Compensation

Definition

Compensation is the remuneration received by an employee in return for his/her contribution to the organization. It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness.

Components of Compensation System

Compensation system is designed on the basis of certain factors after analysing the job work and responsibilities. Components of a compensation system are as follows: Job analysis Salary structures Pay structure

Employees Perspective

What compensation do you seek?

Direct
Money

Indirect
Benefits

Employers Perspective

What do you compensate?

Job:
Responsibility Critical function Job content Individual Characteristics: Ability Training Education

Employers Perspective

What factors influence your compensation policy?

Supply and demand skills Unions

Ability to pay
Cost of living increases Government (FLSA, min. wage) Strategy

Influence of Equity
External

Market wages

Internal Perceived/ observed equity

Develop a Job Hierarchy

A. Job Evaluation
1. Preliminary planning 2. Select a plan 3. Develop the plan 4. Evaluate jobs, NOT PEOPLE

Pricing Jobs
"The acceptability of job evaluation hinges in large part on whether the results are consistent with the ranking of the same jobs in the external labor market."

Pricing Jobs
A. Use key or benchmark jobs

Jobs that are relatively stable in content and found in many organizations Compare your internal analysis to external wages

B. Conduct wage survey to examine external wages

Pricing Jobs
C. Use points from job evaluation as a predictor

Use predictor to determine wages for non-key positions

Non-key positions: jobs that have no similar comparison job outside of the organization

Executive Compensation

It is the role of the chief executive (CEO) and other executives to oversee the companys strategy and operations. Obviously, these individuals require compensation for their work. It is the responsibility of the compensation (or remuneration) committee of the board of directors to design executive compensation contracts. The right amount to pay an executive is the minimum amount it takes to attract and retain a qualified individual. Executive compensation (also executive pay), is financial compensation received by an officer of a firm. It is typically a mixture of salary, bonuses, shares of and call options on the company stock, benefits, and perquisites/privilages, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance. Executive pay is an important part of corporate governance, and is often determined by a company's board of directors.

Executive compensation packages in organization

Base pay for the core role and responsibilities of the day-today running of the organization Annual bonuses for meeting annual performance objectives. Long-term incentive payments for meeting performance objectives to be achieved for a two- to five-year period. These awards are sometimes described as performance shares, performance units, or long-term cash incentives. Perquisites, such as : Restricted stock awards as an incentive to assure the executives are strongly aligned with the interests of shareholders. Stock options and stock appreciation rights (SARs) for increasing share price and increasing the shareholders' returns.

CEO in the U.S

Most US corporate leaders believe chief executives are overpaid and do not provide value for money for their companies, according to a study that will embolden critics of excessive compensation. The findings to be published today by the National Association of Corporate Directors are likely to strengthen appeals by investors and politicians, including George W. Bush, US president, for restriction on executive pay at a time of growing income unfairness in the US.

Pay for Performance

According to Business Week, the average CEO of a major corporation made 42 times the average hourly worker's pay in 1980. By 1990 that had almost doubled to 85 times. In 2000, the average CEO salary reached an unbelievable 531 times that of the average hourly worker.