1. (a) What do you mean by compensation and compensation management?

Describe the basic objectives of compensation.

What is compensation?

Compensation is the total cash and non-cash payments that you give to
an employee in exchange for the work they do for your business. It’s
typically one of the biggest expenses for businesses with employees.
Compensation is more than an employee’s regular paid wages. It also
includes many other types of wages and benefits.

Typically, compensation refers to monetary payment given to an individual in

exchange for their services. In the workplace, compensation is what is earned
by employees. It includes salary or wages in addition to commission and any
incentives or perks that come with the given employee’s position. Paid
employees as well as outside or temporary consultants are entitled to
compensation, meaning the individual will be paid for the product or service
they provide. A broader compensation definition includes monies owed as a
recompense to an injured or otherwise wronged party by the party
responsible.

Compensation doesn’t mean only paycheck, although that’s part of it.

Compensation comprises of a number of different elements that may be
cash and non-cash payments.

Here’s a list of some of the most common and commonly overlooked

types of compensation:

 Base pay (hourly or salary wages)

 Commissions
 Overtime Pay, shift differentials and longevity pay
 Bonus
 Profit Sharing distributions
 Merit Pay or recognition
 Incentive plan or achievement award
 Tip income
 Benefits including Dental, insurance, medical, vacation, leaves,
retirement, etc.
 Stock options
 Travel/Meal/Housing Allowance
 Child care and tuition assistance
 Gym memberships and free lunches
 Employee assistance programs that provide counseling, legal
advice, and other services.
 Health and wellness benefits
 Other non-cash benefits

What is compensation management?

Compensation management is the process of managing, analyzing, and

determining the salary, incentives, and benefits each employee receives.
Compensation management is a crucial part of any talent management and
retention strategy. Creative compensation includes monetary and non-monetary
benefits companies can employ to boost engagement and productivity, reduce
attrition, and attract top talent.

Compensation managers aim to attract, retain, and engage employees by

offering broad and competitive compensation plans within the company budget.

Compensation management ensures that people get paid a fair salary based on:

 Work performance
 Position

 Responsibilities

 Experience

 Job market
 Company budget

Objectives of Compensation Management

The basic objective of compensation management can be briefly termed

as meeting the needs of both employees and the organization.

Employers want to pay as little as possible to keep their costs low.

Employees want to get as high as possible.

Objectives of compensation management are;

1. Acquire qualified personnel.

2. Retain current employees.

3. Ensure equity.

4. Reward desired behavior.

5. Control costs.

6. Comply with legal regulations.

7. Facilitate understanding.

8. Further administrative efficiency.

9. Motivating Personnel.

10. Consistency in Compensation.

11. To be adequate.

Compensation management tries to strike a balance between these two

with specific objectives;

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 labor market
since employees compare for workers.
Premium wages are sometimes needed to attract applicants working for
others.

Retain current employees

Employees may quit when compensation levels are not competitive,

resulting in higher turnover.

Employees serve organizations in exchange for a reward. If pay levels are

not competitive, some employees quit the firm. To retain these
employees, pay levels must be competitive with that of other employers.

Ensure equity

To retain and motivate employees, employee compensation must be fair.

Fairness requires wage and salary administration to be directed to
achieving 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 other firms in the labor
market pay comparable workers.

Reward desired behavior

Pay should reinforce desired behaviors and act as an incentive for those
behaviors to occur in the future. Effective compensation plans reward
performance, loyalty, experience, responsibility, and other behaviors.

Good performance, experience, loyalty, new responsibilities, and other

behaviors can be rewarded through an effective compensation plan.

Control costs

A rational compensation system helps the organization obtain and retain

workers’ reasonable costs. Without effective compensation management,
workers could be overpaid or underpaid.
Comply with legal regulations

A sound wage and salary system considers the legal challenges imposed
by the government and ensures employers comply.

Facilitate understanding

The compensation management system should be easily understood by

human resource specialists, operating managers, and employees.

Further administrative efficiency

Wage and salary programs should be managed efficiently, making

optimal use of the HRIS, although this objective should be a secondary
consideration with other objectives.

Motivating Personnel

Compensation management aims at motivating personnel for higher

productivity.

Monetary compensation has its own limitations in motivating people for

superior performance. Besides money, people also want praise,
promotion, recognition, acceptance, status, etc., for motivation.

Consistency in Compensation

Compensation management tries to achieve consistency-both internal

and external in compensating employees. Internal consistency involves a
payment based on the criticality of jobs and employees’ performance on
jobs.

Thus, higher compensation is attached to higher-level jobs. Similarly,

higher compensation is attached to higher performers in the same job.

To be adequate

Compensation must be sufficient so that the needs of the employee are

fulfilled substantially.
(b) Explain the different policy decisions that should be addressed by the
employer.

6 Must-Have Policies for Every Company

From the code of conduct to social media in the workplace

Internal company policies define how employees should behave in the

workplace. They also define what employees can expect from their
employer. Which policies are necessary for a company depends strongly
on the corporate culture, on the legislative environment and also on the
industry.

Nevertheless, there are some policies which are must-haves for most
companies:

1) Code of Conduct

A code of conduct is the basis for many policies because it defines the
basic standards of company conduct. Important components of this
document are for example corporate values, the protection of corporate
property, dealing with corruption and conflicts of interest, but also
employees’ personal and professional responsibility. Furthermore, a
code of conduct should explicitly state how employees should behave if
they observe a violation of the applicable rules and what the
consequences of misconduct are.

2) Policy on Equality

An equality policy forms the basis of protection against discrimination or

harassment in the workplace and helps to promote diversity. The primary
objective must be to ensure that the employer does not make decisions
that discriminate against employees or applicants on the basis of race,
ethnic origin, gender, religion, age, disability or sexual orientation. The
introduction of an appropriate policy is a clear commitment by the
company and raises awareness among the entire workforce.

3) Policy on Health and Safety at Work

It is in every company’s interest to prevent accidents in the workplace
and promote the good health of employees. This policy should document
the company’s responsibilities and duties to ensure safety in the
workplace. The policy should also include any procedures and
instructions for work which involves particular risks and conduct in
emergency situations.

4) Policy on the Use of Social Media and the Internet

These days the definition of what constitutes professional and private

use of the internet and social media is a very grey area. All the more
reason that every company should introduce a policy to educate
employees. In particular, this policy should stipulate what employees
may and may not share online and which rules apply to the use of the
company’s own IT infrastructure. The policy should aim to strike a
balance between the employee’s personal rights and the employer’s
interests.

5) Policy on Data Protection

At the latest since the General Data Protection Regulation (GDPR) came
into force, data protection has been a hot topic in every company. The
legal requirements concern both the personal data of employees and
customer data. In order to reduce the risk of a data protection violation,
every company should introduce a data protection policy. In particular, it
should stipulate how the company uses personal data and what
measures the company is taking to protect data.

6) Policy on Working Times, Absences and Holidays

Companies would be well advised to clarify any possible ambiguities

concerning working hours, absences and holidays, thus preventing
potential disputes. For example, this policy should state what the
minimum and maximum weekly working time is, what the rules are for
taking breaks, how working time can be arranged and what should be
recorded. The relevant labour law should also govern rules regarding
overtime and holiday entitlements.

Bottom Line
Companies should always introduce policies based on a company-
specific risk assessment. In addition, companies should regularly review
whether a new policy is necessary if and when changes occur in the
company or within the legislative environment. Careful introduction and
communication of policies within the company is vital.

2. (a) How total compensation package helps business organization to gain and
sustain
competitive advantages.

How to gain a sustainable competitive advantage for business

11 min read
What are sustainable competitive advantages, and how can you create one for
your business? Discover how in our guide to creating a competitive advantage
that will last.

What are sustainable competitive advantages?

A competitive advantage is by definition is when a brand uses its assets, its

abilities, or its unique features to win out over its competitors. It’s when a
company consistently outperforms its competition due to a specific attribute.

But the real question is: what are sustainable competitive advantages?

A sustainable competitive advantage can last longer than a temporary rise in

popularity. It means building products, services, a brand, and a reputation that
attracts consumers continually over time.

Free eBook: Learn how to maximize your market research ROI and beat the
competition

What are competitive advantages, and how sustainable are they?

The factors that play into a competitive advantage are numerous, and their
sustainability can be greatly affected by external factors.
Unique products

Having a unique product or service can keep a company at the forefront of

consumers’ minds – but this might only last as long as the competition doesn’t
outperform the original. First mover advantage can only go so far as time goes
on.

Renown for customer experience

Brand differentiation due to great customer service is frequently enough to sway

consumers to a brand. Great customer service, quick issue resolution, and fast
responses can put companies above the competition with better products. Of
course, the high level of customer experience needs to be maintained over time
for the competitive advantage to be sustainable.

A low-cost advantage

A company that can keep its operational and supply costs low can keep its
prices low – and this can tempt consumers away from other providers.
However, keeping costs low enough is a delicate balancing act between
weathering supply chain and manufacturing price hikes and undercutting
competitors.

Brand reputation

A brand that attracts its customers on the strength of its reputation alone is
powerful – but it can be a fragile advantage if this reputation is not upheld.
Committing to particular company values, monitoring brand reputation, and
ensuring customers continue to be happy over time is necessary for sustaining
this advantage.

Want to test your brand awareness? Download our free survey template here

Pricing power

A company that can raise its prices without disrupting its share of the market
has pricing power. Companies that can leverage this as their competitive
advantage have usually built a strong reputation that can withstand price
increases. However, as mentioned before, brand reputation can be fragile
without maintenance.
Corporate strategic assets

If a company has advantageous assets – such as patents for technology,

intellectual property trademarks, or copyrights, for example – they can often
hold a stronger position over competitors in the same industry. That being said,
if competitors create new inventions that are more effective, these assets can
end up being less important.

Products and services that can evolve

If a brand has products and services that can change with the needs of the
market, rather than remaining static, they can outdo their competition more
effectively over time. Additionally, new products on the same line can attract a
loyal audience. Investing in this factor as a competitive advantage means
considering product and service lines’ futures right from the beginning and
planning ahead carefully.

A strong cash flow

Companies that have a strong cash flow have the power to make risky plays for
market share – and can weather storms more effectively than their competitors.
However, this can easily be depleted if brand, product, or service issues become
numerous and costly.

(b) How you can develop a total compensation strategy? Discuss in detail.

Developing a compensation strategy

Developing a compensation strategy requires research and analysis to

stay competitive while keeping compensation affordable. When
designing your strategies, follow a few key factors along with examples
of compensation strategies in action:
 
1. Highlight your competitive edge 
Attracting and retaining talented employees might mean offering more
than a competitive salary. If the competition for talent is high, highlight
how your company stands apart from others. Unique perks that job
seekers want can make joining your organization a sought-after career
move. Get creative in your compensation strategy to increase the level
of interest in your business. 
 
Example: A major sporting goods company offers its employees a 40%
discount on merchandise and provides management training. Your
sporting goods company offers a 50% discount, provides management
training and sends its sales force to an annual retreat if they achieve a
designated quota. That slight increase over the competition may help
sway more people toward your organization.
 
2. Analyze job duties
When planning a compensation strategy, consider the duties and
qualifications required for the job role. Use this information to find out
what similar roles are paying and what similar companies offer besides
salary. Understanding your industry can give you insight into designing
an attractive compensation package with extra perks that align with your
business.
 
Example: A retail store may attract talent with product discounts, while a
real estate company might offer a company car. The perks relate to the
industry and interest people who work in those roles.
 
3. Research compensation data
Find out what the competition is doing, and adopt compensation
strategies that are more diverse than what others may offer. Use Indeed
to search salaries and gather data, including state and national salary
averages. You can use this information to develop salary ranges to keep
pay competitive while honoring budget requirements.
 
Don’t forget to look beyond your industry to others where a specific
professional might work. A graphic designer can get a job in almost any
industry, and some employers in those areas might pay more. To attract
graphic designers to your business, you need to consider their other
career options, not just your direct competition, to ensure your
compensation is attractive.
 
Example: While evaluating the salary for your staff accountant, you
search Indeed and find that what you offer is $5,000 less than the
average. This might lead you to bump up your salary range for that job
description.
 
4. Consider your company culture
Look at your overall values and company culture as a guide for
determining the details of your compensation package. Choose perks
that align with those values. If your employees chose to work for a
company with a specific culture, they likely agree with those values.
Giving them related compensation can help keep them happy.
 
Example: You run a business that focuses on healthy lifestyles through
nutrition and exercise. Perks you might offer include a free gym
membership or on-site gym, nutritionist consultations, company-
supported wellness challenges and healthy snacks in the breakroom.
 
5. Set a budget
Know how much can you spend, and perform periodic audits to make
sure you’re in line with market trends and staying competitive. Your
budget factors in all costs including payroll, taxes and existing benefits.
Determine what you can afford to offer by performing a few calculations. 
 
Example: You have a budget of $400,000 for compensation for your
small business. Determine how much goes to salary and how you can
disperse the remainder. If 85% goes to salary, you might allocate the
remaining 15% by spending 8% for health care, 3% for PTO and 3% for
retirement. 
 
6. Review compliance concerns
The Fair Labor Standards Act establishes the federal minimum wage
and requirements for overtime pay, equal pay, record keeping and other
important factors. It also covers compensation for employees who
receive tips. Many states have higher minimum wage rates, which you
need to follow. Review all relevant labor laws on the state and federal
levels before establishing your wages.
 
Example: A retail store in Alaska is hiring entry-level sales clerks. The
minimum wage in Alaska is $10.34 per hour, so the starting wage for
these new employees needs to be at least that amount. The state law
also specifies that employers with four or more employees must provide
premium overtime pay for hours worked beyond eight per day and 40
per week. The store’s compensation plan should specify these overtime
terms.
 
7. Choose rewards
Your compensation package may be the same across the entire
company, or you may offer specific rewards based on departments or
seniority. Once you’ve gathered the data from the previous steps, decide
how and where you’ll divide your compensation. Consider holding
biannual or annual reviews where employees’ performance metrics can
qualify them for raises or bonuses.
 
Examples:  
 
 You offer retirement packages for older or more experienced
employees. 
  You may require employees to stay with the company for a certain
amount of time before earning bonuses. 

 You may stipulate that employees qualify for 2 weeks of paid

vacation after 6 months of employment, 3 weeks vacation after 2
years and 4 weeks after 5 years.

8. Write it down
Explain any rules around compensation and add them to the employee
manual. While you don’t have to identify details of individual
compensation plans, be specific when citing the number of sick days
allowed, vacation limitations and eligibility requirements. If you’ve made
sweeping changes, consider calling a meeting to inform employees of
the new elements. 
 

(c) Explain the virtuous and vicious circles of compensation.

Virtuous circle
An investment in your employees’ ability to provide superior service to c
ustomers can be seen as a virtuous circle. Effort spent in selecting and tr
aining employees and creating a corporate culture in which they are emp
owered can lead to increased employee satisfaction and employee com
petence. This will likely result in superior service delivery and customer s
atisfaction. This in turn will create customer loyalty, improved sales level
s, and higher profit margins. Some of these profitscan be reinvested in e
mployee development thereby initiating another iteration of a virtuous cy
cle.
Vicious circle
A harvesting strategy can be an example of a vicious circle. Rather than 
reinvesting in employee development, new product development, and m
arket research, management could decide to harvest their investment by 
reducing costs then increasing dividends or increasing executive compe
nsation. The consequence of this could be reduced employee wages, mi
nimal training, an outdated product line, and a failure to understand the n
eeds of the customer. This will likely result in employee dissatisfaction, e
mployee incompetence, and high employee turnover. This could cause p
oor service delivery, customer dissatisfaction, high customer turnover, a
nd loss of market share. Reduced sales and lower profit margins may re
quire a further reduction in investment thereby initiating another iteration 
of the vicious cycle.

3. (a) Why is internal alignment an important policy in a strategic perspective of

compensation? Discuss.
Internal alignment is the relationships between the jobs/skills/competencies within a single
organization. The relationships form a pay structure that can support the workflow, is fair to
employees, and directs their behavior toward organization objectives. A company will lay out a set of
strategic objectives each year and they will want to see these objectives met. In order to incentives
their employees they will tie performance bonuses to the meeting of certain benchmarks of the
strategic objective like revenue growth, net income growth or return on equity targets. This
incentive will help the employee gain a strategic perspective, which focuses on those competitive
choices that help the organization gain and sustain a competitive advantage. To formulate an
internal alignment and compensation strategy you must have four steps. 1. Assess total
compensation implications. 2. You must fit policy decisions to strategy 3. Implement strategy 4.
Reassess the fit and make changes if need be. These steps will help integrate an internal alignment
policy to compensation that fits the strategic perspective

(b) Discuss the factors that influence on internal pay structures? Based on your own experience,
which ones do you think are the most important? Why?

One of the factors that influence internal pay structures is the job description and analysis.
Jobs that are difficult or more challenging attract higher wages. Jobs are analyzed in order to
determine their value to the organization. Moreover, job analysis helps to determine the skills
set and knowledge required to perform a particular job. Secondly, the ability of an
organization to pay is a key factor in determining the pay structure.

For example, a company that makes high profits is likely to pay higher wages compared to a
company that earns low profits. Thirdly, organizational policies provide guidelines that are
used to make compensations decisions. For example, a company whose aim is to maintain
external and internal equity will develop policies that focus on a compensation package that
is based on fairness.

The fourth factor is bargaining power of the trade unions. A strong and power trade union, for
instance, will bargain higher wages. The union's power and strength is usually influenced by
its membership, financial strength as well as its leadership. Lastly, there are laws such as the
minimum wage, hours of work, payment of bonus, equal pay for equal work, among others
that are enacted to prevent exploitation of the working class. Labor policies and regulations,
therefore, have a critical impact on internal wages and salaries that an employer pays.
Moreover, the prevailing wage rate is a e factor influencing the internal pay structure.
Usually, wages that are paid by a company are largely influence by what other companies in
the same industry pay.
Based on my experience, the most important factors are the wage laws, job
analysis/description and the prevailing wage rates. Wage and salaries, for example, cannot be
fixed below the minimum figure that is prescribed in the law. Secondly, jobs that requires
more skills, competence, effort, time, energy and responsibility attract higher wages
compared to others. Lastly, companies in the same industry use the 'going wage rate' as a
criterion to set the internal pay structure in order to avoid unnecessary competition with other
firms.