Compensation management

Compensation Management

Payroll involves large sums of money Pays systems are therefore an integral part of the business

strategy The pay debate as to whether the best way of rewarding service

is through pay is far from settled.

Objectives of Compensation System

A large sum of money is invested in people

Design rests on what must the company achieve.

System therefore needs to attract good employees by structuring packages that tempt people to do the job

Achievement of the Objectives are Determined By :

Top managements willingness to recognise ability and effort of individual employees

Top managements Commitment and philosophy regarding pay Operating Labour markets forces Collective bargaining Process Government legislation and rules

Designing a Compensation System

Traditional way of paying was done by ignoring the interaction of organizational members and buying employees time by the hour.

No Incentives, rewards etc In a rewarding environment , people work

hard. Today we value employees.

The Rewarding Environment Includes

How does this benefit practice benefit the organization ? Does the benefit offset the administrative costs? If we discontinued this practice, would that adversely affect

the organization’s performance? This gives off a holistic picture of the organization.

Elements of Total Compensation

Direct compensation is the fixed pay an employee receives on a regular basis, either in the form of a salary or as an hourly wage.

It includes cash incentives and various share offers from employers. The defining factor is that it has a cash value. Designed to reward employees for good performance. Can be monetary or non-monetary. Can also include medial aid, pension, provident fund etc. Perquisites or perks are a special category of benefits and are only

available only to employees with some special status, such as upper – level managers.

Principles of Value-Chain Compensation

Companies need to look at compensation as a value-creating function.

It creates value for the organisation and employees. Balances the four major compensation objectives which include:

Sustaining management Motivating performance Building employee commitment Encouraging growth in employee’s skills

Principles of Reward Strategy

Pay for performance Links to other levers of organisational change

such as providing recognition when deserved Reward measurable competencies Match incentives to the company culture Keep incentives clear and simple Over-communicate the reward strategy for

the best results The greatest incentive is the work itself as

employees want to be recognised for the work they do and the contributions they make

Model for Compensation System

Job- Based Compensation Plan Route

Traditional Pay Systems

Traditionally people were paid primarily through base (basic) salaries determined by specific job, the need to maintain a certain level of internal pay equity an the need to pay externally competitive salaries.

Employees were not encouraged to develop skills. Most of salary structures had various other components.

Emerging Pay Systems

Pay for knowledge and skills Pay for competencies Performance based pay Incentive pay systems Broadbanding = rather than climb up through a series

of grades, employees might spend most of their careers in a single band moving laterally and acquiring new knowledge and competence. Useful in ‘boundaryless’ organisation.

Employee Benefits

Items in the total package offered to employees over and above salary which increase their wealth or well-being at some cost to the employer

Voluntary Benefits

Most of these benefits have certain legislative minimums. Vacation leave Paid public holidays Time for personal matters Sick leave Maternity leave Health and life insurance Medical Aid Schemes Pension Funds Employee Services e.g. Canteens, social, and recreational

services

Benefit Planning and Flexible Benefit Plans

Establish objectives Collect complete descriptive data on the current workforce Determine how much money is available in the budget Determine what programmes fit your objectives, your

workforce and your budget Determine what your employees need and want Decide what you will provide and what you will actually spend

in total Determine options and costs, of admin, management and

communication Plan how the above will be accomplished Implement the above

Advantages of Flexible Benefits Programme

The company can set the sum total of benefits for each employee

The changing needs of the workforce are catered for

Employees take ownership for their choice of benefits by satisfying their own unique needs

It is less costly for the organisation when an employee adds a new benefit

Disadvantages of Flexible Benefits

Without proper assistance employees can make bad choices and find themselves not covered for emergencies

Company administrative costs increase The cost of some benefits may increase as a result of a

majority of employees choosing the benefit

Calculating the Costs of Employee Benefits

The total annual costs of benefits for all employees Cost of benefits per employee per annum Percentage of the payroll (total costs of benefits

divided by the annual wage) Costs per employee per hour Other Benefits

What to Consider when Considering Costs

There is little evidence that benefits really encourage improved performance, or increase employees’ job satisfaction

Costs of employee benefits and services have increased dramatically Employers are required by law to introduce certain programmes So-called voluntary programmes are constantly under pressure from

labour unions, competitors and the industry to improve on employee benefits and services

Benefits Strategy

The Trend-setter Comparable

Benefits Minimum Benefits

Compensation Systems and Quality Assurance

Compensation benefits will shift towards base rates with top-up incentives based on performance, such as gain share,profit share etc.

Increased flexibility will become evident in remuneration packages.

Remuneration packages will become more tax-effective. Remuneration will be linked to teams rather than to

individuals