Compensation Management

Syeda Zakeerin Bakht Nasir

Overview of Compensation Management

The aim of this chapter is to provide a

general introduction to compensation
management. It starts by
Defining Compensation Management
Aims of Compensation Management
Characteristics of Compensation
Management.
Aligning Compensation with the Business
Goals and Objectives

Important factor governing compensation

Before knowing about Compensation

management one must know
the labor laws of the country which are
governing employees compensation or
remuneration system.
Income Tax Law of the country which will
have an impact on designing the tax
efficient compensation.

What is compensation?
Compensation is money or other benefits
provided by the organization to employees
in return for their work.
Compensation is the remuneration received by
an employee in return for his/her contribution to
the organization. It is an organized practice that
involves balancing the work-employee relation
by providing monetary and non-monetary
benefits to employees.

Compensation Management

The fundamentals of compensation management is

concerned with deciding how and what staff should be
paid and with the techniques and procedures for
designing and maintaining salary structures,
Rewarding staff and exercising salary control.
Strategic Compensation Management: Aligning
Compensation with the Business Goals and Objectives
Of the Organization.

Compensation Management Includes

It includes such areas as :
Job evaluation,
Surveys of wage and salaries,
Analysis of relevant organizational problems,
Development and maintenance of salary structure,
Establishing rules for administering salary, salary payments,
Incentives,
Profit sharing,
Salary changes and adjustments,
Supplementary payments,
Control of compensation costs and other related items.

Compensation Traditional Perspective

In traditional organizational structures, employees were

expected to work and follow top-down orders of a boss or
supervisor.
These employees could expect job security, pay rate
increases each year, and promotions based on seniority.
Salary was determined on the basis of work performance and
the years of experience the employee held.
Additionally, some organizations provided pension and
superannuation plan.
Money was considered the primary and only need of the
employee.
With the creation of labor and trade unions, employees began
asking for their rights and facilitated a change in
compensation systems.

Compensation Current Perspective

Behavioral Science Theories also contributed to the change in
compensation systems. Abraham Maslow brought in the need
hierarchy for the rights of the employees.
He stated employees did not work only for money but there
are other needs an employee must fulfill from their job, i.e.
psychological needs, safety needs, needs of love, affection,
and belongingness, needs for esteem, and need for selfactualization (Simons, Irwin, & Drinnien 1987).
Employees were considered a valuable resource to the
organization. Todays compensation systems should be
aligned to the business goals and strategies.
Employees are expected to contribute individually to the
organization and diversity is embraced. Companies expect
employees to make decisions, accepted delegated authority,
and understand their position in the organization.

Total Rewards & the Future Workforce

Although the concept of compensation has changed a
great deal in recent decades moving from a traditional
base pay and bonus structure to a broader Total
Rewards approach its evolution is hardly complete.
A new employment model is evolving, as organizations
face pressure to perform domestically and globally in a
tightening labor market while balancing cultural and
generational differences in employee wants and need
along with long-term sustainability of employment cost.
Adapting to anew model requires the creation of
alternative employment arrangements that recognize the
role of flexible work plans, contingent staff and nonlinear
careers.

Compensation Employee Vs Employer

Perspective
To employees the most recognizable deliverable
in a compensation program is their own pay
package. Getting paid for the work that we do.
From the perspective of the employers, the money
that they pay to the employees in return for the
work that they do is something that they need to
plan for in an elaborate and systematic manner.
The total compensation horse must be put in
front of the employee performance and skill cart.

Compensation Employee Vs Employer

Perspective

It can be said that compensation is the

glue that binds the employee and the
employer together and in the organized
sector, this is further codified in the form of
a contract or a mutually binding legal
document that spells out exactly how
much should be paid to the employee and
the components of the compensation
package.

Aims Of Compensation Management

The basic aims of Compensation Management are to

attract, retain and motivate staff by developing and
maintaining a competitive and equitable salary
structure.
To ensure that a sufficient number of suitable employee
is attracted to join the organization;
To encourage suitable employees to remain with the
organization;
To develop and maintain a logical salary structure which
achieves equity in the pay for jobs of similar responsibility
and consistency in the differentials between jobs in
accordance with their relative values;
To ensure that salary levels match market rates;
To keep the salary levels adjusted in line with increases
in the cost of living;

Aims Of Compensation Management

To maintain consistency in methods used to fix and review
salary levels and differentials;
To provide for progression within the salary structure in
accordance with performance and level of responsibility;
To operate the salary system fairly and convince the staff
that the system is fair;
To maintain a flexible salary system which will
accommodate changes in the market rates for different skills
and in the companys organization structure;
To achieve simplicity in operations as an aid to staff
understanding and to minimize administrative effort;
To operate effective systems of controlling salary costs and
the administrative procedures required to achieve the above
aims at the least cost to the organization.

Aims Of compensation management

(Contd)

Acquire qualified personnel

Retain current employees
Ensure equity
Reward desired behaviour
Control costs
Facilitate understanding

Acquire Qualified Personnel

Compensation needs to be high enough to
attract applicants. Pay levels must
respond to the supply and demand of
workers in the labour market since
employers compete for workers. Premium
wages are sometimes needed to attract
applicants already working for others.

Retain Current Employees

Employees may quit when compensation
levels are not competitive, resulting in
higher turnover.

Ensure Equity
Compensation management strives for
internal and external equity.
Internal equity requires that pay be related
to the relative worth of a job so that similar
jobs get similar pay.
External equity means paying workers
what comparable workers are paid by
other firms in the labor market.

Reward desired behaviour

Pay should reinforce desired behaviours

and act as an incentive for those
behaviours to occur in the future.
Effective compensation plans reward
performance, loyalty, experience,
responsibility, and other behaviours.

Control costs
A rational compensation system helps the
organization obtain and retain workers at a
reasonable cost.
Without effective compensation
management, workers could be overpaid or
underpaid.
Comply with legal regulations.
A wage and salary system considers the
legal challenges imposed by the government
and ensures the employer's compliance.

Facilitate understanding

The compensation management system

should be easily understood by human
resource specialists, operating managers,
and employees.

Importance of Compensation
If you pick the right people and give them
the opportunity to spread their wings - and
put compensation and rewards as a carrier
behind it - you almost dont have to
manage them.
Jack Welch

Importance of employees compensation or

reward system
Compensation or reward system of the organisation is most
influencing factor for employee motivation, must remember.

If we observe history of causes of industrial disputes,

employee compensation a reward system issues were
the main reason in most cases.
good compensation system of rewards system in the
organisation will minimize industrial disputes and helps
in maintaining peace and harmony within the
organisation.
Compensation system plays a key role in employee
attrition.
Compensation system mostly influences retention of
employee in the organisation.

Importance of employees compensation or

reward system
Most of employee satisfaction depends upon
compensation a reward system of organisation.

Effective compensation system builds employer

brand, which plays a key role in attracting talent.
Effective compensation system makes employee
to put his/her full efforts for achievement of
organization's goals and objectives.
Effective compensation system builds initiative
towards work, which in turn enhances the
productivity of organisation.
Effective compensation makes employees feel
belongingness towards the organisation.

Compensation Management : In Bangladesh

Scenario
With the technological developments taking place at a
higher rate, the salary packages are too increasing at a
much higher rate. Pay packages in Bangladesh have
witnessed an increase of more than 10% - 14% in last
2-3 years over current salary packages.
The compensation package comprises of monetary and
non-monetary benefits that includes salary, special
allowances, house rent allowance, travel allowance,
mobile allowance, employee stock options, club
memberships, accommodations, retirement benefits and
other benefits.

Compensation Management: In Bangladesh

Scenario
Globalization is being considered as the cause for such
salary hikes. The establishment of multinational
companies and privatization has led the Bangladeshi
industry to witness higher salary package.
With the immense competition of attracting and retaining
talented human resource, compensation package is the
only motivation factor available with the organizations be
it Bangladesh origin organizations or foreign-owned
multinationals.
With the high attrition rate organizations are increasing
their salary packages to attract and retain talented
human resource.

Bangladesh Industry Analysis

Bangladesh industries are aiming for high growth and are looking for
talented human resource. For the purpose they are offering most
competitive compensation packages.
Besides the monetary and non-monetary benefits some
organizations also offer development benefits such as online degree
programmes or certification courses.
Telco sector has succeeded in increasing the compensation
packages at highest rate followed by Banking and Pharma sectors.
In Bangladesh industry rate of salary hike also depends on the job
position in the organizational hierarchy.
During last few years technical and professional skill oriented jobs
were offered more salary hikes than the senior management.