Compensation Management

Compensation Management

 designing & implementing total compensation package

with a systemic approach to providing value to employees
in exchange for work performance
 objectives:
 To recruit & retain qualified employees
 To increase or maintain morale
 To determine basic wage and salary
 to reward for job performance
 Compensation
 Compensation is all forms of financial returns & tangible
services & benefits employees receive as part of an employment
relationship
 a return for services rendered
 an exchange for effort & ideas
 Compensation can include both non-financial & psychological
returns
 Objectives of effective compensation system:
 Efficiency: Cost effectiveness for the organization
 Equity: Ensures fairness and satisfaction amongst employees
 Compliance: Legal compliance with all appropriate laws and
regulations
 Performance enhancement for the organization
 Four Compensable Factors

 An employee’s skill level

 An employee’s effort
 An employee’s level of responsibility
 The severity of the working conditions
 Nature of Compensation

 Types of Rewards
 Intrinsic
 Intangible, psychological and social effects of compensation
 Extrinsic
 Tangible, monetary and nonmonetary effects of compensation
 Elements of Total Compensation

 Compensation includes:
1.Monetary: direct and indirect
2.Non-monetary
 Direct compensation
 Base pay: salary and wage
 Incentive pay (variable pay): bonus, commission, piece rate, profit
sharing, stock options, shift differentials
 Deferred pay: saving plan, stock purchases, pension/annuity
 Indirect compensation
 Protection programs  Paid leave (on-job):
 Medical insurance  Training work
 life insurance  Breaks
 Rest periods
 disability returns
 social security
 Services & privileges:
 Recreational facilities
 unemployment insurance  Car
 Payment for time not worked  Financial planning
(off-job):  Low-cost or free meal
 Vacations  Miscellaneous benefits:
 Holidays  Legal Advice
 Sick leave  Elder care
 Day care
 Jury duty
 Wellness
 Financial Counseling
 Non-monetary compensation

 It is intrinsic Rewards System (Self Administered Psychological

Rewards)
 It includes:
 Teamwork
 Challenge
 Empowerment
 Recognition
 Security
 Non-monetary compensation:
 Enhance dignity & satisfaction from work performed
 promote social relationship with coworkers
 allocate sufficient resources to perform work assignment
 offer supportive leadership & management
 enhance physiological health, intellectual growth
 Benefits

 Role of benefits:
 to attract new employees
 to retain the customers
 Types of benefits:
1. Mandatory protection programs/Legally-Required :
 social security
 unemployment compensation
 workers compensation – Disability
 worker safety and health
2. Discretionary (optional) Benefits
 Three Broad Categories
 protection programs
 pay -for-time-not-worked
 services
 Benefit: wellness Programs

 Many employers are starting to see the value from

incorporating wellness initiatives into their work places
 disease management
 health risk assessments
 fitness programs
 on-site clinics and pharmacies
 Improve productivity/reduce absenteeism
 Difficult to measure the Return on Investment (ROI) of
wellness programs
 Welfare Benefits

 Provide safety and monetary security beyond health

 Typical benefits
 Basic life ensurance
 Supplemental (optional) life
 Accidental Death and Dismemberment (AD&D)
 Dependent life insurance
 Short-term disability (STD)
 Long-term disability (LTD)
 Fringe Benefits

 Compensation in some form other than currently

spendable cash
 Because benefits not given in current period, some
uncertainty about future receipt, i.e., investment
 Three kinds of fringe benefits:
1. Payment in-kind: current payment in some form other than cash; e.g.,
insurance
 Payment for time not worked; e.g., vacation, sick leave, holiday
2. Deferred Compensation: promise to pay e.g., pensions
3. Miscellaneous bonus
 Factors determining Compensation and pay rates

 Demand for and supply of labor

 Prevailing wage rates
 Government - Laws governing & affecting pay structure:
 Minimum wages rate
 Income tax act
 Equal remuneration act
 Payment of wage act
 Acts on social securities
 Productivity of labor
 Labor union
 Cost of leaving
 Ability to pay
 Job Evaluation (Pricing Jobs)

 The process of determining relative worth of the jobs in an

organization.
 Enhances establishment of a fair and equitable wage and salary system
 Job analysis should be conducted first – job description &
job specification in order to evaluate job
 Job evaluation methods

 Non-quantitative methods
 Job Ranking (create hierarchy of jobs)
 Job Classification (create groups of similar jobs)
 Quantitative Methods
 Point method
 Factor comparison
 Comparison of job evaluation methods
Unit of analysis
Whole job Selected factors of job
Bases of comparison Job ranking Factor comparison
Job vs. job  Identify jobs based on “worth” to the  define compensable factors and
organization relative to other jobs evaluate jobs on these factors relative
 simple, inexpensive, easy to to other jobs
understand  Ease of employee comprehension
 Random, subjective, not useful in  Cumbersome & requires constant
large organizations updating: universal importance of
factors in all jobs questionable

Job classification Point method

Job vs. standard  Prepare jobs grades/classifications &  Define compensable factors & levels
assign jobs to appropriate class of accomplishment & determine
 Apply to large number of varied jobs levels for each job
 Easy to understand: flexible  Simple to understand and administer:
 Detailed & time consuming to easy for employees to aspire to high
develop: lack of flexibility levels
 extremely time consuming to
develop: lack of universal
applicability of compensable factors
 Compensation Theories

 Expectancy Theory
 Equity Theory
 Agency Theory
 Expectancy Theory

 People are motivated by intrinsic and extrinsic outcomes

they desire.
 People will only be motivated if outcome is possible.
 People will only be motivated if outcome is
contingent/reliable.
 Equity Theory

 balance between the inputs an individual brings to a job &

the outcomes he or she receives from it
 Employees inputs: experience, education, special skills,
efforts and time worked.
 Outcomes: pay, benefits, achievement, recognitions, and
any other rewards
 Equity theory suggest that individuals determine whether
they are being fairly treated by comparing their own
inputs/outcomes ratio to the inputs/outcome ratio of others
 Pay equity in compensation system

 Equity: similarity in pay for all jobs requiring comparable

level of knowledge, skills , and abilities, even if actual
duties and market rates differ significantly
 four forms of equity: external, internal, individual, and
procedural
1. External equity:
 Fairness of organizational compensation levels relative to similar
jobs in other organizations.
2. Internal equity: how fair the job’s pay rate is when compared to other
jobs within the same organization
 Equity Theory Cont’d

3. Individual equity: fairness of an individual’s pay as compared with

what coworkers are earning for similar jobs within an organization
 Fairness about pay differentials among individuals who hold the same
job can be established by using:
 Seniority-based pay systems - reward longevity.
 Merit-based pay systems - reward employee performance.
 Incentive plans - allow employees to receive part of their
compensation based on their job performance.
 Skills-based pay systems.
 Team-based pay plans - encourage cooperation and flexibility in
employees.
4. Procedural equity: the perceived fairness of the processes and
procedures used to make decisions regarding the allocation of pay
 Agency Theory

 In the organizations, employer and employees are two main

stakeholders
 Employer act as principals and employees assume the role of
agent
 The remuneration of employee is agency cost
 Principal tries to reduce agency cost and agent expect to have
more agency cost
 The principal (Employer) should try to choose remunerating
schemes that align its own interest with expectation of agents
(employees) using either:
 Behavior oriented (merit based pay) or
 Outcome oriented (profit sharing, commission)