COMPENSATION &

PERFORMANCE MANAGEMENT
MHR6053 / BU4520
LECTURE 1

fauziahdin@segi.edu.my
 PART 1: OVERVIEW

Module Learning Outcomes Assessment Structure

 To describe the main types of

compensation components and
structures currently in use
 To address employer objectives in
developing a compensation system
 To understand the concept of
compensation and its link to
performance management
 Objectives and importance of
compensation
EMPLOYEE COMPENSATION

 Employee Compensation - all forms of rewards to

employees in return for the performance of their
jobs
 Rewards or Compensation Management – design
policies & procedures for allocation of rewards that
is fair, equitable and consistent with the value
systems of the company ( Perkins & White, 2009).
EMPLOYEE COMPENSATION

Main compensation components and structures;

Direct & Indirect
Extrinsic & Intrinsic
Statutory & Non-Statutory

The pay model ;

Goals
 Strategies
Pay decisions
EMPLOYEE COMPENSATION
Main compensation components and structures; Direct & Indirect, Extrinsic & Intrinsic, Statutory & Non-
Statutory

Direct and Indirect Compensation:

Direct Compensation:
the monetary rewards that an employee receives for their work.
It includes the base salary, bonuses, incentives, and any other cash or cash-equivalent
benefits.
They are easily quantifiable and directly contributes to an employee's take-home pay.

Indirect Compensation:
Also known as benefits or non-monetary compensation, indirect compensation includes the
non-cash benefits provided to employees.
This may include health insurance, retirement plans, paid time off, and other perks. Indirect
compensation is essential for attracting and retaining talent but is not immediately tangible in
terms of money.
EMPLOYEE COMPENSATION
Main compensation components and structures; Direct & Indirect, Extrinsic & Intrinsic, Statutory & Non-
Statutory

Extrinsic Compensation:
•This refers to external rewards provided to employees, such as salary, bonuses,
and benefits.
•Extrinsic rewards are external motivators aimed at encouraging employees to
perform well or achieve specific goals.

Intrinsic Compensation:
•Intrinsic rewards are intangible and come from within the individual.
•This includes job satisfaction, a sense of accomplishment, recognition, and the
enjoyment of the work itself.
•Often related to the nature of the job and the individual's personal fulfillment
EMPLOYEE COMPENSATION
Main compensation components and structures; Direct & Indirect, Extrinsic & Intrinsic, Statutory & Non-
Statutory

Statutory Compensation:
•These are the compensation components mandated by laws and regulations.
•For example, minimum wage requirements, overtime pay, and other legally
required benefits fall under statutory compensation.
•Employers must comply with these regulations to ensure fair and legal
employment practices.

Non-Statutory Compensation:
•This encompasses compensation elements that are not required by law but are
offered by employers voluntarily.
•Non-statutory compensation may include bonuses, profit-sharing plans, stock
options, and other benefits that go beyond the legal requirements.
•These are often used as tools to attract and retain talented employees.
COMPENSATION COMPONENTS &
STRUCTURE

Employer objectives in developing a compensation

system ;
 Recruitment & Retention
 Motivation of high performers
 Ensure pay equity
 Influence positive workforce attitudes and behaviors
 Cost effectiveness of the compensation budget.
 Compliance with statutory requirements / collective agreements
 Effective and efficient pay administration.
 To encourage positive labor turnover
COMPENSATION COMPONENTS &
STRUCTURE

Factors influencing pay decisions & rules of pay engagement;

1.Legislation/ government policy
2.Union influence
3.Selection policy requirements
4.Financial position to pay.

Influences on individual/team pay decisions;

1.Seniority and job position/status
2.Cost of living allowances
3.Performance/Competency / Skill mix
COMPENSATION COMPONENTS &
STRUCTURE
Compensation structures in the knowledge based economy
with individual customization to access talent markets;

 Bargaining points of employees

 Individual Customization of Compensation
 New Strategies to access talent markets where reward
packages are defined differently by different groups
 Addressing the notion of internal equity associated with the
market value
MACRO-ECONOMIC COMPENSATION
FACTORS

 Employment Legislation
 Legislation relating to compensation & benefits -
wage and labor hour laws, employee pension &
welfare Laws
 Other Issues
PART 2: MACRO-ECONOMIC COMPENSATION
FACTORS

Main areas of the Employment Act 1955, amended in

1989, 1995 and 1998;
Contracts of Service and employment protection
Payment of Wages and minimum wage levels
Working hours and holidays
Registers of employees
Employee and Industrial Relations issues
Statutory Benefits relating to Provident and Social security funds
and paid leave.
PART 3: MICRO-ECONOMIC COMPENSATION
CONCEPTS

Job Analysis
 Purposes Job Description
 Title,
 Information data collection
processes  Duties ,
 Relationships,
 Answers obtained to address
issues like physical and mental  Know-How
requirements of the job,  Accountability
qualifications required, working  Authority ,
conditions, type of machinery or
 Special circumstances ,
equipment needed , define
attributes of successful  Required Performance standards and
performance within the job. KPIs.
MICRO-ECONOMIC COMPENSATION
CONCEPTS : JOB EVALUATION

Uses of JE
 pay and grading structures , internal & external equity in compensation ,
appropriate benefits, aid career plannning
Types of JE
 Job ranking
 Paired comparisons
 Job classification
 Benchmarking
 Point Factor Analysis (PFA)
 Methods and Level of Pay Determination
MICRO-ECONOMIC COMPENSATION
CONCEPTS : JOB EVALUATION

Methods of Pay Determination

Unilateral
Negotiation
Pay Review Body

Levels of Pay Determination

Centralised
Decentralised

Surveying Market Pay and Compensation Practices

Wages and Salary Surveys
Employer Initiated Wage & Salary Surveys
MEASURING AND PAYING FOR
PERFORMANCE

Application of Motivation Theories ;

Maslow’s hierarchy of needs, Herzberg’s 2 factor theory, Equity
& Expectancy theory, etc

Incentives;
 Short term Incentives - Profit sharing ,Gain sharing
 Long Term Rewards-Incentive Plans (SIP) , Savings-Related
Schemes ( SAYE), Enterprise Management Schemes ( EMIS)
 Types of Incentive Programs- Individual, Group & Enterprise
PERFORMANCE MANAGEMENT &
MEASUREMENT

 Legal , costs and administrative implications

 Role of Performance Appraisal in
Compensation
 Common errors in Performance Appraisal
 Performance Measures
 Training raters
 Contextual Issues in Appraisal
PART 4 : STRATEGY & BENEFITS

COMPENSATION STRATEGY
 Understanding the context of compensation Practice-
the total rewards package
 The historical evolution of compensation practice from
an administrative activity to a strategic function
 Strategic considerations in compensation decisions and
practice- compensation goals and strategic analysis
issues
STRATEGY & BENEFITS

BENEFITS
Factors to consider when designing a Benefits Policy
Mix of benefits
Cafeteria Benefits Program
Executive Benefits
The “real benefit” of benefits
Objectives of a benefits policy
Effective benefits administration
Non – financial benefits

The psychological contract and rewards

Work-life benefits provisions
PART 5: GLOBAL COMPENSATION

Compensation choices for MNCs /expatriate compensation policies;

 Base Salary ,
 Foreign Service Inducement or Hardship Premium ,
 Other Allowances
 Benefits

Compensation structures for diverse national , regional, social and

cultural workforce ;
 System of worldwide pay that recognises variances in national and regional
employment practices and compensation strategies
 Consistency between compensation policies and practices in a variety of host
countries
 Cater to three different categories of employees , mainly Parent Country nationals,
Third Country nationals and Host Country Nationals.
GLOBAL COMPENSATION

Objectives of Global compensation policy

Employer Perspective
 It must be consistent and aligned to overall strategy, structure and business
needs of MNC
 Ability to be competitive in attracting and retaining staff in areas where the
MNC has the greatest need & opportunity
 Facilitate the transfer of international employees in the most cost effective
manner.
 Allow equity in distribution and efficient administration of rewards
Employee perspective
 financial protection
 financial advantage in overseas assignments
GLOBAL COMPENSATION

Complexities Surrounding Global Compensation

 Outsourced activities & labor pricing needs
 Balancing centralization and decentralization decisions
 Evaluation of expatriate performance
 Difference in the social, legal and institutional aspects of corporate
governance with different national & regional employment related and tax
laws
 Flux of currency exchange rates.

Acknowledging the social contract

 different social norms and expectations
 to match the reward to the cultural values.
 be flexible enough to better reflect regional and local expectation