COMPENSATION

MANAGEMENT
Employee compensation refers to all
forms of pay or rewards going to
employees and arising from their
employment.
 Rewards
• Money plus other material and psychological payments
• Employment relationship as an economic exchange – the wage
– effort bargain
• Rewards influence employee attitudes, behaviors &
performance
• Shifts towards individual performance related pay linking
rewards to contribution
• Contextual factors
– labor markets and product/industry
– governmental regulations
– social norms and expectations
 Basic Aims of Compensation
Management

• Attracting talent

• Retaining them

• Motivating them to perform well

• Proper financial management - ensuring adequate

ROI

• Complying with legal requirements

 Factors Influencing Pay

• Business & HR strategies

• Culture, Climate & management practices
• Type of people employed
• History & present arrangement for reward
• Market considerations
• Government regulations/ Legal considerations
 Defining the compensation philosophy
A well-designed compensation philosophy supports the organization's strategic plan and
initiatives, business goals, competitive outlook, operating objectives, and compensation and
total reward strategies.
As such, most compensation philosophies define the following basic tenets:
•To identify the organization's pay programs and total reward strategies.

•To identify how the pay programs and strategies support the organization's business
strategy, competitive outlook, operating objectives and human capital needs.
•To attract people to join the organization.

•To motivate employees to perform at the best of their competencies, abilities and skill sets.

•To retain key talent and reward high-performing employees.

•To define the competitive market position of the organization in relation to base pay,
incentive compensation and benefits opportunities.
•To define how the organization plans to pay and reward competitively, based on business
conditions, competition and ability to pay.
 Reward Policies
Reward Policies would be concerned with

• Level of rewards

• Market rate & equity

• Relating rewards to business performance

• Flexibility

• Involving employees

• Transparency

• Tax implications
Equity Considerations in
Compensation
Equity and Its Impact on Pay Rates

•Forms of Equity

•External •Internal •Individual •Procedural

Equity Equity Equity Equity
 Addressing Equity Issues
•Salary Surveys

•Job Analysis and

Job Evaluation
•Methods to
Address Equity
Issues •Performance Appraisal
and Incentive Pay

•Communications, Grievance
Mechanisms, and Employees’
Participation
 Establishing Pay Rates
•Steps in Establishing Pay Rates

• Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external
•1 equity).

•2 • Determine the worth of each job in your organization through job evaluation (to ensure internal
equity).

•3 •Group similar jobs into pay grades.

•4 •Price each pay grade by using wave curves.

•5 •Fine-tune pay rates.

Compensation Administration Process
 Establishing Pay Plans

1. The salary survey

2. Job evaluation

3. Group similar jobs into pay

grades

4. Price each pay grade—wage

curves

5. Fine-tune pay rates

Classification of Rewards
Rewards

Intrinsic Extrinsic

Financial Non Financial

Direct Indirect
Compensation Compensation
 Intrinsic Rewards

• Personal satisfaction one gets from the job itself

• Self – initiated rewards/ Internal or within the
individual
• Influence Job satisfaction and motivation
• Can be provided for instance by Job enrichment
 Intrinsic Rewards
INTRINSIC
REWARDS

Participate in decision More responsibility Opportunities for personal

making growth

Greater job freedom and More interesting work Diversity of activities

v
discretion v
 Extrinsic Rewards
• External or outside the individual

• Rewards one gets from the employer

– Job context

– The environment of work

– Pay and conditions

– Supervision and managerial behavior

– Job security

• Extrinsic rewards maybe financial or non financial

 Non Financial Rewards

• An array of desirable extras that are potentially

at the disposal of the organization

• Emphasize making life on the job more

attractive

• What one may view as desirable, another might

find relatively useless

 Non Financial Rewards
EXTRINSIC
REWARDS

NON FINANCIAL
REWARDS

Preferred Office Assigned parking Business cards

furnishings spaces

Impressive titles Preferred lunch hours Preferred work Own secretary

assignments
 Financial Rewards
EXTRINSIC
REWARDS

FINANCIAL
REWARDS

Direct Compensation Indirect

Compensation

Basic Salary/ Wage Pay for time not worked

Incentives
Protection Programs
Performance Bonus

Profit Sharing Services & Perquisites

Stock Options
 Basic Wage Plans

• Time Wage Plan

• Piece Wage Plan

• Skill Based Pay

• Competency Based Pay

Skill or Knowledge -Based Pay

• Links pay to the level of skills used in the job &

sometimes the acquisition & application of
additional skills by the person carrying out the job.
• Two forms:
– Conventional skill based job slotting like
unskilled, semi-skilled & skilled
– Skill based pay progression, linking pay
progression to acquisition of skills
 Gain Sharing
• A plan where cost savings are shared
• The sharing with employees of greater-than-expected gains in
productivity.
• Groups rewarded for successful performance
• Group entitled to gain sharing even if the firm has not recorded any
profits
• Alternatives for rewards distribution:
– A flat amount for all employees
– Same percentage of base salary for all employees
– Percentage of the gains by category of employees
– A percentage based on individual performance against measures
 Profit Sharing
• A system to distribute a portion of the profits of the
organization to employees.
• Primary objectives:
– Improve productivity
– Recruit or retain employees
– Improve product/service quality
– Improve employee morale
• Drawbacks
– Disclosure of financial information
– Variability of profits from year to year
– Profit results not strongly tied to employee efforts
 Profit sharing
Three major types of profit sharing:
• Distribution plan
– Annual or quarterly cash bonus paid according to
predetermined formula & based on company’s profits
• Deferred profit-sharing plan
– Profit sharing credits instead of cash payment
– Distributed when employees part from the organization
• Combination plan
– Employees allowed a portion of each period’s bonus in
cash and rest is put in deferred plan.
 Annual Bonus
• Most annual bonus plans based on annual performance of the
company
• At the end of financial year or during important festival
• Payment of Bonus Act, 1965: 8.33% of the salary or wage earned
during the year or Rs. 100, whichever is higher.
• A bonus is aimed at motivating short term performance with three
issues to consider when awarding them:
– Eligibility – based on job level and salary
– Fund size – use a formula
– Individual awards – based on performance
 Employee Benefits
• Benefits can be defined as the fringe advantages
that accrue to an employee over and above his
salary.
• For being with the organization and on the basis of
position
• Normally not linked to performance
• Benefits are a major expense for most employers
 Employee Benefits
• Pension Schemes • Company Accommodation
• Personal Security
• Financial Assistance
– Personal Accident cover
– Medical insurance – Company loans

– Business travel Insurance – Mortgage assistance

– Health Screening – Relocation packages
• Company Cars
– Company discounts
• Company transportation
facilities – Fees to professional
bodies
 Employee Benefits
• Personal Needs
– Paid holidays, Sick Leave • Other Benefits
– Maternity/Paternity leave
– Subsidized meals
– Career breaks/
Sabbaticals – Luncheon vouchers
– Counseling : Personal/ – Clothing allowance
Financial
– Telephone rentals
– Child care facilities
– Club memberships – Mobiles/Laptops
– Sports & social facilities
– Scholarships/Educational
allowances
Compensation Trends
 Some Modern Concepts

• Golden Hellos

Recruitment bonus/ up-front bonus to entice

sought after individuals to join the company

• Golden Handshakes

Essentially termination payments to ensure

that employees leave with a financial cushion
 Some Modern Concepts
• Golden Parachute

Ensures provision of compensation or lucrative

benefits for the loss of job following a change
of control.

• Cafeteria Benefit plan

Customized benefit plan giving employees a

choice to select most suitable benefit scheme.
 Broadbanding
• Collapses many grades into fewer “broad bands”
• More flexibility in paying individuals within bands
• Helps avoid unnecessary distinction in organization
on the basis of level or status.
 Variable Compensation
• Variable Pay
– Compensation linked to individual, group/team, and/or
organizational performance.
• Basic assumptions:
– Some jobs contribute more to organizational success than
others.
– Some people perform better and are more productive than
others.
– Employees who perform better should receive more
compensation.
– Some of employees’ total compensation should be tied
directly to performance.
 Executive Compensation
• “Reasonableness” of Executive Compensation
– Would another company hire this person as an
executive?
– How does the executive’s compensation compare with
that for executives in similar companies in the industry
– Is the executive’s pay consistent with pay for other
employees within the company?
– What would an investor pay for the level of performance
of the executive?
Common Executive Compensation
Issues