LPM 302: Compensation

Management
Prof. Harriet Kidombo
0722734058
hkidombo@uonbi.ac.ke
 Introduction
• Compensation is one of the functions of Human Resource
Management. It entails paying employees in exchange for work done.
• This course aims at enabling you to understand the:
✔ meaning,
✔ content,
✔ processes,
✔ legal context and
✔ emerging issues in the management of compensation of human resources
Introduction to compensation, reward and incentive systems

• Reward and Compensation

Management, is concerned with
the implementation and
formulation of policies and
strategies that aspire to reward
employees equitably, fairly and
regularly in accordance with their
performance and value to the
organisation
 Importance of compensation
function- 1

⚫ Wages and salaries constitute one of the greatest cost in organizations

⚫ It is the sole means of economic survival for the employee

⚫ It is one of the most influential factors determining one’s status in

society.

⚫ It communicates to employees the important link between rewards

and performance

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 Importance of compensation
function- 2
▪Enable an organisation to have the quantity and quality
of staff it requires
▪ Retain the employees in the organisation
▪ Motivate employees for good performance for further
improvement in performance
▪ Maintain equity and fairness in compensation for
similar jobs

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Objectives of compensation, reward and incentive programs

• The aim is to attract, retain and motivate good employees

• Improve productivity and efficiency in the organisation
• Promote desired employee behavior
• Ensure equity and fairness
• Comply with the law
 Objectives of compensation,
reward and incentive programs
Distinction between compensation, reward and incentive

• Compensation, rewards and incentives are terms used in HR to refer

to a package of payments that an organization provides to an
employee in return for work done.
• Compensation refers to direct monetary pay that may be in form of salaries
and wages
• Rewards may be monetary or non monetary benefits such as insurance cover,
health scheme, housing etc. These are usually part of the terms of service
• Incentives are special perks that are given in recognition of good performance
such as bonus, profit sharing, paid vacation, awards etc. It is given after the
work and are linked to results
 Types of compensation, reward and
incentives

• Base Pay – The basic pay as outlined in the salary structure

• Commissions- Pay based on specific achievement e.g. sales
• Overtime Pay – Pay based on extra time worked
• Bonuses, Profit Sharing, Merit Pay
• Stock Options - Shares
• Travel/Meal/Housing Allowance
• Benefits including: insurance, medical, vacation, leaves, retirement
etc
 Principles of Compensation Management
• Understand the labour market
• Make internal comparisons.
• Directly tie pay to performance.
• Share the wealth.
• Provide a living wage.

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Understand the labour market

•Know what immediate competitors are paying and how they

pay.
•Conduct thorough market analyses/surveys
•Explore how other employers pay – do they offer variable
pay, merit increases, pay premiums or bonuses in addition to
base pay?

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Make internal comparisons

•Are certain skills, behaviors or job attributes more valuable than others
to your business?
• Should they be paid a premium as a result?
• Who is most important to your company?
•Comparing the value of positions in the organization can help make
sure that employees are paid fairly in relationship to their contributions
to the business.

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Directly tie pay to performance.

Measure performance
regularly and reward it with
pay increases or variable pay.
• Bonuses
• Commissions
• Stocks
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Share the wealth

•If the organization is having record profits, employees will notice

and become demoralized if they do not share in the wealth and
success they helped create.
• The majority of employers share their business' financial success with
their employees in some way, such as bonuses, profit-sharing and merit
increases.
•Their pay should be tied to your organizational results. If pay
cannot be adjusted, consider other rewards to recognize employees.

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Provide a living wage

•This means compensating employees in a way that allows them to meet

their basic needs.
•When there is a consistent problem or complaint of not being able live
on current pay, consider changing the pay policy.
•If a segment of workforce cannot survive on what they are being paid,
then it may be time to re-evaluate pay practices, even if the market
differs.
•The compensation system should be impactful yet cash preserving.

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Factors Influencing Employee Compensation
• External factors • Internal factors
• Supply and demand for employee • Nature of task (Difficult,
skills responsibility, dangerous,)
• Labour Unions • Personal qualifications (Years of
• Ability to pay experience and education level
• Productivity • Corporate strategy (lead, match,
• Cost of living follow the market)
• Government laws • Organizational culture
(performance oriented)
• Economic growth
 Supply and demand for employee skills

• Following the law of demand

and supply an increase in the
supply of labour for a particular
job will decrease compensation,
while an increase in demand will
increase compensation e.g.
doctors, engineers and lawyers
are highly paid due to the high
demand and low supply of their
services.
 Labour Unions

• Labour unions promote and

protect the economic interests
of their members. Labour
unions use strikes, go-slow etc to
press for higher wages
depending on the states of
markets for their employers
products e.g. bankers unions will
ask for wages when profits are
high.
 Ability to pay

• If firms feel they are making less

profit they will be reluctant to
increase wages but if it is highly
successful it may choose to pay
above the market rate to attract
high caliber employees.
 Productivity

• Government sometimes can use

computed productivity gains in the
economy as guideline to settle wage
disputes between management and
unions. However, this method can
present problems as;
• There is no precise and accurate
measure of productivity acceptable to all
• The computations are general averages
over a long period of time and not
yearly.
• The productivity gains are not achieved
by all industries alike and at the same
time and rate.
 Cost of living

• Cost of living adjustment of

wages is useful as a stopgap
service in times of inflation when
labour cannot keep up with rise
in prices
 Economic growth

• When economies grow,

employers have more income
and can pay more. The state can
tax that revenue and gain the
capacity and resources needed
to pay public employees more.
 Government Laws
• Minimum wages have been
defined as “the minimum
amount of remuneration that an
employer is required to pay
wage earners for the work
performed during a given period,
which cannot be reduced by
collective agreement or an
individual contract’ It is
determined by the government.
End
• Thank you

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COMPENSATION STRATEGIES
• A compensation strategy outlines an organization’s approach towards
employees’ pay and benefits.
• This includes the business’ position on the job market, the level of the
total cash, the main bonus principles in the organization, rules for the
base salary, and employee benefits.
• As it greatly influences an organization’s budget, the owner of the
compensation strategy is always the executive management.
• The HR and/or Compensation & Benefits teams provide input and
shape the strategy.
Importance of a Compensation Strategy
• Attract top talent. An enticing compensation strategy can help establish
an organisation’s position as the employer of choice within the labour
market.
• Boost morale. A sound compensation strategy leaves employees feeling
valued and appreciated as an important part of the organisation.
• Increase productivity. Providing an employee-friendly compensation
package can help incentivize employees to give their best and increase
their level of productivity
• Retain employees. Offering a generous compensation package can help
keep employees satisfied and retain them
Types of Compensation Strategies

Leading Matching Lagging

 Leading
• A leading compensation strategy
aggressively sets salary rates above
the market. By paying employees
more than the market rate, it’s
easier to attract qualified talent
and retain the best employees. It
also
promotes the perception that the o
rganisation is the employer of choi
ce
.
• For this , strategy, the organisation
must be financially healthy to pay
employees higher salaries.
Matching – (Meeting the Market Rate)

• Matching is a compensation strategy

where you pay employees the market
rate. In this strategy, employees are
paid fairly and expected to perform
well.
• It is the most common compensation
strategy,
• Though employees are paid well, this
strategy may make it hard to keep
your best employees as they are
recruited by companies offering more
money (The leaders)
Lagging
• A lagging compensation strategy
is when salary rates are set
below the market rate.
• Opting for a lagging strategy can
help lower costs and use the
money saved to offer other
benefits and incentives.
•
Lagging
• Reasons to pay employees below the established market rate e.g.
smaller organizations don’t have the financial resources, others are
nonprofits and charitable organizations, NGOs .
• Paying salaries below the market rate will make it difficult to attract
good employees and well trained employees may leave for higher
paying competitors.
Compensation and Pay Equity

What is pay equity?

Pay equity is the concept of compensating

employees who have similar job functions with
comparably equal pay, regardless of their
gender, race, ethnicity or other status.
External Equity and Internal Equity
• External equity and internal
equity make up the two halves
of fair pay.
• Both are key toward attracting
and retaining top talent, but
they require different
approaches to manage
External Equity and Internal Equity
Pay level
⚫ Refers to the total pay structure
of an organization relative to
that of other organizations in
the labour market.
⚫ Reflects organization’s external
consistency or equity
Pay structure
• Refers to an organization’s
internal pay scale or grades for
single jobs or a group of jobs.
• Designed to achieve internal
consistency or equity
Pay Structure

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Addressing Equity Issues in Compensation
Equity and Rewards

• EQUITY: is concerned with felt justice according to natural

law or right.
• Determined by ratio of compensation to one’s effort,
education, training, experience, endurance of adverse
working conditions etc.
• Comparison of this ratio relative to those of others in same
position.

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Equity Theory of Motivation

Stacy Equity refers to perception

Adams of fairness and justice in
(1968) the treatment of people.
Equity Theory

• Individuals compare their

job inputs and outcomes
with those of others and
then respond to eliminate
any inequities.
 Equity Theory of Motivation
Examples of ratios of outcomes to inputs

(i)Outcomes of ‘A’ = Outcomes of ‘B = Satisfaction

Inputs of ‘A’ Inputs of ‘B’ (Equity)

(ii)Outcomes of ‘A’ < Outcomes of ‘B’ = Underpayment

Inputs of ‘A’ Inputs of ‘B’ (Inequity)

(iii)Outcomes of ‘A’ > Outcomes of ‘B’ = Overpayment

Inputs of ‘A’ Inputs of ‘B’ (Inequity)
The consequences of dissatisfaction with
compensation.

◼ Corruption/pilferage – stealing from organization

◼ Undermining those who are perceived to be unfairly better

paid/rewarded

◼ Absenteeism (e.g. running private business)

◼ Promoting labour organizations/unions

◼ Putting in less effort to work hence decreasing output.

◼ Quitting/leaving the organization

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end
Process of Salary Determination

There are three

activities
performed by the
●Job analysis
HR department in ●Job Evaluation
order to
determine ●Salary/Compensation
employee Survey
compensation.
Meaning of Job Analysis

• It is the detailed and critical

Job analysis analysis of a specific job or
forms the position
cornerstone • It involves a detailed examination
of its various elements.
of all HR • It provides the groundwork for
functions. determining the value of a job.
Job Analysis
• It is the process of studying a job to
determine which activities and
responsibilities it includes, its relative
importance to other jobs, the
qualifications necessary for
performance of the job and the
conditions under which the work is
performed.
Importance of job analysis

• The recruitment and selection of the most suitable candidates for a job
• The determination of the training needed by employees
• Determination of work performance standards
• The redesign of jobs
• The maintenance of good industrial relations as employees will know what is
expected of them (creates standardization in work)
• Career development provides employees with information on training and career
development
• The determination of the value of a job and subsequently the compensation
level
• Provides the means by which individual performance can be evaluated and rewarded
Uses of Job Analysis
 JOB EVALUATION

• Definition of job evaluation

• Significance of job evaluation
• Objectives of job evaluation
• Challenges of job evaluation
• Methods of job evaluation
 Definition of job evaluation

• Determination of basic
Equity is an compensation rates requires a
important consistent and systematic
concept in procedure.
compensation. • The process for establishing basic
pay is termed as “job evaluation.”
 Definition of job evaluation

Refers to the process

of measuring the
inputs of employees
required for minimum It translates these
performance such as: inputs into specific
• Skill, effort, experience, monetary returns.
education, networks,
personality, attitude,
physical attributes etc.

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Definition of job evaluation

It is the • The central purpose of job

cornerstone evaluation is to determine the
of formal relative worth of jobs of an
wage and organisation
• It helps in establishing fair pay
salary differentials among jobs
programme.
Significance of job evaluation

• It determines the correct rate of pay through an

objective systematic procedure of describing and
placing a value on a job, hence people are paid for
work performed

• It leads to internal and external consistency in wages

and salaries and produces logical pay structures

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Significance of job evaluation
• Job evaluation is a systematic
and orderly process for wage
and salary fixation.
• Employees feel that the wage
rates and salaries offered to
them by their employees are
just, fair and equitable, therefore
it minimizes the employee
grievances.
Significance of job evaluation
• Create satisfaction of pay between employer
and employee and the satisfaction derived leads
to high morale and cooperation

• Reduces disputes where unions are involved in

determining pay
Significance of job evaluation
• It Enhances Goodwill and Reputation of the Company:
• The companies who adopt the job evaluation technique for wage and
salary fixation and gives just fair and equitable wage or salary to their
employees, such companies goodwill and reputation will be
automatically enhanced.
• There is strong feeling among the workers that their merit should also
be rewarded which is totally ignored by the job evaluation technique.
Significance of job evaluation
• Assists in salary
administration, and
updating the wage
structure whenever it
becomes obsolete.
• It simplifies wage
determination
Preconditions for job evaluation

Before conducting a job evaluation, the following are needed:

• Clear and accurate job descriptions and job
specifications
• Decision on which groups of jobs to evaluate made
• Proper communication of objectives and implication
of job evaluation to employees and unions to ensure
ownership and avoid any misunderstanding.
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Challenges of Job Evaluation
• Costly to install and maintain
• Not a universal panacea (solution)
Evaluations are usually a product of subjective
judgments. Although it is systematic, it is not scientific
• Evaluation schemes deteriorate with time

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Challenges of Job Evaluation
• Trade unions do not trust
job evaluations because
the methods are not very
scientific and are difficult
to understand.
• They fear that the job
evaluation will do away
with collective bargaining
Challenges of Job Evaluation
• Employees, trade union leaders and management may
differ on selecting the job factors, weights and points
to be given to each factor
• Job evaluation is only one among several factors in
deterring the wage level. Sometimes, other factors
like government policy may dominate the job
evaluation
Challenges of Job Evaluation
• There is no standard list of factors to be considered
for job evaluation, hence job evaluation lacks scientific
precision and accuracy.
• The salary fixed for a job on the basis of job evaluation
might not retain workers because of the law of
demand and supply.
• It does not take into account the supply and
demand for employees
Methods of conducting a job evaluation

Four primary •Job ranking

methods of job
evaluations •Job classification.
used to set •Point factor,
compensation
levels are:
•Factor comparison,
Methods of conducting a job evaluation
Methods of conducting a job evaluation
Non-Analytical/Qualitative Method- Ranking

• Rank means ‘to arrange according to classes or grades’.

• Under this method all jobs in an organisation are arranged according
to their worth or importance. It is done by a committee
• All the jobs are ranked in order of their importance from simplest to
the most difficult or complex.
• The information used is narrative/ descriptions of jobs based on type
of work, responsibilities involved, working conditions and supervision
required.
• No weight or points are specified for these factors.
Non-Analytical/Qualitative Method - Ranking
• On the basis of job analysis, each member of the job evaluation
committee ranks each job independently against the benchmark job
or against all other jobs.
• The ranking is provided to the job on the basis of this comparison.
• If there are significant differences of opinions among the members
about the ranking of a particular job, the matter is settled by mutual
consultation, or by working out the average.
Non-Analytical/Qualitative Method - Ranking

Ranking • It is comparatively simple, easily

method understandable, and mostly acceptable by

labour unions

has • It is suitable for comparatively smaller

organisations which may not like to

certain undertake more complex job evaluations

• It is less costly to undertake and maintain as

merits. compared to other systems.

Non-Analytical/Qualitative Method –
Job Classification/Job Grading

• In this method jobs are classified or graded in groups and

each job is assigned to one of the grades or classes.
• Using job analysis, information about different jobs is
collected and graded according to nature, importance,
responsibility etc.
• For each grade or class there is a different rate of wages.
• The jobs may be graded as skilled, unskilled, clerical,
administrative, etc.
Advantages
▪ It is easy for the employees to understand the standard used for
classification.
▪ The method is simple to understand and easy to operate. It does not
require any technical background.
▪ It is easy to determine and implement pay scales for various grades or
classes.
▪ This method is successfully used in government departments.
Limitations
▪Human bias exists in this method because no set
standards are available for classification by the
committee.
▪ No job analysis is essential in this method, hence
possibility of wrong classification for jobs.
▪ Where number of jobs are too many, the system
becomes difficult to implement.
 Analytical/Quantitative Method – Point Systems

• This is the most widely used technique of job evaluation. It

involves quantitative and analytical approach to the
measurement of job value.
• Various job factors are assigned points and the total sum
gives an index for the relative importance of the job.
• The points of different jobs are converted into wage/salary
rates
Advantages
▪ It gives a numerical basis for wage differentials.
▪ The scale, once decided can be used for a long period of time.
▪ A job can easily be evaluated in money terms as these are assigned
according to points connected with that job.
▪ The system of job evaluation being systematic and objective is more
acceptable to workers as well as management.
▪ The element of human bias is reduced to minimum level.
▪ This method is useful even if the number of jobs is very large.
▪ This method is more accurate and precise compared to qualitative
methods
Limitations
• This method is costly hence may not be adopted by
medium or small scale organisations
• The task of defining job factors sub-factors, selection
and then assigning points to factors is a time
consuming task
Analytical/Quantitative Method - Factor
Comparison Method
• This method is a combination of ranking and point system of job
evaluation
• In this method the relative rank of the various jobs is evaluated
relative to a monetary scale
• Five key factors generally evaluated for each job are
• Mental efforts,
• Skill,
• Physical effort,
• Responsibilities and
• Working conditions.
Advantages
▪ This method is systematic where every job factor is quantified
▪ It can easily be explained to workers.
▪ The relative value of each job is determined by comparison with
some key job.
▪ The number of factors used is limited, so it helps in avoiding
overlapping.
▪ It can be used for evaluation of unlike jobs.
Limitations
• It is difficult to operate as selection of unfairly paid jobs as key jobs
can result in considerable error.
• There may be frequent changes in wage levels requiring adjustment in
key jobs.
• The system is complex and cannot be easily understood by non-
supervisory staff or unskilled labour.
• This method is expensive and small organisations cannot afford to use
it.
In Conclusion….

Each of these methods

has its own advantages
and disadvantages. The •The best
qualitative methods are
usually faster while the approach is a
quantitative methods are
more objective but
combination
complex as they take into of methods.
account required skills
and responsibilities.
 SALARY/WAGE/COMPENSATION SURVEY
• Meaning of salary surveys
• Importance of salary surveys
• Process and method of carrying out salary surveys
• Challenges of salary surveys
What is salary survey?

A wage/salary/compensation survey is used to

compile market pay data for different types of jobs.
• It is performed in order to assess the effectiveness of an
organisation’s current pay structure and practices.

Surveys are used to plan future methods of

compensation.
What is salary survey?

• They are useful in exposing gaps and waste arising

from current policies and procedures.
• It provides salary information from other
organisations for comparison and adjustment of the
salary structure and achieve external consistency
• Survey data is compiled using information and
records from human resource departments.
 Meaning of Salary Surveys
• Salary Surveys are tools used to determine the remuneration levels
paid to employees in one or more jobs.
• Salaries vary by:
• job title (depending on the job descriptions),
• organisation size,
• geographic location,
• job grade, etc.
• Salary data, collected from several employers, is analyzed to develop
an understanding of the amount of remuneration paid.
Meaning of Salary Surveys

Salary/compensation survey results

provide key insights into job roles
and their salaries, helping
employers to determine and create
their own compensation strategy
 Importance of Salary Surveys
1. Aid in salary benchmarking
2. Help employers design a total rewards compensation package
3. Ensure employers keep up with salary trends
4. Make sure organizations recruit and retain the best employees
5. Create a culture of consistency and transparency
Importance of Salary Surveys
Aid in salary
benchmarking
• The results of a
compensation survey
gives insight into what
the highest and
lowest salaries for a
job in an industry are.
 Importance of Salary Surveys

Helps employers design a total rewards

compensation package
• A total rewards approach to compensation is
crucial for fairness and equity, motivation and
retention of employees
Importance of Salary Surveys
Ensures employers keep up with salary trends
• Consistent review of salaries through
compensation surveys, at least annually, gives an
understanding of what is motivating employees
in the sector at the moment.
Importance of Salary Surveys
Creates a culture of consistency and transparency
• Openness and transparency in conducting compensation
surveys, gives confidence to employees that their pay is
comparable to that of others in the same sector.
• The employees and interested candidates feel that the
organisation is transparent and justified in its compensation
plan.
Importance of Salary Surveys
• Makes sure organizations
recruit and retain the best
employees
• Regular review using salary
surveys ensures competitive
total rewards packages that
keep employees engaged for
longer
Sources of salary surveys
• There are many different sources of salary surveys. Salary surveys are
usually produced by
• Governments,
• Trade and professional associations,
• Consultants,
• Voluntary associations of employers and
• Individual employers
Process of Conducting a Compensation Survey
 Process of Conducting a Compensation Survey

1. Determine the job titles and grades to include

2. Determine the target industry or labour market
3. Determine the comparator organisations to survey
4. Determine organization size
5. Determine the information to be collected and the expected
outcomes
6. Analyse and interpret the results
Process of Conducting a Compensation Survey

Determine the job titles and

grades to include
• The jobs to include in the
survey are the benchmark
jobs that represent a sample
of all the jobs in the
organization
Process of Conducting a Compensation
Survey

Determine • The relevant industry may be the

the target organization’s product market or the
labour market.
industry • The labour market helps determine
the minimum wages it will take to
or labour attract and retain employees to carry
out the organization’s work.
market
Process of Conducting a Compensation
Survey
Determine the comparator organisations to survey
• Choose the particular organizations to be surveyed.
Such organizations are more likely to have all of the
job titles for comparison and also similar salaries
Process of Conducting a Compensation
Survey
Determine organization size
• Compensation varies by organisational size. The
survey should include a balance of organizations of
varying sizes but very small firms may represent non-
comparable labour markets
• Select organizations with formal compensation
system and using similar pay systems
Process of Conducting a Compensation
Survey
Determine the information to be collected and the
expected outcomes
• Surveys are driven by the purpose. These may include
information on pay and benefits as well as payment
policies.
• A better practice is to make separate surveys of
salaries and benefits and perhaps of average salary
changes.
Challenges in Salary Surveys
• Time and money into creating one. This is especially challenging if
the organization is conducting a third-party custom survey made up of
unique and niche job roles.
• Employer concerns including confidentiality. Direct wage information
is sensitive data that no organization wants its competitors to have.
• Participant concern including confidentiality. Revealing survey
participants’ individual data is common. Options include buying
survey reports from well-known companies that specialize in
collecting & reporting data for their sector, and/or hiring a third party
to conduct a salary survey
Challenges in Salary Surveys
• The use of bad market salary data. This will likely result in skewed
compensation results. With a compensation plan based on bad salary
data, it will be hard to attract viable job prospects but also risk looking
ignorant by advertising a salary range that is not in line with the rest
of the industry.
• Risks of turnover. If a salary benchmarking mistake is discovered after
an employee is hired or there is any adjustment (especially
downward) to salary it reflects negatively on the management. Unfair
pay may increase employee dissatisfaction and risk increasing
turnover.
End
 VARIABLE COMPENSATION
• Meaning of variable compensation
• Significance of variable compensation
• Types of variable compensation
• Merits and demerits of variable compensation
• Rules for administering variable compensation
• Factors to consider before introducing variable compensation
• Variable compensation policy
 Definition of variable compensation

• Variable compensation is the pay a firm gives staff based on their

results.
• Typically, it comes in addition to fixed base pay.
• This pay comes in various forms, including: Bonuses and
Commissions.
• It is an incentive on top of a base salary that's used to motivate and
retain employees. Variable pay is based on employee performance.
When a salesperson meets or exceeds their quota, variable
compensation gives them a boost to their salary.
 Definition of variable compensation

• Variable pay is often based on two main factors: your own performance
and your company’s performance. So, most schemes evolved by
companies have a target-setting and actual payout based on that
combination. Variable pay is one of the five main components of total
rewards in any organization and is usually a percentage of fixed pay.
• Employers typically pay employees variable pay for success related to
the personal, team, or company performance. Variable compensation
can be communicated in advance as an incentive, or presented as a
reinforcement or bonus after the fact. Many employers compensate
employees with variable pay in the form of cash, stock, or paid time off
from work.
Assumptions about variable
compensation
Types of Compensation Plans
Types of Compensation Plans
 Significance of variable
compensation

• Pay given over and above basic pay

• Given as an incentive for better performance

• Based on individual or group performance; profits or

competence/skills/knowledge

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ADVANTAGES
🞂 Motivate employees

🞂 Increase employee commitment to the organization -identify with its mission and values

🞂 Change organizational culture - performance and results oriented

🞂 Discriminate consistently and equitably on the distribution of rewards to employees

according to their contribution.

🞂 Deliver a positive message about the performance expectations of the company

🞂 Emphasize individual performance or teamwork as appropriate.

🞂 Improve the recruitment and retention of high quality staff.

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 DISADVANTAGES
⚫ Difficult to measure individual performance
objectively
⚫ Subjectivity may lead to unfair assessments
⚫ Can encourage people to focus only on tasks that will
earn them rewards quickly
Compromises quality and long term issues
⚫ People end up working for money only
⚫ Financial rewards may work for some and not others
⚫ Can lead to pay rising faster than performance if the
control systems are not strong enough.
11/8/2022 Prof. Harriet Kidombo, University of Nairobi 108
 Rules for successful variable compensation

⚫ Clarify targets and standards of performance to individuals

⚫ Individuals should be able to track their performance against targets
and standards
⚫ Be able to influence their performance by changing their behaviour
or decisions
⚫ Be clear about the rewards they will receive for achieving the
required end results
⚫ The rewards should be meaningful enough to make the efforts
required worthwhile.

11/8/2022 Prof. Harriet Kidombo, University of Nairobi 109

Factors to consider before introducing variable pay.

⚫ Organization culture
⚫ Business strategy
Qualitative and quantitative measures
⚫ Flexibility
⚫ Avoid short term thinking/objectives –

11/8/2022 Prof. Harriet Kidombo, University of Nairobi 110

Schemes for administering variable pay
• Merit Rating/Seniority Progression
• Incentive plans for operatives
• Incentive plans for managers
• Suggestion systems.

11/8/2022 Prof. Harriet Kidombo, University of Nairobi 111

EMPLOYEE OR FRINGE BENEFITS

Indirect forms of remuneration given in

addition to basic pay.

Importance of employee benefits

• Motivate
• Provide for actual or perceived needs
• Demonstrate that the company cares
• Provide a tax efficient method of remuneration

11/8/2022 Prof. Harriet Kidombo, University of Nairobi 112

Factors that influence employee benefits

• Government policies and regulations

• Labour Unions
• Economic conditions
• Organizational strategies and objectives
• Employee preferences and demographics

11/8/2022 Prof. Harriet Kidombo, University of Nairobi 113

END