COMPENSATION SYSTEM

What is Compensation?

Employee compensation is the process of

paying and rewarding people for the
contributions they make to an organization.
Compensation is a broad term which includes
pay and benefits such as insurance, retirement
savings, and paid time off from work.
Compensationrepresents the total package of
rewards—both monetary and nonmonetary.

IPMI-HRM-Krishnan Rajendran, 2010

 Total Compensation

Direct Indirect

Wages / Salaries Time Not Worked

• Leave
• Holidays
• Vacations
Commissions
Insurance Plans
• Medical
Bonuses • Dental
• Life
Gain sharing, etc.
Security Plans
• Pensions

Employee Services
• Educational assistance
• Recreational programs
 Pay Policy Model

Policies Techniques Objectives

Internal Alignment
Internal Job Job Internal
Equity Job Analysis Description Evaluation Structure

Efficiency
Competitiveness
External Market Market Policy Fairness
Pay Structure
Equity Definition Survey Decision

Compliance
Contribution
Employee Performance Incentive Incentive
Contribution Appraisal Guidelines Scheme

IPMI-HRM-Krishnan Rajendran, 2010

Linking Compensation to Organizational
Objectives

Value-added Compensation
◦ Evaluating the individual components of the
compensation program (pay and benefits) to
see if they advance the needs of employees
and the goals of the organization.
 “How does this compensation practice
benefit the organization?”
 “Does the benefit offset the administrative
cost?”
IPMI-HRM-Krishnan Rajendran, 2010
Common Strategic Compensation Goals

1. To reward employees’ past performance

2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To mesh employees’ future performance
with organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover
IPMI-HRM-Krishnan Rajendran, 2010
Comparison of Compensation Strategies
Strategic Framework for Employee
Compensation

IPMI-HRM-Krishnan Rajendran, 2010

The Compensation Package

The compensation package represents the

blend of rewards employees receive from
the organization.
Money paid as wages or salary is the largest
component of most compensation packages.

Benefitsand short and long term rewards

make up the rest of the package.

IPMI-HRM-Krishnan Rajendran, 2010

Common Elements of Compensation
Packages

The main elements of the Compensation

Package consist of:
◦ Base pay is a form of compensation that is
not at risk and may consist of an hourly
wage or an annual salary.
◦ Employee benefits, are rewards other than
monetary salary and wages.

IPMI-HRM-Krishnan Rajendran, 2010

Elements of the Compensation Package

Individual incentive is a reward that is based

on the personal performance of the employee.
Individual incentives are linked to
performance behaviors and outcomes.
A group incentive is a reward based on the
collective performance of a team or
organization.

IPMI-HRM-Krishnan Rajendran, 2010

Combining Compensation Package
Elements.

IPMI-HRM-Krishnan Rajendran, 2010

HOW DO STRATEGIC DECISIONS
INFLUENCE A COMPENSATION
PACKAGE?
The organization must decide how much
compensation to allocate to base pay,
benefits, individual incentives, and group
incentives in order to align pay to the
organization’s broad HR strategy.

IPMI-HRM-Krishnan Rajendran, 2010

Strategic Compensation Process.

IPMI-HRM-Krishnan Rajendran, 2010

Typical Compensation Elements

IPMI-HRM-Krishnan Rajendran, 2010

HOW IS COMPENSATION LEVEL
DETERMINED?
 It all begins with the pay survey.
 The pay survey provides information about how much
other organizations are paying employees.
 Pay surveys are conducted by consulting firms, which
obtain confidential pay information from numerous
organizations and create reports that describe average pay
levels in other organization.
 Thisinformation is grouped by industry, number of
employees, sales volume and/or operating budget.
 This makes it easier to determine if the companies pay
practice gives it a competitive advantage.
IPMI-HRM-Krishnan Rajendran, 2010
Pay-Level Strategies
 There are three market strategies
1. meet-the-market which establishes pay
that is in the middle of the pay range for
the selected group of organizations.
2. lag-the-market where an organization
establishes a pay level that is lower than
the average in the comparison group.
3. lead-the-market where the average pay
level is higher than the average in the
comparison group.

IPMI-HRM-Krishnan Rajendran, 2010

HOW IS COMPENSATION STRUCTURE
DETERMINED?

Thepay structure focuses on how

compensation differs for people working in the
same organization.
Job-based pay—focuses on evaluating different
tasks and duties associated with various jobs in
the organization.
Skill-based pay focuses on the difference in
skill and ability required to perform the job.

IPMI-HRM-Krishnan Rajendran, 2010

Job-Based Pay

IPMI-HRM-Krishnan Rajendran, 2010

Skill-based Pay.

IPMI-HRM-Krishnan Rajendran, 2010

Executive Compensation: Ethics and
Accountability

 Incentive payments are excessive compared with return

to stockholders.
 Time periods for judging and rewarding performance
are too short.
 Quarterly earnings growth is emphasized at the expense
of research and development.
 Emphasis is placed upon equaling or exceeding
executive salary survey averages.
 Benefitsdo not relate closely to individual
performance.
IPMI-HRM-Krishnan Rajendran, 2010
 The “Sweetness” of Executive Perks
• Company car
• Company plane
• Executive eating facilities
• Financial consulting
• Company-paid parking
• Personal liability insurance
• Estate planning
• First-class air travel
• Home computers
• Chauffeur service
• Children’s education
• Spouse travel
• Physical exams
• Mobile phones
• Large insurance policies
• Income tax preparation
• Country club membership
• Luncheon club membership
• Personal home repairs
• Loans
• Legal counseling
• Vacation cabins