Compensation Strategy is one of the most important strategies in the HRM Function as

it influences the costs of the organization and potential bad decision can lead to very
serious damages to the organization.

The compensation and benefits strategy is derived from the overall HRM Strategy and
it has to be fully aligned. When the HRM Strategy sets the main objectives for the HRM
Function, the compensation and benefits strategy has to follow. When the overall HRM
Strategy states the low cost of services and employees, the compensation and benefits
strategy cannot target the highest salaries at all levels.

The compensation and benefits strategy sets the general rules for the compensation and
benefits area in the organization and the owners and leaders of the area. In some
organizations, the compensation and benefits department is just a support department for
the line management. In other organizations the compensation and benefits manager is a
very powerful employee in the organization with the right “veto”.

The compensation and benefits strategy sets the position of the organization on the job
market and defines the items in the total cash in the organization and their role. The role
of different components of the compensation is very important as the role of the
compensation components can differ. For example, the role of bonuses can be primarily
in performance reward or the retention of the employees and the organization has to
decide.

The compensation and benefits strategy has to reflect the reality in the industry and the
surrounding job market. The compensation strategy can set the wish to pay the lowest
possible salaries, but the HRM Function and the organization have to respect the reality
on the job market.

The compensation strategy needs a strong support from the top management as it sets
strong limits to the daily operation of the line management and they usually do not fully
agree with all the aspects included in the compensation and benefits strategywages,
nominal and real The return to labor in the production process; it may be denoted
either in terms of monetary units (nominal wages) or expressed in terms of
purchasing power (real wages). Real wages are simply money wages deflated by a
price index—an appropriately weighted average of prices of all goods and services.

The classical economists analyzed the determination of wages in terms of the

subsistence level of wages and the wage‐fund doctrine. According to this theory, real
wages are pushed down to the subsistence level by population pressures. If wages
move above or below that level, ….

Generally a real variable, such as the real interest rate, is one where the effects of
inflation have been factored in. A nominal variable is one where the effects of inflation have
not been accounted for. A few examples illustrate the difference:

1. Nominal Interest Rates vs. Real Interest Rates

Suppose we buy a 1 year bond for face value that pays 6% at the end of the year. We pay
$100 at the beginning of the year and get $106 at the end of the year. Thus the bond pays an
interest rate of 6%. This 6% is the nominal interest rate, as we have not accounted for
inflation. Whenever people speak of the interest rate they're talking about the nominal interest
rate, unless they state otherwise.

Now suppose the inflation rate is 3% for that year. We can buy a basket of goods today and it
will cost $100, or we can buy that basket next year and it will cost $103. If we buy the bond
with a 6% nominal interest rate for $100, sell it after a year and get $106, buy a basket of
goods for $103, we will have $3 left over. So after factoring in inflation, our $100 bond will
earn us $3 in income; a real interest rate of 3%. The relationship between the nominal
interest rate, inflation, and the real interest rate is described by the Fisher Equation:

Real Interest Rate = Nominal Interest Rate - Inflation

If inflation is positive, which it generally is, then the real interest rate is lower than the
nominal interest rate. If we have deflation and the inflation rate is negative, then the real
interest rate will be larger.

2. Nominal GDP Growth vs. Real GDP Growth

GDP, or Gross Domestic Product is the value of all the goods and services produced in a
country. The Nominal Gross Domestic Product measures the value of all the goods and
services produced expressed in current prices. On the other hand, Real Gross Domestic
Product measures the value of all the goods and services produced expressed in the prices of
some base year. An example:

Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and
services based on year 2000 prices. Since we're using 2000 as a basis year, the nominal and
real GDP are the same. In the year 2001, the economy produced $110B worth of goods and
services based on year 2001 prices. Those same goods and services are instead valued at
$105B if year 2000 prices are used. Then:

Year 2000 Nominal GDP = $100B, Real GDP = $100B

Year 2001 Nominal GDP = $110B, Real GDP = $105B
Nominal GDP Growth Rate = 10%
Real GDP Growth Rate = 5%

Once again, if inflation is positive, then the Nominal GDP and Nominal GDP Growth Rate will
be less than their nominal counterparts. The difference between Nominal GDP and Real GDP is
used to measure inflation in a statistic called The GDP Deflator.

3. Nominal Wages vs. Real Wages

These work in the same way as the nominal interest rate. So if your nominal wage is $50,000
in 2002 and $55,000 in 2003, but the price level has risen by 12%, then your $55,000 in 2003
buys what $49,107 would have in 2002, so your real wage has gone done. You can calculate a
real wage in terms of some base year by the following:

Real Wage = Nominal Wage / 1 + % Increase in Prices Since Base Year

Where a 34% increase in prices since the base year is expressed as 0.34.

4. Other Real Variables

Almost all other real variables can be calculated in the manner as Real Wages. The Federal
Reserve keeps statistics on items such as the Real Change in Private Inventories, Real
Disposable Income, Real Government Expenditures, Real Private Residential Fixed Investment,
etc. These are all statistics which account for inflation by using a base year for prices.
If you'd like to ask a question about nominal variables, real variables, or any other topic or
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Real wages in the US from 1964 to 2004, have been declining...

...but total compensation, including eg. health insurance, has been rising.

The term real wages refers to wages that have been adjusted for inflation. This term is
used in contrast to nominal wages or unadjusted wages.

The use of adjusted figures is used in undertaking some forms of economic analysis. For
example, in order to report on the relative economic successes of two nations, real wage
figures are much more useful than nominal figures.
If nominal figures are used in an analysis, then statements may be incorrect. A report
could state: 'Country A is becoming wealthier each year than Country B because its wage
levels are rising by an average of $500 compared to $250 in Country B'. However, the
conclusion that this statement draws could be false if the values used are not adjusted for
inflation. An inflation rate of 100 percent in Country A will result in its citizens
becoming rapidly poorer than those of Country B where inflation is only 2 percent.
Taking inflation into account, the conclusion is quite different: 'Despite nominal wages in
Country A rising faster than those in Country B, real wages are falling significantly as the
currency halves in value each year'.

The importance of considering real wages also appears when looking at the history of a
single country. Looking back over the decades, annual wages were considerably less than
they are today. If only nominal wages are considered, the conclusion has to be that people
used to be a great deal poorer than today. The cost of living was also much lower. In
order to have an accurate view of a nation's wealth in any given year, inflation has to be
taken into account — and thus using real wages as the measuring stick.

Real wages are a useful economic measure, as opposed to nominal wages, which simply
show the monetary value of wages in that year. However, real wages does not take into
account other compensation like benefits or old age pensions. When including benefits
and wages, total compensation in the U.S., for example has risen steadily for the last 40
years.[1]

[edit] Example
Consider an example economy with the following wages over three years:

• Year 1: $20,000
• Year 2: $20,400
• Year 3: $20,808

Real Wage = W/P (W= wage, P= i, inflation, can also be subjugated as interest)

Also assume that the inflation in this economy is 2 percent p.a. These figures have very
different meanings depending on whether they are real wages or nominal wages.

If the figures that are shown are real wages, then it can be determined that wages have
increased by 2 percent after inflation has been taken into account. In effect, an individual
making this wage actually has more money than the previous year.

However, if the figures that are shown are nominal wages then the wages are not really
increasing at all. In absolute dollar amounts, an individual is bringing home more money
each year, but the increases in inflation actually zeroes out the increases in their salary.
Given that inflation is increasing at the same pace as wages, an individual cannot actually
afford to increase their consumption. The ability to make smart, informed
compensation and rewards decisions can be the difference between an under-
performing organization and a successful one. Saba Compensation is a compensation
management solution that improves talent retention and drives smarter decision-making
by providing a comprehensive view of employee success.

Saba Compensation is different because it goes beyond simple pay-for-performance

processes that focus solely on a formal review score. Instead, Saba empowers managers
with measures of employee success from various talent processes, both formal and
informal, so that money is spent where it is needed most.

Saba Compensation includes capabilities to support...

• Base and variable compensation plan design

• Compensation eligibility
• Compensation allocation

Saba Compensation is part of Saba’s unified people management solutions. Regardless of

which Saba modules you choose to deploy, Saba includes capabilities to support
competency & career management, expertise identification, multi-rater assessment, job
modeling, and development planning.

• limitations in the information available to decision makers

• a lack of insight into long term workforce needs and plans

Saba Compensation, a key component of successful people management solution, ties

compensation and rewards directly to both formal and informal measures of success,
enabling the organization to incent the specific behavior and achievements necessary to
reach organizational goals.

This approach improves performance, productivity, and talent retention rates, ensuring
your organization’s competitive advantage.

1. The act of compensating or the state of being compensated.

2. Something, such as money, given or received as payment or reparation, as for a
service or loss.
3. Biology The increase in size or activity of one part of an organism or organ that
makes up for the loss or dysfunction of another.
Psychology Behavior that develops either consciously or
unconsciously to offset a real or imaginEnsure your
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Compease includes

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Individual merit increase guidelines
are developed and projected for the
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Reporting capabilities are extensive
and include compa-ratio reports and
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Compensation administration is closely linked to effective employee performance
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ed deficiency, as in personality or physical ability.

Compensation 2

Definition: That which constitutes, or is regarded as, an equivalent; that which makes good
the lack or variation of something else; that which compensates for loss or privation; amends;
remuneration; recompense.

Compensation 3

Definition: The extinction of debts of which two persons are reciprocally debtors by the
credits of which they are reciprocally creditors; the payment of a debt by a credit of equal
amount; a set-off.

Compensation 4

Definition: A recompense or reward for some loss or service.

Compensation 5

Definition: An equivalent stipulated for in contracts for the sale of real estate, in which it is
customary to provide that errors in description, etc., shall not avoid, but shall be the subject
of compensation.

compensation 6

Definition: the act of compensating for service or loss or injury

compensation 7

Definition: something (such as money) given or received as payment or reparation (as for a
service or loss or injury)

compensation 8
 4. Definition: (psychiatry) a defense mechanism that conceals your undesirable
shortcomings by exaggerating desirable behaviors

[edit] References

Deferred Compensation

Deferred compensation is the portion of an employee's income that is paid out at a

date later than when the income was actually earned. Broadly, there are two types of
deferred compensation plans: qualified and non-qualified. Non-qualified deferred
compensation plans include salary reduction arrangements, bonus deferral plans,
supplemental executive retirement plans, and excess benefit plans. Non-qualified
deferred compensation plans are not eligible for the tax deferral benefits associated
with qualified deferred compensation plans. The benefits of non-qualified deferred
compensation plans include aligning employees' incomes with company growth and
adding an incentive for employees to stay with a company. Qualified deferred
compensation plans include pensions and retirement plans and are eligible for tax
deferral benefits. The primary benefit of qualified deferred compensation plans is to
allow employees to defer some of their income (as well as the taxes on that income)
until retirement.
compensation

(1) Payment for goods or services.(2) Damages necessary to restore an injured party to his or her
position before the wrongdoing.(3) In eminent domain, payment to property owners for the value
of the property taken and any damage caused to the value of the remaining property.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-
Hill Companies, Inc.

Compensation

Wages, commissions, tips, professional fees, and net self-employment income received for
services rendered; that is, earned income