LESSON 2 Introduction to Compensation and Rewards Chapter 1: Objectives of Compensation and Rewards Learning Objective Objectives of Compensation and

nd Rewards Determinants of Incentives

Introduction to objectives of Compensation and Rewards: After having discussed in the first Chapter the role of compensation and rewards, ij this chapter we will study the objectives of rewards. Compensation and Rewards determination may have one or more objectives, which may often be in conflict with each other. The objectives can be classified under four broad headings. Objectives of Compensation: (1) The first is equity, which may take several forms. They include income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power), the concept of equal pay for work of equal value compensation management strives for internal and external equity. Internal equity requires that, pay be related to the relative worth of a job so that similar jobs get similar pay. External equity means paying workers what comparable workers are paid by other firms in the labor market. Even compensation differentials based on differences in skills or contribution are all related to the concept of equity. (2) Efficiency which is often closely related to equity because the two concepts are not antithetical. Efficiency objectives are reflected in attempts to link to link a part of wages to productivity or profit, group or individual performance, acquisition and application of skills and so on. Arrangements to achieve efficiency may be seen also as being equitable (if they fairly reward performance) or inequitable (if the reward is viewed as unfair). (3) Macro economic stability through high employment levels and low inflation, of instance, an inordinately high minimum wage would have an adverse impact on levels of employment, though at what level this consequence would occur is a matter of debate.

Though compensation and compensation policies are only one of the factors which impinge on macro-economic stability, they do contribute to (or impede) balanced and sustainable economic development. (4) Efficient allocation of labor in the labor market. This implies that employees would move to wherever they receive a net gain, such movement may be form one geographical location to another or form on job to another (within or outside an enterprise). The provision or availability of financial incentives causes such movement. For example, workers may move form a labor surplus or low wage area to a high wage area. They may acquire new skills to benefit form the higher wages paid for skills. When an employers wages are below market rates employee turnover increases. When it is above market rates the employer attracts job applicants. When employees move from declining to growing industries, an efficient allocation of labor due to structural changes takes place. Other Objectives of Compensation: (1) Acquire qualified personnel compensation needs to be high enough to attract applicants. Pay levels must respond to the supply and demand of workers in the labor market since employers compete for workers. Premium wages are sometimes needed to attract applicants already working for others. (2) Retain current employees- Employees may quit when compensation levels are not competitive, resulting in higher turnover. (3) Reward desired behaviour- pay should reinforce desired behaviors and act as an incentive for those behaviors to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility, and other behaviors. Control costs- a rational compensation system helps the organization obtain and retain workers at a reasonable cost. Without effective compensation management, workers could be over paid or under paid. (4) Comply with legal regulations- a sound wage and salary system considers the legal challenges imposed by the government and ensures the employers compliance. Facilitate understanding- the compensation management system should be easily understood buy human resource specialists, operating managers and employees. (5) Further administrative efficiency- wage and salary programs should be designed to be managed efficiently, making optimal use of the HRIS , although this objective should be a secondary consideration compared with other objectives. Rewards:

The use of Incentives or Rewards assumes that people's actions are related to their skills and ability to achieve important longer-run goals. Even though many organizations, by choice, or tradition or contract, allocate rewards on non-performance criteria, rewards should be regarded as a "payoff" for performance. An Incentive Plan has the following important objectives: (1) An incentive plan may consist of both 'monetary' and 'non-monetary' elements. (2) Mixed elements can provide the diversity needed to match the needs of individual employees. (3) The timing, accuracy and frequency of incentives are the very basis of a successful incentive plans. (4) The plan requires that it should be properly communicated to the employees to encourage individual performance, provide feedback and encourage redirection. Determinants of Incentives These feature are contingencies, which affect the suitability and design of incentives to varying degrees. The effective use of incentives depends on three variables-the individual, work situation, and incentive plan. (I and Ill) The Individual and the Incentives: Different people value things differently. Enlightened managers realize that all people do not attach the same value to monetary incentives, bonuses, prizes or trips. Employees view these things differently because of age, marital status, economic need and future objectives. However, even though employee reaction to incentives vary greatly, incentives must have some redeeming merits. For example, there might be a number of monetary and non-monetary incentive programmes to motivate employees. Money, gift certificates, praises, or merit pay are of the continuous parade of promotion. (ii) The Work Situation: This is made up of four important elements: Technology machine or work system, if speed of equipment operation can be varied, it can establish range of the incentive. (b) Satisfying job assignments, a workers' job may incorporate a number of activities that he finds satisfying. Incentives may take the form of earned time-off, greater flexibility in hours worked, extended vacation time and other privileges that an individual values. Feedback, a worker needs to be able to see the connection between his work and rewards. These responses provide important reinforcement. Equity, worker considers fairness or reasonableness as part of the exchange (or his work,

Incentives, in general, are important motivators. Their effectiveness depends upon three factors: drives, preference value, and. satisfying value of the goal objects. Misra says: "Beyond subsistence level, becoming needs (self-actualization needs) possess greater preference value and are more satisfying than deficiency needs (which are necessary for survival). Below the subsistence level, however, the reverse holds true." He makes the following generalizations: (i) Incentives, whether they are monetary or non-monetary, tend to increase the level of motivation in a person.

(ii) Financial incentives relate more effectively with basic motivation or deficiency needs. (iii) Non-financial incentives are linked more closely with higher motivation, or becoming needs. (iv) The higher the position of a person in an organizations hierarchy, the greater is his vulnerability to non-financial incentives. "While budgetary restrictions and' temporary improvements in performance place a limit on the potency of money as a motivator, non-financial incentives involve only human ingenuity as investment and also insure a relatively stable acceleration in output. Monetary incentive imply' external motivation, non-monetary incentives involve internal motivation. Both are important. It is a judicious mix-up of the two that tends to cement incentives with motivation. Tutorial Activity 1.1 (1) Discuss the objectives of compensation and Rewards. (2) Discuss the determinants of compensation and Rewards. Tutorial Activity 1.2 Let us study the reason that why doesn't pay motivate? Most companies have some form of incentive plan. However, one of the most frequent comments heard is that "my employees aren't performing any better with the incentive plan than they were before. Am I wasting my money?" Chances are you are. To provide effective motivation, incentives must: 1. Flow from the business process

2. Provide sufficient opportunity to retain attention 3. Directly link actor and the action 4. Be timely Most plans out there violate at least one, and often all four of these rules: 1. Business Process Whether it is manufacturing the proverbial widget, processing credit card charges or overseeing a multi-product line business, those creating the compensation system must understand the customer chain, the work process, and how and where employees add value. Failure to do so results in a "one size fits all" mentality where all employees are treated similarly, or where we base our pay on what everyone else is doing. Although this may be seen as "administration savings" or "being competitive in our industry", it really means we are accepting a competitive disadvantage - we are actively forgoing a tool of competitive advantage. 2. Pay Opportunity Although people talk about competitive pay based on scope of job, or number of salary points, the ultimate determinant of the pay opportunity is the value created by the job. To the extent a job does not create value, employees are a drain on capital. The extent to which value is added (or lost) should be shared with employees to provide motivation. How much is to be shared is a company-by-company (or business-unit-bybusiness-unit) judgment based on three factors: a. What is the minimum amount of opportunity that must be paid to attract and retain employees both in boom and bust times? b. How much compensation is necessary to provide a meaningful link between the employee and the business goals? c. How much of the value added can we afford to share while maintaining a viable business with adequate shareholder return? An example of how incentives have consistently worked to the good is the steel maker Nucor. Base pay for most employees is less than "competitive" market levels. However, because of variable pay systems linked to the value created by the system, Nucor's employees are both paid above the "market" and receive constant feedback as to their, and their company's performance.

3. Link the Employee and the Action By tying compensation directly to these the controllable employee actions we provide a critical feedback link. For example, a work group which is rewarded based on the number of units shipped, less a holdback for defective widgets returned will (ideally): seek ways to speed throughput and shipping; provide feedback to earlier teams to eliminate defects and, seek product improvements which will increase demand. If these are in line with the business process and the goals of the business are communicated, then, the feedback will reinforce the actors to align with the business. If there is no clear linkageno "line of sight" - the money spent is, at best, sub optimized, at worst, wasted. This is the flaw in program such as all employee stock options or company wide profit sharing plans. There is no direct, meaningful, measurable link between, for example, the actions of a soda truck driver and the price of the company's stock. 4. Timeliness As Pavlov demonstrated, timeliness is critical to rewards. As results become measurable, feedback pay should follow, with a minimum of administrative delay. In many broadbased incentive plans, payout happens quarterly, monthly, or even, as at Nucor, weekly. This provides rapid reinforcement feedback. As a rule of thumb, the longer the delay, the less useful the reward. In come situations, this rapidity is not possible because the process is both uncertain and long for example a researcher working on a new drug. In these cases, feedback can still be provided on a milestone basis rewards linked to clinical trials, FDA approval, sales past a profitability milestone, etc. Unfortunately, the area where there is historically the least timeliness is executive pay. Executive pay is historically focused on "annual incentives: requiring executives to categorize their performance into discrete, one-year segments, regardless of business cycle. Depending upon the structure of the plan, this results in executives either setting goals which do not clearly relate to adding value, but which are measurable in a one-year time frame (e.g., "by November create a training program for 1995 implementation."), or measuring financial results without regard to product cycles (e.g., we release a new edition of the product every six months, with a six month life. An annual award cycle eliminates the opportunity to provide feedback on every edition of the product.) Conclusion Pay has the potential to drive performance in the best companies, it does. However, too often, pay is designed in a vacuum, without focus on either the underlying objectives of

the company or the actions employees can actually control to achieve those goals. Compensation must be seen as part of the total business process to be successful. Ted Buyniski is a Principal with Quantic, Inc., a compensation and strategic HR consulting firm headquartered in San Francisco. He manages the East Coast practice from Chester, NJ. Theodore R. Buyniski Tutorial Activity 1.3 From the case below let us understand the Reward system of this organization: The Employers Organization Company background: The Employers' Organisation for local government's (EO) role is to help councils achieve the high standards of people management needed to ensure the continuous improvement of services. We offer a range of services to local authorities, from free telephone advice and specialist guides to tailor made consultancy services. Essex Our approach to pay progression Essex County Council has been going through radical change. Some of that change has been structural but the more important aspect of the change is cultural. We are seeking to move the organisation to a much more customer focused and facing organisation. Situation One of the mechanisms to support this move has been our approach to pay strategy. We also wanted to implement the Single Status Agreement, which removes the employment conditions divide between some of our staff. The Agreement and the approach we used affected our 9,000 staff. The cornerstone of our approach was to develop the Essex Competency Framework. This sets out the skills and abilities that our staff need to deliver best quality services for the Council. We then incorporated this into our individual performance management system. This formed the foundation on which we could build our new approach. The principles of the approach are: (1) It is simple and consistent (2) A member of staff meeting the objectives of their job and their competency statements can expect pay progression

(3) It fits with the service planning cycle (4) Development opportunities are available (5) Staff at their maximum pay point undergo performance review and competency development so that further development opportunities can be explored. Process The new system for these staff moves away from automatic service based increments, although it still uses the national pay spine up to point thirty-four. It is based on four Broad Band Grades that have been determined by using the National Job Evaluation Scheme. Within each Band the first increment is automatic, then performance is assessed against delivery of objectives - i.e. what needs to be delivered - and the demonstration of competencies - i.e. how it needs to be delivered. Objectives come from the job profile for the individual and the service objectives for the service area. Around six objectives are required for each job and they need to be constructed in a way that is easily measurable. We provide guidance and training for managers and staff on how to do this effectively. The objectives are set at the beginning of each review year and can be reviewed and amended. We also use statements from the appropriate four Competency Headings from the Competency Framework plus the Technical Professional Competency. A statement from the Competency Framework sets out what needs to be demonstrated by the individual in their role. An example is: Seeks regular feedback from customers about services provided and uses this to recommend continuous improvements to the service. This statement comes under the Competency Heading 2 Customer/Client Orientation and is the appropriate statement for spinal column point twenty two. Each of the generic competencies has a defined and prescribed statement for every spinal column point. A few of the statements remain the same at all spinal column points; for example, those around equality and diversity, but most become more demanding the higher the spinal column point. The selection of the Competency Headings from the Essex Competency Framework may be for individual posts where there are no other similar posts but job families have commonly agreed Competency Headings across the organisation in order that we have consistent levels of service delivery for that function. There is also a Competency Heading entitled Professional and Technical so that job specific competencies are included e.g. social workers. This framework is flexible

enough to cover all jobs and roles within the Council including the Member role. For jobs above spinal column point thirty-four and for Members the Competency Framework is used in a different way. Each year, the manager will identify the spinal column point for their member of staff as at the first of April. A database will produce all of the appropriate statements under the selected Competency Heading for that spinal column point. These will be recorded on the appropriate form for the individual together with their agreed objectives for the year. The professional technical statements are not prescribed because they relate directly to the area of work and the manager will draft these with the individual, although there is general guidance in place to assist the process. Questions: (1) What do you understand by the term People Management. (2) What is pay progression and discuss its relevance to this case. Tutorial Activity 1.4 Let us understand the rewarding strategy of an another company belowFRONT RANGE SOLUTIONS Company Information: Founded in 1989, FrontRange Solutions Inc. is a privately held company, delivering software that facilitates extraordinary relationship solutions. An international leader in business relationship software for nearly 15 years, FrontRange Solutions employs more than 500 people worldwide. FrontRange Solutions' products address the needs of customer service and support (help desk), sales force automation (SFA), knowledge management and customer relationship management. FrontRange's expertise lies in delivering the highest value, industryspecific, integrated software solutions for the complete lifecycle of business relationships. And FrontRange puts its knowledge into practice by providing outstanding customer service to the over 100,000 customers and one million plus users. One result: HEAT, the service and support solution from FrontRange, has a 98% customer satisfaction rating as indicated by an independent survey. We have a reputation for providing big-company solutions at prices that dont exclude small organizations. FrontRange has earned more than 60 major industry awards, including: Software Magazine Hot 500, Windows Magazine "Win 100," Call Center CRM Solutions Magazine Editor's Choice, RealWare Award for CRM, WinMag.com

WinList Award, Entrepreneur Magazine Best Software, Call Center Solutions Product of the Year, and InformationWeek Top 50 Application Service Providers. Rewarding strategy of FrontRange FrontRange Solutions rewards its employees FrontRange Solutions' Total Rewards Strategy contains four key components to attract, motivate and retain the best talent available in the marketplace: Compensation: FrontRange Solutions offers its employees a competitive pay package that provides: Compensation for satisfactory work (base salary, merit pay); Short and long-term incentives for achieving strategic business objectives; Rewards for specific individual or team achievements (bonuses, awards). Total compensation for an individual employee is determined by four considerations: Internal value of an individual's position, as determined through the position evaluation process. To ensure internal equity, positions of similar or equal responsibility will be grouped in the same salary range or band. External competitiveness, as established through market surveys of companies we compete with for customers and talent.

Individual performance, as measured by the annual Performance Development Process (PDP), which identifies individuals who should be considered for higher levels of responsibility and pay. Business performance, as measured through strategic business goals, such as earnings per share, profit or cash flow. Local programs should complement FrontRange Solutions overall pay philosophy and avoid duplication of global initiatives. Benefits: FrontRange Solutions aims to provide private benefits programs that supplement or enhance mandatory plans available in the various locations where we do business. Our programs serve two main objectives: (1) To protect employees from risks (sickness, accidents, disability) that may result in substantial economic loss; and (2) To provide employees with retirement benefits (pension plans, savings plans, retiree health care) that offer economic security after employment.

Our goal is to give employees a variety of benefits choices and to deliver these benefits in a tax-effective, economical manner. Development: We believe in helping employees develop to their utmost potential. Given the unique nature of FrontRange Solutions' business, we cannot rely on external recruiting as a primary source of talent- so we have developed those critical skills internally. Workplace Environment FrontRange Solutions is committed to creating an environment that attracts and rewards talented, ambitious people. Employment with our company is an enriching experience that enables employees to achieve their highest potential. To that end, we will recognize and reward teamwork, excellence and innovation, and will provide opportunities consistent with these contributions. We also foster diversity among our employees and value the broad spectrum of thought and skills each person brings to FrontRange Solutions. Performance is measured in ways that encourage reasonable risk-taking, foster an awareness of personal accountability, and support standards and competencies consistent with FrontRange Solutions' basic values. Overall, the relationship between our company and our employees is governed by respect for the individual and a sense of personal integrity. FrontRange Solutions recognizes that only when a company truly values people can it expect to be prized as an employer. To the extent permitted by applicable law, FrontRange Solutions retains employees on an at-will basis. Nothing in this website is intended to alter an employee's at-will status, or create an offer or contract of employment. Questions: (1) Discuss the Rewarding Strategy of FrontRange. (2) Discuss on the nature of pay package offered by FrontRange. (3) What do you understand by the term employee benefits and throw light on the nature of benefits provided by FrontRange to its employees. (4) Discuss the importance of Workplace Environment with regard to reward management.