Compensation HRM

Compensation

Cash, Bonuses, Insurance, Cash, Bonuses, Insurance, Vacation, HolidaysVacation, HolidaysPerks, RecognitionPerks, Recognition

What does compensation (what you receive for your services) mean to you?

A Definition . . . All forms of

financial return, tangible services and benefits

that employees receive as part of their employment relationship

Compensation is what employees receive in exchange for their contribution to the organization. Generally speaking, employees offer their services for three types of rewards

Components of Total CompensationComponents of Total Compensation

(legally required)• Social Security•Unemployment•Disability

Public Protection• Pensions• Savings• Insurance

Paid leave• Training• Work breaks• Sick days• vacation• Holidays• Personal

MiscellaneousBenefits• Legal advice• Eldercare• Daycare• Wellness• Counseling• Moving• Perks

Basic Salary• basic• shift• premium

Performance-Based Pay• Stock Options•Bonuses• Merit• Incentive

Direct CompensationIndirect Compensation (Benefits)

Intrinsic Rewards (nonmonetary)• job security• Status symbols• Social rewards• Task-self rewards

Extrinsic Rewards (monetary)

Total Compensation

Total Compensation - Total Compensation - ExtrinsicExtrinsicTotal Compensation - Total Compensation - ExtrinsicExtrinsic

DirectDirect IndirectIndirectIndirectIndirect

BonusesBonuses

GainsharingGainsharingSecurity Plans• Pensions

Security Plans• Pensions

Employee Services• Educational assistance• Recreational programs

Employee Services• Educational assistance• Recreational programs

CommissionsCommissions

Wages / SalariesWages / Salaries

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays

Components of a Total Compensation Program - 1 FinancialFinancial Direct

wages, salaries, commissions, bonuses Indirect

insurance plans life, health, dental, disability

social assistance benefits retirement plans, social security, workers’ comp

paid absences vacations, holidays, sick leave

Components of a Total Compensation Program - 2 Non-FinancialNon-Financial The Job

interesting, challenging, responsible opportunity for recognition, advancement feeling of achievement

Job Environment policies, supervision, co-workers, status symbols,

working conditions, flextime, compressed work week, job sharing, telecommuting, flexible benefits programs

Factors Affecting the Wage MixFactors Affecting the Wage Mix

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Compensation Administration

Equity Theory

The most important objective of any pay system is fairness or equity, generally expressed in three forms

Internal equity: where more difficult jobs are paid more

External equity: where jobs are fairly compensated in comparison to similar jobs in labour market

Individual equity: where equal pay is ensured for equal work

Compensation Theories

Reinforcement and Expectancy Theory

Behaviour which has rewarding experience is likely to be repeated

Agency Theory

Employers act as PrincipalsEmployees as AgentsWages paid is Agency CostChoose a contracting scheme to align the interest

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Objectives of compensation planning

Attract talent

Retain talent

Ensure equity

Reward appropriately(loyalty, commitment, experience, risk raking and other

desired behaviours)

Control costs

Comply with legal rules

Ease of operation


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It is the process of managing a company’s compensation (base

compensation as well as supplementary) programme Base

compensation, here, refers to monetary payments to employees in

the form of wages and salaries. It is a fixed, non-incentive kind of

payment calculated on the basis of time spent by an employee on

the job. Supplementary compensation signifies incentive payments

based on the actual performance of an employee.


Wage And Salary Administration

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Objectives To establish a fair and equitable remuneration To attract competent personnel To retain present employees To control labour cost To improve motivation and morale of employees To project a good image of the company


Wage And Salary Administration

Principles Wage and salary plans be sufficiently flexible Job evaluation being done scientifically Wage and salary plans be always consistent with overall

plans Wage and salary plans being responsive to changing conditions

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Wage Policy In India

A wage policy offers certain guidelines for determining a wage structure. The term wage structure refers to various pay scales showing rages of pay within each grade. Three important elements of wage policy in India need to be elaborated here

Minimum wage: Wage sufficient to sustain and preserve the efficiency of the worker and offer basic amenities of life

Fair wage: It is above the minimum wage but below the living wage. It is fixed, taking into account factors such as the

productivity of labour, prevailing wage rates, level of national income and its distribution, the employer’s capacity to pay etc.

Living wage: This is the highest amount of wages proposed by the government, offering basic amenities of life and satisfying

the social needs of worker.

Components of SalaryThe two essential components of pay

structure are; basic wages and dearness allowance .the basic wage rate is fixed taking the skill needs of the job, experience needed, difficulty of work, training required, responsibilities involved and the hazardous nature of the job. Dearness allowance it paid to employees in order to compensate them for the occasional or regular rise in the price of essential commodities.

Variable Compensation Types: Individual Incentives Merit Pay Bonus Commission Profit Sharing Stocks

Employee BenefitsMandated Benefits or Legally required eg EPFDiscretionary or Voluntary BenefitsPayment for time not worked eg Paid VacationHealth and Security Benefits Employee Services eg relocation BenefitsPremium Pay eg hazard pay, shift differentialsWork Place Flexibility

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performance based pay systems

To be fair to employees, organisations should keep the following guidelines in mind while instituting merit-pay systems

Establish high standards of performance, so that only the truly outstanding employees emerge as winners.

Develop accurate performance appraisal systems. The focus must be on job-specific, results-oriented criteria as well as employee behaviours.

Train supervisions in the mechanics of carrying out appraisals and offering feedback to employees in a proper way.

Tie rewards closely to performance.

Use a wide range of increases. Also, make pay increases meaningful.

Choices In Designing A Compensation System

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Suitability of job based vs. knowledge based pay systems

A job based-pay system is suitable when:

Jobs do not change often Technology is stable Lot of training is required to learn a

given job Turnover is relatively how Employees are expected to move

up through the ranks over time Jobs are fairly standardised within

the industry

Individual-based pay system is suitable when:

The firm has relatively educated employees with both the ability and willingness to learn different jobs The firm's technology, processes are

subject to frequent change Vertical growth opportunities are limited Opportunities to learn new skills exist Teamwork and employee participation are encouraged


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Broad banding vs. Competency based pay system

Organisations that follow a skill-based or Competency Based Pay System frequently use broad banding to structure their compensation payments to employees. Broad branding simply compresses many traditional salary grades (say 15 to 20 grades) into a few wide salary bands (three or four grades). By having relatively few job grades, this approach tries to play down the value of promotions. Depending on changing market conditions and organisational needs, employees move from one position to another without raising objectionable questions,. As a result movement of employees between departments, divisions and locations becomes smooth. Employees with greater flexibility and broader set of capabilities can always go in search of jobs in other departments or locations that allow them to use their potential fully. Broad banding, further, helps reduce the emphasis on hierarchy and status. However, broad banding can be a little unsetting to a new recruit when he is made to roll on various jobs. Most employees still believe that the existence of many grades helps them grab promotional opportunities over a period of time. Any organisation having fewer grades may be viewed negatively – as having fewer upward promotion opportunities. Moreover, a number of individuals may not want to move across the organisation into other areas.

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Below market vs. above market compensation

Open vs. secret pay


Compensation HRM

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