COMPENSATION MANAGEMENT:

Effect on Employee Engagement & Commitment

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 Discussion Outline
1) Introduction & conceptual clarifications
2) Compensation management elements
3) Compensation Management Objectives
4) The philosophy and principles of reward system
5) Compensation management and employee
engagement
6) Engagement drivers and diagnostic tool

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 Discussion Outline (cont’d)

7) Managing compensation for employee

engagement – what works?
8) Managing compensation for employee
engagement – Useful Tips
9) Class Exercise
10) Summary & Conclusion

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 1. Introduction
Compensation refers to all forms of pay and rewards
received by employees for the performance of their jobs.

i) Direct Compensation
Wages & Salaries, Incentives, Bonuses, Commissions etc.
ii) Indirect Compensation
Generally - non-financial in nature. These include eg.
Life-insurance coverage, dental plans and non-financial
compensation e.g. employee recognition programs, rewarding
jobs & flexible working hours.
[Direct + Indirect Compensation] = Total Compensation

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 Introduction (cont’d…)
• The way compensation is allocated among employees
sends a message about what management believes is
important and the type of activities it encourages

• Total compensation constitutes a major part of an

organization’s operating costs

• Strategic management of compensation program is

essential for purposes of motivating employees and to
achieve efficiency in managing labour costs.

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 Introduction: Compensation
Elements
i. Basic Pay:
i.e. Basic regular commitment in terms of salary or wage rate
ii) Benefits/ Security Schemes:
e.g. life insurance, health insurance, retirement or pension plans,
disability income, savings & other thrift plans
iii) Perquisites & Working Conditions:
e.g. paid vacation leave, holidays, recreation facilities, official quarters,
car loans, official cars, medical facilities etc
iv) Incentives:
e.g. commissions, bonus plans, profit sharing, safety awards, stock
options etc
v) Career Opportunities / Development
Recognition, skills development opportunities career opportunities,
quality of working life
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 Compensation Management

What is compensation management?

Simplistically, it is a systematic management
of the reward system of an organization with
the objective of attracting, retaining and
motivating the right number and quality of
people to achieve the corporate objectives of
the organization.

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 Compensation
Management (cont’d)

Compensation management is the structures, resources and

processes that organizations use to manage its compensation
system

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 Compensation
Management (cont’d)

Organizations with effective compensation

management: -

• Achieve - a more effective distribution of the pay

bill (saving money and reducing the risks associated with
poor allocation),
• Report - better employee satisfaction with pay (job
satisfaction & commitment to the company)
• Experience - improved attraction & retention rates and lower
function operating costs.
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 2. Compensation Management:
Elements
The work involved in compensation
management can be grouped into four
different blocks as shown below

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Compensation Management:
Elements

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 Compensation management:
Elements (cont...)

i. Foundational element:

This entails: -

• ongoing evaluation of the effectiveness of compensation

plan designs with emphasis on….
compensation function’s service delivery model
access to leading-edge compensation management
technology that allows real-time analysis and reporting

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 Compensation management:
Elements (cont...)

ii. Transactional element:

This involves: -
• market pricing
• job evaluation
• survey data management support

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 Compensation management:
Elements (cont...)

iii. Analytical element:

This involves: -

• annual compensation planning

• merit increase planning/modelling
• management reporting

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 Compensation management:
Elements (cont...)
iv. Strategic element:
This involves: -

• defining compensation/reward strategies

• designing appropriate compensation programmes
& policies
• developing a communication strategy to inform
and effectively engage mangers and employees
around compensation issues

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 3. Compensation Management
Objectives
i. To attract & retain talents
ii. Must help an employer to remain competitive in
the labour market
iii. To reward employees for performance
iv. To maintain internal and external equity
v. To control the compensation budget
vi. Must not impose undue financial strain on the
employer

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 Compensation Management
Objectives (cont’d)
vii. To develop a performance culture
viii. Reward people according to what the
organization values and the value the people create
ix. Reward the right things and to convey the
right message.
x. Motivate people and obtain their
commitment and engagement
xi. Create total reward processes that recognize the
importance of both financial and non-financial
rewards

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 4. The philosophy and
principles of reward system

The Philosophy of Reward

 Reward strategy must flow from business
strategy – Performance Contract
 Need to achieve fairness, equity and
consistency
 Differentiation in the reward system
 Adopts a “total reward approach”

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 Components of Total Reward

Recogniti
Base Pay
on
Skills
Variable Development
Opportunities
Pay Total Non-
Financial Total
Rewards
Remun + Financial
Reward
Share eration rewards Career
Opportuniti
Ownershi
es
p
Quality of
Benefits Working
Life

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 Principles Of Reward System

• Pay For Responsibility

 Remuneration is linked to work level (job
accountability) &
 Pay Scale ( is determined by job size,
scope and market value).
 In order words, increase in pay must
attract corresponding increase in job
responsibility

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 Principles Of Reward System
(Contd.)

• Pay For Results

• Variable pay offers significant financial
reward to eligible managers who
achieve business and individual
performance targets

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 Principles Of Reward (Contd.)

• Pay For Potential

 Certain scientific tools are used to assess
potentials. There are instances where
employers pay for potentials. Employees
reckoned to possess `High Potential’ are
oftentimes placed within what is known as
Premium Zone.

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 Principles Of Reward System (Contd)

• Pay Competitively
• Pay scales are revised regularly based on
survey of prevailing rates within or across
industry – usually among comparators/
competitors

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 5. Compensation Management
and Employee Engagement

Employee engagement is defined as ‘A positive

attitude held by the employee towards the
organization and its values. An engaged employee
is aware of business context, and works with
colleagues to improve performance within the job
for the benefit of the organization.’ (IES, 2008)

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 Compensation Management and
Employee Engagement (cont’d)
Studies have shown engaged employees demonstrate
behavioral patterns which includes the following: -
 Belief in the organization’s products and services
 Desire to work and improve things
 Understanding of the business context and the bigger picture
 Respectful of and helpful of colleagues (being a good team
player)
 Keeping to date with development in the field

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 Compensation Management and
Employee Engagement

Many times people mix-up `engagement’ with concepts

such as `commitment’. There are overlaps and differences
as well. Particularly, engagement is two-way
organizations must work to engage the employee;
employees in turn has a choice about the level of
engagement to offer the employer.

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 6. Engagement Drivers
 A sense of feeling valued and involved
 good quality line management (i.e. employee-manager
relationship)
 two-way communication
 effective internal co-operation
 a development focus
 Concerns for and commitment to employee wellbeing
 clear, accessible HR policies and practices to which managers
at all levels are committed.

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 Employee engagement
diagnostic tool

Source: IES Survey, 2003

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 7. Managing compensation for
Employee Engagement: What works?

What works?
• Employee segmentation
The advice is for organizations to improve the
effectiveness of compensation and reward spend by
identifying and targeting rewards to specific
employee segments. 

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 What works? Segmenting
employees
 Contract Type, Location, Seniority and Business Line

 Generation:
To be able to compete in the war for talent Distinguish
between Generation X-ers versus the ambitious, challenge-
seeking, high-performance and high-maintenance Generation
Y.

 Business impact:
Distinguish between the ``performance drivers” – those who
directly create value for the organization and the
“performance enablers”- those who support them quite
differently from employees with less critical skills. 

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 8. Compensation Management &
Employee Engagement: Useful Tips
• It is important to hear-out your employees
• Communicate your compensation program to employees and ensure
that they fully understand
• Always reveal the ``full picture’’
• All HRM staff must have thorough knowledge of the company’s
benefits program
• Make Benefits Education a priority in your orientation program
• Explore the possibility of of flexibility in your program & giving
employees the opportunity to exercise `choice’
• Monitor employees’ reactions to your program
• Provide feedback and problem resolution procedures

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 9. Class Exercise
1. What is your company’s compensation and reward
strategy?
2. To what extent has No. 1. above helped your organization
in achieving its strategic objectives?
3. What is its performance in its industry?
4. Do you really understand your company’s strategic
objective/direction?
5. On a scale of 100 what proportion of your organization’s
workforce can you consider to be engaged?
6. What can you do to improve the current situation?

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 10. Summary & conclusion
• Today’s employees place so much demand on their employers.
e.g., In addition to fair pay for a fair day’s work, they want a
good work/life balance, access to training and development,
clear career progression, recognition of their contributions, &
the opportunity to work with interesting and intelligent people.

• The most successful companies will be those that recognize

distinctions in their workforce and link compensation and
rewards with the unique needs and interests of different
employee segments and that treat their employees as
consumers rather than recipients, of rewards.

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 Conclusion (cont’d)

• An organization's compensation strategy can have far-reaching

effects on its competitive advantage.

• If effective, the strategy can improve cost-efficiency, ensure

legal-compliance, enhance recruitment efforts, boost morale and
reduce turnover problems.

• Final word to the HR expert is – Aim at ensuring that your

organization’s compensation and reward strategy achieve
engagement of your employees while adding value to all
stakeholders?

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Thank you for listening.

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