Compensation Management

What is compensation?
 Compensation is the human resource
management function that deals with
every type of reward individuals receive
in exchange for performing
organizational tasks
 Types of financial compensation
 Direct financial compensation:
 wages
 salaries
 bonus
 commission
 Indirect financial compensation: all financial
rewards not included in direct financial
compensation.
 Vacations
 insurance
 child/elder care
 Non-financial rewards:
 Praise
 Self-esteem
 Recognition
 New responsibility/ projects
Criteria for effectiveness of a
compensation policy
 Adequate
 Equitable
 Balanced
 Cost-effective
 Secure
 Incentive-providing
 Acceptable to all employees
Factors that influence compensation
policies

 External factors
 The labor market
 The economy
 The government policies &regulations
 Unions
Internal factors
 Size
 Age
 Labor budget
 Who is involved in pay decisions
Compensation decisions
 Pay-level decisions
 Pay-structure decisions
 Individual pay determination
 Organizations have to evolve an
accurate system for evaluating jobs and
assessing their worth.
 How can this be done?
 Through Job Evaluation
 Job evaluation helps to determine
relative worth of a job in an
organization in a systematic, consistent
and accurate manner
Job evaluation
 Method used for taking ‘ Pay-structure’
compensation decisions
 Evaluation/ rating of jobs to determine their
position in job hierarchy. The evaluation may
be achieved through assignment of points or
use of some other systematic method for
essential job requirements such as skill,
experience & responsibility. (Bureau of Labor
Statistics, USA)
Objectives of Job Evaluation
 Systematic process of analyzing &
evaluating jobs to determine the
relative worth of each job in an
organization
 Provides basis for compensation
management
 Objectives of job evaluation
 To determine the place & position of a
job in the organizational hierarchy
 To clarify the responsibility & authority
associated with each job
 To manage internal & external
consistency in compensations
 To ensure employee satisfaction with
respect to compensation
 To avoid discrimination in wage
administration
 To provide basis of classification for new
or changed jobs
 Principles of Job Evaluation
 The job dimensions have to be properly
selected and should be rated in
accordance with the demands of the job
 Dimensions should be clearly defined to
ensure proper understanding
 The evaluation program should be
explained & illustrated to the employees at
all levels
 The employees should be actively
involved in the evaluation program
 Market/external factors should be taken
into consideration while evaluating jobs.
 Process of Job Evaluation
 Preparation of a Job Evaluation plan
 Job analysis
 Job description & job specification
 Selection of job dimensions
 Classification of jobs
 Implementation of the evaluation
 maintenance
 Techniques of Job Evaluation
COMPARISON BASIS NON QUANTITATIVE QUANTITATIVE
COMPARISON COMPARISON
(Job as a Whole) (Parts/Factors of
Job)

Job vs. Job Job Ranking Factor

Comparison

Job vs. Scale Job Grading/ Point System

Classification
Job Ranking
 Various types of Ranking techniques:
1. Relative Ranking
2. Paired Comparison
3. Single Factor Ranking
 Job Grading/ Classification
 Jobs are classified and graded based on
their significance and their worth to the
organization
 Jobs at various levels are placed under
different grades
 Grades are formulated on the basis of the
nature of tasks & responsibilities,
authority associated with it & knowledge
& skills required to perform them
 Steps in Job Grading:
 Analyzing the organizational structure and its
chief characteristics
 Determining the job dimensions/factors, for the
purpose of defining grades
 Defining & determining job grades
 Classifying jobs on the basis of these grades
 Take inputs (from employees, union etc)
regarding the number and descriptions of
grades
 Freeze grades and assign monetary values to
them
Factor Comparison Method
 Steps in Factor Comparison Method:
• To determine and define the specific
factors across different jobs.
• Identify Key/Benchmark jobs (well
known; established pay rate; contain
factors determined in first step)
• Factors in each key job are compared &
ranked, based on their relative
importance (Factor Comparison)
• Factors are assigned monetary values &
the sum of the monetary values
assigned should add up to the pay of
the benchmark job (factor evaluation)
• The remaining jobs are evaluated based
on the evaluation of benchmark job
Factor Comparison
 Universal job factors:
1. Responsibilities: Money, human
resources, records
2. Skill: facility in muscular coordination
& training in the interpretation of
sensory requirements
3. Physical efforts: sitting, standing,
walking, lifting, moving
4. Mental effort: intelligence, problem
solving, reasoning, imagination
5. Working conditions: environmental
factors like noise, ventilation, heat,
cleanliness etc.
Point Rating Method
 Quantitative point scale is developed to
evaluate jobs
 Different scales might be required to
evaluate different jobs
 Steps in Point Rating method:
• Determine the job factors or
compensable factors
• Determine the sub factors
• Define the degree statements or profile
statements (describe the specific
requirements of each sub factor;
determine the degree of importance
associated with each sub factor)
• Assign points to factors, sub factors and
degrees
• Preparation of a chart
• Applying the point system (compare the
job description of each job wit the
description given in the standard point
manual)
 After the points are finalized, the jobs
are ranked based on their points
Decision Band Method (DBM)
 Basic premise of DBM in that the values
of a job depends on its decision making
requirements.
 DBM distinguishes Six levels of decision
making or “decision bands”
 Decision bands cover entire spectrum of
decisions taken in an organization
Advantages of Job Evaluation
 Logical & objective method for
compensation management
 Helps in preventing & removing
discrepancies in wage administration
 Helps in maintaining employee
satisfaction levels & sound industrial
relations
 Facilitates entry of new jobs into the
organizational wage structure
 Helps in comparing organization’s wage
structure with the competitors wages &
market rates
 Limitations
 Changing technologies & systems render
job evaluation techniques outdated &
irrelevant
 If not formulated or implemented
properly, can lead to employee grievance
 Introduces rigidity in pay system
Related concepts
 Delayering : Involves reduction of the
total number of job levels resulting in a
flatter job structure.
 Increases flexibility by allowing
employees to move among a wider
range of job tasks without having to
adjust the pay with each move
Wages & Salary Administration
Wages, Salary & Compensation
 Wages : pay calculated at hourly rate
 Salary : pay calculated to an annual or
monthly rate rather than hourly
 Base wage & salary are the foundation
of an employee pay structure.
 Total compensation is calculated after
these are fixed
 Compensation includes incentives &
benefits
Principles governing
Compensation Administration
 Maintaining equity in the distribution of
wages & salaries
 Maintaining competitiveness in the
wage market
 Match employee expectations
 Reinforcing positive employee behavior
& contribution to the organization
 Eliminating discrepancies in wages
 Designing an effective & efficient
system for the organization
 Maintaining good industrial relations &
harmony
Purpose of wage & Salary
Administration
 Satisfy employee needs & meet their
expectations
 Attracting talented resources
 Retaining & motivating employees
 Financial management
 Legal requirements
 Concept of different wages:
Minimum wages
 Remuneration that is just sufficient to
enable an average worker to fulfill all his
obligations
 Can be either
 Minimum piece rate
 Minimum time rate
 Fixed by Government & enforced by the
Law as per the Minimum Wage Act,1948
 Fair wage
 Workers performing work of equal skill,
difficulty or unpleasantness should
receive equal or fair wages
 It also takes into consideration the
financial capacity of the employer
 Higher than minimum wages
 ‘Fair Wages Committee’ recommends:
should be less than living wage & more
than minimum wage
 Recommendations of Fair Wages
Committee:
 The basis of fair wage is the minimum
wage, within the capacity of
organization to pay
 Should be related to productivity of
workers
 Should match prevailing rates of wages
 Should reflect the level of national
income & its distribution
Living Wages
Living wages should enable the male earner to
provide for himself & his family:
 The bare essentials of food, clothing & shelter
 A measure of frugal comfort including
education for children
 Protection against ill health
 Requirements of essential social needs &
 Insurance against important misfortunes & old
age
 Living wages are highest in value of all
three
 Based on premise that employees
should be awarded incentives & share
the gains of the organization through
provision of higher wages & better
living standards.
Basic Wage Plans: Traditional
plans
Time wage plan
 Employees are paid for the period of
time for which they are employed
 Worker is assured fixed amount of
wages irrespective of the output
 Relevant where quality of work is more
important than quantity or work cannot
be standardized
Piece wage plan
 Workers are paid for the work done
 Basic premise is that work done is
measurable
 Earning is directly proportional to
output/ productivity
 Relevant where production of large
numbers is needed & units of work
produced can be standardized
Payment by results system

 The wage of each piece of work is fixed

and the workers are paid once the work
is completed
 Though a certain time limit is fixed,
workers are not paid according to it.
 Modern approaches to wage
determination
Skill based pay
 It sets pay levels on the basis of how many
skills employees have or how many jobs they
can do.
 When a new skill is added to a job, the
employee can earn a pay increase by mastering
the new skill
 Instead of job descriptions, “person” & “skill
block” descriptions are used.
 Skill block descriptions are priced much as in
job description
 Knowledge based pay

 Variation that rewards employees for

acquiring additional knowledge both
within the current job category & in new
job categories
 This is extension of skill based model to
professionals, managers & technical
personnel
Credential Based pay

 Rests on the fact that the individual

must have a diploma or license or must
pass one or more examination from a
third party professional or regulatory
agency.
 E.g. lawyers must be members of Bar
Associations
 Feedback Pay
 Based on aligning pay with strategic
business objectives & then establishing a
direct connection between the job holder
& his/her part in accomplishing these
goals
 The design must conform to four
principles:
 It flows directly from organization’s
strategic business goals
 It directly links employees actions to the
goals
 Provides sufficient opportunity for
rewards to hold employee’s attention
 It is timely
 Competency based pay

 A combination of skill based pay,

knowledge based pay & credential based
pay
 Applied to highly educated ‘knowledge
workers’
 In addition to knowledge, skills &
credentials, it includes cognitive &
subjective measures for evaluating a job
 Pay is more person oriented
 Two basic types:
 Pay for knowledge
 Skill based pay
 Variable Pay/ Compensation
 Any compensation plan that emphasizes a
shared focus on organizational success,
broaden opportunities for incentives to
non traditional groups (non-
managers/executives) & operates outside
the basic pay increase system
 Designed to pay according to performance
& not according to position in the
hierarchy
 It enhances productivity & motivate
employees
 Its an employee involvement program
 Employees responsible for their pay
packages
 Research shows (AMA):
 Grievances dropped 83%
 Absenteeism 84%
 Lost time 64%
 Key design factors:
 Support by management
 Acceptance by employees
 Supportive organizational culture
(teamwork, trust, involvement)
 Timing (when there is minimum risk of
economic downturns)
 Flexibility is essential & can be built by taking a
“Total Compensation Approach”:
 Basic pay matched close to competitors
 Variable pay as a centre piece to total
compensation approach. Some components of
variable pay are:
 Production incentives
 Gain sharing
 Bonus etc
 Indirect pay adds cost effective benefits keyed
to supporting the goals of the organization &
sharing costs
 It is paid at three levels:
 Worker level
 Manager level
 Group level
Broad banding
 Number of salary ranges are
significantly reduced.
 Involves collapsing multiple salary
grades & ranges into a few wide levels
known as bands
 More emphasis on basing salary
increases on individual performance
 Increases flexibility
Pricing Managerial & Professional
Jobs
 Is Job Evaluation the answer?
● Harder to qualify factors (judgment,
problem-solving)
● Based on results/performance (rather
than on static job demands e.g.
working conditions etc.)
● Non-salary issues like bonus, incentives
& benefits
 Compensating Managers
 Compensation for top executives consists
of four components:
 Base Pay (fixed salary, guaranteed bonus)
 Short term incentives (cash/stock bonuses
to achieve short term goals)
 Long term incentives (stock options; to
drive up the value of company stock)
 Executive benefits & Perks (retirement
pension plan; life/health insurance etc)
What determines executive pay?
 Compensation emphasizes performance
incentives more than pay/salary
(performance based pay)
 Why?
 Organizational results are likely to reflect
executives’ contribution more directly
 Incentives equal 31% or more of a typical
executive’s base pay (UK, US, France &
Germany)
Managerial Job Evaluation
 Rank the executive & management
positions in relation to each other,
grouping those of equal value
 Job classification & point evaluation
method with factors like
 Position scope
 Complexity
 Difficulty
 Creative demands etc
 Executive Compensation
How to design effective & efficient executive
compensation plan:
1. Review the existing compensation plan.
 Identify the flaws.
 Retain the good points
2. Analyze organizational objectives. Design a
pay system that is linked to organizational
objectives
3. Plan should provide for retaining a competent
& successful executive for a longer period of
time
4. Funding of executive compensation
should be planned
5. The final plan should be prepared
6. Should be known to all stakeholders
Principles of Comparative
Performance
 Compensation committees made up of
stockholders & company directors link
CEO’s pay to returns to stakeholders
 Variable performance based pay is
emphasized over guarantees
 CEOs are encouraged to invest in
company stock
 Performance yardsticks are linked to
actual key productivity indices; to the
competition or both
 CEOs are held responsible for the cost
of capital; this forces them to look for
vehicles of growth rather than just
amass personal wealth
 Compensating Professional
Employees
 Compensable factors are not easily compared
or measured
 Job evaluation . Compensable factors are:
 Problem solving
 Creativity
 Job scope
 Technical knowledge
 Expertise
 Point method & Factor Comparison Method
 Market pricing approach
Issues in Compensation
Administration
 Pay secrecy or Openness
 Pay security
 Cost of Living Adjustments (COLA)
 Severance pay
 Minimum wages etc
 Pay Compression
Rewards & Employee Benefits
 Concept of Rewards
 Organizational rewards are those that an
employee earns as a result of his
employment with the organization
 Indirect financial compensation
 These can be:
1. Extrinsic rewards : tangible rewards and
normally under control of organizations
e.g. bonus.
2. Intrinsic rewards: intangible & internal to
an individual e.g. recognition
 Other classifications:
1. Financial : monetary rewards
2. Non- financial :
 paid in kind.
 Can be measured in terms of value to
the employee. E.g subsidized cafeteria
Incentives
 Are rewards to employees, over &
above their basic wages or salary
 In recognition of the performance and
contribution of the employee
 These are ‘performance based rewards’
 E.g. ESOP, annual performance
incentive
Benefits
 Are the rewards an employee receives
for his employment and position in the
organization
 These are ‘membership based rewards’
 E.g. scholarship to employee’s children,
Reimbursement of medical bills, paid
vacation etc
Types of incentive plans
 Short term plans: based on employee
productivity over a short period: a day,
a week or a month
 Long term plans: related to employee
performance over a long period,
normally a year or entire tenure of the
employee.
Short term incentive plans
 Halsey plan
 Rowan plan
 Barth system of wages
 Task bonus system
 Point rating system
 Progressive bonus
Long term incentive plans
 Annual bonus (Payment of Bonus Act,
1965)
 Profit sharing
 Distribution plan
 Deferred plan
 Combination plan
 Gain sharing
 Employee Stock Options
Non monetary incentives
 Recognition of employee’s performance/
contribution
 A challenging assignment
 Giving additional responsibility
 Free gifts/ vacations
 Awards
Guidelines for effective
Incentive Plans
 Should be linked to employee
performance
 Should be communicated to the
employees clearly
 Employee suggestions & inputs should
be valued & rewarded
 Should be minimally effected by
external factors
 Should be flexible
 Should provide challenge to employees
to improve performance
 Should lead to tangible savings in labor
costs
Employee benefits
 Free or subsidized lunches
 Medical facilities
 Paid holiday/ vacation
 Retiral benefits like PF & gratuity
 Employee insurance
 Maternity leave
 Child care centres
 Educational allowance for employee’s children
 Company accommodation
 Company transportation facilities
 Cafeteria & rest rooms
 Study leave
 Club memberships
 Credit cards
 Loans
 Tax assistance etc
Objectives of Employee
Benefits
 To match the growing cost of living,
providing social security & improve
quality of work life
 Reward employees for employment
 Satisfy unions
 Attract & retain employees
 Tax benefits to employees
Modern Benefit schemes
1. Golden Parachute
 Continuation of the salary
 Bonus and/or certain benefits & perks
 Retirement benefits
 Accelerated vesting of stock incentive
2. Cafeteria Benefit plans