Compensation Management

Compensation

• Employee compensation– refers to extrinsic and intangible rewards. – refers to all forms of pay or rewards going to

employees and arising from their employment.– includes monetary as well as nonmonetary pay or

rewards.– could be

– Direct financial payments-• Wages, Salaries, Incentives, Commission and Bonuses etc.

– Indirect financial payments-• Financial benefits like insurance, vacations etc.

Components of compensation

Typical Compensation Responsibilities

Compensation Program

• It should have four objectives:– Legal compliance with all appropriate laws and

regulations

– Cost effectiveness for the organization

– Internal, external, and individual equity for employees

– Performance enhancement for the organization

Legal compliance

• Some the compensation related acts in India:–Minimum Wages Act, 1948

– Payment of Wages Act, 1936

– Adjudication of Wage Disputes

– Pay Commissions

– Payment of Bonus Act, 1965

Strategic Compensation

• Attracting, motivating, and retaining the talent required for a sustainable competitive advantage

• Focusing the energy of employees on implementing the organization’s particular competitive strategy

• Improving productivity

Compensation Philosophies

Other considerations

• Alignment with organizational cultures

• Balancing the costs of attracting and retaining employees with the competitive pressures in its industry.– where firm wishes to be positioned in the labor

market?

Labour Market Positioning

• Lead strategy – the organization intends to pay somewhat above the market

rate in valuing employees as a competitive advantage.

• Match strategy– sets the organization’s policy line at the middle of the

market.

• Lag strategy– the organization intentionally pays below the market.

Competency-based Pay

• Pay for the competencies

• Also k/a Knowledge-based pay (KBP) or Skill-based pay (SBP)

• Employees start at a base level of pay and receive increases as they learn to do other jobs or gain other skills and therefore become more valuable to the employer.

Outcomes of competency-based pay

Broadbanding

• It uses fewer pay grades having broader ranges.

• Prime reasons– creating more flexible

organizations, encouraging competency development, and emphasizing career development.

Behavioral Aspects of Compensation

• Equity– Perceptions based on comparisons between an

individual’s ratio of inputs and outcomes and the ratios of others doing similar work.• Inputs: What an employee gives to the job

• Outcomes: What people get out of doing the job

Inputs

Outcomes

Inputs

Outcomes

Self Other

Equities

• Equity– the perceived fairness of the relation between what a person does

(inputs) and what the person receives (outcomes).

• External Equity– Employees are paid comparably to those who perform similar jobs in

other firms.

• Internal Equity– Employees are paid according to relative value of their jobs within an

organization.

• Individual or Employee Equity– Individuals performing similar jobs for the same firm are rewarded

according to factors unique to the employee, such as performance level or seniority.

Behavioral Aspects of Compensation

• Pay Fairness– What people believe they deserve to be paid in relation to what others

deserve to be paid.

• Pay Secrecy– Employees may have inaccurate information or misperceptions about

pay.

– Secrecy is the norm—managers get fewer questions about inequitable pay.

• Pay Communication– Involving employees in pay system design increases pay satisfaction.

– Implementing pay systems fairly and providing due process reduces misperceptions about pay.

Wage and Salary Administration

• It is described as– the development, implementation, and ongoing

maintenance of a base pay system.

– Base pay• The wage or salary an employee receives, exclusive of

any incentive pay or benefits.

• Is predictable and fixed.

– Pay Mix• The way an organization distributes pay among all

elements of total compensation, including monetary versus nonmonetary elements.

Wage and Salary Administration

• Pay Policies–Market positioning

–Market pricing• Market price is the typical wage paid for a job in the

immediate labour market.

• Unions and Compensation

Development of a Base Pay System

Pay Surveys

• A pay survey – is a collection of data on compensation rates for

workers performing similar jobs in other organizations.

– An employer may • use surveys conducted by other organizations, or

• may decide to conduct its own survey.

Pay Surveys

• While using surveys from other sources, it is important to address following questions:– Participants

– Broad-based

– Timeliness

–Methodology

– Job matches

Job Evaluation

• Job Evaluation– provides a systematic basis for determining the

relative worth of jobs within an organization.

– every job in an organization is examined and ultimately priced according to the following features:• Relative importance of the job

• KSAs needed to perform the job

• Difficulty of the job

Job Evaluation Methods

• Job Ranking Method– Places jobs into a rank order according to the perceived

overall value or importance of the job.

– Is convenient when only a few jobs need to be evaluated and one person is familiar with them.

• Job Classification Method– Groups jobs into a set of classifications based on the job

descriptions, and then ranks the jobs that are found within each classification.

– Jobs classified as being similar are usually referred to as being in the same job grade.

Job Evaluation Methods

• Point Factor Rating Method– It breaks down jobs into various compensable factors and

places weights, or points, on them.– Compensable factor

• is one used to identify a job value that is commonly present throughout a group of jobs.

• The factors are determined from the job analysis.

Job Evaluation Methods

• Point Factor Rating Method

–STEP 1: Select Compensable Factors

–STEP 2: Assign Factor Weights

–STEP 3: Define Factor Degrees

–STEP 4: Establish the Degree of Each Factor Present in Each Job

–STEP 5: Calculate Job Values

Job Evaluation Point Chart

Defining degrees

Establishing Pay Structures

Executive Salaries

Executive Benefits

Executive Perquisites(Perks)

Annual Executive Incentives and Bonuses

Performance Incentives: Long Term vs. Short Term

Elements of Executive

Compensation