COMPENSATION MANAGEMENT

Unit-1

Competitive Imperatives of Compensation

Compensation is what employees receive in exchange for their contribution to the

organisation. Generally, employees offer their services for three types of rewards. Pay refers
to the base wages and salaries employees normally receive. Compensation forms such as
bonuses, commissions and profit sharing plans are incentives designed to encourage
employees to produce results beyond normal expectation. Benefits such as insurance,
medical, recreational, retirement, etc., represent a more indirect type of compensation. So, the
term compensation is a comprehensive one including pay, incentives, and benefits offered by
employers for hiring the services of employees. In addition to these, managers have to
observe legal formalities that offer physical as well as financial security to employees. All
these issues play an important role in any HR department’s efforts to obtain, maintain and
retain an effective work force. So, the employers are, therefore are required to know that what
are competitive imperatives which can justify the compensation structure and the satisfaction
of employees.

Competitive imperatives influencing the compensation are:

1. Productivity
2. Speed of work
3. Quality of work
4. Service
5. Learning

1. Productivity

 Productivity refers to an individual’s intention, urge or choice to earn more by doing

extra efforts or applying innovative/creative ways of doing the job.
 At the same time, the improvement of productivity depends on the management’s
ability to motivate and manage the human resources effectively and purposefully.
 Productivity is a tool to reduce the operational cost but performance parameters are
the backbone of effectiveness or efficiency of human beings, which plays a pivotal
role in managing the other resources to improve productivity.
 Higher technology; improved methodology, effective planning, effective logistics
management and control can achieve productivity.
 But the performance effectiveness or the efficiency of human beings depends on their
willingness to work, satisfaction of their worth and so on the fair compensation.
 Compensation is generally decided on the productivity of an average worker/
employee and one can earn more by improving productivity either by doing extra
efforts to making an extra quantity or by improving the skill level.
 Productivity has been widely accepted as a basis for minimum or extra earning of
employees, and therefore productivity agreement have been considered a fair basis to
compensate the workers satisfactorily.
 The productivity agreements entail jointly determined improvement in the method of
working and management of work to enable the employees to receive a share of
benefits accruing from increased productivity, in the form of increased wage or salary.
 For a fair perception of productivity linked compensation, the productivity agreement
should share problem solving on the subject of human resource contributions to
technology change and conflicts arising out of the inequity of efforts or the payments
in return of the efforts.
 Productivity bargain has been found to be the most ephemeral technique for
determining incentive payments linked to productivity, as problem productivity’
bargain in terms of extra earnings would not have been sufficiently contained by
productivity improvement to avoid a contribution to drift and cost inflation.
 To study the imperative of productivity in compensation, any organisation should
know the factors influencing the motive to work and the expectation of employees to
judge their worth.
 This helps-to evaluate their worth on the basis of the employees’ output and the
competency level. ‘
 However for fair perception of productivity linked compensation, the productivity
agreement should share the problem solving in the context of human resource
contribution to technology changes, and conflicts arising out of the inequity of efforts
or payment disparity.
2. Speed of work

 Speed is related to the time factor of the efforts put on by the employee to measure
his/her effectiveness or the efforts put on to reduce or eliminate the unwanted
breaks/interruptions or delays.
 This is more critical and important in chain production process where every next
operation is dependent on the completion of the preceding one in time.
 Similarly, the group performance is dependent on the time efficiency of each member
of the group.
 The most widespread economic development could be achieved by cutting down or
minimizing the overtime payments and consolidation of cost benefit due to speed of
work.
 This speed of work thus becomes a factor of determining the compensation and
benefit both to the employees and the employers.
 Speed of work no doubt increases the productivity and presses a higher demand of
compensation, but speed should not refer to quantity alone but also to the quality of
work and safety of men, machines and materials, as well as ensure the compilation of
safety rules.

3. Quality of work

 Quality is the totality of features and characteristics of a product or service that bear
on its ability to satisfy stated or implied needs.
 Quality is also one of the elements of productivity and the result of competency of the
individual.
 Productivity measured in quantity may be satisfactory in some of the production units
where the human contribution may be negligible to maintain quality.
 But in most of the production or service units, quality must wed quantity to justify the
quality production level. So is the case of performance, which could be measured in
terms of quantity as well as quality and the qualitative worth. Both become imperative
to justify the compensation.
  Quality feedback from a performer is information, which can be acted upon as it
contains examples of individual behaviour, contention, conscious efforts and
commitments.
 This could not only be used to analyze the job performers but can also be useful in
guiding, training and motivating the employees in managing the change by
eliminating negative behaviour.
 The job worth also cannot be measured by providing numbers alone but a job may be
complete only if it is done with the desired quality.
 However, quality consciousness too can have adverse effect on quantitative
production. Therefore compensation should be viewed in the context of the concept of
equity as it is sometimes difficult to assess whether the subjects were concerned about
reducing quality or whether it was low simply because of their concern for higher
quality.
 Especially it becomes difficult to evaluate the job worth when the subjects are paid at
piece rate with the intention to produce quality. In such situations sometimes over
paid employees produce less than equitably paid employees.
 Expectancy theory, however, emphasizes that employees will try to maximize their
output rather than try to balance the input to output. The job design process therefore
will have to consider the aspects of motivating behavioral expectations and methods
to ensure the desired quality and time to produce the job.

4. Service

 Services refer to attitude, habits and behavior of the employees, which are to the ways
of offering intellectual, manual or combined efforts to do any job.
 It is the quality of services and mannerism which decide the compensation worth
besides the quantity, and the quality of the product or service.
 Quality of service includes time keeping, attitude and behavior at work place, quick
understanding of the problem, the ability to quickly arrive at a conclusion to a
solution and promptness to attend the complaints.
 The compensation differentials, therefore could be generally seen in the same type of
service offered by different individuals.
5. Learning

 Learning as used here refers to concerted activity that increases the capacity and
willingness of individuals, groups, organizations and communities to acquire and
productively apply new knowledge and skills, to grow and mature and to adapt
successfully to changes and challenges.
 Such learning empowers individuals and organizations to make wise choices, solve
problems and break new ground. Education is involved with transmitting concepts
and ideas.
 It is a marvelous ability of an individual to learn and grow and there is no limit to this
capacity. In the learning process, the mind takes in information through a number of
receptors, edits it and compares it with previously received information.
 The actions and reactions that occur are stored in the memory for future use. Thus, an
older learner has a rich bank of experience complemented by a reinforced attitude.
 The initial learning makes a significant contribution to one’s attitude and continuous
learning reinforces it or improves it. He/she develops confidence to prepare responses
to new situations and to other people based on the learning experiences.
 Learning which behavior pattern leads to rewards and which one to punishment can
certainly help an individual to adjust to the working environment and feel comfortable
without grumbling for compensation. On the other hand, more and learning enhances
conceptual and behavioral knowledge which can help him/her to earn more.
 Unconscious competence is what causes mental errors, serious mistakes and resulting
accidents. Lack of knowledge is a cause of negative perceptions and proper learning
habits can only overcome this deficiency.
 The performance of individual can go on increasing if he/she has an aptitude for
learning. Learning habit is an important characteristic of an individual, which
positively benefits personal development and helps an organization with improved
efficiency.
 Compensation increments provide the opportunity to-take more challenging roles but
they require extra skill, knowledge and expertise which could be achieved through
learning.
 The ability to think, the capacity to learn and the details kept in mind are the
components of intelligence. Memorizing and retention the details are a skill that can
 be learnt. It is this learning which develops one’s verbal ability, inductive reasoning
and problem-solving. These are considered in comparing the worth for compensation.

Why Develop a Competitive Compensation Plan?

Ways to Beat Your Competition with Your Compensation Plan/ Planning for Improved
Competitiveness

1. Properly compensate your new hires.

From To-Do List for Human Resources Planning

When you hire a new employee, what you pay them can set the tone for long-term
satisfaction or disappointment with their compensation. If your organization notably under-
or over-pays your new hires, you  run the risk of losing good talent or creating employees 
who expect more than they have  earned.

“New Hire” To-Do List for Human Resources

 Be realistic. People know what they are worth. Even if they accept a position at
below-market wages, they may bear resentment toward the organization (and
ultimately leave).
 Manage your managers. Rogue hiring managers do not always serve the
organization’s best interests. Whether they want to pay too little or too much, they
waste financial and talent resources. Make sure they are aware of what they can offer
and why.

2. Deepen your knowledge.

From Setting Compensation Budgets

The knowledge you need includes awareness of the regulatory environment in which you are
operating. If you work in the manufacturing industry, you have different issues to handle than
in the healthcare industry. But, both industries require specific know-how if you want your
company to excel and avoid legal trouble.

3. Determine how competitive do you want to be relative to the market.

From Employee Compensation Plan Design

You will need to decide how competitive you want to be relative to the market. Your
organization’s competitive positioning will depend on many variables which may include:

 the outlook for growth over the next year and beyond
 your company’s ability to attract and retain talent
 your industry
 your overall philosophy on pay

Many companies choose to target the market somewhere between the 40th and 90th
percentiles.

4. Explain total rewards to your employees.

From How to Explain Employees’ Total Compensation

How well do your employees understand their total compensation, – namely the amount of
money spent on them by the company – outside of base salary? To communicate total
compensation to employees, some organizations use what is sometimes referred to as an
annual benefit summary. What this summary does is provide a detailed list of costs incurred
by the organization to retain, train, support, and reward a member of that organization. There
is nothing complicated about it, it just requires some research on the part of the person who is
developing it.

Beyond preparing a summary, remember the following tips:

 Develop a compensation plan for your positions that accounts for education,

skills, tasks and responsibilities in such a way that they make sense to an outside
observer.
 Explain benefit packages in a manner that reminds employees that they are not
intrinsic to the position itself.
 Make compensation predictable. Through the use of either an established pay scale,
or even the pay-for-performance approach, employees can gain an understanding of
their base pay and set goals beyond it.
  HR professionals and accounting professionals alike should make themselves
readily available to explain their compensation plan to employees. This not only
increases the employee’s insight into what their company provides them, but also
provides the resourcing professionals a chance to gauge the current applicable
compensation plan against various job niches and titles.

5. Think before you cut.

From Reasons for Company Layoffs: Save Costs without Salary Freezes

There is nothing worse than taking money away from employees. In most cases, targeted and
smart layoffs are easier for the organization to recover from than taking money away from
employees. Not to mention that it is a lot easier to save dollars by focusing on a few
employees than by taking a little bit away from everyone. Most Americans are living
paycheck to paycheck. A reduction in pay can mean the difference between meeting all of
their financial obligations or not. In our society today, too many people are living too close to
the edge to absorb this type of financial hit.

One way to think about this is from a personal finance perspective. If you really needed to
save money in your household, you would cut back on non-essentials, such as eating out,
travel, clothing and movies, rather than reducing what you pay on your mortgage or
electricity bill. By giving full support where your crucial functions are, much like keeping a
top performer at their full wage, you increase your chances of surviving tough times.
  
6. Remember the key issues covered by a successful employee incentive plan.

From Successful Employee Incentive Plans

 Who are you going to incent?

 How much are you going to pay, and for what result?
 How are you going to deliver the employee incentive – monthly, first-dollar, quota
attainment, etc.?
 And, a key question that Payscale.com can help you answer: Is your total pay package
competitive when you include your incentive compensation plan?

7. Equip your managers to have effective conversations about compensation.

From Compensation Planning Mistakes

Explaining your compensation plan is a big responsibility. If managers do not have

a compensation communication strategy and explain individual compensation decisions
credibly, at best, they put employee morale at risk. At worst, they put the organization in
legal jeopardy.

Here are tips for improving communication from managers:

 Train your managers. Many organizations invest in management training for hiring,

anti-harassment and performance appraisals, but neglect to train managers on how to
talk about compensation.
 Check their answers. Your managers will be asked difficult questions. Can they
answer these questions to your and the organization’s standards?

How does the organization set salaries?

Why did I only get this much money?
Why did my colleague get that much money?
What can I do to maximize my earning potential at this organization?
When can I expect to see my hard work turn into better compensation?

8.  Get buy-in on your company’s compensation policy.

From Employee Compensation Policy

Gain approval. Generally, it is the board of directors that approves the final policy, but these
aren’t the only people involved in developing your policy. The top executives such as the
CEO, COO, and CFO have input to the overall goals and objectives of the compensation
program. The human resources professional serves as the expert regarding items to be
included in the policy. Your organization may also choose to create a compensation
committee consisting of individual stakeholders from different departments including some
managers and employees as an internal control measure, as well as an employee engagement
strategy.

9. Write a compensation philosophy.

From Developing a Compensation Philosophy

The following are tips for creating a lasting compensation philosophy:

 Be as concise as possible. Your philosophy should be about two paragraphs in length.

 Maintain an optimistic yet realistic tone.
 Keep in mind that the organization has and will go through changes. Policy can
change, but remember, your compensation philosophy should weather these changes
with few adjustments.
 Ensure that your philosophy reflects some of the values already listed in your
company’s mission statement.
 Consider using general language such as “attractive, flexible, and market based pay”,
“competitive in recruiting and retaining employees through high-quality
compensation plans”, or “compensation program aligned with shareholder interest.”

10. Target pay rates appropriately.

From Establishing Competitive Pay Rates

Understand the job. If you haven’t yet, correctly define the job for market pricing. When
you are targeting pay rates for positions, you’ll want to correctly define the full proficient
employee who has average performance. This centers your market compensation data at the
midpoint on the typical employees. Those that are new to the position or have less than
acceptable performance will be below your target pay rates, and those with more experience,
education or certifications than required, or those with outstanding performance, should be
above your target pay rates

Five steps to better pay benchmarking

Pay benchmarking is a valuable exercise which can save you money and underpin a whole
reward structure. There are plenty of reasons for undertaking pay benchmarking. Perhaps
you’re struggling to retain or attract talent; control payroll costs; or need demonstrate a clear
link between pay and business objectives.

Whatever your motivation, here’s how to go about it in five handy steps:

Step 1: Get the budget

In the words of Wham!, ‘If you're gonna do it, do it right.’ To secure much-needed cash with
which to undertake pay benchmarking, you’ll need to demonstrate a clear return on
investment (ROI) for the project.

The most effective way of persuading management is by highlighting future savings you’ll
make. Do your sums and appeal to their pockets:

 Ad-hoc salary increases outside of a normal pay review are costly and ineffective.
Work out how much you’re currently spending on these, and demonstrate how
knowing the market rate will help you manage pay more efficiently.
 Think of the money spent on costly recruitment campaigns with poor ROI – why is
the business wasting its time pitching jobs at the wrong market rate?
 What do your attrition rates look like? How confident are you that leavers are exiting
the business because of reasons other than pay? How much money did you spend on
training new recruits last year? Would a more informed picture on the pay landscape
of your sector have helped at all?
 Loss of talent – are your top employees going elsewhere and is reward a key factor in
that?
All of this, presented well, can make a reasoned case that is very difficult for the business to
ignore.

Step 2: Know why you’re doing it

Too often we see the results of a pay benchmarking exercise shape next steps in a reward re-
alignment programme. But you shouldn’t wait for the outcome of the analysis to shape future
decisions around the intended management of pay. Make your aims clear from the offset. For
example: “we aim to be a median payer”; “we accept we are not market leaders in base pay,
however we know our benefit package is first class”; “we want to reward for performance
and tracking the market is a key factor in achieving that”.

Step 3: Know your data sources

This is the key decision in benchmarking – data is a significant cost and it’s vital to hone in
on what is suitable and most worthy of investment.
Choosing salary surveys because they are cheap or free is a false economy. Companies often
feel like they have their finger on the pulse of market data via various recruitment websites
and other freely available salary information. Unfortunately, this can prove more of a
hindrance than a help as the data is so high level, often masking hidden salary elements.

Choose salary surveys that provide data for roles with a robust matching methodology. Too
often surveys publish ranges of salary data linked solely to job title and this can prove very
misleading. The more reliable surveys use a proper matching system which allows companies
to match the specifics of their role with that of the survey.

Remember, a small amount of investment in a good salary survey reaps rewards in the long
term. Credibility is a key success factor in communicating decisions around pay management
and without a solid data foundation everything can be called into question.

Step 4: Practical advice

The more information you have/know about the role, the more precise the benchmark. A few
pointers:

 remember you benchmark the role, not the person

 take a balanced view of the role across the whole year
 always cross check matches internally across departments.


Step 5: Be open with your employees

we see first-hand the measures of success associated with a solid reward management system,
and one of the most critical factors is transparency. Employees often have distorted
perceptions or unrealistic expectations as to what a pay benchmarking exercise might mean
for them. It’s therefore important to manage this and be as honest as possible as to the aims of
the company in embarking on this type of exercise.

Why Is External & Internal Equity in Compensation So Important?

Prioritizing fair pay and closing the gender pay gap are two of the biggest initiatives in
compensation today. Implementing processes to sustain fair pay throughout the employee’s
journey from hiring to promotion is crucial for your organization.

External equity

Salary competitiveness versus the market. It is impossible to ensure fair pay without using
industry and regionally-specific market data to establish appropriate salary ranges for each
position.

Internal equity

Equal pay for equal work within the organization. When organizations leverage market data
to establish pay ranges, they incorporate that data into their overall salary structure. Jobs of
comparable value are assigned to the same grade range, and the range of pay is the same for
those jobs, which promotes equity. This assures that employees within an organization are
paid fairly versus each other.

How Companies Are Addressing External and Internal Pay Equity

The specific tactics that your organization should use to address pay fairness varies widely
depending on business goals. However, according to our Pay Practices and Compensation
Strategy survey, there are three approaches successful organizations consistently use to
ensure pay fairness:

 Leverage market data to establish externally competitive pay ranges.

 Use analytics to ensure pay is internally equitable.
 Build a culture of pay transparency  to foster a positive perception of compensation
decisions in the organization.

External Equity in Compensation System – Leveraging Market Data

By using HR-reported market data, your organization can ensure it is keeping up with a

rapidly moving job market, and never falling short of fair pay for any of its positions. Nearly
17% of organizations in our survey use market data to ensure pay is competitive.
Additionally, 12.5% use market data to help establish pay ranges for positions within the
company’s overall salary structure.

Internal Equity in Compensation System – Leveraging Analytics

With external competitiveness in mind, you should analyze outlying jobs and employees in
your organization’s salary structures to see if you are maintaining internal pay equity. To
this end, 13.7% of organizations use survey data and internal analytics to ensure pay is
equitable, and an additional 12.2% follow a formal compensation analysis process.

Furthermore, we suggest HR professionals self-audit and review these decisions frequently to

keep up with a fast-moving market and changing conditions within their organizations. Our
survey shows that 10.7% of organizations review external data and internal equity at least
once a year. Plus, an additional 9.5% have a system in place for reviewing pay decisions and
approvals.

Employee Perception of Internal Equity and External Equity Is Critical

Organizations armed with accurate market data and an internally-equitable salary structure
have the blueprint for fair pay. However, your organization must also be proactive about
communicating with employees.

The mere perception of unfair pay is enough to sink an organization. To this end, some
organizations in our survey communicate with employees around job descriptions (6.9%) and
how their salaries are calculated (5.3%). Yet, the majority of organization have yet to
embrace this critical step in promoting their organizations commitment to fair pay.

To start, your organization can inhibit negative perceptions of pay by providing managers
with internal pay ranges, market data, and job descriptions for the roles they oversee. This
will allow direct superiors to be more transparent with employees and more effectively
articulate why their employees’ pay is fair.

But even if managers are armed with salary data, they may not adequately trained to discuss
compensation, and could communicate misinformation. Poor communication may cause
employees to become confused and disillusioned, further driving disengagement, flight risk,
and damage to a brand’s reputation.
Why is Fair Pay Important?

Pay fairness is not achieved through a one-time initiative or assessment. Maintaining internal
and external equity should be an evergreen priority. The modern workforce wants to be paid
equitably and competitively, and your employees want to work for a company that takes pay
fairness initiatives seriously.

Unlike HR-reported data, consumer-reported should never be relied on for external pay
points. The correlation between accurate market data and fair pay is not coincidence.
According to our survey, 23% of companies that agree or strongly agree that their employees
are paid fairly used market data.