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Q1 Explain the importance of compensation management and detail how organizations

handle its complexities?

Ans1 compensation refers to all forms of pay and rewards received by employees for
the performance in their jobs including all forms of cash, benefits, services, and perks. It
is important to recognize and communicate your "total" compensation as "all" the pay
you are providing your employees. This should be done so that the value of what you
are offering in compensation is clear and that it in turn attracts and retains the people
you need.
The compensation policy and the reward system of an organization are viewed by the
employees as indicators of the management’s attitude and concern for
them.traditionally,pay scales in companies reflected the importance of the work and the
responsibility level .today, organization try more to assess the worth of an individual in
terms of his performance and contribution to the organization. These caselets
discuss the importance of a compensation system that is
competitive and attractive for the employees and at the same
time, profitable for the organization.
Compensation and reward system plays vital role in
a business organization. Since, among four Ms, i.e. men, material,
machine and money, men has been most important factor, it is
impossible to imagine a business process without men. Every
factor contributes to the process without men. Every factor
contributes to the process of production/business. It expects
return from the business process such as rent is the return
expected by the landlord, capitalist expects interest and organizer
i.e. entrepreneur expects profits. Similarly the labor expects
wages from the process.
Labor plays vital role in bringing about the process of production
/business in motion. The other factors being human, has
expectations, emotions, ambitions and egos.
Compensation is the cornerstone of an effective talent
management strategy the ability to enable consistent, reliable
and standardized compensation processes that are linked to key
performance drivers of individual and organizational strategies
can affect many facets of the business. Some of these facets

Improved employee morale and retention Increased employee

engagement and productivity Strengthened governance and
compliance with company and regulatory issues Integrating a
talent management vision—maintaining visibility, control and
alignment of performance and compensation tied to business
outcomes—has become critical to the success or failure of today’s
organizations. Additionally, recognition of how well a company
performs, and how the workforce contributes to that
performance, can translate into an employment brand that will
attract the best talent and ensure the company’s reputation as a
desirable employer for both active and passive candidates.
However, achieving this brand is not easy. Compensation plans
must be rational in design; robust in deployment, governance and
management; and methodical in communication and rollout.
Compensation must also seamlessly integrate all talent
management components, especially performance management.
The ability to leverage performance and compensation data in a
single view can provide some compelling insight into what
motivates a high-performance employee. Performance-driven
compensation can shape the future of the workforce as well as
the business.

1) The system should be simple and flexible so that every

employee would be able to compute his own compensation

2) It should be easy to implement, should not result in

exploitation of workers.

3) It will raise the morale, efficiency and cooperation among the

workers. It, being just and fair would provide satisfaction to
the workers.

4) Such system would help management in complying with the

various labor acts.
5) Such system should also solve disputes between the
employee union and management.

6) The system should follow the management principle of equal


7) It should motivate and encouragement those who perform

better and should provide opportunities for those who wish to
8) Sound Compensation/Reward System brings peace in the
relationship of employer and employees.

Q2 Outline various approaches in setting fair compensation


Ans2 (1) Performance, Position and Person: This textbook model

looks at compensation for a certain position and performance of
the person appropriate to that role. An element of competitive
positioning in the market place is implied in this model, as also
paying differentially for the critical “Person”. Arguably a good
model which has elements of fairness built-in.
2. Keeping up with the Joaneses model: This is a model which is
market driven that looks at percentile positions of its people vice
versa competitive. Simply put, my compensation plan is
dependent on what my neighbor does! One of the models which
has put enormous pressure on the business, as it calls for
positioning statements, like as a company we would like to be
positioned at the 75th percentile, which means that I would be
one of the top paymasters. This model was suitable when the IT
dream-run was at its height. This model is often put to test in a
3. The value fit model : Looking at what is the right compensation
to be paid to a person in a position commensurate with internal
equities in the value fit model. This is largely internal focused and
in my experience I have found this to be fairly consistent from
within. Is fraught with pressure, of people leaving the organization
for better compensation. Internal satisfaction of employees on
compensation approach is high.
4. “Tune of the time” model : A flavor of the day is closer in
description. On its own merit, it seems logical to pay more when
you are doing well and to slash salary during bad times.
Sometimes seen as whimsical and inconsistent, particularly in a
downturn. It has its own relevance and strength when the
company size is small/medium.
5. Capacity to pay model : Large manufacturing industries have
traditionally looked at capacity to pay model as over riding in the
approach to compensation. Metrics like employee cost as
percentage of overall cost is sacrosanct. Many structures are in-
built to prevent run-away compensation.