

How important is career planning? * People leave an organisation due to lack of career growth * Deeper focus on an employee’s aims and aspirations * Degree of clarity * Helps in identifying handicaps & the blind spots to overcome frustrations & turnover among employees * Significant motivator to boost the morale * Key retention tool * Critical human resource strategy * High-level vision and goals of company are clearly made known to employees * Growth of an organisation is intrinsically linked with the growth of an individual * Matching organization vision & employees aspirations is must

Elements of career Management programe: * Preparation of inventory of job positions in the organisation. * Preparation of personnel inventory of present & anticipated human resource. * Career planning & development-consideration to long range & short range goals & aspirations of employees. * Matching career plans of management & individual. * Effective career planning system including career planning workshops for employees & management development programme.

Satisfaction is a person’s feelings of pleasure or disappointment resulting fromcomparing a product’s perceived performance (or outcome) in relation to his or her expectations. Whether the buyer is satisfied after purchase depends on theoffer’s performance in relation to the buyer’s expectations. If the performancefalls short of the expectations, the customer is dissatisfied. If the performancematches the expectations, the customer is satisfied. If the performance exceedsexpectations the customer is highly satisfied or delighted. A company would bewise to measure customer satisfaction regularly because one key to customer retention is customer satisfaction. A highly satisfied customer generally staysloyal longer, buys more as the company introduces new products and upgradesexisting products, talks favourably about the company and its products, paysless attention to competing brands and is less sensitive to price, offers productor service ideas to the company, and costs less to serve than new customers because transactions are routine. When customers rate their satisfaction with anelement of the company’s performance - say, delivery. It could mean earlydelivery, on-time delivery, order completeness, and so on. The company mustalso realize that two customers can report being “highly satisfied” for differentreasons. One may be easily satisfied most of the time and the other might behard to please but was pleased on this occasion. A number of methods exist tomeasure customer satisfaction. Periodic surveys can track customer satisfactiondirectly. Respondents can also be asked additional questions to measurerepurchase intention and the likelihood or willingness to recommend thecompany and brand to others. Companies that do achieve high customer satisfaction ratings make sure their target market knows it. For customer centered companies, customer satisfaction is both a goal and a marketing tool.Although the customer-centered firm seeks to create high customer satisfaction,that is not its ultimate goal. If the company increases customer satisfaction bylowering its price or increasing its services, the result may be lower profits. Thecompany might be able to increase its profitability by means other thanincreased satisfaction (for example, by improving manufacturing processes or investing more on R&D). Also, the company has many stakeholders, includingemployees, dealers, suppliers and stock holders. Spending more to increasecustomer satisfaction might divert funds from increasing the satisfaction of other “partners”. Ultimately, the company must operate on the philosophy that itis trying to deliver a high level of customer satisfaction subject to delivering