Compensation and

Performance Management
Ch # 1
Strategic Compensation
What are core Management functions?
What are core HR functions?
 Total Compensation

Extrinsic Compensation Intrinsic Compensation

Psychological mindsets that results from

Consists of both monetary and non-monetary Performing their jobs.
rewards
What/how do you feel after you finish
Your work or while you are at work?
 Extrinsic Compensation

Core Compensation: Adjustment to the core Discretionary employee

Hourly wage compensation: Legally required employee benefits:
Annual salary  Cost of living benefits: • Health and insurance
 Seniority • Social security • Disability insurance
 Merit • Workers’ compensation • Life insurance
 Incentive law • Retirement plans
 Person-focused • Family and medical leave • Paid time off
act. • Accommodation and
enhancement
Also called Non-
monitory
rewards)
Elements of core compensation
• Base pay
• Hourly pay
• Annual pay

• How Base pay is adjusted over time

• Cost of living adjustments (COLAs)
• Seniority pay
• Merit pay
• Incentive pay
• Person focused pay – pay for knowledge, skill-based pay
• Non-monitory rewards (Employee benefits)
• Protection plans (for example medical insurance)
• Paid time-off (Vacations)
• Services (e.g day care assistance)
Core compensation
1. Base pay:
• Employees receive money for performing jobs on recurring basis – meaning
that they continue to receive money as long as they work.
• Companies give base pay in two forms 1) hourly pay or wage 2) salary

• Companies typically set base pay amounts for job on following basis
• Level of skill
• Level of effort required These factors are also
• Responsibility called “compensable
factors’
• Severity of working conditions
Core compensation (Continued…)

2. Cost of living adjustments (COLAs)

• Periodic base pay increases that are founded on changes in price as recorded
by Consumer Price Index (CPI).
• COLAs enable workers to maintain “purchase power”
• Worker unions normally discuss/negotiate COLAs with management
• CPI shall be used to adjust base pay for newly hired employees.
Core compensation (Continued…)

3. Seniority pay

• Rewarding employees with periodic additions to base-pay according

to seniority.
• These plans assume that employees become more valuable to
company over time. Do you agree?
• Foundations of seniority pay are rooted in to human capital theory.
According to human capital theory skill and knowledge are acquired
through experience. Thus managers believe that employees shall be
rewarded based upon experience.
Core compensation (Continued…)

4. Merit pay: compensating employees overtime, at least in part, by

difference in job performance.
Employees earn permanent increase to base pay according to their
performance.

5. Incentive pay: Rewards employees for partially or completely

attaining a predetermined work objective. Its other than base pay.

6. Pay for Knowledge/Skill

Historical perspective on compensation
• Scientifc Mangement
• Work of F.W Tylor
• Time and motion studies

• World War – II
• Welfare practices
• Creating employee competitive advantage
What is HR Strategy?
• Strategic Decisions v/s Tactical Decisions

Guide activities of Supports the fulfillment of

companies in the market strategic decisions
 Competitive strategy
Strategic Decisions
HR Strategy

Compensation Strategy

Recruitment
Selection
General Tactical HR
Performance Management
Decisions
Compensation
Training & Development

Seniority pay
Merit pay
Specific tactical HR Incentive pay
decisions Pay for knowledge
(Compensation Skill based pay
example) Broad banding
Two-tier pay structure
Discretionary benefits
Competitive strategy choices
• Low cost strategy
• Differentiation strategy
How compensation fits into HR department
• Recruitment
• Relocation
• Retention
• Performance appraisal
• Training
• Career development
• Labor management relations
• Employee termination
• Legislation
Compensation Department Goals
• Internal consistency (use of job analysis, job evaluation)
• Market competitiveness (strategic analysis, comp. surveys)
• Recognized individual contributions
Compensation system stakeholders
• Employees
• Line managers
• Executives
• Unions
• Government