TOPIC 3 3.0 REMUNERATION

TOPIC 3

3.0 REMUNERATION

 

Trainee should be able to;

  • -Explain concept of remuneration
  • -Explain elements of remuneration policy
  • -Discuss types of remuneration systems
  • -Discuss the factors influencing remuneration
  • -Explain the principles of wage and salary administration
  • –Describe various statutory deductions
  • -Explain types of pay structures
  • -Explain the role of job evaluation in determining remuneration

 

3.1Concept of Remuneration

Remuneration is the compensation that one receives in exchange for the work or services performed. Typically, this consists of monetary rewards, also referred to as wage or salary. It can also be defined as Reward for employment in the form of pay, salary, or wage, including allowances, benefits (such as company car, medical plan, pension plan), bonuses, cash incentives, and monetary value of the noncash incentives.

 

The remuneration package of an employee therefore includes; wages/salary, incentives, fringe benefits, perquisites and finally non-monetary benefits. Wage is the payment given to employee by the employer. It is the hourly-rate of pay while salary refers to monthly rate of pay. Salary includes allowances and also annual increment. Salary payment is not uniform to all employees and depends upon nature of job, responsibilities, merits available, status, and seniority of the employee. Incentives are addition to regular wage payment and depend on productivity, sales, profit, cost reduction efforts etc. The purpose behind incentives is to encourage/motivate employees to take more interest in the work and according to the results get the incentives. Fringe benefits are monetary benefits provided to employees and includes; provident fund, gratuity, medical care, hospitalization payment, provision of uniforms to employees etc.

 

Importance of Compensation

Compensation decisions are strategic decisions and play a key role in achieving performance and sustainable competitive advantages for organizations. Its key objectives are to: Attract employees who are qualified, experienced and interested in the assignments at hand; provide a consistent and reasonable relationship between the pay levels of employees at different levels; and become cost effective by reducing unnecessary expenses. other aims of compensation are to: reward people according to what the organization values and wants to pay for as well as reward them for the value they create; develop a performance culture; motivate people and obtain their commitment and engagement; help to attract and retain the high quality people the organization needs; create total reward processes that recognize the importance of both financial and non-financial rewards; develop a positive employment relationship and psychological contract; align reward practices with both business goals and employee values; operate transparently since employees understand how reward processes operate and how they are affected by them; and to operate fairly as employees feel that they are treated justly in accordance with what is due to them because of their value to the organization.

Fair compensations also help in reducing conflicts in an organization because makes employees feel valued and enable them to create togetherness due to job satisfaction. In addition, it aids in organizational development since high productivity enable the organization to achieve its short and long term goals leading to continuity and sustainability.

 

3.2 Elements of Remuneration Policy

Remuneration is made up of three sets of elements which can be grouped into primary, secondary and tertiary elements. Primary elements of remuneration are the pay in money or pay in kind, which includes all bonuses and allowances, holiday allowance, shift work premium, etc., granted directly to the employee in person. Of this gross pay, a proportion is deducted at source for collective charges levied on employees, tax, social security and pension contributions, etc., leaving the net pay actually received by the employee; Employee compensation and benefits are basically divided into four categories: Primary elements may be inform of guaranteed pay or variable pay. Guaranteed pay is the reward paid by an employer to an employee based on employee/employer relations. The most common form of guaranteed pay is the basic salary. Variable pay refers to reward paid by an employer to an employee that is contingent on discretion, performance or results achieved. The most common forms are bonuses and sales incentives.

 

Secondary elements of remuneration are those elements which, although their cost is apportioned on an individual basis, do not become available to the employee personally. These are the employer’s share of social security and pension contributions and any other contributions. Paid time off, such as leave of absence and annual holidays, is sometimes also included in this category. Tertiary elements of remuneration are the general staff costs borne by an employer, such as a staff association, company newspaper, company shop, canteen facilities and the cost of meal breaks. It is difficult to apportion the cost of these elements on an individual basis.

 

This categorization of remuneration elements is neither universally accepted nor watertight. A number of elements such as various fringe benefits (e.g. the right to take annual holidays in the form of scattered days off, medical care, pension contributions and education costs) are difficult to categorize. The primary and secondary elements together constitute gross wage costs .These can be calculated per hour worked, either per employee or for all the company’s employees combined.

3.3Types of Remuneration Systems

Different employees of the same organization might be remunerated by different systems, according to the type of work they perform. In some organizations, a combination of two or more remuneration systems may be used e.g. piece work rates with guaranteed time pay. However, the following are the most common systems of remuneration:

 

Time rates

Under this system, payment of an agreed amount is made for agreed period of working time which may be a day, a week or a month. Time rates are mainly used when output cannot be directly related to the wage or labour cost, or when the emphasis is on the quality of work to be performed rather than on quantity alone. If the same employee works for additional hours, he/she is likely to be paid extra for the time worked in excess of the agreed number of hours at an `overtime rate. This overtime rate may vary from organization to organization or from one department to another. Other employees such as managerial and supervisory staff, clerical and secretarial staff, professional and specialist staff etc. might be paid monthly.

 

The advantages of this method are that it: is simple to understand and administer; provides a basis for regular payment of employees; is reliable since pay time is known; leads to harmonious relationship in the work place since it is based on remuneration policies which determine wage differentials among employees ; makes it easy to budget and trackdown the amount of money spent on employees compensation ; and it is the most useful when paying employees who provide services that are not easily measureable and whose performance is not tangible. In addition, this system is useful in paying employees where the employee have no control over the quantity of output as well as rewarding collective responsibilities such as where tasks have been achieved by a team.

 

The disadvantages of this method are: it lacks a basis for rewarding high performers which de-motivates employees and some become indifferent since they are sure they will be paid at the end of the month; it requires close supervision of employees by their superiors which may lead to tension; and it is slow when implementing new salary scales.

 

Piece work rates

Under this system, payment is made according to the output: that is, the quantity of an acceptable quality of an item produced. It is therefore based on the amount of work completed by an individual within a given period of time. Every unit of output is assigned a particular amount of money and the employees are paid depending on number of units produced.

 

The main advantage of this method is that there is a direct relationship between effort and reward which makes it possible to motivate high performers by providing them with higher earnings. The method requires less supervision because employees have self-drive and want to maximize on their earnings. It is also fair since it prevents employees from soldiering on the job and reduces employee resistance to change especially if the change introduced will help enhance performance. Piece rate method also helps the management to distinguish between high and low performers which makes it easy to decide who deserves promotions or the manhunt of bonuses. In addition, it reduces the costs of production because employees want to reduce the amount of wastage of materials and time in order to maximize production.

 

The disadvantages of this system include: uncertainties in the earnings of employees since it is based on quantity produced; it creates frustration in the workforce if work is delayed by factors beyond the control of the employee such as power failure, machine breakdown, delayed supply of raw materials etc; Quality of the products may be compromised because employees are more interested in quantity; it discourages team work and makes the employees adapt an attitude of every one for himself. However, this method is useful where employees are working on temporary basis.

 

Team Based Pay

This is the provision of rewards to groups/ teams of employees who have carried out tasks that are linked to the team performance. This system encourages effective team effort and cooperation; leads to collective responsibility; encourage s team members to multi-skills and multi-task and encourages less effective team members to improve individual performance for the sake of the group.

 

The disadvantages of this system are that it can only work if the group is very mature and cohesive, high performers may resent, and it may result to undesirable behavior and attitudes as a result of peer pressure. However, the system is suitable where: teams are well established, the work carried out by team members is interrelated, when standards and targets of performance are agreeable amongst team mates and if there is an acceptable to be able to meet the final pay.

Other systems used in addition (together with) to the above are:

Bonus

Bonus is a reward for output or achievement above previously agreed levels. Sonic schemes are based on an individual’s output, while others are based on the output of the group. This is usually paid at the end of the work year. Commissions or target bonuses generally applies to sales people, and is based on the values of sales achieved above a certain pre-determined ‘target. Some are paid on an individual salesperson’s achievement, while others are based on the performance of a group, and shared out proportionately.

Incentives

They are usually given to employees for a variety of factors such as good timekeeping, increased productivity, reducing operational costs or wastage, or involving in innovative activities.

Allowances

Depending on the nature of their work, some employees might be paid allowances, for example: Cost of transport; Cost of expenses incurred on entertaining existing or potential customers or clients; Cost of buying and maintaining clothing and accessories; Travel allowances etc

 

3.4 Factors Influencing Remuneration

A number of factors influence the remuneration payable to employees. They can be categorized into: External and Internal factors. External Factors are those beyond the control of the organization and include: labour market; cost of living; labor unions; government legislations; the society; and the economy. Internal factors are those that the organization can control and include: ability to pay; employee related factors like Performance, Experience, Seniority and Potential; Job requirement; job evaluation and organization’s strategy.

  1. a) External Factors

Demand for and supply of labor influence wage and salary fixation. A low wage may be fixed when the supply of labour exceeds the demand for it. A higher wage will have to he paid when the demand exceeds supply, as in the case of skilled labour. Going rate of pay is another labour-related factor influencing employee remuneration. Going rates are those that are paid by different units of an industry in a locality and by comparable units of the same industry located elsewhere. This is the only way of fixing salary and wage in the initial stages of plant operations. Subsequently, a comparison of going rates would be highly useful in resolving wage-related disputes. Technological changes also influence the fixation of wage levels. Due to the advancements in the technology there may be shortage of skilled manpower in that area. So, the organisation will provide high wages for skilled personnel. For example, information technology (IT) is suffering from the shortage of IT experts and is therefore paying them higher wages.

Next in importance to labour market is the cost of living. This criterion matters during periods of rising prices, and is forgotten when prices are stable or falling. The justification for cost of living as a criterion for wage fixation is that the real wages of workers should not be allowed to be whittled down by price increases. Increase in the prices of commodities and decrease in value of the money is called inflation also affects wage rates. The causes of inflation are many which are raising costs; fall in the currency value in international markets, raising taxes by government and stagnation in the development of economy, etc.

 

The labour unions attempt to work and influence the wages primarily by regulating or affecting the supply of labour. The unions exert their influence for a higher wage and allowances through collective bargaining with the representatives of the management. If they fail in their attempt to raise the wage and other allowances through collective bargaining, they resort to strike and other methods where by the supply of labour is restricted. This exerts a kind of influence on the employees to concerned test partially the demands of the labour unions. The employers of strongly unionized employees therefore have no freedom in wage and salary fixation due to pressure of labour representatives in determining and revising pay scales.Employers in non-unionized factories enjoy the freedom to fix wages and salaries as they please. Because of large-scale unemployment, these employers hire workers at little or even less than legal minimum wages.

 

The laws passed and the labour policies formed by the Government have an important influence on wages and salaries paid by the employees. Wages and salaries can’t be fixed below the level prescribed by the government. The laws on minimum wages, hours of work, equal pay for equal work, payment of dearness and other allowances, payment of bonus, etc. have been enacted and enforced to bring about a measure of fairness in compensating the working class.

 

Society also affects remuneration in that remuneration paid to employees is reflected in the prices fixed by an organization for its goods and services. For this reason, the consuming public is interested in remuneration decisions. In addition, whether the wage is adequate and equitable depends not only upon the amount that is paid but also upon the perceptions and the views of the recipients of the wage. Even though the wage is above the going wage rate in the community if it is lower than that of fellow worker it may be deemed inferior, it will be regarded as inequitable in the eyes of the recipients of the wage. A man’s perception of the equity of his wage will undoubtedly affect his behaviour in joining and continuing in the organisation.

 

The last external factor that has its impact on wage and salary fixation is the state of the economy. While it is possible for some organisations to thrive in a recession, there is no question that the economy affects remuneration decisions. For example, a depressed economy will probably increase the labour supply. This, in turn, should serve to lower the going wage rate.

 

  1. b) Internal Factors

Ability to pay is one of the most significant internal factors influencing employee compensation. Generally, a firm, which is prosperous and successful, has the ability to pay more than the competitive rate. This way it can attract a superior caliber of personnel. Often the labour unions also demand an increase in compensation on the grounds that the organisation is prosperous and is able to pay more.

 

Numerous employees related factors also influence his or her compensation. These include performance, experience, seniority and potential. High performance is always rewarded with pay increase and as a result it motivates the workers to do better in future. Experience makes a person perfect by providing valuable insights and thus rewarded also. Employers presume that experienced candidate posses’ leadership skills which influence the other behavior and performance. Generally experience candidate perform the job without need of training which is time consuming and deals with matter of cost to company. Hence the experience candidates demand more pay than an inexperienced candidate.

 

In today’s environment seniority of employee also influences remuneration. Naturally senior employees demands for more salary than fresher because of their hold on related job and its functions. Today many companies are demanding senior employees for key positions by offering high pay and even sometimes offering retired employees handsome salary for key positions. Firms also pay their employees, especially young ones on the basis of their potential. Software companies are very good example for this, IT graduate just who completed his education having potential in the subject can gain a good job with high payment anywhere in the world.

 

Wages are also influenced by the requirements of a job such as physical and mental requirement. Jobs, which demand more skill, responsibility, efforts and are of hazardous in nature, will carry high wage tag with them. Job evaluation establishes a consistent and systematic relationship among base compensation rates for all jobs. In other words, it establishes the satisfactory wage differentials. The organization’s strategy regarding wages also influences employee compensation. For example, an organization, which wants rapid growth, will set higher wages than competitors. On the other hand, organizations that want smooth going and just maintain the current earning will pay average or below average.

3.5 Principles of Wage and Salary Administration

The main objective of wage and salary administration is to establish and maintain an equitable wage and salary system. This is so because only a properly developed compensation system enables an employer to attract, obtain, retain and motivate people of required caliber and qualification in his/her organization. Other objectives include: To control pay-rolls; to satisfy people, reduce the incidence of turnover, grievances, and frictions; to motivate people to perform better; and to maintain a good public image. These objectives can be seen in more clearly from the point of view of the organization, its individual employees and collectively.

 

The compensation system should be duly aligned with the organisational need/ objectives and should also be flexible enough to modification in response to change. Accordingly, the objectives of system should enable the organization to: have the quantity and quality of staff it requires; Retain the employees in the organization; Motivate employees for good performance for further improvement in performance; Maintain equity and fairness in compensation for similar jobs; Achieve flexibility in the system to accommodate organisational changes as and when these take place; and Make the system cost-effective.

From individual employee’s point of view, the compensation system should have the following objectives: Ensure fair compensation; Provide compensation according to employee’s worth; avoid the chances of favoritism from creeping in when wage rates are assigned; and Enhances employee morale and motivation. Collective Objectives include:  Compensation be ahead of inflation; Matching with market rates; Increase in compensation reflecting increase in the prosperity of the company; and Compensation system free from management discretion.

 

Principles of wage and salary administration

There are three general principles that govern wage and salary fixation namely External Equity; Internal Equity and Individual Worth. The principle of external equity acknowledges that factors/variables external to organization influence levels of compensation in an organization if these variables are not consideration while fixing wage and salary levels, the salaries may be insufficient to attract and retain employees in the organization.

 

The principles of external equity ensure that jobs are fairly compensated in comparison to similar jobs in the labour market. Internal equity acknowledges that organisations have various jobs which are relative in value term. In other words, the values of various jobs in an organisation are comparative. This relative worth of jobs is ascertained by job evaluation. Thus, an ideal compensation system should establish and maintain appropriate differentials based on relative values of jobs i.e., the compensation system should ensure that more difficult jobs should be paid more.

 

According to the principle of individual worth, an individual should be paid as per his/her performance. Thus, the compensation system, as far as possible, enables the individual to be rewarded according to his contribution to organization. This principle ensures that each individual’s pay is fair in comparison to others doing the same/similar jobs, i.e., ‘equal pay for equal work’.

 

Based on these three principles, Wage administration should be guided by the following basic considerations (principles):

  • Wage policies should be carefully developed having in mind the interests of management, the employees, the consumers and the community.
  • There should be a definite plan to ensure that differences in pay for jobs are based upon variations in job requirements such as skill, effort, responsibility or job or working conditions, mental and physical requirements.
  • The general level of wages and salaries should be reasonably in line with that prevailing in the labour market.
  • The plan should carefully distinguish between jobs and employees. A job carries a certain wage-rate and a person is assigned to fill it at that rate.
  • Wage policies should be clearly expressed in writing to ensure uniformity and stability.
  • Wage decisions should be checked against the carefully formulated policies.
  • Management should see to it that employees know and understand the wage policies.
  • Wage policies should be evaluated from time to time to make certain that they are adequate for current need.
  • Departmental performance should be checked periodical against the standards set in advance.
  • Job descriptions and performance ratings should be periodically checked to keep them up-to-date.

3.6 Statutory Deductions

In Kenya, all payments made to employees for salary and wages are subject to the following statutory deductions:

Pay As You Earn (PAYE)

The Income Tax Act places on employers an obligation to deduct and remit monthly, income tax for Kenyan resident employees earning above  Ksh 10,164/= per month. Employers are required also to tax benefits such as use of company vehicles. In addition, the employer is required to file Annual income tax returns for all employees whether subject to PAYE or not. The penalty for failing to comply is twenty five per cent of the amounts of tax involved or ten thousand shillings, whichever is greater. The employer is also subject to proceedings for the recovery of that tax plus interest thereon at two percent per month. Directors and managers are also liable to a fine of not less than ten thousand shillings but not more than two hundred thousand shillings or to imprisonment for a term not exceeding two years or to both.

 

National Social Security Fund (NSSF)

The National Social Security Fund Act (cap 258) establishes the NSSF as a compulsory contributory social security scheme whose objective is to receive contributions from employers and employees as well as make payments to employees when they leave the organization. The employer is expected to contribute fifty percent of the contribution while the employee contributes the other fifty percent. Standard NSSF (currently under review) contribution is Ksh 200/= deducted from employee’s salary, with employer contributing an equal amount. Failure to comply is a criminal offence subject to a penalty equal to five per cent of the amount payable and a fine of up to Ksh 15,000/=.

 

National Hospital Insurance Fund (NHIF)

The National Hospital Insurance Fund Act (cap 255) establishes the NHIF, which is an insurance fund, which: Caters for medical insurance and Pays for expenses incurred by a contributor, and his or her spouse and dependant children. All employers are required to deduct NHIF contribution from employee’s salary through check off system depending on their salary. Failure to comply is a criminal offence subject to a penalty equal to five times the amount of that contribution. The National Hospital Insurance Fund (NHIF) is the primary health insurance provider in Kenya with a mandate to enable all Kenyans to access quality and affordable health services. Membership is mandatory for all Kenyans above 18 years of age. The benefits package includes comprehensive medical coverage for all diseases meaning that NHIF members can be fully treated at cost to the NHIF without making additional payments.

3.7Types of Pay Structures

Pay structures, also known as salary structures, set out the different levels of pay for jobs, or groups of jobs, by reference to: their relative internal value, as established by job evaluation; external relativities, via market rate surveys; and where appropriate, negotiated rates for the job.

 

The main characteristics of pay structures are they: indicate rates of pay for different jobs; provide scope for pay progression via performance, competence, contribution, skill or service; and contain pay ranges for jobs grouped into grades, individual jobs or job families. Pay structures are important in an organization because they: establish a logically-designed framework within which equitable, fair and consistent reward policies can be implemented; determine levels of pay for jobs and people; form a basis for the effective management of relativities; help monitor and control the implementation of pay practices; and communicate the pay opportunities available to employees. The most important types of pay structure, or salary structure are:

a)Narrow-graded structure

A narrow-graded structure consists of a sequence of job grades into which jobs of broadly equivalent value are placed. There may be ten or more grades and long-established structures, especially in the public sector.  Grades may be defined by a bracket of job evaluation points so that any job for which the job evaluation score falls within the point’s bracket for a grade would be allocated to that grade. Alternatively, grades may be defined by grade definitions or profiles, which provide the information required to match jobs set out under job demand factor headings (analytical matching). This information can be supplemented by reference to benchmark jobs that have been already graded as part of the structure design exercise.

  1. b) Broad-graded structures

Broad-graded structures have six to nine grades. They may include ‘reference points’ or ‘market anchors’, which indicate the rate of pay for a fully competent performer in the grade and are aligned to market rates in accordance with ‘market stance’ policy. The grades and pay ranges are defined and managed in the same way as narrow-graded structures except that the increased width of the grades means that organizations sometimes introduce mechanisms to control progression in the grade so that staffs do not inevitably reach its upper pay limit.  Broad-graded structures are used to overcome or at least alleviate the grade drift problem endemic in multi-graded structures. If the grades are defined, it is easier to differentiate them, and matching (comparing role profiles with grade definitions or profiles to find the best fit) becomes more accurate. But it may be difficult to control progression and this would increase the costs of operating them, although these costs could be offset by better control of grade drift.

  1. c) Broad-banded (pay ranges) structures

Broad-banded structures compress multi-graded structures into four or five ‘bands’. The process of developing broad-banded structures is called ‘broad-banding’. For example, all teaching jobs in universities are reduced to three broad grades namely, Professor, lecturer and tutorial fellow. Bands are unstructured and pay is managed much more flexibly than in a conventional graded structure (no limits may be defined for progression, which depended on competence and the assumption of wider role responsibilities) and much more attention is paid to market rates that governed what were in effect the spot rates for jobs within bands. Each grade or band has a pay range or scale with a minimum and a maximum. It also has a reference point. The reference point is the market rate i.e. the going rate for the job in the market and is equivalent to the mid-point or the maximum of the range depending on the pay progression method used.

  1. d) Job family structures

Job families consist of jobs in a function or occupation such as marketing, operations, finance, IT, HR, administration or support services, which are related through the activities carried out and the basic knowledge and skills required, but in which the levels of responsibility, knowledge, skill or competence levels required differ. In a job family structure, different job families are identified and the successive levels in each family are defined by reference to the key activities carried out and the knowledge and skills or competences required to perform them effectively. They therefore define career paths i.e. what people have to know and be able to do to advance their career within a family and to develop career opportunities in other families. Typically, job families have between six and eight levels as in broad-graded structures.

  1. e) Career family structures

Career family structures resemble job family structures in that there are a number of different ‘families’. The difference is that in career family, jobs in the corresponding levels across each of the career families are within the same size range and, if an analytical job evaluation scheme is used, this is defined by the same range of scores. Similarly, the pay ranges in corresponding levels across the career families are the same. In effect, a career structure is a single graded structure in which each grade has been divided into families. Career family structures focus on career mapping and career development as part of an integrated approach to human resource management. This is as important a feature of career families as the pay structure element, possibly even more so.

f)Pay spines

Pay spines consist of a series of incremental ‘pay points’ extending from the lowest to the highest paid jobs covered by the structure. They may be standardized from the top to the bottom of the spine, or the increments may vary at different levels, sometimes widening towards the top. Job grades are aligned to the pay spine and the pay ranges for the grades are defined by the relevant scale of pay points. The width of grades can vary and job families may have different pay spines. Progression through a grade is based on service, although an increasing number of organizations provide scope for accelerating increments or providing additional increments above the top of the scale for the grade to reward merit.

  1. g) Spot rates

Some organizations do not have a graded structure at all for any jobs or for certain jobs such as directors. Instead they use ‘spot rates’. They may also be called the ‘rate for the job’, more typically for manual jobs where there is a defined skilled or semiskilled market rate that may be negotiated with a trade union. Spot rates are quite often used in retail firms for customer service staff. Spot rates are sometimes attached to a person rather than a job. Unless they are negotiated, rates of pay and therefore relativities are governed by market rates and managerial judgement. Spot rates are not located within grades and there is no defined scope for progression while on the spot rate. There may, however, be scope for moving on to higher spot rates as skill, competence or contribution increases. Job holders may be eligible for incentive bonuses on top of the spot rate.

3.8 Role of Job Evaluation in Determining Remuneration

Concept of Job Evaluation

Job evaluation is the rating of jobs in an organisation. It is the process of establishing the value or worth of jobs in a job hierarchy. It attempts to compare the relative intrinsic value or worth of jobs within an organisation. Thus, job evaluation is a comparative process.  According to the International Labour Office (ILO) “Job evaluation is an attempt to determine and compare the demands which the normal performance of a particular job makes on normal workers, without taking into account the individual abilities or performance of the workers concerned”.  Wendell French defines job evaluation as “a process of determining the relative worth of the various jobs within the organisation, so that differential wages may be paid to jobs of different worth. The relative worth of a job means relative value produced. The variables which are assumed to be related to value produced are such factors as responsibility, skill, effort and working conditions”.

 

It is important to note that job evaluation is ranking of job, not job holder. Job holders are rated through performance appraisal. Job evaluation assumes normal performance of the job by a worker. Thus, the process ignores individual abilities of the job holder. It provides basis for developing job hierarchy and fixing a pay structure. It must be remembered that job evaluation is about relationships and not absolutes. That is why job evaluation cannot be the sole determining factor for deciding pay structures.

 

The starting point to job evaluation is job analysis. No job can be evaluated unless and until it is analyzed. Job analysis is a process of examining the various components of a job and the circumstances in which it is performed. Job description is a description of the duties, scope and responsibilities associated with the job while job specification refers to the minimum qualifications that a job incumbent must possess to perform the job successfully.

Methods Used In Job Evaluation

Job evaluation approaches can be categorized into non-analytical and analytical evaluations.

 

a) Non-Analytical Job Evaluation

Non-analytical job evaluation compares whole jobs to place them in a grade or a rank order hence they are not analysed by reference to their elements or factors. The main non-analytical schemes are:

i) Job classification

This is the most common non-analytical approach. Jobs as defined in job descriptions
are slotted into grades in a hierarchy by comparing the whole job with a grade definition and selecting the grade that provides the best fit. It is based on an initial definition of the number and characteristics of the grades into which jobs will be placed. The grade definitions may therefore refer to such job characteristics as skill, decision making and responsibility. Job descriptions may be used that include information on the presence of those characteristics but the characteristics are not assessed separately when comparing the description with the grade definition

ii)Job ranking

Whole-job ranking is the most primitive form of job evaluation. The process involves comparing jobs with one another and arranging them in order of their perceived size or value to the organization. In a sense, all evaluation schemes are ranking exercises because they place jobs in a hierarchy. The difference between simple ranking and analytical methods such as point-factor rating is that job ranking does not attempt to quantify judgements. Instead, whole jobs are compared, they are not broken down into factors or elements although, explicitly or implicitly,
the comparison may be based on some generalized concept such as the level of responsibility.

iii) Paired comparison ranking

Paired comparison ranking is a statistical technique that is used to provide a more sophisticated method of whole-job ranking. It is based on the assumption that it is always easier to compare one job with another than to consider a number of jobs and attempt to build up a rank order by multiple comparisons. The technique requires the comparison of each job as a whole separately with every other job. If a job is considered to be of a higher value than the one with which it is being compared it receives two points; if it is thought to be equally important, it receives one point; if it is regarded as less important, no points are awarded. The scores are added for each job and a rank order is obtained.

 

The advantage of paired comparison ranking over normal ranking is that it is easier to compare one job with another rather than having to make multi-comparisons. But it cannot overcome the fundamental objections to any form of whole-job ranking that no defined standards for judging relative worth are provided and it is not an acceptable method of assessing equal value. There is also a limit to the number of jobs that can be compared using this method. Paired comparisons can also be used analytically to compare jobs on a factor by factor basis.

iv) Internal benchmarking

Internal benchmarking is what people often do intuitively when they are deciding on the value of jobs, although it has never been dignified in the job evaluation texts as a formal method of job evaluation. It simply means comparing the job under review with any internal job that is believed to be properly graded and paid, and placing the job under consideration into the same grade as that job. The comparison is often made on a whole-job basis without analysing the jobs factor by factor.

v) Market pricing

Market pricing is the process of assessing rates of pay by reference to the market rates for comparable jobs and is essentially external benchmarking. Strictly speaking, market pricing is not a process of job evaluation in the sense that those described above only deal with internal relativities and are not directly concerned with market values, although in conjunction with a formal job evaluation scheme, establishing market rates is a necessary part of a programme for developing a pay structure. However, the term ‘market pricing’ in its extreme form is used to denote a process  of directly pricing jobs on the basis of external relativities with no regard to internal  relativities.

 

b) Analytical Schemes

i) Point-factor evaluation

Point-factor schemes are the most commonly used type of analytical job evaluation. The methodology is to break down jobs into factors or key elements representing the demands made by the job on job holders, the competencies required and, in some cases, the impact the job makes. It is assumed that each of the factors will contribute to job size (i.e. the value of the job) and is an aspect of all the jobs to be evaluated but to different degrees. Using numerical scales, points are allocated to a job under each factor heading according to the extent to which it is present in the job. The separate factor scores are then added together to give a total score, which represents job size.

ii)Analytical matching

Like point-factor job evaluation, analytical matching is based on the analysis of a number of defined factors. Grade or level profiles are produced which define the characteristics of jobs in each grade in a grade structure in terms of those factors. Role profiles are produced for the jobs to be evaluated set out on the basis of analysis under the same factor headings as the grade profiles. The roles profiles are then ‘matched’ with the range of grade or level profiles to establish the best fit and thus grade the job.

 

Alternatively or additionally, role profiles for jobs to be evaluated can be matched analytically with generic role profiles for jobs that have already been graded. Analytical matching may be used to grade jobs following the initial evaluation of a sufficiently large and representative sample of ‘benchmark’ jobs, ie jobs that can be used as a basis for comparison with other jobs. This can happen in large organizations when it is believed that it is not necessary to go through the whole process of point factor evaluation for every job. This especially applies where ‘generic’ roles are concerned, ie roles that are performed by a number of job holders, which are essentially similar although there may be minor differences.

iii) Factor comparison

The original and now little used factor comparison method compared jobs factor by factor using a scale of money values to provide a direct indication of the rate for the job. The main form of factor comparison now in use is graduated factor comparison, which involves comparing jobs factor by factor with a graduated scale. The scale may have only three value levels – for example lower, equal, higher – and factor scores are not necessarily used.

It is a method often used by the independent experts engaged by Employment Tribunals to advice on an equal pay claim. Their job is simply to compare one job with one or two others, not to review internal relativities over the whole spectrum of jobs in order to produce a rank order. Independent experts may score their judgements of comparative levels, in which case graduated factor comparison resembles the point factor method, except that the number of levels and range of scores are limited, and the factors may not be weighted.

iv) Proprietary brands

There are a number of job evaluation schemes offered by management consultants. By far the most popular is the Hay Guide Chart Profile Method, which is a factor comparison scheme. It uses three broad factors (know-how, problem solving and accountability) each of which is further divided into sub-factors, although these cannot be scored individually. Definitions of each level have been produced for each sub-factor to guide evaluators and ensure consistency of application.

 

Criteria for Selecting Job Evaluation Method

The main criteria for selecting a job evaluation scheme are that it should be:

·   Analytical – it should be based on the analysis and evaluation of the degree to
which various defined elements or factors are present in a job.

·   Thorough in analysis and impartial application in its application, the scheme should have
been carefully constructed to ensure that its analytical framework is sound and
appropriate in terms of all the jobs it has to cater for. It should also have been
tested and tried to check that it can be applied impartially to those jobs.

·   Appropriate – it should cater for the particular demands made on all the jobs to be
covered by the scheme.

·   Comprehensive – the scheme should be applicable to all the jobs in the organization
covering all categories of staff, and the factors should be common to all those jobs. There should therefore be a single scheme that can be used across different occupations or job families and to enable benchmarking to take       place as required.

·   Transparent, the processes used in the scheme from the initial role analysis
through to the grading decision should be clear to all concerned.

·    Non-discriminatory, the scheme must meet equal pay for work of equal value
requirements.

 

 

Procedure of Job Evaluation

Though the common objective of job evaluation is to establish the relative worth of jobs in a job hierarchy, there is no common procedure of job evaluation followed by all organisations. As such, the procedure of job evaluation varies from organisation to organisation. However, a job e valuation procedure may consist of the eight stages as outlined below:

 

  1. Preliminary Stage:

This is the stage setting for job evaluation programme. In this stage, the required information’s obtained about present arrangements, decisions are made on the need for a new programme or revision of an existing one and a clear cut choice is made of the type of programme is to be used by the organisation.

 

  1. Planning Stage:

In this stage, the evaluation programme is drawn up and the job holders to be affected are informed. Due arrangements are made for setting up joint working parties and the sample of jobs to be evaluated is selected.

iii. Analysis Stage:

This is the stage when required information about the sample of jobs is collected. This information serves as a basis for the internal and external evaluation of jobs.

 

  1. Internal Evaluation Stage:

Next to analysis stage is internal evaluation stage. In the internal evaluation stage, the sample of bench-mark jobs are ranked by means of the chosen evaluation scheme as drawn up at the planning stage. Jobs are then graded on the basis of data pending the collection of market rate data. Relative worth of jobs is ascertained by comparing grades between the jobs.

 

  1. External Evaluation Stage:

In this stage, information is collected on market rates at that time.

 

  1. Design Stage:

Having ascertained grades for jobs, salary structure is designed in this stage.

 

vii. Grading Stage:

This is the stage in which different jobs are slotted into the salary structure as designed in the preceding stage 6.

 

viii. Developing and Maintaining Stage:

This is the final stage in a job evaluation programme. In this stage, procedures for maintaining the salary structure are developed with a view to accommodate inflationary pressures in the salary levels, grading new jobs into the structure and regarding the existing jobs in the light of changes in their responsibilities and market rates.

Other procedures may have less steps, for example the Indian Institute of Personnel Management, suggests five steps namely: Analyze and Prepare Job Description ; Select and Prepare a Job Evaluation Programme/Plan; Classify Jobs; Install the Programme; and Maintain the Programme

 

Advantages of Job Evaluation

Job evaluation offers the following advantages:

  • Job evaluation being a logical process and objective technique helps in developing an equitable and consistent wage and salary structure based on the relative worth of jobs in an organisation.
  • By eliminating wage differentials within the organisation, job evaluation helps in minimizing conflict between labour unions and management and, in turn, helps in promoting harmonious relations between them.
  • Job evaluation simplifies wage administration by establishing uniformity in wage rates.
  • It provides a logical basis for wage negotiations and collective bargaining.
  • In the case of new jobs, job evaluation facilitates spotting them into the existing wage and salary structure.
  • In the modem times of mechanization, performance depends much on the machines than on the worker himself/herself. In such cases, job evaluation provides the realistic basis for determination of wages.
  • The information generated by job evaluation may also be used for improvement of selection, transfer and promotion procedures on the basis of comparative job requirements.
  • Job evaluation rates the job, not the workers. Organisations have large number of jobs with specializations. It is job evaluation here again which helps in rating all these jobs and determining the wages and salary and also removing ambiguity in them.

 

Disadvantages of job evaluation:

In spite of many advantages, job evaluation suffers from the following drawbacks/limitations:

  • Job evaluation is susceptible because of human error and subjective judgment. While there is no standard list of factors to be considered for job evaluation, there are some factors that cannot be measured accurately.
  • There is a variation between wages fixed through job evaluation and market forces. Say Kerr and Fisher, the jobs which tend to rate high as compared with the market are those of junior, nurse and typist, while craft rates are relatively low. Weaker groups are better served by an evaluation plan than by the market, the former places the emphasis not on force but on equity”.
  • When job evaluation is applied for the first time in an organisation, it creates doubts in the minds of workers whose jobs are evaluated and trade unions that it may do away with collective bargaining for fixing wage rates.
  • Job evaluation methods being lacking in scientific basis are often looked upon as suspicious about the efficacy of methods of job evaluation.
  • Job evaluation is a time-consuming process requiring specialised technical personnel to undertake it and, thus, is likely to be costly also.
  • Job evaluation is not found suitable for establishing the relative worth of the managerial jobs which are skill-oriented. But, these skills cannot be measured in quantitative terms.
  • Given the changes in job contents and work conditions, frequent evaluation of jobs is essential. This is not always so easy and simple.
  • Job evaluation leads to frequent and substantial changes in wage and salary structures. This, in turn, creates financial burden on organisation.

 

3.9 Review Questions

1. Discuss five internal factors that influence employee remuneration

2. Distinguish between primary, secondary and tertiary elements of remuneration

3. Explain the principles of salary and wage administration

4. Define the following terms: Salary, wages, remuneration, pay structures, remuneration

5. Explain the advantages and disadvantages of piece rate based remuneration system

6. Outline the criteria for selecting a job evaluation method

 

References

1.Armstrong,M.,(2006), A Handbook of Human Resource Practice (10th Ed),Koganpage.London

  1. Dessler& Cole (2011), Human Resources Management in Canada (11th Ed) Pearson Canada Inc.

3.Joshi, M.,(2013),Human Resource Management (1st Ed), Manmohan. Bookboon.com

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