Compensation refers to all forms of financial returns and tangible services and benefits employees

receive as part of an employment relationship.

Compensation Management is an organized practice that involves balancing the work-employee

relation by providing monetary and non-monetary benefits to employees.

Compensation includes payments such as bonuses, profit sharing, overtime pay, recognition rewards
and sales commission. Compensation can also include non-monetary perks such as a company-paid
car, company-paid housing and stock options. Compensation is an integral part of human resource
management which helps in motivating the employees and improving organizational effectiveness.

Why Compensation Management

• Has positive impact on the efficiency and results produced by employees.

• Encourages the employees to perform better and achieve the standards fixed.

• Helps management in complying with the various Labor Laws.

• Helps to solve disputes between the employee union and management.

Helps in following principle of equal pay.

• Aims at creating a healthy competition among employees and encourages employees to

work hard and efficiently.

• Provides growth and advancement opportunities to the deserving employees.

Hay Group’s research (2010) suggests that a successful responsible reward strategy:

• Enables the long-term sustainable success of the organisation.

• Pays out over the same timescale that business value is created in.

• Is linked to a bundle of performance measures that reflect the impact of the activity not only
on shareholder value but on the bigger picture

• Does not enrich management and employees to the detriment of shareholders.

• Takes account of the extent to which performance is driven by external factors beyond
management or the employee’s control.

• Takes account of the risks inherent and capital employed in the business, and the impact this
has on the returns required by shareholders.

• Achieves an appropriate balance between individual, team and corporate performance.

• Is competitive enough to attract the talent the business needs.

• Encourages rational thinking about the unique combination of economical and societal
responsibilities of the individual company.

• Is justified in differentiating between the highest and least well paid by impact, workload,
intensity and personal risk.

• Is actively, effectively and repeatedly communicated to employees and stakeholders.

 • Recognises that reward is more than pay. 

Total Returns for Work

Components of compensation

 Basic

 Allowances

 Incentives

 Benefits

 Any other component

Types/Forms of Compensations

 Direct Compensation

 Indirect Compensation

 Deferred Compensation

 Internal alignment

 Focus - Comparisons among jobs or skill levels inside a single organization

 External competitiveness

 Focus - Compensation relationships external to the organization: comparison with

competitors

 Employee contributions

 Focus - Relation emphasis placed on employee performance

  Management

 Focus - Policies related to managing the pay system

 Include methods used to operationalize policy decisions and link decisions to overall
compensation objectives

 Examples of techniques

 Internal consistency

 Job analysis

 Job evaluation

 External competitiveness

 Pay surveys

 Employee contributions

 Incentive plans

 Performance-based pay increases

Why Perform Job Analysis?

 Potential uses for job analysis exist for every major human resource function

 An internal structure provides a work-related rationale for pay differences

 Uses of job analysis in compensation

 Establishes similarities and differences

in work content of jobs

 Helps establish an internally

fair and aligned job structure

What Information Should be Collected?

 Analysis begins with a review of information already collected

 Types of information collected

 Related to job

 Related to employee

Data collection

 Data Related to Job

 Job Identification

 Job Content

 Data Related to Employee

 Employee Characteristics
  Internal Relationships

 External Relationships

Problems with Job Analysis

Job Analysis Stakeholders

 Executive management -

 <How much is it going to cost?

 <How will it help us better meet our business objective

 Supervisors

 <How much time will it require (own & staff)?

 <How much will it impact our ability to get our job done?

 <What is the benefit in participating

 Employees -

 <How much will it disrupt my day?

  <Does participation pose a personal risk?

 <What’s in it for me

Obtaining Executive/Supervisory Support

 Link job analysis to existing organizational concerns

 Demonstrate the multi-functional uses of job analysis

 Include communication from high level of management

 Demonstrate the need for defensible processes

 Use methods that minimize staff time

 Obtain a departmental liaison for communication/scheduling

 Obtain a liaison for the distribution & collection of matierals

 Consider public information opportunities

 Have a written plan and share

Prepare people to participate

 The purpose of the study and how it will impact them

 The importance of their participation

 How the information that they provide will be used

 Their specific role in the process and other process components

 The logistics for their participation

 The time requirements for their participation (make it reasonable)

Obtaining co-operation

 Be prepared: know areas to pursue, areas to be wary of, and current issues

 Make the process as comfortable and non-threatening as possible

 Re-emphasize the purpose of the study and the importance of their participation

 Allow for occasional tangents

 Share the information

 Say thanks

Meeting facilitation techniques

 Round-robin meeting start

 Work from general to specific; tasks to KSAs

 Flexible agenda to accommodate group interaction

 Allow for tangents

  Summarize and feedback information

 Redirect and prompt when necessary

Compensation theories

• Subsistence theory - Each member of society be provided enough food, clothing and
shelter to continue to exist. When the income of the worker exceeds their subsistence
level, they respond by further pro-creation, thus, increasing the labor force and
consequently lowering wages as a result of supply and demand. This theory is also known
as the iron law of wages.

• Just price theory - Each person born into the world is foreordained to occupy exactly the
same status and to enjoy the same creature comforts as did his or her parents. Therefore,
society owes these individuals sufficient compensation to maintain exactly the same
position of life into which they were born.

• The wage fund theory - Wage was a variable dependent on the relation between the
laboring population and the aggregate funds set aside by the capitalists to pay them.

• Residual claimant theory - the wage fund was derived not from previous year’s operations,
but simply from residue of total revenues after deducting all other legitimate expenses of
business operations, such as, rent, taxes, interest, and profits.

• The Marxian theory/surplus value theory - the surplus between labor cost and product
price should be paid to labor.

• Worker investment - Labor markets vary in the scope of ‘worker investment’ required for
their particular industry. The individual worker’s ‘investments’ consists of the education,
training, and experience that the worker has invested in a lifetime of work. Individual
workers vary in their desire to maximize income, just as employing organizations vary in
their worker investment requirements

• Institutional Wage theory - It suggests that a wage level depends on a variety of choices of
decision-makers and that weights can be assigned to these choices. It considers all types of
wage structures, such as interpersonal, inter-firm, inter-area, inter-occupational, and
inter-industry. It suggests that one must analyze compensation from a dynamic,
continually changing basis, rather than assuming that we can hold constant all factors
affecting compensation while varying only one factor

• Consumption theory - wage increases are desirable because they raise labor income
thereby stimulating consumption. Since wage earners spend a very large proportion of
their incomes, it is held that higher wages will result in a rise in consumer spending and
thus act to sustain or to stimulate the economy.

• Productive efficiency theory - Each worker is provided the opportunity to increase his or
her wages by increasing his or her productive efficiency. This theory provides the basis for
an array of monetary motivational tools, such as, incentives systems, bonuses, and profit
sharing plans. Many economists feel that because of its realistic application, the
productivity theory is the most constructive of recent wage theories.

• Bargaining theory - The bargaining theory is based on the assumption that there is no
single fixed wage rate for a particular kind of work. Rather there is a range of possible
wage rates. When and if, an employee chooses to designate a union as a bargaining agent
with the employer, then this theory becomes the collective bargaining theory.