5th Lecture

Employee Compensation, Incentive, and Benefits Strategies

What is the difference between compensation and benefits?

Put simply, compensation covers people’s direct pay, their salary. Benefits cover
employees’ indirect pay, things like health insurance and stock options but also social benefits
such as parental leave.

Direct Compensation. This consists of:

 Salary. This is the base and variable pay for work.

 Rewards. Other monetary benefits from working at the company, including health care,
retirement pay, and allowances. 

Indirect Compensation. This consists of:

 Work-life balance. A good work-life balance is crucial for a happy career. 

 Recognition. Recognition by colleagues and supervisors, as well as external recognition
for your job.
 Development & career. Training and development, mentor programs, talent (mobility)
programs.

Procedural and Distributive Fairness.

Compensation fairness consists out of two elements: procedural fairness and distributive fairness.

1. Distributive Fairness refers to the perceived fairness of the amount of compensation the

employee receives.
2. Procedural (systemized) Fairness refers to the perceived fairness of the means used to
determine those amounts.

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 Strategy is the determination of organizations, designed to achieve long-term or overall

goals as well as the adoption of a course of action.
 Approaches that organizations undertake in order to create and sustain their competitive
advantages, can generally be categorized as business-level strategies, such as overall cost
leadership, differentiation, and focus.
 Organizations’ sustainability and competitiveness are heavily relying on the compatibility
and execution of their business strategy implementations.
 An organization's compensation strategy, the structure and design of compensation
package, have different pattern dimensions that vary in range. The first type of
compensation pattern emphasizes internal equity and hierarchical position as basis for
compensation distribution. The second type of compensation pattern is more flexible and
adaptive to varying business circumstances, in which personal skills and attributes are
the basis for compensation determination. A decentralized and less hierarchical
administrative structure allows the existence of greater employee input.
 Contemporary approaches to compensation emphasize the importance of aligning
employee behaviors to the strategic direction of the organization.
 Within an organization, employees’ satisfaction regarding their compensation packages
is one of the management’s main determinants when designing a suitable
compensation strategy. In a perfectly competitive labor market, workers entering the
workforce expect to receive compensation equal to their opportunity cost and companies
aim to provide a compensation package sufficient to retain workers of the desired quality.
Organization’s compensation strategy is the collection of reward choices available to
the management that may affect the organization’s performance and the effectiveness of
human resources. Therefore, successfully implementing various compensation choices
depends heavily on the contingencies facing the organization at a certain moment in time.
 The effectiveness of strategy implementation and organization performance, at both
corporate and business level, depend heavily on the existence of a match between
compensation strategy and competitive business strategy.
 Organization’s compensation strategy is influenced by both the corporate and
business strategy, and the design of organization’s benefits package may additionally
reflect the business strategy.

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 The desired outcomes of a high performance work culture, philosophy, vision, mission
and goals of the organization with desirable behaviors for productivity should be aligned
is called “organization’s compensation strategy”.
 Grounded results & MBOs
 Once aligned with this agenda, compensation becomes a powerful means through which
firms may attract and retain desired talent, and elicit desired behavior outcomes in the
form of employee motivation, commitment and loyalty, all of which are conducive to
positive organizational performance.
 Large organizations are far more likely than smaller ones to have adopted a formal
compensation strategy.
 Compensation represented a 'cost of doing business' or, more particularly, the cost of
hiring the labor necessary to do business.
How do you develop a compensation strategy?
 To develop a successful compensation strategy you need to take the following steps:
 Define your compensation philosophy.
 Link compensation to your overall business strategy.
 Change the culture and reinforce it with compensation.
 Reward the behaviors that drive the results.
 Think total compensation.
What is strategic compensation system?
Strategic Compensation is a human resource management approach employers use to attract,
retain, and grow talented employees while aligning their behaviors and job performance with the
organization's goals and objectives.
What are the theories of compensation?
Compensation management is a system that is put into place with the goal of maximizing
employee performance and bringing together the goals of all people involved with running
organizations. The three main compensation management theories are: behavior reinforcement
theory, equity theory, and agency theory.

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 Agency theory is a principle that is used to explain and resolve issues in the relationship
between business principals and their agents. Most commonly, that relationship is the one
between shareholders, as principals, and company executives, as agents.
 Reinforcement theory is a psychological principle maintaining that behaviors are shaped
by their consequences and that, accordingly, individual behaviors can be changed through
rewards and punishments.
 Equity theory focuses on determining whether the distribution of resources is fair to
both relational partners. Equity is measured by comparing the ratio of contributions (or
costs) and benefits (or rewards) for each person. ... The structure of equity in the
workplace is based on the ratio of inputs to outcomes. This theory aims to strike a
balance between an employee's input and output in a workplace. If the employee is able
to find his or her right balance it would lead to a more productive relationship with the
management.
Such theories might also have a strong impact on the entire field of compensation by ensuring
that job evaluation procedures and techniques are designed to reinforce the strategies adopted
by these organizations.

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