Compensation and Benefits Unit 1

Unit 1 Compensation Management: An Introduction

Structure:
1.1 Introduction
Objectives
1.2 Compensation Management
1.3 Compensation and Non-compensation Dimensions
Compensation dimensions
Non-monetary Compensation
Non-compensation dimensions
1.4 3-P Concept in Compensation Management
Pay for position
Pay for person
Pay for performance
1.5 Compensation as Retention Strategy
1.6 Compensation for Special Groups
Compensation of executives
Compensation of sales personnel
Compensation for international employees
1.7 Significant Compensation Issues
1.8 Summary
1.9 Glossary
1.10 Terminal Questions
1.11 Answers
1.12 Case Study

1.1 Introduction
Compensation in its simplest form is the payment that one gets for the work
done by him either on full time or on part time basis. The issue of
compensation has always been a critical issue for both the employer and
the employee. Money is a crucial incentive and can be directly or indirectly
stated as a medium of fulfilling human needs. On one hand, employees
need it to meet their primary needs. On the other hand, the employers
provide compensation to meet their firm’s objectives of manpower
requirement. Employers also provide compensation to engage, motivate and
incentivise employees and not only to meet manpower requirement.

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In this unit, you will study the concept of compensation management,

dimensions of compensation and non-compensation. You will also study the
3-P concept of compensation management, compensation as retention
strategy and compensation for special groups.
Objectives:
After studying this unit, you should be able to:
• explain the concept of compensation management
• define the dimensions of compensation and non-compensation
• describe the 3-P concept in compensation management
• analyse the use of compensation as a retention strategy
• identify and describe the compensation for special groups
• recognise the significant compensation issues

1.2 Compensation Management

According to Stephen P. Robbins, Davis A DeCenzo, Robin Stuart-Kotze
and Eileen B. Stewart, the authors of “Fundamentals of Management”,
“Compensation management is a process of determining cost-effective pay
structure designed to attract and retain the employees, provide an incentive
to work hard and structured to ensure that pay levels are perceived as fair”.
In words of I. Kessler, a renowned compensation manager, “compensation
management refers to payment system which determines employee wage
or salary, direct or indirect rewards”.
You can say that compensation acts as a binding agent between the
employer and the employee. Figure 1.1 shows you that an organisation’s
internal environment comprises of a compensation policy that includes
financial and non-financial benefits.

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EXTERNAL ENVIRONMENT
INTERNAL ENVIRONMENT
COMPENSATION
Financial Nonfinancial
Direct Indirect (Benefits) The Job Job Environment
Wages Legally Required Benefits Skill Variety Sound Policies
Salaries Social Security Task Identity Capable Managers
Commissions Task Significance Competent Employees
Bonuses Workers' Compensation Autonomy Congenial Co-workers
Family & Medical Leave Feedback Appropriate Status Symbols
Working Conditions
Voluntary Benefits
Payment for Time Not Worked Workplace Flexibility
Health Care Flextime
Life Insurance Compressed Workweek
Retirement Plans Job Sharing
Employee Stock Option Plans Telecommuting
Supplemental Unemployment Benefits Part-Time Work
Employee Services More Work, Fewer Hours
Premium Pay
Customized Benefit Plans

Source: http://digitalscholarship.unlv.edu/cgi/viewcontent.cgi?article=
Figure 1.1: Organisational Environment and Compensation Types
Now, let us understand this concept with the help of a case let.

Case Let

SAS India Pvt. Ltd.

SAS India Pvt. Ltd. is a well-known major software company in India. The
company makes statistical analysis software. The company is growing
rapidly from 1900 employees five years ago to the existing 5400
employees.
At its headquarters, in Mumbai, there is a 36,000 square-foot gym for
employees. In addition to a well-planned basic salary, allowances, stock
options and benefits there is a full-length basketball court, pool tables, a
private sky-lighted yoga room and workout areas, which form part of their
compensation package. Outside, there are soccer and cricket fields.
Massages are available several times a week and classes are offered in
dance and tennis.
The company also operates the largest day-care facility in India. To
encourage families to eat lunch together, the SAS cafeteria supplies baby
seats and high chairs. To encourage families to eat dinner together, the

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company has a seven-hour workday, five days a week. Unlike many

work-obsessive software firms, most SAS employees leave the office by
5:00 PM. Management likes to call its work place culture “relaxed”.
Is this any way to run a business? Management thinks so. SAS’s strategy
is to make it impossible for people not to do their work. Even though the
company provides no stock option plans and salaries no better than the
competitors do, the company has built an unbelievably loyal workforce.
Whereas competitors typically have turnover rates above 30 percent,
SAS’s rate has never been higher than 5 percent. Management claims
that it saves ` 75 lakhs a year just in employee replacement-related costs
such as recruitment, interviews, moving costs for new hires and lost work
time.
Source: www.sas.com

As stated earlier, compensation is the remuneration received by an

employee for his contribution to the organisation. Compensation includes
payment either in form of annual salary or hourly wage in combination with
different benefits like insurance, stock purchase option and vacations, etc.
The components of a compensation management system of an organisation
as reflected in figure 1.2 are designed keeping in mind the organisational
strategies and objectives.

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Compensation System

Indirect compensation Direct compensation

Base pay Merit pay

Salary Wage

Protection Pay for Time Services and Incentive Deferred

Programs Not Worked Perquisites Pay Pay
z Medical z Vacations z Recreational z Bonus z Savings plan
insurance z Holidays facilities z Commission z Stock purchase
z Life insurance z Sick leave z Car z Piece rate z Annuity
z Disability income z Jury duty z Financial Planning z Profit sharing
z Pension z Low-cost or z Stock option
z Social Security free meals z Shift differential

Source: http://www.whatishumanresource.com/compensation-management
Figure 1.2: Components of a Compensation System

Self-
Actualisation

Esteem Needs

Social Needs

Safety Needs

Physiological Needs

Source: http://www.abrahammaslow.com/m_motivation/Hierarchy_of_Needs.asp
Figure 1.3: Maslow’s Need Hierarchy Theory

Maslow’s Need Hierarchy Theory considers compensation to fall in the

safety needs category as reflected in figure 1.3. In addition, there are many
other factors, which account for designing an effective compensation

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strategy to motivate and retain effective workforce, which forms an integral

part of human resource management of an organisation. Factors to be
considered while designing a compensation package include (reflected in
figure 1.4):
• Job analysis and evaluation
• Salary structure
• Pay scale

Source: http://www.pwc.com/tw/en/services/people-and-change/compensation-
and-benefits.jhtml
Figure 1.4: Compensation Structure Design

There are direct and indirect types of compensation. The direct type implies
cash compensation – basic pay, dearness allowance, long-term incentives
like equity-benefit incentives, short-term incentives, benefits, allowances
and services, income-tax protection and devices meant for work-life
protection.
• Direct Compensation basically refers to the benefits related to the
monetary terms which are being offered to the employees in return of
the services rendered by them. Thus, monetary benefits comprises of
Basic Pay, HRA, Leave Allowance, Medical Reimbursement,
Conveyance, Gratuity, Bonus, Special Allowance etc. Therefore, they
are given at definite time and at definite interval.

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The different components of direct compensation are given in figure 1.5.

Medical
Reimbursements

Basic Salary Special

Allowances

Direct
Compensation
House Rent Bonus
Allowances

Conveyance Leave Travel

Allowances

Source: http://trueinfos.com/compenandben.html
Figure 1.5: Direct Compensation

• Indirect Compensation basically refers to the non – monetary benefits

which are provided and offered to the employees in return of the
services rendered by them. Thus it includes Overtime Policy, Leave
travel Assistance Limits leave policy, Holiday Homes, Retirement
benefits, Hospitalisation, Car Policy etc.

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Table 1.1 mentioned below reflects the total compensation practices of fast-
growth companies.
Table 1.1: Total Compensation Practices of Fast-Growth Companies

Source: http://www.paypeopleright.com/Compensation_Reward_and_Retention_
Practices_in_Fast-Growth_Companies.pdf

You can now say that organisations are using compensation and rewards
system as effective tools to develop, build and maintain “human capital” for
competitive advantages by the following ways:
• Management of compensation aims at attracting qualified individuals to
organisation.
• It helps in retention of competitive workforce in the organisation.
• It acts as an incentive for motivation of employees to put their best
efforts in organisational development.

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• It helps in minimisation of cost of compensation thereby further adding to

organisational effectiveness.
• Maintaining competitiveness in the market in order to control or
decrease employee’s attention, which affects the organisational working.
• Encourages employees to develop their competencies.
• Compilation of social and legal legislations like The Minimum Wages
Act, 1948, Companies Act 1956 etc.
You can understand the importance of compensation management by going
through the example of Indian industries, which are aimed towards high
growth and are in search for talented human resource. To achieve such an
objective they are providing the most competitive packages.
Self Assessment Questions
1. __________________ can be defined as the remuneration earned by
an employee in return of his contribution to the organisation.
2. Compensation includes annual salary or hourly wages in combination
with different benefits. (True/False)
3. Indirect compensation includes payment for ____________________.
(a) Medical insurance
(b) Sick leave
(c) Basic pay
(d) Both (a) and (b)

1.3 Compensation and Non-Compensation Dimensions

Organisations design out the employee compensation packages based on
some dimensions for its different employment units. These are explained
below:
1.3.1 Compensation dimensions
The compensation dimensions are described briefly as follows:
1. Pay for work and performance: This includes short-term monetary
payments made on weekly, monthly and annual periods in form of
awards or bonuses to allow employees to make payment for their
desired product and services.
2. Pay for time not worked: It has been observed from past experience
that the number of days worked per year and the number of hours
worked per week have decreased.
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For past 40 years, the workers have taken the advantage of with-pay
leaves, paid for time-off for personal reasons and for longer vacations,
etc.
3. Disability income continuation: An employee becomes unable to
perform his normal duties when he incurs some health or accident
disabilities. Medical, surgical and hospital bills creates an additional
burden for him in addition to his ongoing self and family expenditure.
Example: Social security, sick leave, workmen compensation, etc. are
example of the benefits that can help an employee in such situations.
4. Deferred income: Different types of programmes, like savings plans,
social security, employer-provided pension plans, annuities, and
supplemental income plans provide after retirement income to the
employee. These are considered lucrative by them because of tax
benefits like immediate tax deduction and deferment of tax obligation,
etc. and help employees to earn tax-free interest.
Example: Stock purchase, option, and grant plans are components
commonly used to achieve estate building, tax-deduction and deferral
goals.
5. Spouse (family) income continuation: In compensation, there are
some plans, which are designed to provide the dependents of the
employee with income source in case of his death or permanent
disability to work.
Example: Life Insurance plans, social security, pension plans, workers'
compensation, and other related plans provide income to the families of
employees in such situations.
6. Health, accident, and liability protection: At the time of health
problems, employee’s main focus is not only concerned with income
continuation but also associated with payments for medicinal treatments
to overcome disability or illness. This is provided to them in the form of
different insurance plans.
Example: Statistics show that in comparison to any other type of
product or services the demand for health related product and services
have highly increased.
7. Income equivalent payments: In addition to basic pay and allowances,
the employees are provided with some additional benefits. These
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benefits are attached to their designation either in form of monetary or

non-monetary incentives. This is usually referred to as perquisites or
simply perks. Some perks are tax-free, in hands of employees and tax-
deductible for employers.
8. Organisations develop compensation policy: The compensation
system centres on sound principles of compensation administration.
1.3.2 Non-monetary Compensation
Non-monetary compensation can equal 20 – 60% of the value of the cash
compensation that an employee receives. For the current job seeker,
starting salaries have barely increased, frozen or actually dropped. So,
finding non-monetary benefits in an offer can be essential when an
employee evaluates it. These added perks can sweeten (and seal) the deal.
Beyond the employee getting material value from their benefits, there are
non-material perks, as well. Companies who offer benefits, such as a rich
retirement plan, send a message that they value their employees and want
to promote long-term relationships with their employees. These employers
are becoming more and more sought after.
There are a host of benefits that companies can offer to attract and retain
top talent
• Flex-time schedules
• On-site childcare
• Free or discounted parking
• Free or discounted food and drinks
• Gym membership discounts
• In-office massage or yoga
• Casual Fridays
• Mentoring programs for career advancement
• Free or discounted educational and training opportunities
• Work opportunities in multiple locations
• Cross-training in other areas of the business
• Annual or quarterly company parties

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1.3.3 Non-compensation dimensions

Non-financial compensation rewards can be defined as situation-related
rewards though very important but not included in the compensation
package. These are explained as below:
1. Enhance dignity and satisfaction from work performed: Recognition
of an employee as valuable and useful contribution can be considered
as one of the most powerful and least costly rewards. It motivates the
feeling of self-worth and pride among employees in making contribution
to the organisational success.
2. Enhance physiological health, intellectual growth, and emotional
maturity: The organisation at time of designing its compensation policy
must also consider the modern health practices. This recognises the
direct relationship linking the physiological health and emotional and
intellectual well-being of every individual employee.
3. Promote constructive social relationships with co-workers: In
today’s world of extensive specialisation, the dependency of people has
increased on one another. The opportunity to interact with other
individuals in a socially productive manner to enjoy workplace
association can be considered as one of the most valuable rewards
gained from working.
4. Design jobs that require adequate attention and effort: Workers over
past forty years, through their job designs, were taught how to perform
quickly few highly repetitive tasks. The workers were made to perform
these jobs for long for the time when they remained on job. Such an
action, which initially appeared to be an effective way of melding
workforce, turned to give serious drawbacks. Therefore, the firm must
design the jobs in such a manner that it grabs adequate attention and
efforts from workers.
5. Allocate sufficient resources to perform work assignments: An
organisation opens doors for problems when it forces employees to
perform those assignments for which they possess neither skills nor
knowledge. Most of the employees seek a sense of achievement from
their work. They are motivated by the degree of challenge to help them
feel that they can succeed in handling such new assignments, so the
organisation must provide them with adequate resources.

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6. Grant sufficient control over the jobs to meet personal demands:

Behavioural scientists over fifty years have felt the need for granting
employees a greater opportunity to participate in the decision making
process of organisation. The basic reason being that there are some
employees in the organisation who rather being told what to do and what
acceptable levels of performance to achieve, guide the top management
on how to manage the organisation and its assignments more
effectively.
7. Offer supportive leadership and management: This is considered as
a dimension, which is almost difficult to separate from all other non-
compensation ones. However, such a dimension is so important that it
must be recognised as a unique dimension of the non-compensation
rewards.
Self Assessment Questions
4. Pay for work and performance can be said to include money that is
provided in long-term. (True/False)
5. Over the years, the number of days worked per year and number of
hours worked per week have ____________________.
(a) Decreased
(b) Increased
(c) Remained unchanged
(d) First decreased and then increased
6. Tax regulations and laws make ___________ more tempting to many
employees.
7. _____________ rewards is the situation related rewards though
important but not included in the compensation package of an
organisation.

Activity 1
Critically analyse the compensation management system practiced in
your organisation. Identify its strengths and weaknesses.

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1.4 3-P concept in Compensation Management

The concept of paying for the 3-P’s, consists of three parameters that are
considered by the management of any organisation while deciding the
salary as well as the incentives of employees. It is to pay for the position,
the person and the performance.
1.4.1 Pay for position
With respect to pay for position, the crucial point of the policy of
compensation is interpreted into the grade width. The grade width is the
extent to which the various sizes are integrated within the same grade and
thus, result in the reduction that lays emphasis on position.
Therefore, some factors such as individual’s competencies or skills or
person’s achievement of goals laid greater impact on the total pay level
instead of the grade level. A width of the grade not only identifies the
importance of position to pay but also used to distinguish the importance of
the different level of the firms and to arrange them in hierarchy.
Example: The insurance sector in India is providing the highest pay
packages followed by Banking and IT sectors. In the year 2006, professional
and technical skill oriented jobs provided a higher salary than senior
management.

Compensation Increase

Others Top/Senior
Management
17% 20%

Clerical
Middle top/senior management
19%
21% Management middle management
professional/technical
23%
clerical

Professional/ others
Technical

Source: http://www.mairec.org/IJRFM/Sep2011/9.pdf
Figure 1.6: Changes in Compensation Payment in India

The above figure 1.6 shows the compensation increase in India.

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1.4.2 Pay for person

In this approach, the second element of P is the “Person” which is regarded
as one of the most subjective and essential part of the compensation
management. It determines person’s experience and competencies which is
both competitive and equitable in setting a salary structure. It is associated
with the “competency based pay” and incorporates the approach of “market
based pay.”
The very first stage in this approach is to determine the requirements of the
position, which includes experience and competencies which the
organisation required in the person for a particular position. Thus, the firm
must look for such a procedure which assesses people and position within
the structure of the organisation’s value, philosophy, identity and image
against the same competency.
The key player between pay for person and pay for positions is the
reference salary. This salary depends on the market competitive pay for the
person who fulfils the needs of the position for experience and competency.
The P concept of who gets what is given in table 1.2.
In the present day market scenario, it is the skills and the talents that
matters the most. Companies are paying the least attention towards the sky-
rocketing remunerations of the deserving employees.
Example: IIM graduates drawing huge packages and breaking their own
records year after year is perhaps the biggest example of this.

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Table 1.2: P Concept – Who gets What

Source: Compensation and Reward Management, 1st Edition, B D Singh,

Excel Books, 2007.

1.4.3 Pay for performance

The 3rd P of compensation management is pay for performance. The 3-P
compensation management does not only give importance to performance
of an individual in either setting of salary or providing increase in salary. It is
based on the logic that since performance is variable and it fluctuates from
year to year, the performance pay similarly is flexible and must fluctuate on
similar patterns. In such an innovative form, the performance of an individual
is managed through performance contract which consists of role
clarification, objective setting and performance review. As a result of this
contract of performance, the performance measurement at individual and
corporate level becomes the basis for setting performance pay.
The purpose of pay for performance is to define the short and long-term
incentive schemes and efficient rewarding of the employee’s contribution to

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its immediate and long-term results. An efficient scheme is one which is

agreed-upon by all, is challenging, and is based on reasonable targets. It
motivates the employee by relating targets to huge rewards, and which
clearly and openly recognises the employee’s contribution.
Self Assessment Questions
8. A _____________ identifies the importance of position to pay.
9. Pay for person takes into account the experiences and capabilities in
setting a pay level which is __________________.
(a) Equitable
(b) Competitive
(c) Non-equitable and competent
(d) Both (a) and (b)
10. In pay for performance, only the individual performance is considered
in setting remuneration or its increase. (True/False)

1.5 Compensation as Retention Strategy

As you know that in today’s competitive and dynamic environment, human
resource management has to play a significant role in hiring and retaining
right kind of employees. Among different strategies employed by
organisation to retain its effective employees, one of the most critical one is
measurement and reward of performance through compensation and other
benefits.
Compensation system plays an integral role in retention of employees as a
poor compensation is indeed one of the strong factors of employees leaving
the organisation. A compensation system in an organisation can be linked to
employees’ behaviour and attitude. An ineffective compensation strategy
can result in poor job satisfaction and organisational identification which
may further affect employee behaviours towards each other and the
organisation.
As represented in table 1.3, ten studies conducted in past show that poor
compensation stands as one of the major reasons for a higher employee
turnover.

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Table 1.3: Result of Study reflecting Reasons for Employee Turnover

Study Industry Findings: Turnover Recommendations
Due to

Carraher General Compensation Different compensation plans for

et. al. high cognitive complexity jobs vs.
(2004) low complexity jobs.
Carroll & lodging Poor HR/hiring Review Pay and compensation
Sturman from other industries to compare.
(2008) Hire for skills and competencies
to fit job description.
Chickwe Hospitality Compensation, Add incentive pay. Have a clear
(2009) poor HR policy on recruitment, retention,
motivation, exit interview, and
employee development.
Choi & Hospitality Poor HR Offer promotions, conduct exit
Dickson interviews, have regular
(2010) performance appraisals, have
better training.
Croes & lodging Compensation Communicate better on incentive
Tesone programs, incentive plans for
(2007) hourly workers, incentives
increased production and
reduced turnover. Have better
training.

Source: http://digitalscholarship.unlv.edu/cgi/viewcontent.cgi?article=
Now you can say that by developing a right kind of retention strategy for
employees, the organisation achieves success in retaining its employees
during fluctuating economic periods.
Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7

Focusing on Ensuring Analyzing Writing Job Determining Determining Designing a

the Strategic Commitment Job Description Internal External Salary
Objectives Functions Pay Equity Pay Equity Structure

Source: http://www.shorecapexchange.org/files/Comp_paper_v8.pdf
Figure 1.7: Designing Compensation Strategy

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A retention strategy, in addition to providing support to company’s vision and

values, must also support compensation and benefit package. The firm must
design the overall compensation policies and strategies.
Thus, in order to retain a right kind of workforce, organisation must follow
the steps given above in figure 1.7 to design an effective compensation
strategy from top to bottom.
Self Assessment Questions
11. ________________ plays an integral role in retention of employees in
an organisation.
12. A compensation system in an organisation can be linked to employees’
behaviour and attitude. (True/False)
13. A retention strategy in addition to providing support to company’s vision
and values must also support ___________________.
(a) Compensation
(b) Benefit package
(c) Both (a) and (b)
(d) Job description

1.6 Compensation for Special Groups

Compensation systems though are similar for most but not for all kinds of
jobs in the organisation. In every organisation, there are some special
groups whose compensation is not determined in the same manner as it is
done for majority of jobs in the organisation. This is simply because the
compensation needs of such groups are greater than those of employees
generally. The special group of employees includes executives, sales
personnel and international employees. Now, you will understand them in
brief:
1.6.1 Compensation of executives
Executive compensation attracted much of the attention in the area of
compensation. It focuses on the size of monetary rewards earned by top
executives like Chief Executive Officers (CEOs).
Example: If you talk about global market of America in the year 1996, the
average salary of CEOs was 2.3 million dollars per year. After adding the
incentives, stock options and other benefits, their compensation on an
average rose to 5.8 million dollars.
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Typically, the compensation of executives consists of basic pay, bonuses,

stock option and other perquisites.
Organisations, at the time of designing compensation plans for executives,
take into account the tax implications of providing such perks before
incorporating them into the compensation system.
1.6.2 Compensation of sales personnel
Compensation to sales personnel has remained one of the basic concerns
in compensation payment to special groups which aims at providing sales
personnel some kind of combination of basic pay and performance
incentives. Sales compensation has been pointed out as an ideal form for
using incentive plans as most of the sales personnel spend maximum of
their time outside the organisation and control of the supervisor.
Different types of compensation incentives can be designed out for sales
personnel like:
1. Straight commission compensation plan: It helps an organisation to
attract and retain result oriented sales personnel giving consideration to
high earning potential and freedom of action. Moreover, it also
encourages aggressive selling which is the demand of current industry.
2. Salary plus performance bonus: In this, the sales personnel receives
fixed salary and also additional amount for achieving the sales target at
the end of the sales period on monthly, quarterly and yearly basis.
Therefore, at the time of selecting a suitable compensation policy for sales
personnel, the firm must take into account its organisational strategy,
competitors’ compensation practices and the products and services offered
by firm for sale.
The firm must first design the process of compensation such that it includes
elements like payout mechanics, payout frequency, pay mix, incentive form,
etc. Second, this design process should take into consideration the
organisational strategy, job roles and competitive pay levels. Finally sales
rewards should be tied to organisational goal setting.
1.6.3 Compensation for international employees
Globalisation has resulted in creation of an internationally equitable system
of compensation for the firms operating in multinational environment. Firms
operating in such environment involve three basic kinds of employees
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known as Expatriates, Local-Country Nationals (LCNs) and Third-Country

Nationals (TCNs).
1. Expatriates: These individuals, also termed as expats, are the citizens
of a country in which headquarters of an organisation are situated.
Example: An Indian working in an Indian Subsidiary company in
Thailand is an expatriate.
2. Local-country nationals: LCNs are citizens of the country in which the
subsidiary or branch of parent company is located.
Example: A Mexican working for a U.S company in its Cabo San Lucas
branch.
3. Third-country nationals: TCNs are individuals who are in the process
of applying visas to move to the countries which are not their country of
origin.
A number of benefits are provided to all three categories of people. The
compensation system of an organisation aims at providing them the benefits
which keep them in identical economic condition as they were in, before
accepting an overseas project and to positive aspect of living in a foreign
country.
Various incentives are provided to expatriates starting from cash bonuses to
stock options and performance related incentive payments.
Self Assessment Questions
14. _____________________ focuses on the size of monetary rewards
earned by top executives like Chief Executive Officers for product
standardisation.
15. Sales compensation has been pointed out as an ideal form for using
incentive plans. (True/False)
16. ___________ are the citizen of a country in which headquarters of an
organisation are situated.
(a) Expatriates
(b) LCNs
(c) TCNs
(d) NRIs

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1.7 Significant Compensation Issues

Just as HR activities strive in a dynamic environment, compensation
management also operates in this environment.
When managers aim to reward their employees in a fair manner they must
also take into consideration certain critical issues like labour cost control,
legal issues relating to male and female wage payments and concerns
relating internal pay equity.
Therefore, you can say that the major or significant issues relating to
compensation in an organisation are:
Equal pay for comparable worth
This issue has risen from the fact that the jobs which are performed by
women employee are less paid in comparison to the jobs which are
performed by men. Such a practice in criticism is termed as institutionalised
Sex discrimination.
Example: A female receptionist is paid less than a male receptionist in spite
of the fact that both may be contributing equally to the organisation success.
Low salary budgets
You can simply say that while current inflation trends have been stable
making employees realise the real worth of their gain in earnings which
seems to be quite smaller in comparison to earlier years. The tight
compensation cost control resulted from global job competition, reduction in
use of manpower due to introduction of new technology and increasing
utilisation of part-time and temporary workers receiving lower wages and
benefits have all resulted in low salary budgets of the company.
Example: Though the employees did not have a tough time but still the
reports of “WorldatWork” shows that the increase in the size of salaries has
been comparatively more before 1990.
Wage Rate Compression
The issue of low salary budget as discussed above can be rooted to the
compensation problem known as pay compression. A compression in wage
rate takes place when less experienced junior employees earn
comparatively more than the employees who are experienced. This can be
attributed to the sole reason that such inexperienced employees are paid
more due to higher starting salaries.
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Example: Due to lack of availability or supply of well-qualified applicants in

field of engineering, computers and other technical and professional fields,
they are offered higher salary packages in comparison to senior and
experienced employees.
Another reason accountable to pay compression can be stated as the
slightly lower salaries earned by employees at the top of pay grades in
comparison to the managers at the low end of their pay grades.
Identification of compression of wage rate and its causes is quite simple f in
comparison to implementation of policies aimed at reducing its effect.
Therefore, you can say that pay compression problem should be well
addressed as it can cause low morale among employees. This may result in
reduction in their performance, a higher turnover and absenteeism rate, and
emergence of an immoral behaviour of employee such as theft, etc.
Self Assessment Questions
17. One of the most important issues in compensation management can be
considered as equal pay for comparable worth. (True/False)
18. WorldatWork reports shows that the increase in the sizes of salary
have been comparatively ________________ before 1990.
(a) More
(b) Less
(c) Constant
(d) Either (a) or (b)
19. ______________ takes place when less experienced junior employees
earn comparatively more than the employees who are experienced.

1.8 Summary
Let us recapitulate the important concepts discussed in this unit:
• Compensation in its simplest form is referred to as the payment that one
gets for the work done by him either on full time or par time basis.
• Pay for work and performance, pay for time not worked, disability
income continuation, spouse (family) income continuation, income
equivalent payments, and organisations develop compensation policy
are some of the important compensation dimensions.

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• Non-financial compensation rewards can be defined as situation-related

rewards though very important but not included in the compensation
package.
• The concept of paying for the 3-P’s consists of three parameters that are
considered by the management of any organisation
• Compensation system plays an integral role in retention of employees.
• In every organisation there are some special groups whose
compensation is not determined in the same manner as it is done for
majority of jobs in the organisation.
• Equal pay for comparable worth, low salary budgets and wage rate
compression are some of the significant issues of compensation
management.

1.9 Glossary
Base pay: Fixed salary or wage constituting the fixed basic rate for the job.
Benefits: This includes sick pay, pensions, company car, insurance cover
and other perquisites.
Compensation: It includes every kind of financial return and tangible
benefits and services which workers receive as part of their employment
relationship with employer.
Incentive: The additional form of compensation that is directly linked with
performance and paid over and above the standard pay.
Salary: The payment to managers and professionals who generally fit this
category, where the pay is calculated at an annual or monthly rate rather
than hourly rate.
Variable pay: Variable pay can be defined as a non-traditional
compensation method which is performance-based.
Wage: It is the payment to workers who get either daily or hourly payment.

1.10 Terminal Questions

1. Explain the concept of compensation. What are its components?
2. What are the different types of compensation dimensions? Discuss in
brief.
3. Do you think only non-compensation dimensions are of any use?
Explain stating examples.

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4. Define the 3-P concept of compensation management.

5. Critically comment on the statement, “Compensation is a significant
employee retention strategy”.
6. “In every organisation, there are some special groups whose
compensation is not determined in the same manner as it is done for
majority of jobs in the organisation”. List the various special groups of
employees. Explain the compensation for these special groups.
7. What do you think are the significant compensation issues that you
would like to address as a manager while designing compensation
strategy in your organisation.

1.11 Answers
Self Assessment Questions
1. Compensation
2. True
3. Both (a) and (b)
4. False
5. (a) Decreased
6. Deferred income plans
7. Non-financial compensation
8. Width of the grade
9. Both (a) and (b)
10. False
11. Compensation system
12. True
13. (c) Both (a) and (b)
14. Executive compensation
15. True
16. (a) Expatriates
17. True
18. More
19. Pay compression
Terminal Questions
1. Compensation management refers to payment system which determines
employee wage or salary, direct or indirect rewards. For more details,
refer to section 1.2.
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2. Compensation dimensions include pay for work, pay for time not worked,
etc. For more details, refer to section 1.3.
3. Non-financial compensation rewards are all situation-related rewards.
For more details, refer to section 1.3.
4. Pay for the position, the person and the performance are the three
parameters that are considered by the management of any organisation.
For more details, refer to section 1.4.
5. Compensation system plays an integral role in retention of employees as
a poor compensation is indeed one of the strong factors of employees
leaving the organisation. For more details, refer to section 1.5.
6. The special group of employees includes executives, sales personnel
and international employees. For more details, refer to section 1.6.
7. Equal pay for comparable worth, low salary budgets and wage rate
compression are some of the significant issues of compensation
management. For more details, refer to section 1.7.

1.12 Case Study

Salary Inequities at Acme Manufacturing
Joe Black was trying to figure out what to do about a problem salary
situation he had in his plant. Black recently took over as president of Acme
Manufacturing. The founder and former president, Bill George, had been
president for 35 years. The company was family owned and located in a
small eastern Arkansas town. It had approximately 250 employees and was
the largest employer in the community. Black was the member of the family
that owned Acme, but he had never worked for the company prior to
becoming the president. He had an MBA and a law degree, plus five years
of management experience with a large manufacturing organisation, where
he was senior vice president for human resources before making his move
to Acme.
A short time after joining Acme, Black started to notice that there was
considerable inequity in the pay structure for salaried employees. A
discussion with the human resources director led him to believe that salaried
employees pay was very much a matter of individual bargaining with the
past president. Hourly paid factory employees were not part of this problem
because they were unionised and their wages were set by collective

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bargaining. An examination of the salaried payroll showed that there were

25 employees, ranging in pay from that of the president to that of the
receptionist. A closer examination showed that 14 of the salaried employees
were female. Three of these were front-line factory supervisors and one was
the human resources director. The other 10 were non management.
This examination also showed that the human resources director appeared
to be underpaid, and that the three female supervisors were paid somewhat
less than any of the male supervisors. However, there were no similar
supervisory jobs in which there were both male and female job incumbents.
When asked, the HR director said she thought the female supervisors may
have been paid at a lower rate mainly because they were women, and
perhaps George, the former president, did not think that women needed as
much money because they had working husbands. However, she added
she personally thought that they were paid less because they supervised
less-skilled employees than did the male supervisors. Black was not sure
that this was true.
The company from which Black had moved had a good job evaluation
system. Although he was thoroughly familiar with and capable in this
compensation tool, Black did not have time to make a job evaluation study
at Acme. Therefore, he decided to hire a compensation consultant from a
nearby university to help him. Together, they decided that all 25 salaried
jobs should be in the same job evaluation cluster, that a modified ranking
method of job evaluation should be used, and that the job descriptions
recently completed by the HR director were current, accurate, and usable in
the study.
The job evaluation showed that the HR director and the three female
supervisors were being underpaid relative to comparable male salaried
employees.
Black was not sure what to do. He knew that if the underpaid female
supervisors took the case to the local EEOC office, the company could be
found guilty of sex discrimination and then have to pay considerable back
wages. He was afraid that if he gave these women an immediate salary
increase large enough to bring them up to where they should be, the male
supervisors would be upset and the female supervisors might comprehend
the total situation and want back pay. The HR director told Black that the

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female supervisors had never complained about pay differences. The HR

director agreed to take a sizable salary increase with no back pay, so this
part of the problem was solved. Black believed he had for choices relative to
the female supervisors:
1. To do nothing.
2. To gradually increase the female supervisors salaries.
3. To increase their salaries immediately.
4. To call the three supervisors into his office, discuss the situation with
them, and jointly decide what to do.
Questions
1. What would you do if you were Black?
2. How do you think the company got into a situation like this in the first
place?
3. Why would you suggest Black pursue the alternative you suggested
Source: http://www.chrmglobal.com/Replies/3544/1/Case-study
Compensation-and-Reward-Management.html
References:
• Armstrong, M. (2006). Handbook of Human Resource Management,
Kogan Page, 10th Edition.
• Milkovich G. T. & Newman J. M. (2005). Compensation Management.
Tata McGraw Hill.
• Robinson, S. L. & Rousseau, D. M. (1994) "Violating the psychological
contract: Not the exception but the norm" Journal of Organisational
Behavior 15, pp 245-259.
• Singh, B. D. (2007), Compensation and Reward Management, Excel
Books Pvt Ltd.
• Soni, Shyam Singh (2008), Compensation Management, Excel Books
Pvt Ltd.
E-References:
• http://www.citehr.com/68382-what-definition-compensation
management.html, Retrieved on 11th July 2012, Time: 10:09 AM
• http://www.scribd.com/doc/8579074/compensation-Management,
Retrieved on 11th July 2012, 10:10 AM

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• http://books.google.co.in/books?id=, Retrieved on 11th July 2012, Time:

4:05 PM
• http://www.ehow.com/info_7924255_compensation-affect-employee-
retention.html, Retrieved on 12th July 2012, Time: 12:37 PM
• http://entrcommunicators.blogspot.in/2011/08/compensation-system-vs-
employee.html, Retrieved on 12th July 2012, Time: 12:44 PM
• http://suite101.com/article/understanding-compensation-for-special-
employment-groups-a405646, Retrieved on 12th July 2012, Time: 4:12
PM

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