COMPENSATION MANAGEMENT

MS/15ID/404C

UNIT: II - Compensation Management (6 hours)

Managing Compensation: Strategic Compensation planning, determining compensation-the wage

mix, Development of a Base Pay System: Job evaluation systems, the compensation structure-
Wage and salary surveys, the wage curve, pay grades and rate ranges, preparing salary matrix,
government regulation on compensation, fixing pay, significant compensation issues,
Compensation as a retention strategy.

Managing Compensation:

Strategic Compensation Planning

A strategic plan for employee compensation determines how much you want to pay employees
and what type of employees you want to attract. Your compensation plan entails a variety of
aspects including pay scales, reward programs, benefits packages and company perks. A
successful strategic compensation plan allows your business to compete in the market for the
best employees in your industry.

Attracting Quality Employees

Your strategic plan for compensation plays a large role in attracting competent employees.
Paying wages at or above the prevailing wage in the market for your company's industry allows
you to demand workers with more experience and positive work histories. Employing more
qualified workers leads to better results, including higher productivity and customer service
interactions. This can increase your company's revenue and help your business establish its
identity with consumers.

Rewards for Performance

A compensation strategy may also include rewards for employees based on workplace
performance. This may include a commission-based system that rewards employees for total
amount of sales or for consistent positive feedback from customers. A reward system should be
easy for employees to understand and attainable enough at its lower levels to encourage
employees to work harder to reach higher goals. A reward system with performance levels too
high for employees to reach early on in the process won't encourage harder work because
employees will simply ignore it.
Encouraging Employee Retention
Retaining quality workers requires a strategic plan for compensation that rewards employees for
company loyalty. Compensation based in part on seniority with the company shows new
employees that your business values workers who choose to remain with the company long-term.
This encourages new employees to make a commitment to build a career with your business and
deters established employees from jumping to other companies. Experienced workers will think
twice about pursuing another opportunity if the new job also comes with a pay cut.
Perks and Benefits
Perks and benefits can make or break your company's ability to attract the best and brightest in
your industry. Offering health insurance benefits to full-time workers should be a goal of your
strategic compensation plan. You can combine health insurance with other company perks,
including paid holidays and guaranteed paid vacation time, to attract more qualified workers to
your business. Your decision to offer these benefits is also contingent on the success of your
company. You may choose to add health care coverage and paid time off to your benefits
package only after your company is showing profitability or makes it past the first year.

Determining compensation-the wage mix

The following factors should be taken into consideration in determining wage and salary
structure of workers:

(i) Labour Unions:

The labour unions attempt to work and influence the wages primarily by regulating or affecting
the supply of labour. The unions exert their influence for a higher wage and allowances through
collective bargaining with the representatives of the management.

If they fail in their attempt to raise the wage and other allowances through collective bargaining,
they resort to strike and other methods where by the supply of labour is restricted. This exerts a
kind of influence on the employees to concerned test partially the demands of the labour unions.

(ii) Personal perception of wage:

Whether the wage is adequate and equitable depends not only upon the amount that is paid but
also upon the perceptions and the views of the recipients of the wage. Even though the wage is
above the going wage rate in the community if it is lower than that of fellow worker deemed
inferior, it will be regarded as inequitable in the eyes of the recipients of the wage. A man’s
perception of the equity of his wage will undoubtedly affect his behaviour in joining and
continuing in the organisation.

(iii) Cost of living:

Another important factor affecting the wage is the cost of living adjustments of wages. This
approach tends to vary money wage depending upon the variations in the cost of living index
following rise or fall in the general price level and consumer price index. It is an essential
ingredient of long term labour contracts unless provision is made to reopen the wage clause
periodically.

There are measurement problems both in ascertaining productivity and cost of living increases.
This problem may lead to lack of understanding and unanimity on the part of the management
and the workers.

(iv) Government legislation:

The laws passed and the labour policies formed by the Government have an important influence
on wages and salaries paid by the employees. Wages and salaries can’t be fixed below the level
prescribed by the government. The laws on minimum wages, hours of work, equal pay for equal
work, payment of dearness and other allowances, payment of bonus, etc. have been enacted and
enforced to bring about a measure of fairness in compensating the working class.

(v) Ability to pay:

Labour unions have often demanded an increase in wages on the basis that the firm is prosperous
and able to pay. However, the fundamental determinants of the wage rate for the individual firm
emanate for supply and demand. If the firm is marginal and cannot afford to pay competitive
rates, its employees will generally leave it for better paying jobs. However, this adjustment is
neither immediate nor perfect because of problems of labour immobility and lack of perfect
knowledge of alternatives. If the firm is highly successful, there is little need to pay for more
than the competitive rates to obtain personnel.

(vi) Supply and demand:

As stated earlier, the wage is a price for the services rendered by a worker or employee. The firm
desires these services, and it must pay a price that will bring forth the supply, which is controlled
by the individual worker or by a group of workers acting together through their unions. The
practical result of the operation of this law of supply and demand is the creation of “going- wage
rate”.

It is not practicable to draw demand and supply curves for each job in an organisation even
though, theoretically, a separate curve exists for each job. But, in general, if anything works to
decrease the supply of labour such as restriction by a particular labour union, there will be a
tendency to increase the wage. The reverse of each situation is likely to result in a decrease in
employee wage, provided other factors, such is those discussed below, do not intervene.

(vii) Productivity:
Increasingly there is a trend towards gearing wage increases to productivity increases.
Productivity is the key factor in the operations of a company. High wages and low costs are
possible only when productivity increases appreciably. The above factors exercise a kind of
general influence on wage rates. In addition, there are several factors which do affect the
individual difference in wage rates.
The most important factors which affect the individual differences in wage rates are:

(a) Worker’s capacity and age;

(b) Educational qualifications;
(c) Worker experience;
(d) Hazards involved in work;
(e) Promotion possibilities;
(f) The prevailing wage in the community;
(g) Stability of employment;
(h) Demand for the product; and
(i) Profits or surplus earned by the organisation.

Development of a Base Pay System:

Job Evaluation Systems

Job evaluation is the process of comparing a job against other jobs within the organization to
determine the appropriate pay rate. This toolkit discusses the following topics:

● Internal job evaluation methods.

● External job evaluation methods.
● Conducting job evaluations.
● Auditing and maintaining job evaluations, including legal considerations.

Job evaluation takes place early in the process of creating a compensation system for the
organization. The job evaluation process may contrast with or be used in conjunction with
market pricing, which uses the labor market to set jobs' worth. This process, which may take
several months, is usually completed by a team of knowledgeable senior employees who
understand the functions of most of the organization's jobs. To maintain objectivity, employers
sometimes hire consultants to complete this step in the compensation planning and design
process.
Job evaluations are often confused with job analysis, but the two activities differ drastically. A
job analysis is the systematic process of examining specific tasks and responsibilities related to a
job, typically for writing a job description. .
Job Evaluation Methods
Four primary methods of job evaluations used to set compensation levels are point factor, factor
comparison, job ranking and job classification. Historically, job evaluations were internal
comparisons of job worth; however, in recent years employers have begun to use a combination
of internal comparisons and external market benchmarking.
Internal Job Evaluation Methods
Internal job evaluation methods are either quantitative or qualitative.
Quantitative approaches
Quantitative methods use facts based on collected data to define a job.
Point factor. The point factor method is a commonly used quantitative technique. This approach
breaks down jobs into compensable factors identified during a job analysis. Points are assigned
to the factors, and a pay structure is established for the position.
Using a system for internal equity, such as the point factor system, forces an organization to
quantify total points for each unique job, determining its true value to the company. This process
often provides value beyond compensation, including benefits for recruitment, promotions and
job design. However, designing a custom point-factor system may take additional time and
resources and require assistance from senior management.
Factor comparison. The factor comparison method represents a combination of the ranking
(explained later) and point methods. The first step is to identify benchmark jobs (i.e., jobs
performed by several individuals with similar duties within the organization, such as
administrative assistance, stock clerk, security guard, accountant, sales representative, supervisor
and manager). In addition, the organization must select compensable factors and rank all
benchmark jobs after completing factor analysis. Next, the employer must compare jobs to
market rates for benchmarking, which results in the assignment of monetary values for each
compensable factor. Finally, the organization should compare all of its jobs with respective
benchmark jobs.
Custom Factor Comparison
The custom factor comparison method is specific to the organization, but it is time-consuming to
establish and maintain. In addition, the organization must monitor market rates to maintain the
system's integrity.
Qualitative approaches
Qualitative approaches use observations or descriptions to define jobs.
Job ranking. Job ranking places jobs in a hierarchy of their value to the company. It is the
simplest method but is not appropriate for every organization. This method is best suited to
smaller organizations that can reduce the number of positions to be reviewed to no more than
100 specific jobs. Larger organizations should select another system.
Job ranking generates an estimate of the correct job hierarchy, not the exact hierarchy found in
the point-factor system. Job ranking should be facilitated by a skilled compensation specialist
who can address favoritism by managers and evaluate other subjective input.
Job classification. In the job classification method, the evaluator writes descriptions of each
class of jobs and then puts them into the grade that best matches the class description. Because
this process is subjective, with a wide variety of jobs and general job descriptions, positions
could fall within more than one grade level. This method also relies on job titles and duties,
assuming they are similar among organizations. These classifications are based on the job's skill
and complexity. Organizations usually create grades along occupational lines.
External Job Evaluation Methods
For some organizations, internal job evaluations may be inappropriate. For example, jobs with a
skills shortage may result in inflated prices. In addition, matrix organizations with little hierarchy
would not benefit from job ranking or point-factor comparisons. Therefore, many employers are
beginning to use market data to determine a job's worth. To stay competitive, organizations
frequently review external pay rates and monitor current, accurate market data.
Market Pricing.
Market-pricing the external value of individual jobs enables employers to create effective
competitive pay plans and allocate compensation costs wisely. The most common source for
such market data is third-party compensation surveys.
Market pricing emphasizes external competitiveness; however, employers may have insufficient
or unreliable market data for all the organization's jobs. Additionally, an internal job evaluation
even a simple approach, such as ranking—is required to maintain internal equity. Key benefits of
job content evaluation include internal consistency and the ability to evaluate all jobs based on
content. Organizations can use job evaluations to:

● Ensure compliance with federal laws and regulations on equal pay and state/provincial or
local ordinances on comparable worth. .
● Establish a rational, consistent job structure based on value to the organization in terms of
each job's complexity and importance (with or without reference to market valuation).

● Help provide a basis for pay-for-performance.

● Assist in establishing competitive pay rates and structures.

Conducting Job Evaluations

Many job evaluation methods are subjective. Evaluators' decisions about which jobs are worth
more can be personal and emotional. If the team members know the job incumbents, they may
consider employees' personal qualities as job factors. Outside consultants can help the team have
productive and objective discussions about job factors and their relative weights.
Base pay, which establishes the standard of living, is the foundation for total compensation. It
also indicates the value the organization places on an employee's role and contributions.
According to a SHRM Foundation study, Implementing Total Rewards Strategies, compensation
is a highly emotional topic that may initiate resistance to change and increase emotional turmoil.
The organization and employees must view base pay rates as:
 ● Internally equitable.
● Externally competitive.
● Affordable and cost-effective.
● Legal and defensible.
● Understandable.
● Appropriate for the organization.
● Appropriate for the workforce.

A typical job evaluation project includes these common steps:

1. Specify the project's parameters, and gain approvals and support from senior
management.
2. Select an appropriate evaluation method or system.
3. Collect job data consistent with the method or system. This step includes specifying
trustworthy data collection techniques.
4. Analyze data, document job content and evaluate jobs.
5. Use points to develop job worth hierarchy, and group jobs into grades based on
appropriate breaks, or take another fair, understandable, defensible and practical
approach.
6. Allocate jobs to the existing pay structure, or develop a new one.
7. Document system development, and establish operating procedures, including policies
for reconsidering decisions or a formal appeals procedure.
8. Gain final approvals.
9. Implement and administer system.

Finally, organizations should employ a robust management-employee communications program

to help employees understand how the organization makes pay decisions.
Auditing and Maintaining Job Evaluations
Completing the job evaluation process may signal the organization to address the remainder of
the organization's compensation planning and design project. Organizations should plan to
conduct regular job reviews and develop a process to handle job changes and additions.
Organizations must acknowledge and address any deficiencies they find during audits and
explain the need for any changes. HR may wish to have external evaluators complete periodic
audits to dispel the suspicion that the program's designers will not acknowledge inadequacies.
For example, a task force representing employees at all levels across the organization can lend
credibility to the evaluation process.
Understanding when reevaluation is necessary
In smaller organizations or those in which pay increases or upward mobility are unlikely,
managers may be tempted to request a reevaluation based on minor changes in responsibility. A
best practice is to focus on major job changes outside the normal auditing cycle and to routinely
reevaluate all jobs, such as every other year.
Jobs in a broad banding system need to be classified, but with fewer groupings, job evaluation
may not require complex systems, such as point factor plans. Instead, organizations may use a
combination of ranking-to-market and whole-job slotting. Of course, employers using these
methods should document job content, because job descriptions are useful and valuable
management tools.
Legal considerations
The U.S. legal and regulatory environment is a major pay administration concern. From an equal
pay perspective, if audits find that one class of employees occupies lower priority jobs, the
organization may have to justify its job evaluation approach. Unexplained differences should be
investigated, regardless of the probability of legal action. Employers should correlate pay to the
value of the job or role, mastery level and performance.
Maintaining the system
Once an organization completes its job evaluation process, it should document and periodically
review the system, so it can evaluate new jobs or changed jobs using the same method. Items to
document include:

● Selection of compensable factors.

● Definition of degrees for each factor.
● Determination of values (weights) for factors and degrees.
● Application of these criteria to derive points on each factor and a point total.
● Allocation of each job to a grade (range of points) or exact position in the hierarchy based
on total points.

Typical system-specific steps for a non-quantitative approach to job evaluation (e.g., whole-job
ranking methodology) are:

1. Identify and briefly describe the benchmarks (key jobs based on employee count,
importance to the organization and other considerations).
2. Rank the benchmarks into a hierarchy through paired comparisons (e.g., identifying
which job in each comparison is "better" than the other overall).
3. Slot the remaining jobs by comparing each with the ranked benchmarks.

Slotting new jobs then becomes the operational method for evaluating them. Organizations may
also use slotting to supplement, or replace, an established quantitative approach by comparing
critical job elements with those of jobs whose worth is already ranked.
No matter how the organization establishes its job worth hierarchy, job evaluators continue to use
job content to value new and changed jobs. Some organizations use market pricing to check job
evaluation. Pay rates in organizations using the job content evaluation approach are set by
reference to the market, collective bargaining or other means.
Pay ranges and pay increase budgets are the most common control devices used for base pay
administration. When discussing merit pay, employers must evaluate where pay rates fall within
the ranges to determine whether the organization's pay policy is consistent. Pay rates that fall
below or above the pay range minimums or maximums, respectively, can be a problem. "Red
circle rates" are salaries above the maximum rate established for the position. "Green circle
rates" are salaries below the minimum rate. Green circle rates are as problematic as red circle
rates because they violate the organization's philosophy. Organizations should move employees
with green circle rates up to at least the minimum in the range or give them an opportunity to
move to a job in the next grade above them.

The compensation structure-

Wage and salary surveys

A wage and salary survey is used to compile market pay data for a plethora of jobs on either a local or
nationwide basis. This survey is usually performed in order to assess the effectiveness of a company’s
current pay structure and practices. Surveys are used to plan future methods of compensation, and they
can be instrumental in exposing gaps and waste stemming from current policies and procedures. A
comprehensive survey may also provide companies with wage data from other companies – this will
allow them to assess their own compensatory policies and adjust them accordingly. Survey data is
compiled using various data and records from human resource departments. Information will usually be
displayed on a wage curve.

The Wage Curve

Definition: Wage Curve
Wage curve is a curve which represents a relationship between the rate of unemployment (plotted
on the X-axis) and wage rate (represented on the Y-axis). Example. The wage curve in a
particular mall will be lower when the rate of unemployment is high. It’s is a representative of
relationship between the two variable at the local level i.e between local wages and local level of
unemployment.
Initially, it was supposed that the there is a relationship between unemployment & wage rate, and
also the unemployment in a particular area is directly related to the changes in the rate of wages
in a particular area. This is contrary to what is explained by the wage curve according to which
their exists an inverse relationship between the two.
Understanding the Wage Curve:
We know that the supply/number of labors is directly related to the wages, ie. the higher the
organization pays the more is the number of hours of work the individual is ready to put in, but
there is a twist in it in terms of the fact that the individual might not be ready to sacrifice an hour
or more of his rest/leisure time (which is quite essential). The lower the rate of unemployment ,
fewer is the number of people available for a particular job and hence higher is the wage per
employee.

Example. If a person can put in a maximum of 8 hours of work daily @ Rs.80/hr. If the same
person is paid @ Rs. 100/hr, which is higher in terms of returns that the person gets after putting
in the same amount off work. Therefore, more number of people will be required for getting the
work done.
Implications: Wage Curve
1. It gives us an idea of how the rate of unemployment varies in different countries and also the
reasons for the same.
2. It also explains why labors are willing to move from an area with low wage rate and high
unemployment to an area with high wage rate and low unemployment.

Pay grades and rate ranges,

Pay grades are defined as a method of categorizing different types of jobs into groups that have the same
relative pay rate and internal worth. They are used to determine a standard framework of monetary
compensation for both private and public sector organizations. Pay grades typically encompass two
separate levels of evaluation. The vertical range is associated with the responsibilities needed for a
specific position, while the horizontal range corresponds to tenure and performance in the workplace. In
this way, employee progress can be assessed on a regular basis rather than relying on an open form of
negotiation for fair salary ranges.

Preparing salary matrix,

Grade Pay : Government employees receive grade pay which depends on the
category/class of employee. Actually grade pay depends on the seniority and the
position of the employee in the government.

Basic Pay :- This is the core of salary, and many other components may be calculated
based on this amount. It usually depends on one’s grade within the company’s salary is a
fixed part of one’s compensation structure. Many allowances and deductions are
described in terms of percentage of the Basic Salary.

Pay Scale :- It is the range of the salary you are entitled to receive during your tenure in
company. For eg :- If payscale is Rs( 5240-20000). Number 1 , 5240 : It is the basic pay
at which your salary is calculated when you are appointed. Number 2 , 20000,: It is the
maximum basic pay a person can receive in a designated post.
Allowance: It is the amount received by an individual paid by his/her employer in
addition to salary to meet some service requirements such as Dearness Allowance(DA),
House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance,
Conveyance Allowance , Children’s Education Allowance, City compensatory
Allowance etc. Allowance can be fully taxable, partly or non taxable.

DA(Dearness Allowance) :The Dearness Allowance(DA) is a cost of living

adjustment to allowance. It is calculated as a percentage of (Basic pay + grade pay).
Dearness allowance is updated every quarter of calendar year to compensate for
inflation in consumer price index. It may increase or decrease depending on inflation
rate. (Decrease in DA is rare).

House Rent Allowance: House rental allowance (HRA) is allowance paid for house
rent. It depends city to city. Cities are classified as X, Y and Z, on the basis of their
population, as recommended by Sixth Central Pay Commission in 2008. HRA is also
used by the Indian Revenue Service (IRS) to provide income tax exemptions.

Other miscellaneous allowances: Miscellaneous allowance (MA) includes phone

allowance, shift allowance, travel allowance etc.

It means salary will be calculated as (Basic + grade pay)+DA+HRA+MA. Presently, DA

is around 110%, HRA may vary from 10% to 30% and MA can vary widely.

Assuming DA=110% HRA=20% MA=40%

I would take a example for calculation :-

● Basic pay = 5200-3%-20200

● Grade pay =1800
● Gross monthly salary = (5200+1800)+(7000*1.10)+(7000*0.2)+(7000*0.4) =
18900
● Your net salary (that is your in hand salary) will be a little less due to PPF and
other deductions. It is about 15-20% roughly. So net salary will be around Rs.
16000 per month.

Government regulation on compensation,

The Wage Code regulates wage and bonus payments in all employment. The Code combines
the provision of the following four laws: (i) the Payment of Wages Act, 1936, (ii) the Minimum
Wages Act, 1948, (iii) the Payment of Bonus Act, 1965, and (iv) the Equal Remuneration Act,
1976. The Wage Code repeals the above 4 laws.
NON-STANDARD WORKERS' RIGHTS ON WORKING HOURS AND OVERTIME -
PLATFORM WORKERS

Working hours are regulated for employees. Since, independent contractors, i.e., platform workers are
not considered employees, the working hours' restriction are not applicable to them.

Uber requires its drivers to take an uninterrupted 6-hour break after every 12 hours of time spent
driving. Driving time is from the time a driver confirms the trip request and start driving to the pickup, to
when you complete the trip. If a driver is online and stationary, for example waiting for a request, driving
around the city without a passenger, or sitting in an airport queue, this time is not included into the 12
hours of driving time.

In the event of bad weather as well as rush hours, demand for rides increases. In such cases, fares
increase. This is referred to as surge pricing. Fares are updated based on the demand in real-time. Uber
drivers or partners are shown this high demand through a changed colour map indicating demand
originating from those areas. Surge rates are charged as a multiplier of X. The surge multiplier generally
lies between 1 to 2. In the case of surge pricing with a multiplier of 1.5, the normal fare was 100 rupees
rises to 150 rupees. The actual payout to the worker increases in this case.

NIGHT WORK COMPENSATION

In accordance with the Factories Act, the night shift is a shift which extends beyond midnight. There is no
special pay premium for employees working overnight.

The Code on Wages Bill, 2019 was passed by the Lok Sabha on July 30, 2019 and Rajya Sabha on 02
August 2019.

Fixing pay

1.Organization’s ability to pay

Companies with good sales & profits tends to pay higher compensation. In the long run it is important
because in prosperity time, employers pay high to carry profitable operation. But in depression wages &
compensation are cut down due to non-availability of funds. Where ever minimum wages legislation is
applicable organization should pay, irrespective of their capacity to pay.

2.Supply & Demand of labour

Labour market condition always operate at National, Regional& local level. Higher demand & low supply
of skilled person results in rise in compensation. Lower demand & higher supply results in decrease in
compensation.

3. Prevailing Market rates

Also known as Comparable wage or Going wage rate. Going rate system involves fixing wage/salary rate
in tune with what is paid by different units of an industry in a locality. Going rates are generally paid in
the initial day of company and plant operation.

4. Trade Unions Bargaining Power

Generally stronger & more powerful the trade union ,higher the wages and compensation. But the concept
is changing with collective bargaining and strong Industrial relation.

5. Job Requirements - More difficult the job, Higher the Wages & Compensation. Measure of Job
difficulty, used with relative value of job to another Organization (Comparison).Job Grading Relative
Skills Efforts, Responsibility Job Conditions

6. Managerial Attitude Decisive Influence on Compensation Management

Whether Firm should pay Below Average Rate or Above Average Rate, What Job Factors used to reflect
Job Worth Performance or Length of Service. These matters requires approval of Top Executives.

7. Cost of Living Known as Automatic Minimum Equity Pay Criteria

Based on Cost of Living Index DA and CCA are the Integral Part of it, Negative Effect, Increase in Cost
of Living usually possess additional burden on Employer without corresponding improve in Productivity

8. Productivity Measured in terms of Output per hour Negative

Technical Improvement, Better Organisation & Management, Better Methods of Production, Greater
Skills by Labour, Negative Productivity Calculation & Definitional Measurement and Conceptual Issues

9. Pay for Performance Linking Pay to Performance Jobs & Work Flows
Continues Appraisal Incentive Methods

10. Skills level available in market

With growth of Industries, Business & Trades all over the world results in Shortage of Skilled Resources,
Technological Advancement, Automation of Work Process & Computerization

11.Psychological & Sociological factors

These determine significant measures on How hard a person work for Compensation, What Pressure he
exerts to get increased Compensation, Psychological Level of Wages as success of Life, Feeling of
Security, Sociological No distinction on the basis of Colour, Caste, Religion

12. Region & Area in practice

Differentiation on the basis of various Cities, Metros, Tier 1, Tier 2, Landscape and Hardship of Living in
Hilly Region

13. Attraction & Retention

Employee Retention Strategy through Perks & Fringe Benefits, Policy of Wage Leaders in the
Organization

14.Merit & Seniority progression

Practice of Rewarding according to one’s Contribution based on Annual Performance Appraisal which
includes Production Incentive, Profit Sharing Scheme, Bonus & Promotion Logic for Seniority
Progression is that Person gains Experience, his skills get sharpened
Significant compensation issues
Forms of Pay

Employee pay begins with a cash base and bonus pay, but may also contain non-cash forms of
compensation. The valuation of non-cash compensation is often most difficult for employees to
appreciate, but it offers the most opportunity for creativity on the part of the organization.

Pay Philosophy

“All organizations pay according to some underlying philosophy about jobs and the people who
do them”, says KP Kanchana, a professor at CFAI National College in Bhopal, India.
Compensation programs must consider and value the work of those who provide internal support
to the organization as well as those who directly impact financial results. An organization’s
compensation strategy will dictate the rate and timing of pay increases, which jobs are eligible
for bonuses, and the level of competitiveness with similar organizations.

Employee Incentive

Pay-for-performance has become increasingly popular. Companies use compensation to reward

and boost the morale of high-performing employees, but also to motivate underachievers.

Presentation of Compensation

How a manager speaks regarding pay can inadvertently create ill will when the intention was to
deliver good news. It is important to use specifics when speaking with employees rather than
categorize any pay increase as “good”, “significant” or some other qualifier. Employee
perceptions of compensation are based on individual values, needs and expectations.

Pay Competitiveness

Businesses wishing to compete for the best of the available talent pool must offer a competitive
compensation program compared to other companies within their industry and at large.

Automation and Outsourcing

Automating compensation, including outsourcing some compensation functions, enables

businesses to standardize its system throughout the organization, eliminate paperwork and help
departments to communicate more effectively. It minimizes payroll errors and makes it easier to
compensate performance based on quantifiable measures. Organizations may also use technology
to benchmark jobs and survey employees.
Generational Differences

People are living longer, and thus, working longer. In a look at physician compensation, Max
Reibolt of The Coker Group noted a difference in work ethic and expected compensation that fell
along generational lines. Older workers were more likely to work longer hours in exchange for
their pay while younger workers expected high levels of pay even when their productivity was
aided by technology.

Multinational operations

Multinational corporations must balance the needs and expectations of employees from various
countries. Compensation must balance conformity with local laws and customs against global
corporate policies.

Controlling labour Cost

Labor costs often constitute the largest line in a corporation’s budget. In a tight economy,
companies are faced with a flat, if not shrinking, pool of funds. The cost of labor is broader than
the amount paid to employees, taking into account recruitment, training, turnover, infrastructure
and overhead, and the impact of these things on productivity.

Compensation as a retention strategy

Understanding of strategies of staff retention in companies. It stresses on the measuring and rewarding
performance through compensation and other benefits, stating that the recognition for individual
performance would lead to higher motivation at work and help in employee retention. The review of the
retention strategies shows the eleven key learning’s based on which retaining the employees in the
company and maintaining the competition in the current market scenario could be made easy. It states that
compensation and benefits is to be made instrumental to obtain the goals of the company, focusing on the
direct monetary compensation system. It states that designing the compensation is the most important part
of the whole process and is directly related to the business strategy of the company. It is inclusive of:

● Focusing on the strategic objectives;

● Ensuring commitment through participation and communication;
● Analyzing job functions;
● Writing job descriptions;
● Determining internal pay equity;
● Ascertaining external pay equity;
● Designing the salary structure.

The key to the successful implementation of the compensation system including:

● Involvement of the management and leadership in the whole process;

● Regular communication with employees;
● Designing of a fair system and training employees to use it;
● Generation of trust among the employees about fairness of the system.