COMPENSATION

HRM 605 MANAGEMENT

1 Compensation Management
Defining Compensation:
Compensation is the total amount of the monetary & non-monetary pay provided to an
employee by an employer in return for work performed as required.
Or
Something, such as money, given or received as payment or reparation, as for a service or loss.

Compensation is based on:

 Market research about the worth of similar jobs in the marketplace.

 Employee contributions & accomplishments
 The availability of employees with like skills in the market place
 The desire of the employer to attract & retain a particular employee for the value they
are perceived to add to the employment relationship.
 The profitability of the company or the funds available in a non-profit or public sector
setting and thus the ability of an employer to pay market rate compensation.
Compensation also includes payments such as bonuses, profit sharing, overtime pay,
recognition rewards and cheques, sales commission. It can also include non-monetary perks
such as a company –paid car, stock options in certain instances, company –paid-housing and
other non-monetary but taxable, income items.

Compensation Management:

If you pick the right people & give them the opportunity to spread their wings-and put
compensation & rewards as a carrier behind it- you almost don’t have to manage them.
Jack W.
Most of us would have heard the term “compensation” in the context of getting paid for work
we do. Work can be as part of full time engagement or part time in nature. What is common to
them is that the “reward” that we get for expending our energy not to mention the time is that
we are compensated for it.

From the perspective of the employers, the money that they pay to the employees in return for
the work that they is something that they need to plan for in an elaborate and systematic
manner. Unless the employer & the employee are in broad agreement, the net result is
dissatisfaction from the employee’s perspective & friction in the relationship.

It can be said that compensation is the “glue” that binds the employee & the employer together
& in the organized sector, this is further codified in the form of a contract or a mutually binding
legal document that spells out exactly how much should be paid to the employee & the
components of the compensation package.

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Though Maslow’s Need Hierarchy Theory talks about compensation being at the middle to
lower rung of the pyramid & the other factors like job satisfaction & fulfillment being at the top
, for the majority of the employees, getting the right compensation is by itself a motivating
factor. Hence the employer needs to quantify the employee’s contribution in a proper manner
if they are to get the best out of the employee. The provision of monetary value in exchange for
work performed forms the basis of compensation & how this is managed using processes,
procedures & systems form the basis of compensation management.

Compensation management is something that companies must take seriously if they are to
achieve a competitive advantage in the market for talent. Employees are treated as “creators &
drivers of values” rather than one more factor of production, companies around the world are
paying close attention to how much they pay, the kind of components that this pay includes &
whether they are offering competitive compensation to attract the best talent.

Components of Compensation:

Right kind of compensation goes a long way in making employees motivated & happier.
Hertzberg’s hygiene theory refers to how certain factors are necessary to maintain “Hygiene” or
ensure that the employees are not dissatisfied.
 These factors alone do not contribute to “quantum” jumps in employee satisfaction.
Rather, absence of these factors makes employees dissatisfied.
 The point here is that if a fair & just compensation is provided, the employee has the
“baseline” requirements met which ensures that he or she is now in a position to go for
higher things like job satisfaction & fulfillment.
 However, if compensation is found to be lacking, the employee might very well be
unhappy and dissatisfied with the company leading to attrition & other such negative
outcomes.
 Hence, having the right compensation is the first step in getting the best of employees.

Employers decide on what is the right compensation after taking into account the following
points:

1. The Job Description of the employee that specifies how much should be paid & the parts
of the compensation package.
a. The job description is further made up of responsibilities, functions, duties,
location of the job & the other factors like environment etc.
b. These elements of the job description are taken individually to arrive at the basic
compensation along with the other components like benefits, variable pay &
bonus.
2. The Job Evaluation that is a system for arriving at the net worth of employees based on
comparison with appropriate compensation levels for comparable job across the
industry as well as within the company.

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a. Factors like experience, qualifications, expertise & need of the company

determine how much the employer is willing to pay for the employees.
3. It is often the case that employers compare the jobs across the industry & arrive at a
particular compensation after taking into account the specific needs of their firm and in
this respect salary surveys & research results done by market research firms as to how
much different companies in the same industry are paying for similar roles.
4. Common to all packages at all levels:
 Basic Pay is the base on which the compensation package rests. This is
equivalent of the base of the pyramid & the other components are usually fixed
as a percentage of the basic pay; like house rent allowance.
 There are many companies that have introduced the concept of Variable Pay
where this particular component of the compensation is not fixed, but is a
percentage of the basic that is paid out according to the performance of the
company, group and individual.
o Performance linked pay
o Group performance linked pay
o Individual performance linked pay
The rationale for these components is that an employee would be better motivated to
perform individually, contribute to the group to which he or she belongs & finally,
perform well keeping in view the overall growth of the company.

From employer’s perspective that factors that affect compensation are:

 Macroeconomic situation: Booming & recession

 Demand for particular skill: Scarcity of expertise
 The position of the company in Business Cycle: Different stages require differently.
 Urgency of the firm

Negotiation in compensation management:

It is impossible to talk about compensation management without referring to the process of

negotiation & bargaining that is an integral part of compensation management. Some steps in
negotiating the compensation are as follows:

Have a plan in Place: How much you want and how much an employer is willing to pay you.
Communicate you need: once you arrived at a figure that you think you deserve; you should
communicate the same to prospective employer without delay.
Employees must research compensation trend in the market & negotiate it with the employer.
Timing is every thing: Consequences of being too late & early.
Consider the Alternatives

Executive Compensation:

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Gap between CEO & Workers pay

Perks & Benefits

Compensation Management & Globalization:

Global village
Cost advantage, outsourcing
Challenge

Overview of reward system:

It is axiomatic to suggest that an organization is only being as good as the people it is able to
attract and keep. Therefore, as we have indicated in sections dedicated to recruitment and
selection, it is important that firms take the time necessary to find the right people to fill job
openings. Choosing people to work for an organization generally means choosing people for a
long time; these people should be thought of as investments. As these people are likely to be
essential ingredients in the firm's success, it is incumbent upon the firm to protect this
asset/investment. As such, the firm must pay employees what they are worth or else they may
choose to work for another firm. The firm's compensation policy must be managed
appropriately.

COMPENSATION MANAGEMENT

"What is compensation?" While there may be as many answers to this question as there are
employees, we'll start with the following definition:

Compensation is the outcomes (rewards) employees receive in exchange for their work, or

Pay is an exchange between the individual or group and the employer.

 From a manager's perspective, the compensation package offered a firm's employees

are important not only because it costs money, but because it's likely to be the primary
reason the employees work for the firm. Compensation packages with good pay and
benefits can help attract and retain the best employees. A quick survey of employees
about compensation is likely to reveal an expectation that wages cover basic living
expenses, keep up with inflation, leave some money for savings (perhaps for retirement)
and leisure, increase over time, and are fair.
 From an employee’s perspective, employees are more likely to look at what a company
pays rather than what it says. In many respects, people behave as they are rewarded.
Insofar as this is true, a compensation scheme communicates to the employees what
the firm's expectations are of them. Therefore, for example, if quality is an important
value, it should be reinforced through some element of the total compensation system.
A firm's compensation scheme also communicates a great deal about the firm's values
and cultures.

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An Overview of Reward Systems

The objectives of a compensation policy are manifold:

 attract suitable staff

 retain qualified personnel
 develop reward structures that are equitable with consistent and fair pay relationships
between differently valued jobs
 adjust pay structures to reflect inflationary effects
 ensure that rewards and salary costs adjust to changes in market rates or organizational
change
 reward performance, responsibility, and loyalty, and provide for progression and
increases
 comply with legal requirements
 keep compensation levels and differentials under review and control salary/wage costs

Clearly, managing a firm's compensation policy is a complex task as it involves providing

systematically administered and equitable salaries, reconciling employees' career aspirations in
terms of earnings, aligning employees' personal objectives with those of the organization, and
keeping the firm's costs under control.

CONSEQUENCES OF PAY DISSATISFACTION

There are also clear consequences to neglecting a firm's compensation policy. The desire for
more pay has the potential to lead to reduced productivity, increased levels of grievances,
strikes, and the search for higher paying job. Further, organizational symptoms of pay
dissatisfaction may include increased levels of absenteeism and job accidents, and
psychological withdrawal.

EQUITY

One consideration in the establishment of a compensation policy has to do with absolute

versus relative levels of pay. Quite simply, absolute levels of pay provide for satisfaction of an
employee's physiological and safety needs (see Maslow on the topic of motivation). On the
other hand, relative pay levels address issues of satisfaction of social and esteem needs.
Relative pay levels have to do with the comparisons employees make of pay within the
organization, and deal with feelings of fairness or equity. Worker dissatisfaction is likely
increase if either internal or external equity principles are violated.

Internal equity refers to the relative fairness of wages received by other employees in the same
organization. External equity is fairness relative to wages outside the organization.

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Employees will act to restore equity if they perceive an imbalance (see Equity Theory of
Motivation). In evaluating the fairness of their pay, employees balance the ratio of their inputs
(e.g., work effort, skills) and outcomes (e.g., pay, privileges) against those of their coworkers.
Workers may thus experience guilt if they feel over-compensated, or they may feel anger if
they perceive that they are being under-compensated. The greater the perceived disparity, the
greater the tension. In order to relieve this tension, employees may seek balance in a number
of ways:

1. modify input or output (e.g., if underpaid, a person may reduce his efforts or try to obtain a
raise; if overpaid, he/she may increase efforts or work longer hours without additional
compensation -- although they are as likely to be able to rationalize their level of over-
compensation);

2. adjust the notion of what is fair (e.g., if underpaid, a worker may think of himself as being the
recipient of other benefits—such as doing interesting work; if overpaid, an employee may come
to believe he deserves it);

3. Change source of equity comparison (e.g., an employee who has compared himself with a
promoted co-worker may begin to compare himself with another worker);

4. Attempt to change the input or output of others (e.g., asking others not to work so hard or to
work harder);

5. Withdraw (e.g., through increased absenteeism, mental withdrawal or quitting);

6. Force others to withdraw (e.g., trying to obtain a transfer for a co-worker or force him to
quit).

Employees use a myriad of factors (both inputs and outputs) to arrive at their perceptions of
fairness. As such, reward systems must compensate not only for levels of work done, but also
for quality of performance, age, and length of service. The reward system is clearly an integral
part of the motivational process. Further, the reward system also serves to protect employees
against inflationary pressures.

BEYOND WAGES AND SALARIES

It is important to remember that a consistent finding of studies of pay and motivation is that
cash compensation, while important, is often overshadowed by employees' needs for growth,
challenge, and the feeling of being valued and appreciated.

Money is not the only way to attract the best people. The best way to attract and keep good
people is to offer them:

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1. Responsibility

2. A good working environment

3. A sense of accomplishment

4. A belief in the business and

5. A fair salary

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