What is Compensation? Types of Compensation? The basic factors in determining pay rates. How to establish pay rates. How to price managerial and professional jobs. Competency based pay. Incentives & benefits.

Presented by, Muhd Irshad Vinod Feroz Khan Sachin Sophia

Compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that organisations provide their employees. 

Direct Compensation (Money) 

Indirect Compensation (Benefits) 

Demand and supply:- If the labour is in short supply, the
workers will offer the services only if they are paid well. On the other hand, if the supply is more then workers available might get ready work at cheaper rates. 

Bargaining Power: Where labour unions are strong enough to
force the hand of employers, the wages will be determined at a higher level in comparison to other units where unions are weak. 

Cost of living:-

Wages of workers also depends upon the cost of living of the worker so as to ensure him a decent living wage. 

Comparative Wages:- Wages paid by the other firms
for the same work also influence the wage levels. 

Ability to Pay:-

Those firms which are earning huge profits may afford to pay high wages and can provide more facilities to its workers in comparison to the firms earning comparatively low profits. 

Productivity of labour:- Higher productivity will
automatically fetch more profit to the firm, where in turn workers will be paid high wages in comparison to other firms with low productivity. 

Job Requirements:- If a job require higher skill,
greater responsibility and risk, the worker placed on that job will naturally get higher wages in comparison to other jobs which do not require the same degree of skill, responsibility or risk. 

Since the bargaining power of the workers is not enough to ensure fair wages in all industries, the Govt. has to interfere in regulating wage rate to guarantee minimum wage rates in order to cover the essentials of a decent living.

Govt. Policy:-


Salary compression
¾ A salary inequity problem, generally caused by inflation, resulting in longer-term employees in a position earning less than workers entering the firm today.


¾ It also plays a policy role. Employers handle cost-of-living differentials in several ways. ¾ Like, giving transferred person a nonrecurring payment, usually in lump sum.


The equity theory of motivation
¾ States that if a person perceives an inequity, the person will be motivated to reduce or eliminate the tension and perceived inequity.


External equity
¾ How a job¶s pay rate in one company compares to the job¶s pay

rate in other companies.

Internal equity
¾ How fair the job¶s pay rate is, when compared to other jobs

within the same company

Individual equity
¾ How fair an individual¶s pay as compared with what his or her

co-workers are earning for the same or very similar jobs within the company.

€ € € €

Salary surveys
¾ To monitor and maintain external equity.

Job analysis and job evaluation
¾ To maintain internal equity,

Performance appraisal and incentive pay
¾ To maintain individual equity.

Communications, grievance mechanisms, and employees¶ participation
¾ To help ensure that employees view the pay process

as transparent and fair.


Step 1. The salary survey
¾ Aimed at determining prevailing wage rates. x A good salary survey provides specific wage rates for specific jobs.
x Benchmark job: A job that is used to anchor the employer¶s pay scale and around which other jobs are arranged in order of relative worth.


Step 2. Job evaluation
¾ A systematic comparison done in order to determine the worth of one job relative to another.


Compensable factor
¾ A fundamental, compensable element of a job, such as skills, effort, responsibility, and working conditions.

Ranking each job relative to all other jobs, usually based on some overall factor. € Steps in job ranking:

¾ Obtain job information. ¾ Select and group jobs. ¾ Select compensable factors. ¾ Rank jobs. ¾ Combine ratings.


Raters categorize jobs into groups or classes of jobs that are of roughly the same value for pay purposes.
¾ Classes contain similar jobs. ¾ Grades are jobs that are similar in difficulty but otherwise different.


A quantitative technique that involves:
¾ Identifying the degree to which each compensable factors are present in the job. ¾ Awarding points for each degree of each factor. ¾ Calculating a total point value for the job by adding up the corresponding points for each factor.


Step 3. Group Similar Jobs into Pay Grades
¾ A pay grade is comprised of jobs of approximately equal difficulty or importance as established by job evaluation.
x Point method: the pay grade consists of jobs falling within a range of points. x Ranking method: the grade consists of all jobs that fall within two or three ranks. x Classification method: automatically categorizes jobs into classes or grades.


Step 4. Price Each Pay Grade ² Wage Curve
¾ Shows the pay rates currently paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation. ¾ Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.


Step 5. Fine-tune pay rates
¾ Developing pay ranges x Flexibility in meeting external job market rates x Easier for employees to move into higher pay grades x Allows for rewarding performance differences and seniority ¾ Correcting out-of-line rates x Raising underpaid jobs to the minimum of the rate range for their pay grade. x Freezing rates or cutting pay rates for overpaid (³red circle´) jobs to maximum in the pay range for their pay grade.

€ 1.
2. 3. 4.

Usually consist of 4 main elements. Base pay..
Short term incentives.. Long term incentives.. Executive benefits..

€ 1. 2. 3. 4. 5.

CEO pay is set by the board ..
FACTORS EFFECTING::: Company size.. Company performance.. Business strategy.. Corporate trends.. Complexity firms..



Ex: GlaxoSmithKline Pharmaceuticals firm € Sh. Voted to reject board¶s recommendation. € $35 million if CEO lost his job € Pension plans of both him & his wife..

Example::: € DANA CORP.± € (Auto parts maker of heavy trucks..) € CEO± Mr. Joseph Magliochetti.. € Sales dropped by 6%, & profit 44%. € CEO got $850,000.. € Board eliminate his bonus & stock grant, € $1.8million..

€ € 1. 2. 3. 4.

Engineers & Scientists« Factors effecting::: Problem solving skills.. Creativity.. Job scope.. Technical knowledge & expertise..


Traditionally the jobs pay rates are based on the relative worth of the job.


Over the past few years, there has been a surge of interest in pay for performance.

The logic is crystal clear. You pay people contingent on their performance motivating exemplary employee behavior. € Individuals benefit from enhanced rewards
€ €

organizations benefit from the cumulative boost in performance.


Competency-based pay
¾ Where the company pays for the employee¶s range, depth, and types of skills and knowledge, rather than for the job title


¾ Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.


Title & Tenure to Performance &Competency Job-Oriented to Person Oriented Compensable factors of Effort and Responsibility to Knowledge ,skill and Abilities (KSAs)



€ high-performance € more

work system


€ Measurable

skills, knowledge, and competencies are the heart of any company¶s performance management process.


Main components of skill/competency/ knowledge±based pay programs:
¾ A system that defines specific skills, and a process

for tying the person¶s pay to his or her skill
¾ A training system that lets employees seek and

acquire skills
¾ A formal competency testing system ¾ A work design that lets employees move among jobs

to permit work assignment flexibility.

¾ Adopt SMART goals (specific, measurable, achievable, ¾ ¾ ¾ ¾ ¾

relevant, time-bound) Support the process, from the CEO, through the entire organization Make goal-setting as transparent a process as possible Do not consider the goal in an employee¶s plan until the employee physically accepts the goal in the system Allow for top down (cascading goals) and bottom up (pushed) goals Encourage balanced scorecard philosophy and alignment of individuals goals to corporate initiatives


¾ Higher quality ¾ High productivity ¾ Higher Growth ¾ High Motivations ¾ Higher job Satisfaction ¾ Higher Accountability ¾ Healthy Competition


¾ Implementation problems ¾ Cost implications of paying for unused knowledge, skills and behaviors ¾ Complexity of program ±systems and evaluations and assessment ¾ Uncertainty that the program improves productivity


Different people react to different incentives in different way Hence Incentive plans have to be carefully drawn.



Higher ±Level needs & Lower Level needs also called Motivators and Hygiene.

Hygiene factor like monetary hikes are easy to achieve and may not motivate for long enough. € Hence should work on Motivators like job challenge and job satisfaction needs.

40 35 30 25 20 15 10 5 0 E tr m m r m t tt t tr


Individual based Group based Sales based Company wide





Financial ±bonus /perks /commissions Non Financial- rewards /recoginitions/title changes/social recoginitions/appreciations


€ € € € € € € € € €

Holidays & vacations Medical benefits Loans Car /House Lease Insurance Pension Plans Education for Child benefits Educational subsidies and leaves Leaves Flexi work

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