Rangamati Science & Technology

University

Assignment On
The Pay Model & Compensation Strategy
Course Name: Compensation Management
Course Code: MGT-506

SUBMITTED TO
Mohona Biswas
Assistant Professor
Department of Management
Rangamati Science & Technology University

SUBMITTED BY:
Firoz Ahammad Bhuiyan
Reg.No: 2018-21-31
Roll: 31
Department of Management
Rangamati Science & Technology University

Submission Date: 20th July, 2021

Question 1: What Is Compensation/Pay?
“Compensation refers to all forms of financial returns and tangible services and benefits employees
receive as part of an employment relationship”- G.T. Milkovich and J.M. Nemwan in 2002.
Compensation includes the basic salary as well as rewards in the form of bonuses, overtime, leave,
insurance, company car, expense account, and other benefits. Not all compensation models are
alike. Some plans put the emphasis on the basic salary, while others are more focused on using
performance incentives. Some organization also offer profit share schemes to their employees if
they help to increase production and lower costs.

Question 2: What do you mean by Pay Model?

The Pay Model of Compensation and benefits helps managers to structurally design and
understand the compensation system for their employees. The model consists of three main
components:
a) Objective of the remuneration model
b) The policy that is the foundation for the structure
c) The techniques that link the policy to the objectives.

Figure 1: The Pay Model

Question 3: What are the objectives of compensation? Discuss them briefly.
Compensation Objective
Pay systems are designed to achieve certain objective. The basic objective are-
a) Efficiency
b) Fairness
c) Ethics
d) Compliance with law and regulation.
Let describe these objective below-
Efficiency: Efficiency can be stated more specifically as-
1. Improving performance, increasing quality, delighting customers and stockholders
2. Controlling labor cost
Fairness: Fairness is a fundamental objective of pay systems. Fairness means-
1. Ensure Fair treatment by recognizing both employee contributions and employee needs
2. Procedural fairness is the process used to make pay decisions and suggests that the way a pay
decision is made may be as important to the employee as the results of the decisions.

Ethics: Ethics refers to how an organization-

1. care about how its results are achieved
2. Managing pay sometimes creates ethical dilemmas
3. Manipulating results to ensure executive bonus payouts, misusing statistics used to measure
competitors’ pay rates, and shaving the hours recorded in employees’ time cards are all too common
examples of ethical lapses

Compliance with law and regulation: Compliance as a pay objective means conforming to
federal and state compensation laws and regulations. If law changes, pay systems need to be
change, too, to ensure contained compliance. As companies go global, the must comply with the
laws of all the countries in which they operate.

Question 4: Briefly discuss the policy decisions of the pay model

Four Policy Choices
Every employee must address the policy decisions shown on the left side of the pay model-
1. Internal alignment
2. External competitiveness
3. Employee contributions
4. Management

Let discuss about these objective briefly-

Internal alignment: Internal alignment refers to comparisons among jobs or skill levels inside a single
organization.

 Jobs and people s’ skills are compared in terms of their relative contributions to the organization's
business objectives
 Pertains to the pay rates both for employees doing equal work and for those doing dissimilar work
External competitiveness: Internal competitiveness refers to pay comparisons with competitors.

 Compensation relationships external to the organization: comparison with competitors

 Effects of decisions regarding how much and what forms have a twofold effect on objectives: To
ensure that pay is sufficient to attract and retain employees, To control labor costs to ensure
competitive pricing of products/ services
Employee contributions: Employee contributions focus on Relation emphasis placed on employee
performance as it directly affects employee’s attitudes and work performance.

 Performance based pay affects fairness: employees need to understand the basis for judging
performance in order to believe that their pay is fair.
Management: A policy regarding management of the pay system is the lust building block in our model.
Management means ensuring that the right people get the right pay for achieving the right objectives in the
right way. The greatest system design in the world is useless without competent management.

Question 5: What is strategic compensation Question? What do you mean by

strategic compensation?
A strategic compensation strategy guides an organization’s approach to managing total employee
compensation. In the past, compensation may have been just a paycheck, but today it’s much more.
Employees seek employers that not only pay them a competitive wage, but also provide benefits
and programs which help them address other financial costs, such as healthcare and retirement
plans.

Question 6: What is Strategic Choice? Show it with a diagram.

Strategic Choice involves a whole process through which a decision is taken to choose a particular
option from various alternatives. There can be various methods through which the final choice can
be selected upon. Managers and decision makers keep both the external and internal environment
in mind before narrowing it down to one.
Strategy refers to the fundamental directions that an organization has chosen. An organization
defines its strategy through the tradeoffs it makes in choosing what (and what not) to do. Exhibit
2.2 relates these strategic choices to the quest for competitive advantage. At the corporate level,
the fundamental strategic choice is, what business should we be in? At the business unit level, the
choice shifts to, how do we gain and sustain competitive advantage? How do we win in those
businesses? At the function level the strategic choice is, how should total compensation help gain
and sustain competitive advantage? The ultimate purpose—the “so what?”—is to gain and sustain
competitive advantage.

Figure 2: Strategic Choice

Question 7: Discuss four steps of developing compensation strategy

Developing a compensation strategy involves four simple steps-
1. Assess Total Compensation Implications
2. Fit Policy Decisions to Strategy
3. Implement Strategy
4. Reassess the Fit
While the steps are simple, executing them is complex. Trial and error, experience, and insight play major
roles.
 Figure 3: Four steps of developing compensation strategy

Step 1: Assess Total Compensation Implications

Think about any organization’s past, present, and, most vitally, future. What factors in its business
environment have contributed to the company’s success? Which of these factors are likely to become more
(or less) important as the company looks ahead? It classifies the factors as competitive dynamics,
culture/values, social and political context, employee/union needs, and other HR systems.
Step 2: Map a Total Compensation Strategy
The compensation strategy is made up of the five choices outlined in the pay model: objectives, alignment,
competitiveness, contributions, and management. Mapping these decisions is step 2 in developing a
compensation strategy. The aim is to make the right compensation choices based on how the organization
competes.
Steps 3 and 4: Implement and Reassess
Step 3 is to implement the strategy through the design and execution of the compensation system. The
compensation system translates strategy into practice—and into people’s bank accounts. Step 4, reassess
and realign, closes the loop. This step recognizes that the compensation strategy must change to fit changing
conditions. Thus, periodic reassessment is needed