Chapter One

Compensation: A Component of
Human Resource Systems
 Learning Objectives
 Basic Compensation concepts and the context of
compensation practice
 A historical perspective on compensation-from an
administrative to a strategic function
 The Difference between strategic and tactical
compensation
 Compensation professionals’ goals within a human
resource department
 Relation of compensation professional to various
stakeholders
 What is Compensation?
 Intrinsic compensation
» Reflects employees’ psychological mind sets that
result from performing their jobs.
» Through effective job design
 Extrinsic compensation
» Rewards given you by others
» Includes both monetary and non-monetary (e.g.,
benefits) rewards.
» Through compensation systems
 Intrinsic Compensation

 Represents employees’ critical states that

result from performing their job.
 According to job theory employees experience
enhanced psychological state when their job
rate high on five core job dimensions.
 Core Job Characteristics of
Intrinsic Compensation
 Skill variety:-different tasks, different skills, abilities and
talents.
 Task identity:-complete the entire job
 Task significance:-impact of job
 Autonomy:- Independence and discretion to perform the job
 Feedback:- information by employer about the job outcome
and performance.
The Influence of Core Job Characteristics on Intrinsic
Compensation and Subsequent Benefits to Employers

Core Job Critical Psychological Benefit to

Characteristics State Employers

Skill variety Experienced Lower turnover

Task identity meaningfulness of
Task significance the work Lower
absenteeism
Experienced
Autonomy
responsibility for Enhanced job
work outcomes performance

Feedback Gained knowledge Greater job

of results from satisfaction
work activities
 Extrinsic compensation

 Includes both monetary and nonmonetary

rewards
 Elements of Core Compensation

 Base Pay
 Hourly pay/wage
» Monthly/Annual salary
 How Base Pay is Adjusted Over Time
» Cost-of-living adjustments (COLAs)
» Seniority pay
» Merit pay
» Incentive pay or variable pay
» Pay-for-knowledge and skill-based pay
Legally Required Benefits

Legally Required Benefits:- Social Insurance

» Unemployment insurance
» Retirement insurance
» Benefits for dependents
» Disability benefits
» Medicare
» Workers’ Compensation
» Family and Medical Leave
 Discretionary Benefits

 Discretionary Benefits
» Protection Programs
– Income protection programs
– Health protection programs
» Pay for time-not-worked
– Holidays
– Vacation
– Sick leave
– Personal leave
– Jury duty
– Funeral leave
– Military leave
– Cleanup, preparation, travel time
 Discretionary Benefits

 Discretionary Benefits (cont.)

» Services
– Employee assistance programs (EAPs)
– Family assistance programs
– Tuition reimbursement
– Transportation services
– Outplacement assistance
– Wellness programs
 A Historical Perspective on
Compensation

 Scientific management Practices

 Time and Motion Studies
 Welfare Practices
 Competitive Advantages
 Strategic vs. Tactical Decisions
 Strategic decisions guide activities in the market
 Tactical decisions support the fulfillment of strategic decision
Strategic General Tactical Specific Tactical
Decisions HR Decisions HR Decisions
(Compensation)
*Competitive strategy *Recruitment *Seniority pay
*HR strategy *Selection *Merit pay
*Compensation *Performance appraisal *Incentive pay
strategy *Compensation * Pay for knowledge
*Training Skill based pay
Broadbanding
Two-tier pay structures
Discretionary
 Competitive Strategy
 Planned use of resources to promote & sustain competitive
advantage
 Lowest-cost strategy
» Efficient-scale, cost minimization
» Southwest Airlines, Wal-Mart
» Employee roles: repetitive, predictable behaviors, short-term focus,
individual activity, concern for quantity, primary concern for results.
 Differentiation Strategy
» Unique products: design image, technology, etc
» Build brand loyalty, price premium, invest in R&D
» Iams company, Saks Fifth Avenue
» Employee roles: creative behavior, long-term focus, cooperative and
interdependent behavior, risk taking, openness to novel work.
 HR and Corporate Hierarchy
HR professionals design and implement a verity of HR practices
including compensation are:-
 Recruitment
 Selection
 Performance Appraisal
 Training
 Career Development
 Labor-Management Relationship
 Employment termination
 Managing HR within the context of legislation
 Compensation and HR
Department
 Recruitment, Selection  Labor-Management
Relations
» $ to get top candidates,
signing bonus, benefits » Collective bargaining
agreements, pay, COLAs,
 Performance Appraisal incentives
» Basis for merit pay and  Employee Termination
incentives
» Severance pay, pension,
 Training early retirement
» Pay for knowledge  Legislation
 Career Development » Income and continuity,
» Promotions, lateral safety, work hours, pay
moves discrimination, disabilities
and family needs
 The compensation
Department’s main Goals

 Internal Consistency:- Internally Consistent

Compensation systems.
 Market Competitiveness:- Market- competitive
pay Systems through external market strategic
analysis and compensation surveys.
 Recognizing Individual Contribution:-Pay
Structure.
 Internal Consistency

Achieved when the value of each job is clearly

defined
 Represents:

» Job structure
» Hierarchy
 Achieved using:
» Job analysis
» Job evaluation
 Market Competitiveness

 Compensation policies that fit with business

objectives
 Vital in attracting and retaining employees
 Are based on:
» Strategic analyses
» Compensation surveys
 Individual Contributions

 Pay Structures: Pay is determined by

employee’s credentials, job knowledge, and
job performance
 Pay Grades: Based on compensable
factors and value
 Pay Ranges: Builds on grades, uses
midpoints, minimums, and maximums
Stakeholders of the Compensation
System

 The success of HR Department depends on

“how Well” they serve various stakeholders.
 Employees
 Line managers
 Executives
 Unions
 Government
 Link to Chapter No.01

 http://www.learningace.com/doc/7749971/91d
3ed24ed1a5be26e8e835d7c9e5956/chapter-
1-strategic-compensation