TOPIC: Case Studies on Compensation

Management relevant issues.

 Topic:
Case Studies on Compensation Management relevant issues.

Submitted for:
Tamanna Parvin Eva
Senior Lecturer,
Department of Business Administration,
East West University

Submitted by:
Nadia Ahmed Mim
(2015-3-10-010)

Section: 2

Date of Submission:
11/05/2020
 LETTER OF TRANSMITTAL

11th May, 2020

Tamanna Parvin Eva,
Senior Lecturer,
Department of Business Administration
East West University,
Aftabnagar, Dhaka
Subject: Submission of individual term paper.
Madam,
I have the pleasure to inform you that I have accomplished my term paper on “Case Studies on
Compensation Management relevant issues”. I have reviewed various articles and our text
book to gather information on the topics. I have written this term paper based on that.

I have gathered valuable experiences from different situations in the process of preparing the
term paper. I would like to thank you for giving me such a challenging opportunity to work on
this project because the term paper has given me an opportunity to apply my theoretical
knowledge in real world. I certainly believe that, this term paper will be able to meet your
approval. I would genuinely appreciate to make further corrections where it seems necessary by
you.
I would be glad if you kindly accept this report & thus oblige.

Sincerely yours,

NAME ID
Nadia Ahmed Mim 2015-3-10-010
 Acknowledgement
Successful completion of any study generally requires support from various related parties. To
prepare this term paper, I have received adequate support from text book and Online sources.
First of all, I am very grateful to Almighty God who gave me blessings, courage, and ability to
prepare this term paper. I am very grateful to Miss Tamanna Parvin Eva, honorable course
instructor of Human Resource Planning course for guiding me to complete my term paper. I am
also highly indebted to her for her scholarly and constructive suggestion which was of much
assistance to prepare this term paper. I would also like to express our utmost gratitude to my
parents and respective elders for always guiding and inspiring us.
Finally once again, I am very much grateful to the Almighty that I was able to complete this term
paper successfully.
 Executive Summary
In today’s ever changing and dynamic business world HRM plays a vital role in the development
and growth of a company. Every organization gives incentives to their employees and that is a
company’s Compensation Management System. Compensation management is the act of
providing monetary value to an employee for the work they do by means of a company process
or policy. Some types of compensation include salary, bonuses, and benefit packages.
Companies use compensation management in order to find, keep, and motivate employees to do
quality work. Compensation is a vital part of human resource management, which helps in
encouraging the employees and improving organizational effectiveness. Compensation packages
with good pay and advantages can help attract and retain the best employees. Pay for
Performance, Incentives, Benefits, Pay Compressions these all are under a company’s
compensation management system. Pay for Performance refers to a pay strategy that uses salary,
bonuses, or other incentives based upon employee performance. This is generally measured by
pre-defined metrics or qualitative evaluations (performance appraisals). Pay compression is the
situation that occurs when there is only a small difference in pay between employees regardless
of their skills or experience. It is also referred to as salary compression. Just like that, Benefits
are any perks offered to employees in addition to salary. The most common benefits are medical,
disability, and life insurance; retirement benefits; paid time off; and fringe benefits.

Through this term paper we hope to analyze all these different factors and provide insight into all
the opportunities and issues related. The term paper will highlight all the relevant issues and how
they are perceived in the organization. Lastly, the paper will also consider all the opportunities
that can be gained through the effective utilization of the topics.
 Table of Content

Sl Detail Page
No No

01 Introduction

02 Theoretical Background

03 Analysis

04 Finding

05 Conclusion & Recommendation

06 Reference

07 Appendix
 Chapter 1: Introduction

1.1 Background of the study

There is no doubt that the world of work is rapidly changing. As part of an organization then,
HRM must be equipped to deal with the effects of the changing world of work. In every
organization there is a Compensation Management system. And a company has to face so many
relevant issues related to compensation management system. Compensation is very important for
an organization to keep their employee motivated toward work. And a good employee can help a
company achieve its goal. There are issues in Compensation Management. Challenges of
Compensation Management are, Forms of Pay, Underlying Pay Philosophy, Employee
Incentives and Compensation, Presentation of Compensation, Offering Competitive Pay,
Automation and Outsourcing, Generational Differences in Expectations and many more. Pay for
Performance (PFP) compensation plans are very helpful for a company if it implements them
effectively. It can meet the following objectives:
o Employ and retain the best quality workers
o Convey and reinforce the goals, values and motives of the company.
o Engage workers in the success of the company
o Benefit value creators
Moreover, the rewards policies instituted by a company should assist employees in
understanding the relation in:

o Company Vision: where the organization heads.

o Company Strategy: how is the business going to reach them
o Employee Expectations and Roles: what kind of role is assigned to each employee in the
plan and what does the company expect from him/her.
o Employee Rewards: how employees get financial benefits and rewards from the expected
achievements linked to their roles.
This line of sight should be a target of the company applying a Pay for Performance strategy. As
a result, the role of compensation is for reinforcing the outcomes the organization requires its
workers to achieve such that it accomplishes the financial vision of shareholders as well as the
employees. Pay for Performance refers to a pay strategy that uses salary, bonuses, or other
incentives based upon employee performance. This is generally measured by pre-defined metrics
or qualitative evaluations (performance appraisals). Incentive compensation is performance-
related remuneration paid with a view to encourage employees to work hard and do better. Both
individual incentives and group incentives are applicable in most cases. Bonus, gain-sharing,
commissions on sales are some examples of incentive compensation. Individual incentives refer
to incentives given to individual employees for their additional contribution towards
organizational objectives. Under it, incentives are calculated on the basis of individual
performance. Benefits are any perks offered to employees in addition to salary. The most
common benefits are medical, disability, and life insurance; retirement benefits, paid time off,
and fringe benefits. There are four major types of employee benefits many employers offer:
medical insurance, life insurance, disability insurance, and retirement plans. Merit pay refers to a
performance-related pay which provides bonuses or base pay increases for employees who hit
the target or perform their jobs effectively, according to measurable criteria over a predetermined
period of time. Merit pay, also known as pay-for-performance, is defined as a raise in pay based
on a set of criteria set by the employer. This usually involves the employer conducting a review
meeting with the employee to discuss the employee's work performance during a certain time
period.

We live and work in a global economy but what globalization actually involves is far less
obvious especially for the management of pay and reward. Companies operating in different
cultures and economic environments used to leave most things to be determined at local level.
The most important objective of any pay system is fairness or equity, generally expressed in
three forms,

a) Internal equity: This ensure that more difficult jobs are paid more.

b) External equity: Where jobs are fairly compensated in comparison to similar jobs in labor
market.

c) Individual equity: It ensures equal pay is ensured equal work.

1.2 Objectives of the study

Main Objective:
The main objective of the study is to compare and analyze different Compensation Management and
gather necessary information regarding all the relevant issues that are faced. The ethical concepts related
to Pay for Performance, Merrick Differential Piece rate, International pay system, are all observed and
evaluated through this study. The overall objective is to give a clear picture of how companies use
management policies and practices to improve Compensation Management in different levels.

Specific Objectives:
There are also a number of specific objectives of this study:

 To focus on theoretical knowledge on the field of Compensation Management.

 To focus on pay for performance, Merrick Differential Piece rate, International pay
system related to Compensation Management system.
 To find the effects of Compensation management relevant issues on employees.
 To analyze the effects of pay for performance, benefits on all related parties.
 To find the relation between theoretical and real life scenarios
 To attract talent and retail talent
 New and desired behavior
 Comply with legal rules
 To motivate employees to perform.
 To regulating labor cost.
 To focus on your employees’ effort.
 Attracting quality employees.
 To provide recommendations based on the findings of this study.

1.3 Methodology of the study

This term paper has been fully based on information about Compensation Management and
concepts that have been collected from various sources such as articles on the internet, text book
and practical knowledge of the topic. I used the raw information to analyze and determine
several factors. Then I interpreted our findings and presented them in my paper.

Sources of information:
1. Primary Source
2. Secondary Source

Primary Source: Information collected from the internet through articles and webpages.

Secondary Source:
Information collected from our Text Book “Compensation”
1.4 Limitation of the study
Like other term papers I had to face a number of limitations and problems when trying to create a
flawless paper. But I have tried my level best according to our capability to make the best term
paper possible.
The problems I had to face while making the term paper include:
• Not all information was easily available
• Limited time to prepare a highly informed report
• Insufficient access to physical or digital books regarding the topics
• Lack of knowledgeable people to provide information regarding the details of the
topic.

Chapter 2: Theoretical Background

The term “pay-for-performance compensation” refers to performance-based pay programs where

an employee is incentivized and rewarded for achieving goals or objectives. Pay-for-performance
plans are extremely popular – according to our recent Pay Practices and Compensation Strategy
survey, 75% of organizations currently leverage pay-for-performance compensation as part of
their overall compensation plan. Pay-for-performance compensation can come in many varieties
depending on your organization’s budget, compensation philosophy, and organizational goals.
When designing a pay-for-performance plan, you’ll want to consider the outcomes your
organization is looking to achieve, the frequency with which you’ll reward employees, and the
total increase you’ll be budgeting to fund these programs. There are two general categories of
pay-for-performance compensation: merit pay increases and variable pay programs. As you look
to implement a pay-for-performance program in your organization, you can use either of these
two types of pay-for-performance plans – or both – to incentivize employee performance and
drive your desired outcomes.

Merit Pay Increases 

A merit pay increase refers to an increase to an employee’s base pay due to high performance.
These raises are typically delivered an annual basis, and are budgeted for as part of the annual
salary increase budgeting process. Merit pay increases are the most commonly used pay-for-
performance model for recognition of employee performance, as they deferentially reward top
performers for their contributions with a bump to their base salary for the following year.
Variable Pay Programs
Variable pay programs encompass a variety of discretionary and non-discretionary bonuses that
can vary according to the payout period, the employees who are eligible, and the metrics that
employees are measured against. Unlike merit pay increases, variable pay programs are
increasingly administered not just annually but multiple times a year (e.g., once a quarter) and a
mix of different variable pay programs are often used in combination to achieve the desired
results.
Discretionary bonuses are awarded on an ad-hoc basis to employees who demonstrate
exceptional performance, often without consideration of pre-defined goals and objectives. Some
common discretionary bonus types are:
*Spot bonuses – Reward employees “on the spot” for achievements that deserve special
recognition.
*Project bonuses – Reward employees for completion or superior completion of a specific
project. Retention bonuses – Typically awarded to long-tenured employees, or employees in hot
jobs, to decrease their flight risk.
Nondiscretionary bonuses are awarded when employees, teams, or the entire organization meets
specific, pre-defined goals and objectives. Based on the duration of the assessment period (the
amount of time over which performance is measured), they are considered either short-term
incentives (STI) or long-term incentives (LTI). Some common nondiscretionary bonus types
include:
*Company-wide bonuses – these focus around specific improvement goals for the organization,
and reward employees based on how much improvement is made on these goals within a certain
period of time.
*Team-incentive bonuses – these focus around specific improvement goals for one team (e.g.,
marketing or sales) and are rewarded based on performance for that team.
*Individual incentive bonuses – these plans are often based on predetermined, measurable
business objectives (MBOs) that are evaluated periodically based on one person’s performance.
Organizations with a formal pay-for-performance philosophy are more than twice as likely to
have above average or excellent employee engagement. That means that tying compensation to
performance can be a strategic human resource management strategy. Pay-for-performance
compensation models improve employee engagement and retention by clearly tying employee or
company achievement of performance goals to tangible financial rewards. These programs also
enable employees to see a clear connection between the work they do every day and the success
of the company as a whole. Since they are frequently awarded, they can also facilitate more
regular conversations about individual and company performance, allowing managers to provide
critical feedback outside the annual review process. Pay-for-performance compensation plans are
not just necessary to keep up with today’s talent market. Pay-for-performance plans can help
employees grow professionally due to their desire to be rewarded. Frequent rewards can also
lead to increased employee retention, as the money motivation helps keep staff at your business
long-term. And of course, increased retention will lead to greater productivity and lower turnover
costs.
Compensation awarded for results rather than for time worked. Incentive pay, also known as
pay-for-performance, is so-called because the prospect of financial compensation is supposed to
be an incentive for an employee to remain motivated, work hard and strive for the best possible
results. An incentive scheme is a plan or program to motivate individual or group performance.
An incentive program is most frequently built on monetary rewards (incentive pay or monetary
bonus), but may also include a variety of non-monetary rewards or prizes. Incentive plans are
methods in which employees of an organization are kept motivated for the work that they do, and
are given incentives on reaching or accomplishing certain organization goals. The incentive
plans can be for lower level employees, middle management and senior management. It usually
comprises of incentives like profit sharing, project bonuses, stock options, sales commission etc.
Incentive plans are plans for low level employees who are at the bottom of the organization’s
hierarchy, which mostly includes staffs and first line supervisors. For example, a software
programmer might receive a performance bonus for creating a low cost application which helps
the organization in cost optimization.
Pay-for-Performance plans:
1. Individual Employee incentive and Recognition Programs.
2. Sales Compensation Programs.
3. Team/Group-based variable Pay Programs.
4. Organization wide Incentive Programs.
5. Executive Incentive Compensation Programs.
Pay for Performance plans known as Incentive plans, have become valuable tools for
driving employee productivity and profitability within several types of organizations. The
key is to put in place incentive plans that are closely aligned to your business's objectives so that
employees are rewarded when your organization is close to, at or above its goal. Incentives
increase performance by boosting the value people assign to work goals, causing them to make
stronger commitments to those goals and achieve them. The program has to provide the meaning,
rewards, communication, and support that foster a sense of value. Incentive compensation
represents a variable or bonus pay plan that is often linked to company performance. Incentive
compensation plans are used to attract and retain key employees aligning the interests of
employees with expected performance outcomes that enable company success. Pay is a powerful
Human resource management tool for recruitment, retention, motivation and reward for work
done. It is a factor that must be considered if an organization wants to remain competitive in its
industry. What employees expect of their employers is no longer just “a fair day’s” pay for a
fair day’s work” but rather a competitive remuneration package with new innovative methods of
providing benefits. Reward provides employees with a tangible reward for their services to the
organization. It also provides them with a source of livelihood. Reward and incentive programs
are vital to both organizations and employees.
International compensation refers to all forms of financial returns and tangible benefits that
employees of an international organization receive from their employer in exchange for
providing their labor and commitment. Compensation for employees of U.S. organizations
operating in an international environment consists of four components: base salary, indirect
monetary compensation (benefits), equalization benefits, and incentives. In USA, compensation
package includes: base salary, long term incentives and other benefits and peaks. The base salary
is the small part of the total package. In Europe, paid less compensation than that of American
executives, but benefits and employee perks are much better in Europe than America. In Japan,
the compensation levels of CEO’s of large companies are just one third of those of American
CEO’s. Japanese compensation is based on seniority of employees. Factors of international
compensation can be Labor Market Conditions, Economic Conditions, Prevailing Wage Level,
Government Control, Cost of Living, Union's Influence, Globalization and many more.

Technology has greatly assisted the globalization of pay systems although there are many
differences that still require a broad approach, says David Shonfield. We live and work in a
global economy but what globalization actually involves is far less obvious, especially for the
management of pay and reward. Companies operating in different cultures and economic
environments used to leave most things to be determined at local level. That has changed quite
significantly over the past few years, especially in the last 18 months. There is now a strong
tendency towards centralization and the harmonization of policies and practice in large firms.

An individual living in a country other than their country of citizenship, often temporarily and
for work reasons. An expatriate can also be an individual who has relinquished citizenship in
their home country to become a citizen of another. If your employer sends you from your job in
its BD office to work for an extended period in its London office, once you are in London, you
would be considered an expatriate or ‘expat”.
For expatriates, the term base salary means the primary component of a package of allowances
which are, 1. Foreign service premium, 2. Cost of living allowance, 3. Housing and utility
allowance, 4. Basis for in service benefits and pension contributions. Base salary may be paid in
home or local currency or in some hard currency like pound or dollar.
Parent country nationals often receive a salary premium as an inducement to accept a foreign
assignment or as compensation for any hardship caused by the transfer. Such payments vary
depending upon the assignment, actual hardship, tax paid to foreign governments and length of
the assignment.
Various allowances are paid to expatriates depending upon the assignment. They include; The
cost of living allowance, housing allowance, Home leaves and travel allowance.
Education allowances are given towards fees for the education of expatriates’ children.
Education allowances include items such as tuition, language class tuition, books, transportation
and uniforms.
Relocation allowances usually cover moving, shipping, temporary living expenses, and down
payments or lease related charges.
Many international compensation plans attempt to protect the expatriate from negative tax
consequences by using a tax equalization plan. Under this plan, the company adjusts an
employee’s base income so that the expatriates will not pay any more or less tax than if they had
stayed in the home country.
To help guard against or offset income lost by an expatriate’s spouse as a result of relocating
abroad. Multinationals generally pay allowances in order to encourage employees to take up
international assignments.

Expatriate compensation packages can vary enormously from company to company and location
to location. When negotiating an expat contract that is right for your needs and those of your
family, it is important that you carefully consider several factors. a) Nature of the Employment,
b) Contract duration and termination notice, c) Governing Law and Jurisdiction.
One of the first major considerations of any expatriate compensation package should concern the
nature of the relationship between the employees and the employer relationship will constitute.
There are a number of different types of expat contract, those with specified end dates or
durations, and that are ongoing.
This will usually be the local law in the country you will be employed in, the law of the home
country from which you relocated or the law of the country in which your employer in
incorporated. There is simply no such thing as standard expatriate contract that can be
implemented in any country. The clauses and inclusions need to be modified according to the
law of the foreign jurisdiction and tailored in such a way that ensures that any conflict between
the law of the country and the law of the country of the corporation or hiring entity do not
conflict. Many companies will include clause in their contract that specifies that all local laws be
waived in favor of the law of the employing country. However, despite this, it is worth nothing
that in many counties, especially those within the EU, this is unenforceable. In addition to this,
although the law varies from country to country, it is generally accepted that, in the absence of a
clear choice of law in the contract, the employment agreement will be carried out in the country
within which the employee will carry out their work.