Overview of Compensation Management

PERFORMANCE AND COMPENSATION MANAGEMENT(HRM 751)

OVERVIEW: COMPENSATION MANAGEMENT

SITI ZAIHASRINA BINTI HASSAN(2012208912)

Prepared for: Assoc. Prof. Dr Roshidi Hassan

Outline• Introduction of compensation management

– History– Definition– Perspectives – Purpose / objectives– How is compensation used?– Relationship of compensation with performance, motivation, engagement and turnover– Strategic function of compensation

• Compensation system– Definition– Relational return– Total compensation

• Compensation model– Policies– Technique– Objectives

HISTORY OF COMPENSATION

Cont…..

• The concept of workers' compensation had its origins in Germany, Great Britain and the United States between the late 1800's and early 1900's.

• Workers’ compensation became common in the US in the 1930’s and 1940’s and it continues until today.

(Lectlaw. 2013)

Islamic perspective of Compensation & Benefits

And for all there are degrees (of reward and punishment) for what they have done, and (it is) so that He may fully

compensate them for their deeds, and they will not be wronged

(Surat Al-Ahqaf:19)

Pay the worker for his work before his sweat dries (HR Ibnu Majah: 2443)

Gave direction to educate the people by mentioning and promising the reward (Al-Thawab) and punishment (Al-Iqab)

(Shafeeq, 2013) (Mohd, 2011)

DEFINITION OF COMPENSATIONCompensation refers to all forms of financial returns and tangible

services and benefits employees receive as part of an employment relationship

(Milkovich, Newman & Gerhart, 2011)

The term compensation means any form of payment made to an individual for services rendered as an employee for an employer;

services performed as an employee representative; and any separation or subsistence allowance paid under any benefit

(Cornell University Law School Report, 2011)

Compensation referred to as tangible return, include cash compensation and benefits

(Aguinis, 2009)

Compensation of employees measures the total income both wages and salaries and

supplements to wages and salaries earned by employees in return for contributing in production.

(Steven. 2012)

Employee compensation is comprised of annual salary plus, as appropriate, variable compensation awarded at

the end of the year(Steve. 2011)

Compensation is about what employees receive in exchange for their contribution to the organization in

terms of tangible and intangible return

All remuneration which is payable to an employee for work done in respect of his contract of service

(Maimunah. 2011)

Traditional VS Contemporary Compensation Management

- Salary was determined on the basis of the job work and the years of experience the

employee is holding- Human work for money, there was no space

for other psychological and social needs of workers

- Designed aligned to the business goals and strategies

- Employees are expected to work and take their own decisions (eg: cafeteria plan)- Organization offer monetary and non-

monetary benefits to attract and retain the best talents in the competitive environment.

(Naukri, 2007)

EMPLOYEES- A major expense- Used to influence employee behaviors and to improve the organization's performance

STOCKHOLDERS- Using stock to pay employees creates a sense of ownership

PERSPECTIVE OF COMPENSATION

(Milkovich, Newman, Gerhart. 2011)

PURPOSE OF COMPENSATION


• EMPLOYER• Attracting candidates• Motivating employee for high performance• Retain talent• Consistency in compensation

• EMPLOYEE• Work life balance• Recognition • Planning for better quality of life

(Nazri, 2012)


• Retain current employees: When compensation are not competitive, resulting in high turnover.

• Reward desire behavior: Effective compensation plans rewards performance, loyalty, experience, responsibility and other behaviors.

• Control cost: Rational compensation helps an organization obtain and retain workers at a reasonable cost.

• Facilitate understanding: Easily understood by human resource specialist, operating manager and employees. (William, 2013)

15

Compensation Objectives: IBM

IBM’s compensation programs are kept as simple and flexible as possible in order to keep the control at the first line manager level.

Pay for Performance: Pay our best performers like the best in the marketplace.

Pay Competitively: Attract, retain and motivate, as well as enable competitive prices for IBM services and solutions

Differentiate Strongly: Give larger increases/bonuses to those who are most deserving.

(IBM Corporate report,, 2013)

Compensation objectives: Medtronic

• Support company mission and increased complexity

• Minimize increase in fixed cost• Attract and engage top talent• Emphasize personal and team performance• Ensure fair treatment


Benefits OfferedOffered by Employers with

250 or more EmployeesRank

Health Insurance 97.7% 1

Life Insurance 95.4% 2

Retirement Plans 94.4% 3

Paid Holidays 94.1% 4

Pre-Tax deductions for Employee benefit contributions

86.5% 5

Long Term Disability Insurance 84.1% 6

Paid Vacation 83.7% 7

Educational Assistance/Tuition Reimbursement 75.1% 8

Sick Leave 73.8% 9

Employee Assistance Program (EAP) 73.1% 10

Fitness Center or Gym subsidy 36.7% 11

Long Term Care Insurance 32.8% 12

Flextime 32.5% 13

Casual Dress (every day, not just Fridays) 32.2% 14

Retiree Health Insurance (post age 65) 25.6% 15

Telecommuting 18.9% 16

Child Care Assistance (on or off site) 7.4% 17

Subsidized employee meals Not on list 18

Free Coffee/Soda Not on list 19

Pet Insurance Not on list 20

Source: Employer Benefits Study, David P. Lind and Associates (2005)

HOW IS COMPENSATION USED?

• Recruit and retain qualified employees• Increase or maintain morale and satisfaction• Reward or encourage peak performance• Achieve internal and encourage company

loyalty• Modify (through negotiation) practices of

unions

RELATIONSHIP OF COMPENSATION WITH ENGAGEMENT, MOTIVATION, TURNOVER AND PERFORMANCE

RELATIONSHIP OF COMPENSATION WITH > ENGAGEMENT

• Engagement: employee engagement is typically described as a high level of employee involvement, commitment to the organization and job satisfaction (Scot, 2010)

• Respondents: United States, Canada, Western Europe, United Kingdom, Eastern Europe, Asia-Pacific and the Middle East and other country.

• 42% respondents indicated that their organization’s total rewards strategies had a positive effect on employee engagement

• Organizations that encourage managers to engage employees by making it a performance criteria and rewarding engagement through incentive programs indicate that their organizations more effectively foster employee engagement and motivation then those organizations that do not

RELATIONSHIP OF COMPENSATION WITH> MOTIVATION

• Motivation is the activation of goal-oriented behavior whether motivation is intrinsic or extrinsic. Intrinsic motivation is something that comes from the person(challenging work) and extrinsic motivation is motivation caused by external factors (pay, bonus). (Khan and Mufti, 2012)

• Relationship between satisfaction with compensation and work motivation (Ghanzafar, 2011)

• Dimensions: fixed pay, flexible pay, and benefits.

• Respondent: sales departments of the cellular service providers in Lahore.

• Results: Work motivation in the organizations is influenced by the satisfaction of the employees with their compensation, which is offered by the organization

• Regression established that there is a strong relationship of compensation with motivation most employee motivated because of the reward they value (Khan & Mufti, 2012)

• Management compensation and the intention to turnover for proprietors at Outback Steakhouse restaurants

• Instrument: mail to all of the 599 general managers of Outback Steakhouses listed on the company’s web site in the US

• Result: Compensation had a significant positive relationship with turnover intentions (Murphy, 2000)

RELATIONSHIP OF COMPENSATION WITH > TURNOVER

RELATIONSHIP OF COMPENSATION WITH > PERFORMANCE

Compensation effect the quality of an employee’s performance and the intensity of an employee’s engagement

(Dur, 2005)

Positive relationship was found to govern rewards and motivation implying that if rewards being offered to employees

were to be altered, then there would be a corresponding change dissatisfaction and performance while the periodic salary increments, allowances, bonuses, fringe benefits and other compensations on regular and specific periods keeps

their morale high and makes them more motivated to perform (Danish and Usman, 2010).

• PM provides information for:

PM + TRAINING

PM + WORKFORCE

PLANNING

PM + COMPENSATIO

N SYSTEM

PM + TALENT MANAGEMENT

(Aguinis, 2009)

Milliman, Nason, Zhu, and Cieri (2002)

COMPENSATION IS A STRATEGIC FUNCTION

Strategic compensation is determining and providing compensation packages to employees, those are aligned with the business goals and objectives (Jenny,

2009)

Intention of the organization on rewards policies, processes and practices required to ensure that it has the skilled, competent and well motivated workforce it

needs to achieve business goals (Srivastava, 2010)

Strategic compensation is determining and providing the compensation packages to the employees that are aligned with the business goals and objectives.

Organizations have to take special measures regarding compensation of the employees so that the organizations retain the valuable employees. The compensation systems have changed from traditional ones to strategic

compensation systems (Naukri, 2007)

COMPENSATION SYSTEM

Employment Act, 1955

Purpose• To provide a number of

minimum benefits for those workers covered by the Act and to establish certain rights for both employers and employees.

• All of the benefits is stated in the contract of employment.

(Maimunah, 2011)

Mandatory Benefits

• Annual leave• Gazette public holidays• Maternity leaves• Medical leave• Termination & Lay off

benefits

Optional Benefits

• Long Service Payment • Housing allowances• Car allowances• Medical insurance• Bonus• Commission• Retirement benefits

(Malaysia payroll service report, 2009)

Standard term in a contract of employment:

• Job title• Wage and detail of the monetary

payment such as allowances and bonuses

• Normal working hour and overtime• Holiday and leave entitlement• Notice period to termination• Requirement to give exclusive service• Mobility or transfer• Penalties which may be imposed in

cases of misconduct• Other benefits


(Maimunah, 2011)


Examples: Wage

Under this Act, “wage is defined as a basic wage and all other payment due under the contract of service, excluding- Annual bonus- Overtime payment- Commission- Subsistence allowance- Travelling allowance

(Maimunah, 2011)

Employment Act, 1955Example: Maternity Protection

• Female employees are entitled to 60 day’s maternity leave.

• Must serve employers at least 90 days.

• During maternity leave period, female employee does not receive wages but entitled to be paid a maternity benefit or allowance.

• The amount is equivalent to her wages.

• Limit to only five child.

(Maimunah, 2011)

Compensation system

Relational return

Cash compensation

Base pay

•Recognition & status•Employment security•Challenging work•Learning opportunities

Total compensation

Benefits

Protection programs•Medical insurance•Life insurance•Disability income•Pension•Social security

Incentive pay•Bonus•Commission•Piece rate•Profit sharing

Merit pay

Salary Wage

Pay for time not work•Vacations•Holidays•Sick leaves•Maternity leave

Service & perquisites•Recreational facilities•Car•Financial planning•Low cost or meals

(Milkovich, Newman & Gerhart. 2011)

RELATIONAL RETURNS

Job characteristi

c

Recognition & status

Eg: IBM (Thanks award)

Employment securityChallenging work

Learning opportunities


CASH COMPENSATION

• Base pay

Wages •Payment for the number of hour worked

Salary •Salary refers to monthly rate of pay, irrespectively of the numbers of hours put by an employee.


CASH COMPENSATION

Merit pay and Cost of living adjustment (COLA)

• Merit increase are given as increment s to the base pay in recognition of past

work behavior• COLA give the same

increase to everyone regardless of performance


CASH COMPENSATION

Incentive pay workers are given a specific production target

• Bonus• Commission• Piece rate• Stock option (granting

employees the right to purchase as specific number of shares of the company’s stock at a guaranteed price during a designated time period) eg: Apple, Yahoo, Coca-Cola, Nike (Srivasta. 2010) (Milkovich, Newman & Gerhart, 2011)

Largest increase in benefits at Oil & Gas company

(Hayss, 2013)

* Health plan high because nature of work

Malaysia budget 2014

Half month bonus or minimum RM500 for all civil servants to be paid in January 2014.

(Utusan & Malaysian Insider, 2013)

BENEFITS

Protection programs• Medical insurance• Life insurance• Disability income• Pension• Social security• Allowance (house, meal, transportation, wedding

at Bharti Telecom)*In Pakistan insurance policy has not been use

because its very costly (Kumar, 2009)

BENEFITS: Pay for time not workAlso called as supplemental benefits• Vacations• Holidays• Sick leaves (out of work due to illness)• Maternity leave• Paternity leaves (Yes Bank, HCL Tech-software)


BENEFITS: Service & perquisites

• Recreational facilities (Chesapeake Energy Corp.)• Car (Google)• Financial planning• Low cost or meals

PERKS FOR EXECUTIVE (privileges granted to employee usually for those in high position)

• Company car• Company paid parking• First class air travel • Home computers• Children’s education• Mobile phones• Large insurance policies• Country club membership• Personal home repair• Loans

(Srivastava, 2010)

Google (Green, 2013)

Free food

Haircuts rock climbing wall Bring Fido to Work

laundry for free Nap Time

Genentech, Inc. (Biotechnology)

• Laundry service• Made to order sushi• Free cappuccino everyday• 24 hours libraries (Green, 2013)

SAS Institute, Inc. (software)

• Campus recreation• Fitness centre • Olympic size pool• Low cost child care • Unlimited sick days• Free medical centre (four physician, 10 nurse) (Green, 2013)

Chesapeake Energy Corp. (natural gas)

• Day care centre• Scuba classes • Company’s scuba trip to Cozumel, Mexico• Cooking demonstration• Yoga classes (Green, 2013)

Compensation preferred by a different generation

(Generation X, Generation Y)

Gen X (1965-1979)

• Combination of salary and long-term savings and retirement options

• Concerned about long-term care, as they have seen their parents go to assisted living or nursing homes. They want to make sure they are prepared for long-term care if the need arises.

• Baby boomers tend to see four to five weeks per year of paid time off

Gen Y (1980-1999)

• Receive immediate compensation for their contributions

• Tend to purchase both disability coverage and life insurance. They differ from baby boomers by opting to purchase individual home/auto/liability insurance instead of long-term care

• Only earn one to three weeks paid time off annually.(Peterson, 2012)

Cafeteria Plan

What is Cafeteria plan?• Also called as a tax-advantaged benefits plan because a cafeteria plan

reduces the amount of taxes

• Is an employees benefits plan which allows employees to choose from a list of options, much like they might choose from a cafeteria menu (Thierry and Croonen. 2010)

• Some menu of a cafeteria plan: Health insurance, childcare assistance, life insurance, payments into retirement accounts, adoption assistance, paid leave, and assistance with care for injured or disabled family members (NLI. 2007)

• For example, a young woman who is planning on having children in the near future might choose to put payments toward paid maternity leave, health insurance, and child care (Heathfield. 2007)

Reason for introducing Cafeteria Plan

(NLI Research institute. 2007)

Objectives of cafeteria plan in Japan companies

• Response to rising non-mandatory benefit costs and diverse employee needs

• Ensuring fairness among employees• Enhancing corporate image and recruitment• Fostering a new corporate culture (White. 2009)

COMPENSATION MODELPOLICIES

(foundation on which pay system are built)

TECHNIQUES(make up of the system)

OBJECTIVES

INTERNAL ALIGNMENT INTERNAL STRUCTURE• EFFICIENY

• FAIRNESS

• COMPLIANCE

• ETHICS

COMPETITIVENESS PAY STRUCTURE

CONTRIBUTIONS PAY FOR PERFORMANCE

MANAGEMENT EVALUATIONS


COMPENSATION POLICIES

POLICIES

Internal alignment

External competitivenes

sEmployee

contribution

Management


TOP BENEFITS PROVIDED BY REGION

(Hayss, 2013)

POLICIES: INTERNAL ALIGNMENTRefers to comparisons among jobs or skill levels

inside a single organization (Milkovich, Newman, Gerhart. 2011)

Definition

Internal alignment, often called internal equity, refers to the pay relationships among

different jobs, skills, competencies within a single organization (Vandae. 2010)

POLICIES: EXTERNAL COMPETITIVENESS

It is refer to the pay comparisons with the competitors


Definition

Effects of decisions regarding how much and what forms:

To ensure that pay is sufficient to attract and retain employeesTo control labor costs to ensure competitive pricing of products/ services

All pay decisions must be made without regard to race,

colour, creed, national origin, religion, sex, sexual orientation, age, disability or Vietnam-era

veteran status (Ohio State University. 2004)

POLICIES: EMPLOYEE CONTRIBUTION

Employee contributions-Focus - Relation emphasis placed on employee performance- Generation Ys desire to be instantly rewarded for good performance which is pay for performance (PFP) policies (Gherson, 2001).

Definition

POLICIES: MANAGEMENT

Ensuring the right people get the right pay for achieving the right objectives in the right way


Definition

MEDTRONICObjectives -Focus on customer

-Attract and engage top talent-Recognize personal accomplishment and share success

Internal alignment -Foster team culture-Support promotional growth opportunities-Reflect job responsibilities

External competitive -Choice in benefits-Market value of jobs establishes overall pay parameter

Employee contribution -Incentives tied to business goals-Opportunity to earn above market pay-Recognition of individuals and team performance

Management -Clearly understood-Employee choice

(Milkovich, Newman & Gerhart. 2011)

TECHNIQUE

TECHNIQUE > INTERNAL PAY STRUCTURE

• Pay structure refer to pay rates for a different work or skills within a single organization.

• The number of levels, the differentials in pay between the levels and the criteria used to determine those difference describe the structure.

• Pay structure can be define:- Number of level work- Pay differentials between the level- Criteria used to determine those levels differential

Cont….• Number of level

- One feature of pay structure is hierarchical nature.- Some are hierarchical with multiple levels and some have a few levels.

• Differentials- Pay is varies among employees- Work that require more knowledge, skills, perform under unpleasant working condition is usually paid more.

• Criteria: Content and Value- Work content and value are the most common bases for determining internal structure.- Content refer to work performed in a job and how it gets done (skills required, complexity of task, problem solving, responsibilities)- Value refer to the worth of the work (contribution to the organization objectives)

TECHNIQUE > EXTERNAL PAY STRUCTURE

• Refer to pay relationship among organizations. The objectives is:

- Control cost and increase revenue (the higher the pay level, the higher the labor cost)

- Attract and retain employees (higher paid employees are more productive than those at other companies). It can save recruiting and training cost.

Cont…Competitive pay policy alternatives:1. Lead

- maximize the ability to attract and retain quality employees and minimize employee dissatisfaction with pay.- High pay level can reduce absenteeism and turnover (Charles. 2010)

2. Match- Match paid rates by competitors

3. Lag - Pay below the market rates- Can reduces the ability to attract potential employees- If it is combined with the compromise of higher future retain, it may increase the productivity- Can lead for the other return eg: increase benefit (Milkovich, Newman, Gerhart. 2011)

(Pay scale report, 2013)

LEAD MATCH LAG

Average annual base pay: $165, 815

(Fortune Report, 2013)

TOP PAYING COMPANIES

Average annual base pay: $182,394

Average annual base pay: $216,000For: AssociateBest Companies rank: 82At this Boston, MA-based law firm, all attorneys and staff are eligible for merit-based bonuses. For associates at its New York and Washington DC offices, dinner is on the house for those working past 7pm. And on Monday evenings, free yoga classes are offered.

(TSENG, 2013)

TOP PAYING COMPANIES

TECHNIQUE: PAY FOR PERFORMANCE

• Pay which according to the some measure of individual or organizational performance

• Pay for performance plan:- Short term (merit pay, lump-sum bonuses, individual incentives plan, individuals spot awards)- Team incentives (Gain sharing, profit sharing, large group incentives plan) (Milkovich, Newman, Gerhart. 2011)

International Business Machine Corporation

• Pay for performance, pay competitively, and differentiate strongly by giving the right dollars to the right people.

• Our approach includes:- Benchmarking annually to ensure competitive pay- Using job family to distinguish value of similar skills- Using geographic data used to understand market value by geography- Using a structured framework to track and measure employee performance allowing managers to assess relative contributions of all employees and to strongly differentiate

(IBM Corporate report,, 2013)

OBJECTIVES

– Guide the design of the pay system– Serve as the standards for judging success of the pay

system– Policies and techniques are means to reach objectives


Cont…• Efficiency

– Improving performance, increasing quality, delighting customers and stockholders

– Controlling labor costs• Fairness

– Fundamental objective of pay systems– Fair treatment by recognizing both employee contributions, and

employee needs

76

How IBM Ensures Fairness• Clear message to managers to make sure employees are treated fairly;

Non-discrimination policy mentioned as the managers enter the planning application

• Base Pay Equity Analysis conducted before the planning cycle to review women or minority employees who are paid one standard deviation away from the mean of the majority– Look for possible reasons for the difference in pay: poor performance,

promoted quickly so it takes time to catch up, had been on an extended leave of absence

– If appropriate, recommendations are made, giving allocation relief to managers to correct potential problems that are identified

– Managers must either follow the recommendation or enter a valid reason for not doing so, which is reviewed

• Factor weightings and assessments helps to rank employees objectively

• Employees may appeal decisions if they do not feel that they are fair

(Amler. 2005)

77

Key Factors For Success: IBM

• Management Communications

• Senior management is involved in discussions before major compensation changes are implemented.

• Employee Communications

• Up line management is involved in the decision making process with managers in their organization. This ensures fairness and equity.

(Amler. 2005)

Cont….

• Compliance– Conformance to Federal and State compensation laws and

regulations

• Ethics– Organizations care about how its results are achieved

CONCLUSION

A good combination of total compensation able to attract, retain employees in an organization

Compensation is relatively related with performance and acceptance of employees towards the

compensation management

A structured and fair compensation management will create high motivation for the employee to perform

in an organization

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