Compensation structure for FastCat

Compensation structure for FastCat

Executive summary
In Phase I we looked at the descriptions of sample jobs at FastCat and proposed a structure for the jobs based on the concepts of internal equity and organizational objectives of innovative product design, improved marketing and cost competitiveness. Based on the content and value of the job descriptions available we had created a tailored and hierarchical structure, which supported the organization strategy, work flow and motivates behaviour towards organization’s objectives. In Phase II we ensured external competitiveness by analyzing the external market survey data on total compensation and pricing FastCat’s structure in accordance with it.

We mapped FastCat’s jobs with the benchmarked jobs and defined the market by selecting the relevant industries to benchmark. We adjusted survey data to account for age and defined the pay policy line by setting it at -10% and – 20% of market line. We have then used bands and zones to integrate internal and external structures.

Now in phase III, we have recommended a strategy for pay for performance based on the organizational objective defined in phase I.

We analyzed the base salaries of 25 employees of FastCat based on their Compa ratios and identified Green circles (salaries below the pay structure) and Red circles (salaries above the pay structure). Accordingly adjustments were made in their base salary or grade wherever necessary. We have then given weights to the balance score card based on the employee and customer survey as well as the compensation strategy of the organization. Next, we calculated the mean benefit/base pay ratio for competing companies that fall in our area of interest and decided to set it at 11.3%. Lastly, we believe that success of any new policy will depend on the acceptance and participation by the employees. Hence we have recommended active clarification of goals, monitoring process, information gathering, etc. to ensure the same

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Contents
Restructuring Phase 2
Recommended Strategy for Performance Based Pay
Assessment of Current Salaries
Objectives and Rationale
Bonus Pay
Benefits
Options & Patterns observed in the Initial adjustments
Executing and managing the system
Employee Participation
Conclusion

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Restructuring Phase 2
We have modified our Phase 2 and shifted from Band and Zones to Grades and Ranges .The modified graph is as shown below:

The new grades are as shown below :
Administration Aide
Travel Coordinator
Administration Assistant II

115
120
135

Training Assistant
Marketing Support
Project Support Assistant
Technician

165
165
170
175

Quality Assurance Analyst

190

Programmer Analyst
Graphics Designer
User Interface Designer

200
210
220

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Administration Leader

220

Quality Assurance Analyst A
Implementation Consultant
Software Designer
Senior Quality Assurance Technician

235
235
245
260

Clinical Liasion
Software Solutions Consultant
Marketing Services Representative
Software User Interface Architect

275
280
305
360

Project Leader
Client Account Leader
Senior Fellow
Visionary Champion

420
435
455
465

200000
y = 455.76x – 36924
R² = 0.8859

180000
160000
140000
120000
100000
80000
60000
40000
20000
0
0

50

100

150

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200

250

300

350

400

450

500

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Recommended Strategy for Performance Based Pay
FastCat’s Pay for Performance should aid its compensation objectives which have b12een already stated as follows:
1.
2.
3.
4.
5.

Encourage to innovate existing products and create better products Encourage to collaborate with customer
Encourage cross‐functional working
Encourage cost‐efficiency
Encourage expansion

Of the options available for FastCat among – Merit Pay, Gain Sharing and Profit Sharing – the performance based pay that we suggest for FastCat is:
1. Merit Pay
a. We were already lagging behind the market to begin with. Unless we give an increase in the basic we might lose the high performers to the competitors in the market. b. Since we have a very well defined job description for each of the employees, measuring individual contribution against the expectations of the organization would not be difficult. Hence implementing merit pay to reward exceptionally performing employees would not be a difficult proposition.

2. Bonus through Profit Sharing
a. Bonus through Profit Sharing treats the entire organization as one unit. Since everyone shares the company’s performance, there is increased motivation for collaboration among the different departments of the organization.

b. The overall profit would be a function of the customer’s satisfaction level. Hence a profit sharing based bonus would ensure that the employees keep the interest of the customers in mind while designing or implementing
the software.

c. This will also ensure that employees seek for more innovative products and more profitable geographies to increase the net profit.
d. Since this is a variable pay and not a permanent increase, it does not ensure a long term commitment and is not reflected in the fixed costs of FastCat.

Assessment of Current Salaries
The salaries of 25 FastCat employees were analysed based on their compa ratios, and the grades and ranges that were framed. Based on that, the following were observed:

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1. Green Circles: Some jobs were paid lower than the ranges that had been specified and the compa ratios that were provided alongside. Here, the following options were considered:  Boost their salaries

 Boost their salaries with an increase in JE points and/or a promotion in his Grades In both the options, pay parity would be ensured. However, employee costs might go up.  Cut salaries of people around them: This might be lead to high attrition. 2. Red Circles: Some jobs were also paid higher than the ranges and the specified compa ratios. The following options were considered:

 Adjust the base wage: This can be done by decreasing the base wage, accompanied by a corresponding promotion in his Grade.
 Move him to another job with a higher pay: Here, the job descriptions would be enlarged, and the higher base salaries would be retained.
Thus we looked at both internal equity (Grades and JE points) and External Competition (Compa Ratios) to adjust/ accept the initial base salaries.

Objectives and Rationale:
A merit pay clearly communicates to the employees the belief and trust in the employee that is shown by the organization. The utility of merit pay is to ensure that performance is truly rewarded as it is sizeable and contingent on the base pay. In addition, a transparent performance appraisal system is required with clearly defined metrics aligned to the organization’s strategy that will ensure that people understand the direction in which they must contribute. Communication emerges as the key. Merit pay is primarily in the realm of high performers who have

Eligibility:
It is not necessary to have merit pay only for jobs that have variability. It must also be included for routine jobs. The employee should have performed well over the years. Here the years must be over 3 to ensure that an average employee life cycle in the software industry is exceeded and it shows a certain level of commitment from the employee towards the organization. Cost :

1. Higher quartile ranges have jobs having a high compa-ratio indicating that the job is being paid above the market value/policy line of the competition. An increase over and above the value will be significant in terms of financial impact but may not mean so much to the employees in that category and thereby resulting in lower values with respect to the other quartile ranges. 2. For the lower quartile of the compa-ratio ranges, increases in merit-based pay shows faith in the employees’ performance since merit increases are permanent in nature. Also, it motivates employees in HRM 2012-14 | Section A | Group A1

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the job to work harder to strive to reach higher quartile ranges where the effective increase of amount value wise may be higher.
Thresholds and cap – The costs of the entire merit system have been set at 5% of the budget cap. Not all employees should receive the merit pay as it results in a permanent increase over the base component resulting in high
costs and only if an employee has performed consistently over the years above expectations will he be eligible for merit increase.

Bonus Pay
Parameter
Revenue Growth
Labour costs
Innovation:
Customers see FastCat representatives as responsive &
knowledgeable
Customer value FastCat’s solution
Employees take pride in working for FastCat
Employees have the tools and support to do their jobs
Employees understand how to make teams successful

Total Bonus Pool ($)

Weightage
12.5
5
15
15

Rating
4
3
5
5

17.5
10
12.5
12.5

5
4
3
5

: 18,684.00

Company Performance: 4.4
Customer value FastCat’s solution:
As per the FastCat’s compensation strategy, the objectives for the company give importance to cost competitive in the software solutions provided to increase value thus this has been given the highest weightage in the balanced scorecard.

According to the customer survey, the customers value the solutions provided by FastCat very highly. Hence, we have rated it as 5(high).
Innovation:
As per the FastCat’s compensation strategy, the objectives for the company give importance to innovative product design created in collaboration with the customers, thus this has been given the highest weighatge in the balanced scorecard.

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As mentioned in the case, employees’ value the innovative environment that is provided by FastCat. Thus, it has been given the highest rating of 5.
Customers see FastCat representatives as responsive & knowledgeable: Since FastCat has a strong customer focus, it is important that customers are satisfied with the depth of knowledge displayed by FastCat employees. Hence we have given it a high weightage. According to the customer survey the customers perceive the employees to be as highly knowledgeable and responsive. Hence, we have given this rating as 5(high). Revenue Growth:

FastCat being a small sized company in a competitive environment, and with
expanding markets, revenue growth is an important factor for sustaining its position and expanding. Hence, we have given it a higher weightage.

Even though the industry is expanding rapidly, currently the revenue growth is not as high as the industry. So, we have rated it as 4.
Employees have the tools and support to do their jobs:
In order to innovate and create value for the customers, full support is required to be given to the employees and thus we have given this parameter a weightage of 12.5 % We perceive that since employees have given the organisation a lower rating on how the organisation is managed thus they are not much satisfied with the support provided. Therefore, we have given it a rating of 3.

Employees understand how to make teams successful:
We believe that teamwork is important and employees need to make and function well in cross functional teams. Hence, this parameter is of relative importance for FastCat. When required the cross functional team are made with ease and thus we have given it a rating of 5(high).

Employees take pride in working for FastCat:
Though the employee commitment is linked to employee pride but it is not a core part of FastCat’s strategy hence we have given it a slightly less weightage as compared to the other factors. As mentioned in the case employees are proud of the value that the products provide to the customers, thus it has been given the highest rating of 4.

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Labour cost:
We believe that in the current scenario FastCat is more focused on expansion with quality talent hence labour cost is not as big a concern as the others factors and thus it has been given the least weightage. It is a small sized organisation and they are currently employees who are not satisfied with how
their pay is determined and hence we have given it a rating of 3.

Benefits:
To decide what % of our base pay should be allotted to benefits, we need to compare the corresponding ratios at the competing companies that fall in our area of interest. In the table below, we have listed the companies and their benefits strategy

Competing Companies of Interest*
Software (company 2)
Software (company 19)
Software (company 41)
Software (company 51)
Software (company 53)
Software (company 55)
*Data from Phase 2

Benefits/Base Pay Ratio
0.11
0.14
0.1
0.11
0.1
0.12

A calculation of the average of the figures listed above yields a mean benefits/base pay ratio of 11.3%. This is the market line for companies that are in direct competition with us. When we defined our strategy in phase 0, we said that a core compensation objective would be to attract, motivate and retain the best of employees considering the highly competitive industry. Hence we need to either match or lead the market line. However benefits are very costly and any increase would have a significant impact on our total compensation budget. Further we have decided to pay at 75th percentile of the base pay. Hence we can pay benefits at the market line thus resulting an overall compensation structure which will be competitive in the market.

Options & Patterns observed in the Initial Adjustments
We observed the following patterns while readjusting the base salary of the employees: When an employee’s base is much lower than the market base:




increase his base salary as justified by the compa ratio
increase his JE points within the same grade
increase his JE points and promote him to a higher grade

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When an employee’s base is higher than the market base:



The employee can be promoted to a higher grade, but his base would be reduced. Here, we are focusing on reducing costs and do not mind the employee leaving because of the salary drop. In case of a senior leader or important employee, we may not mind paying exorbitant salaries to retain them since they are critical for the organization’s success.

Executing and managing the system
While executing the compensation system, we need to ensure that employees at all levels are familiar with the system and perceive it to be fair. At the outset only we would state the objective of the compensation program that would ensure that all the employees understand the various parameters of the compensation structure and also have clarity over the different pay levels and the pay mixes. The compensation strategy will be rolled out in a test phase wherein it will be implemented at a department level and then will be moved to the organizational level after one round of execution. Monitoring
can be done by taking employee feedback and ascertaining the response of the compensation system.

The balanced scorecard, a strategic planning and management system, would align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor FastCat’s performance against strategic goals. Hence the balanced score card will measure the effectiveness of the strategy. The recommendations we are making to our Phase I and II solutions are the incorporation of an adjusted, merit-based and bonus system for FastCat’s employees which is robust and competitive at the same time.

Communication Process
Since the communication is an essential part of any policy introduction and implementation. The CEO has to ensure that all its processes are aligned to the vision of the organization including the changes in compensation structure and policy.

Clarifying objectives: The objective of the compensation strategy should be clearly defined so that the structure across various job families can be adjusted accordingly. The new policy could meet with a lot of speculation, rumours and resistance from the employees. Hence, the company must ensure that its compensation strategy is clearly communicated and all the employee- doubts are cleared. Information gathering: The top management must take action to gather data and survey the pulse of the organization in the light of new salary levels and pay for performance plan. This would help in considering the opinions of employees and prevent heavy attrition or poor implementation of policy. This could be done through informal interviews and interactions, formal opinion survey and solicitation of feedback through emails.

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Communication strategy: The management should take care that the technical details involved in computing the compensation is understood by all the employees and there is no scope for ambiguity. It should focus on answering questions about compensable factors, criteria for job evaluation, weights and scales, linkages between business strategy and compensation strategy and career progression. Mode of Communication: there is a need to conduct training sessions, town halls, opening direct communication channels between employees and top management, sending letters and emails explaining the same, leveraging the influence of the grapevine, conducting general meeting via teleconferencing and broadcasting the same in newsletter for ready referencing.

Monitoring: Key result areas and critical success factors can be established and evaluated on a regular basis can make the implementation of the plan a success.

Employee Participation
Attrition is one of the major prevailing issues; and FastCat which thrives on innovation would want to retain their talented pool of employees. The compensation strategy includes merit based pay structure which would ensure that the talented workforce does not leave. Also the compensation strategy takes care of the external and internal equity. Therefore by adopting this compensation strategy, we don’t have to worry about good people resigning.

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Conclusion:
Based on our analysis, the final cost and summary data for FastCat is as below:

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The final changes in the job evaluation points are as follows: Jobs
Admin Aide
Administrative Leader
Clinical Liaison
Graphic Designer
Marketing Service
representative
ProgrammerAnalyst
Project Leader
Project Support
Assistant
Quality Assurance
Analyst
Senior Quality
Assurance Technician
Software User
Interface Architect
Training Assistant
User Interface
Designer
Visionary Champion

Grades

Initial Points

Adjusted Points

1
3
43
32
5

115
220
275
210
305

115
220
250
180
305

34
6
2

200
420
170

240
420
170

23

190

210

45

260

280

5

360

360

2
3

165
220

165
220

6

465

465

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