Compensation

The sum total of all forms of payments or rewards provided to employees for performing tasks to achieve organizational objectives

Rs

Compensation- Nature and scope

The complex process includes decisions regarding variable pay and benefits It suggests an exchange relationship between the employee and the organization It involves design, development, implementation, communication and the evaluation of reward strategy and process of the organization

Compensation Objectives
1. 2. 3.
4.

To reward employees past performance fairly, in line with efforts, skills and competencies To attract and retain competitive high performing employees To motivate the high performing employees and reinforce desirable employee behaviour
To remain competitive in the labor market

5. 6.
7.

To align employees future performance with organizational goals To communicate the employees their worth to the organization
To provide employee social status

 Strategic compensation
Using the compensation plan to support the companys strategic aims. Focuses employees attention on the values of winning, execution, and speed, and on being better, faster, and more competitive..

IBM

Strategic Compensation Planning

Strategic Compensation Planning
Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization. Serves to identify the net monetary payments made to employees with specific functions of the HR program in establishing a pay-forperformance standard. Seeks to motivate employees through compensation.

Compensation Policy Issues

Pay for performance Pay for seniority Salary increases and promotions Overtime and shift pay Probationary pay Paid and unpaid leaves Paid holidays Salary compression (A salary inequity problem, generally caused by
inflation, resulting in longer-term employees in a position earning less than workers entering the firm today)

Geographic costs of living differences

Pay Structure

Pay grades Pay ranges

Compensation Administration Process

Total compensation Financial (extrinsic rewards) Non -Financial (intrinsic rewards)

Direct

Indirect

Satisfaction derived from job

Praise and rewards

Classification of rewards

Components of Financial Compensation

Direct Variable Pay Incentives -Individual -Group/team -organizational Mandatory

Indirect Benefits voluntary

Vacations Breaks Holidays Security Plans Pensions

Base pay

Wages Salaries

Provident Fund Gratuity Maternity Leave Health plans Medical leave

Educational assistance Recreational programs

Base pay
The direct financial compensation an individual receives based on the time worked Two bases of calculation - Hourly/wage: payment for the number of hours worked - Salaried : receive consistent payments at the end of specific period regardless of number of hours worked

 Nature generally market driven ( D>S=increase in pay) - Job Evaluation

The formal systematic means used to identify the relative worth of jobs within an organization.

Variable pay/ pay for performance : Incentives

Variable Pay - any plan that ties pay to productivity or profitability. (i.e)The standard by which managers tie compensation to employee effort and performance. - it is linked to individual, group, or organizational performance and not to time worked Incentive Pay Programs
Establish a performance threshold to qualify for incentive payments. Emphasize a shared focus on organizational objectives. Create shared commitment in that every individual contributes to organizational performance and success.

Frederick Taylor
Popularized scientific management and the use of financial incentives in the late 1800s.
Systematic soldiering: the tendency of employees to work at the slowest pace possible and to produce at the minimum acceptable level.

Types of incentives
Individual Incentives Group/team Incentives Organizational Incentives

Individual Incentive Plans

Piecework Plans
The worker is paid a sum (called a piece rate) for each unit he or she produces.

Straight piecework: A fixed sum is paid for each unit the worker produces under an established piece rate standard. An incentive may be paid for exceeding the piece rate standard.
Standard hour plan:
An incentive plan that sets pay rates based on the completion of a job in a predetermined standard time. If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.

Individual Incentive Plans (contd)

Pro and cons of piecework
Easily understandable, equitable, and powerful incentives Employee resistance to changes in standards or work processes affecting output Quality problems caused by an overriding output focus Possibility of violating minimum wage standards Employee dissatisfaction when incentives either cannot be earned due to external factors or are withdrawn due to a lack of need for output

Individual Incentive Plans (contd)

Merit pay
A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance.

Bonuses
Bonus
Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria.

Spot bonus
Unplanned bonus given for employee effort unrelated to an established performance measure.

Group Incentive Plans

Team Incentive Plans
Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded.

Establishing Team Incentive Payments

Set performance measures upon which incentive payments are based Determine the size of the incentive bonus. Create a payout formula and fully explain to employees how payouts will be distributed.

Group Incentive Plans (contd)

Gainsharing Plans
Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.
Scanlon Rucker Improshare

Employee Bonus and Gainsharing Plans

Scanlon Plan
Rewards come from employee participation in improving productivity and reducing costs.

Rucker Plan (SOP)

Shared rewards come from the difference between labor costs and sales value of production.

Improshare

Gainsharing based on increases in productivity of the standard hour output of work teams.

The Pros and Cons of Team Incentive Plans

PROS Team incentives support group planning and problem solving, thereby building a team culture. The contributions of individual employees depend on group cooperation. Unlike incentive plans based solely on output, team incentives can broaden the scope of the contribution that employees are motivated to make. Team bonuses tend to reduce employee jealousies and complaints over tight or loose individual standards. Team incentives encourage cross-training and the acquiring of new interpersonal competencies.

The Pros and Cons of Team Incentive Plans (contd)

CONS Individual team members may perceive that their efforts contribute little to team success or to the attainment of the incentive bonus. Intergroup social problemspressure to limit performance (for example, team members are afraid one individual may make the others look bad) and the free-ride effect (one individual puts in less effort than others but shares equally in team rewards)may arise. Complex payout formulas can be difficult for team members to understand.

Organizational Incentive Plans

Profit Sharing Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise. Paid once in a year or deferred sums until retiremement Challenges:
Agreement over division of profits between company and employees. Possibility of no payout due to financial condition of company.

Organizational Incentive Plans

Stock Options
Granting employees the right to purchase a specific number of shares of the companys stock at a guaranteed price (the option price) during a designated time period. The value of an option is subject to stock market conditions at the time that option is exercised. Apple , yahoo, coca cola, nike

Organizational Incentive Plans

Employee Stock Ownership Plans (ESOPs)
Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees.( UK,USA and several other industrialized countries). This provide tax concessions to corporate orgns. And to trusts established for employee stock options. (i.e (difference between acceptance price and market value)
The employer establishes an ESOP trust that qualifies as a taxexempt employee trust under Section 401(a) of the Internal Revenue Code

Why Incentive Plans Fail

Performance pay cant replace good management.
You get what you pay for.

Pay is not a motivator.

Rewards punish. Rewards rupture relationships.

Rewards can have unintended consequences.

Rewards may undermine responsiveness.

Rewards undermine intrinsic motivation.

Implementing Effective Incentive Plans

Ask: Is effort clearly instrumental in obtaining the reward? Link the incentive with your strategy. Make sure effort and rewards are directly related. Make the plan easy for employees to understand. Set effective standards. View the standard as a contract with your employees. Get employees support for the plan. Use good measurement systems. Emphasize long-term as well as short-term success. Adopt a comprehensive, commitment-oriented approach.

Indirect Financial CompensationBenefits

MANDATORY BENEFITS - legally binding

VOLUNTARY BENEFITS - provided at the discretion of the employer

VOLUNTARY BENEFITS-EXAMPLES
Educational benefits
Employees spouse education assistance( Motorola on international assignments ). ONGC,NIIT ,ADITYA BIRLA GROUP, HLL sabbaticals (paid/ non-paid) are provided to employees who wish to study. Meritorious Children of employees are provided opportunity of higher education with loan benefits in BPCL, CPCL etc

Family
Paternity leave in HLL, HCL Tech, Yes Bank, Genpact etc., Wedding anniversary allowance in NIIT, SPIC etc., Joyful Working Team and Happy Moments Board- LG Electronics Family day at office- Bharti telecom.

 Fringe benefits tax - Amended finance act 2005

Non financial compensation : components

Are most effective as motivators when the award is combined with a meaningful employee recognition program.

Intrinsic motivators are worthwhile as financial package Organization reward high performing employees Psychological rewards that employees receive in recognition of their skills and contributions

Types
Awards
Often used to recognize productivity gains, special contributions or achievements, and service to the organization. Employees feel appreciated when employers tie awards to performance and deliver awards in a timely, sincere and specific way. Rooms of offices are named after the employees in NIIT

Recognition awards
Recognition has a positive impact on performance, either alone or in conjunction with financial rewards.
Combining financial rewards with nonfinancial ones produced performance improvement in service firms almost twice the effect of using each reward alone.

Day-to-day recognition from supervisors, peers, and team members is important. Best performer of the month awards in Blue Dart, ALACTEL,XANSA etc.,

Service awards
Award for the length of service and exactly not on performance

IBM: thanks award IDEA: appreciation card

Needs and Motivation

Abraham Maslows Hierarchy of Needs
Five increasingly higher-level needs:
physiological (food, water, sex) security (a safe environment) social (relationships with others) self-esteem (a sense of personal worth) self-actualization (becoming the desired self)

Lower level needs must be satisfied before higher level needs can be addressed or become of interest to the individual.

Needs and Motivation (contd)

Herzbergs HygieneMotivator theory
Hygienes (extrinsic job factors)
Inadequate working conditions, salary, and incentive pay can cause dissatisfaction and prevent satisfaction.

Motivators (intrinsic job factors)

Job enrichment (challenging job, feedback and recognition) addresses higher-level (achievement, self-actualization) needs.

The best way to motivate someone is to organize the job so that doing it helps satisfy the persons higherlevel needs.

Equity and motivation of employees

Pay Equity (also Distributive Fairness)
An employees perception that compensation received is equal to the value of the work performed. A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.

Relationship between Pay Equity and Motivation

Doing More and Receiving Less

Doing the Same and Receiving the Same

Doing Less and Receiving More

The greater the perceived disparity between my input/output ratio and the comparison persons input/output ratio, the greater the motivation to reduce the inequity.

Instrumentality and Rewards

Vrooms Expectancy Theory
A persons motivation to exert some level of effort is a function of three things:
Expectancy: that effort will lead to performance. Instrumentality: the connection between performance and the appropriate reward. Valence: the value the person places on the reward.

Motivation = E x I x V
If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward. Employee confidence building and training, accurate appraisals, and knowledge of workers desired rewards can increase employee motivation.

Determinants of compensation

Pay levels

Internal determinants
Employers Compensation Strategy
Setting organization compensation policy to lead, lag, or match competitors pay.

Worth of a Job
Establishing the internal wage relationship among jobs and skill levels.

Employees Relative Worth

Rewarding individual employee performance

Employers Ability-to-Pay
Having the resources and profits to pay employees.

External Determinants
Labor Market Conditions
Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.

Area Wage Rates

A firms formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.

External Determinants
Cost of Living
Local housing and environmental conditions can cause wide variations in the cost of living for employees. Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.

External Determinants
Collective Bargaining The term extends to all negotiations that take place between an employer, group of employers or one or more employers organizations on the one hand, and one or more workers organizations on the other to (a) Determine the working conditions and terms of employment and / or (b) Regulate relations between employer and employee/workers and / or (c) regulate relations between employer organization or employee/workers organization

New developments
Competency based pay and reward programmes (also skill-based pay or knowledge-based pay) - Competency based pay using Broad banding

What Is Competency-based Pay?

Competency-based pay
Where the company pays for the employees range, depth, and types of skills and knowledge, rather than for the job title he or she holds.

Competencies
Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.

Why Use Competency-Based Pay?

pay plans that aim for high-performance work system. Paying for skills, knowledge, and competencies is more strategic.
Measurable skills, knowledge, and competencies are the heart of any companys performance management process.

Competency-Based Pay in Practice

Main components of skill/competency/ knowledgebased pay programs: A system that defines specific skills, and a process for tying the persons pay to his or her skill A training system that lets employees seek and acquire skills A formal competency testing system A work design that lets employees move among jobs to permit work assignment flexibility.

Competency-Based Pay: Pros and Cons

Pros
Higher quality Lower absenteeism and fewer accidents

Cons
implementation problems Cost implications of paying for unused knowledge, skills and behaviors Complexity of program Uncertainty that the program improves productivity

 Broadbanding
Consolidating salary grades and ranges into just a few wide levels or bands, each of which contains a relatively wide range of jobs and salary levels.
Wide bands provide for more flexibility in assigning workers to different job grades. Lack of permanence in job responsibilities can be unsettling to new employees.

Trends in Executive Compensation

The Executive Pay Package
Base salary Short-term incentives or bonuses Long-term incentives or stock plans Perquisites (perks)

Why are they made more?

Supply is short Most important to organization in terms of their competencies Motivation and retention

Executive Compensation: Ethics and Accountability

Incentive payments are excessive compared with return to stockholders. Time periods for judging and rewarding performance are too short. Subjective in nature Emphasis is placed upon equaling or exceeding executive salary survey averages.

Benefits do not relate closely to individual performance.

The Sweetness of Executive Perks

Company car Company plane Executive eating facilities Financial consulting Company-paid parking Personal liability insurance Estate planning First-class air travel Home computers Chauffeur service Childrens education Spouse travel Physical exams Mobile phones Large insurance policies Income tax preparation Country club membership Luncheon club membership Personal home repairs Loans Legal counseling Vacation cabins

Remedial
Conscious efforts must be made by organization to increase the supply Participative management must be encouraged Income beyond a limit must be subject to higher taxation Remuneration committees must be constituted

Negotiation
Collective Bargaining The term extends to all negotiations that take place between an employer, group of employers or one or more employers organizations on the one hand, and one or more workers organizations on the other to Determine the working conditions and terms of employment and / or Regulate relations between employer and employee/workers and / or regulate relations between employer organization or employee/workers organization

Collective bargaining and stakeholders

Concerned parties during the process of negotiation are The government The employers/ management The workers/trade unions The consumers/ community

Negotiation techniques and skills

Negotiation is the process in which two or more parties who have common and conflicting interested come together and talk with a view to reaching an agreement It involves 5 key activities - Obtaining substantial results - Influencing the balance of power between parties - Influencing the atmosphere - Influencing the consistency - Influencing the procedures

Negotiation results
Win-win Lose-win Lose-lose Win-win

Legal framework for payment of salary in INDIA

Payment of wages Act, 1936 The minimum wages Act, 1948 The payment of Bonus Act, 1965 Equal remuneration Act, 1976

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