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Compensation refers to all forms of financial returns & tangible services & benefits employees receive as part of an employment

relationship.

Compensation Management
Compensation refers to a wide range of financial & non-financial rewards to employees for their service rendered to the organisation.

Compensation may be defined as money received in the performance of work, plus the many kinds of benefits & services that organisations provide their employees. Compensation includes direct compensation (gross pay) & indirect compensation life, health, accident insurance, employers contribution to retirement, pay for vacation or illness, payments for welfare as social security.

Contrasting Perspectives of Compensation

Society s Views

Stockholders Views

Employees Views

Managers Views

Stakeholders
Society -pay as a measure of justice e.g. comparison of earnings of women with men Voters pensions & health care for public/government employees cause for increased taxes Consumers - sometimes see compensation as the cause of price increases Managers major expense used to influence employee behaviour & improve organisational performance

Employees return in exchange of labour an entitlement for being employee a reward for job well done return on their investments in education & training etc. & contribution of time & energy at workplace

Objectives of Compensation

attract & acquire qualified & competent personnel retain employees motivate employees for better performance reward desired behaviour ensure equity: internal & external control costs comply with legal regulations facilitate easy understanding by all easy administration of the compensation system

Dimensions of Reward

Compensation System

Non-Compensation Rewards

Salary

Performance & profit-sharing bonus

Long-term Incentives Stock options

Perquisites

Intrinsic / Non Compensation Rewards

Participation in decisionmaking

Greater job freedom & direction

More responsibility

More interesting work

Opportunities for personal growth

Diversity of activities

Forms of Pay
The variety of returns people may receive from work may be categorized as: total compensation & relational return.

Cash (pay received directly Compensation in cash)

base cost of living adjustments incentives pensions medical insurance programs to help balance work & life demands development opportunities status challenging work

Benefits (pay received indirectly)

Relational (psychological returns) returns

Relational Returns from Work


Recognition & Status

Employment Security

Challenging Work

Learning Opportunities

DEVELOPING A NON-COMPENSATION REWARD SYSTEM


(i) Enhance Dignity & Satisfaction from Work Performed (ii) Enhance Physiological Health, Intellectual Growth, & Emotional Maturity (iii) Promote Constructive Social Relationships with Co-workers (iv) Restructure Job tasks & responsibilities (v) Allocate Sufficient Resources to Perform Work Assignments (vi) Grant Sufficient Control over the Job to Meet Personal Demands (vii) Offer Supportive Leadership & Management

NonCompensation System

What Is an Implicit Employment Contract?


An unwritten understanding between employers & employees over their reciprocal obligations & returns; employees contribute toward achieving the goals of the employer in exchange for returns given by the employer & valued by the employee.

COMPENSATION Gross Earnings


INDIRECT (Wage Supplements, Fringe Benefits)
PROVIDENT FUND PENSION GRATUITY MEDICAL/HEATH INSURANCE SICK LEAVE VACATION EDUCATIONAL ALLOWANCES CHILD FAMILY CARE HOUSING RELOCATION SERVICES

DIRECT (Financial)
BASIC PAY DA OVERTIME PAY SHIFT ALLOWANCE INCENTIVE BONUS PROFIT SHARING BONUS COMMISSIONS -

FACTORS INFLUENCING COMPENSATION


(i) (ii) (iii) (iv) (v) (vi) Organizations capacity to pay. (e.g. MNCs) Prevailing pay & benefits in the industry/location. (e.g. IT sector) Competition in the industry & availability of special competent personnel. (e.g. Insurance sector - Actuary) Flexibility, i.e. kind of competencies & abilities in managers. Performance/productivity/responsibilities individuals. of

Organization philosophy such as to be leader or pay prevailing rates. (e.g. IBM)

(vii) Qualifications & relevant experience. (viii) Stability of employment & advancement opportunities. (e.g. govt service)

CRITERIA FOR EFFECTIVENESS OF COMPENSATION POLICY


Adequate Minimum legal, governmental, union & managerial satisfaction levels should be met. Equitable Each person is paid fairly, in line with his effort, abilities, training competencies, & so on. Balanced Pay, benefits, services & other financial or non-financial rewards constitute a reasonable total compensation package. Cost Effective Compensation package is not excessive, considering what the enterprise can afford to pay. Acceptable to Employee The employee understands the salary system & feels it is a reasonable system. Incentive Providing Package motivates effective & productive work. Security The package meets employees security needs

THE PAY MODEL


STRATEGIC STRATEGIC POLICIES POLICIES TECHNIQUES TECHNIQUES STRATEGIC STRATEGIC OBJECTIVES OBJECTIVES

Work Evaluation/ ALIGNMEN Analysis DescriptionsCertification T

INTERNAL STRUCTURE

EFFICIENCY
Performance Quality Customers & Stockholders Costs

Market COMPETITIVE Definitions Surveys Policy Lines NESS

PAY STRUCTURE

FAIRNESS
Seniority Merit CONTRIBUTO Based Performance Guidelines Based RS INCENTIVE PROGRAMS

Communication EVALUATION ADMINISTRA PlanningBudgeting TION

COMPLIANC E

Compensation Objectives
Efficiency

Fairness

Compliance

Pay System Policies


Internal

alignment

Comparisons among jobs or skill levels inside a single organization (e.g. data entry operator vs. accts clerk)

External

competitiveness

Compensation relationships external to the organization: comparison with competitors

Employee

contributions

Relative emphasis placed on employee performance Policies related to managing the pay system

Management

Pay System Techniques


Include methods used to operationalize policy decisions & link decisions to overall compensation objectives Examples of techniques Internal consistency Job analysis Job evaluation External competitiveness Pay surveys Employee contributions Incentive plans Performance-based pay increases