Compensation

Management

VARIOUS DEFINITIONS OF COMPENSATION

The sum total of all forms of payments or rewards provided
to employees for performing tasks to achieve organizational
objectives.
Compensation is the process of providing adequate,
equitable and fair remuneration to the employees. It is what
employees receive in exchange for their contribution to the
organization. It is a comprehensive term which includes pay,
incentives and benefits offered to the employees.
Compensation is a systematic approach to providing
monetary value to employees in exchange for work
performed. compensation may achieve several purposes
assisting in recruitment, job performed and job satisfaction.

PURPOSE OF COMPENSATION

EnsureEquity

Contributionbased
Remuneration

Attracttalent

Motivate&
RetainStaff

Effective
Compensation

Administratively
Efficient

RewardValued
Behavior

Legal
Compliance

THE PAY MODEL

CEO
CEO

Business
Business Goals
Goals

Business
Business
Strategy
Strategy

Compensation
Compensation
Philosophy/
Philosophy/activities
activities
serve
serveBusiness
Business
Objectives
Objectives

Business Strategy :
This defines the direction in which organization is going in relation to
its environment in order to achieve its objectives.
Compensation Philosophy :
Consists of a set of beliefs which underpin the reward/compensation
strategy of the organization and govern the reward policies that
determine how reward processes operate

THE PAY MODEL

HR Head
Head
HR

CEO
CEO

Business
Business Goals
Goals

Business
Business
Strategy
Strategy

Compensation
Compensation
Strategy
Strategy
Org.Structure
Org.Structure
Compensation
Compensation
Plan
Plan

Compensation
Compensation
activities
activitiesserve
serve
Business
BusinessObjectives
Objectives

Compensation
Compensationstrategy
strategy
isisperiodically
periodically
reevaluated
Non-Financial
reevaluatedand
andthe
the
Non-Financial
Compensation
plan
Compensation plan
Rewards
Rewards
periodically
periodicallydeveloped
developed

Compensation Strategy
defines the intentions of the organization on reward policies, processes
and practices required to ensure that it has the skilled, competent and
well-motivated workforce it needs to achieve its business goals

THE PAY MODEL

CEO
CEO

Business
Business Goals
Goals

HR Head
Head
HR

Business
Business
Strategy
Strategy

Compensation
Compensation
Strategy
Strategy
Org.Structure
Org.Structure
Compensation
Compensation
Plan
Plan

Compensation
Compensation
activities
activitiesserve
serve
Business
Objectives
Business Objectives

Compensation
Compensationstrategy
strategy
isisperiodically
periodically
reevaluated
reevaluatedand
andthe
the
Non-Financial
Non-Financial
Compensation
plan
Compensation plan
Rewards
Rewards
periodically
periodicallydeveloped
developed

strategic perspective
Compensation takes the position that how employees are
compensated can be a source of sustainable competitive advantage

THE PAY MODEL

HR Head
Head
HR

CEO
CEO

Business
Business Goals
Goals

Compensation
Compensation
activities
activitiesserve
serve
Business
Objectives
Business Objectives

Business
Business
Strategy
Strategy

Compensation
Compensation
Strategy
Strategy
Non-Financial
Non-Financial
Rewards
Rewards

Org.Structure
Org.Structure
Compensation
Compensation
Plan
Plan
Performance
Performance
Management
Management

Job
Job Evaluation
Evaluation

Compensation
Compensationstrategy
strategy
isisperiodically
periodically
reevaluated
reevaluatedand
andthe
the
Compensation
Compensationplan
plan
periodically
periodicallydeveloped
developed

Market
Market Surveys
Surveys

Employee
Employee

Unit
Unit Inputs
Inputs

Contribution
Contribution
/outputs
/outputs

Pay
Pay levels
levels //
structures
structures
Total
Total
remuneration
remuneration

Performance
Performance
linked
linked Pay
Pay

Internal
Internal Equity
Equity

Individual
Individual Pay
Pay

Compensation
Compensation
Manager,
Manager,along
alongwith
with
team
is
responsible
team is responsiblefor
for
carrying
carryingout
out
compensation
compensationrelated
related
activities
activities

External
External Equity
Equity
7

STRATEGIC COMPENSATION PLANNING

Strategic Compensation Planning
Links the compensation of employees
to the mission, objectives, philosophies,
and culture of the organization.
Serves to identify the net monetary
payments made to employees with
specific functions of the HR program in
establishing a pay-for performance
standard.
Seeks to motivate employees through
compensation.

COMPENSATION POLICY ISSUES

Pay for performance
Pay for seniority
Salary increases and promotions
Overtime and shift pay
Probationary pay
Paid and unpaid leaves
Paid holidays
Salary compression (A salary inequity problem, generally caused
by
inflation, resulting in longer-term employees in a position earning
less than
workers entering the firm today)
Geographic costs of living differences

COMPENSATION ADMINISTRATION PROCESS

CLASSIFICATION OF REWARDS

ANATOMY OF PAY STRUCTURE

Anatomy of Pay Structure

Monthly salary components
Basic Salary
Dearness Allowance
House Rent Allowance
Conveyance Allowance
Others (Shift Allowance, Uniform Allowance, Education
Allowance)

COMPONETS OF FINANCIAL COMPENSATION

BASE PAY
The direct financial compensation an individual receives based on
the time
Worked.
Two bases of calculation
Hourly/wage: payment for the number of hours worked.
Salaried : receive consistent payments at the end of specific period
regardless of number of hours worked Nature.
generally market driven ( Demand>Supply=increase in pay)
Job Evaluation
The formal systematic means used to identify the relative worth of
jobs within an
organization.

VARIABLE PAY/PAY FOR PERFORMANCE : INCENTIVES

Variable Pay
Any plan that ties pay to productivity or profitability. (i.e)The
standard by which managers tie compensation to employee effort
and performance.
It is linked to individual, group, or organizational performance and
not to time worked
Incentive Pay Programs
Establish a performance threshold to qualify for incentive
payments.
Emphasize a shared focus on organizational objectives.
Create shared commitment in that every individual contributes to
organizational performance and success.

TYPES OF INCENTIVES

Organizati
onal
Incentives

Individual
Incentives

Group/tea
m
Incentives

INDIVIDUAL INCENTIVE PLAN

Piecework Plans
The worker is paid a sum (called a piece rate) for each unit he or
she produces.
Straight piecework:
A fixed sum is paid for each unit the worker produces under an
established piece
rate standard. An incentive may be paid for exceeding the piece rate
standard.
Standard hour plan:
An incentive plan that sets pay rates based on the completion of a
job in a predetermined standard time.
If employees finish the work in less than the expected time, their pay
is still based on the standard time for the job multiplied by their
hourly rate.

BONUS

Incentive payment that is

supplemental to the base wage
for cost reduction, quality
improvement,
or
other
performance criteria.

Spot bonus

Unplanned bonus given for

employee effort unrelated to
an established
performance measure.

GROUP INCENTIVE PLAN

Team Incentive Plans
Compensation plans where all team members receive an incentive
bonus payment when production or service standards are met or
exceeded.
Establishing Team Incentive Payments

Set performance measures upon which incentive payments are

based

Determine the size of the incentive bonus.

Create a payout formula and fully explain to employees how

payouts will be distributed.

Gainsharing Plans
Programs under which both employees and the organization share
the financial gains according to a predetermined formula that
reflects improved productivity and profitability.

ORGANIZATIONAL INCENTIVE PLAN

Profit Sharing
Any procedure by which an employer pays, or makes available to all
regular employees, in addition to their base pay, current or deferred
sums based upon the profits of the enterprise.
Paid once in a year or deferred sums until retirement
Challenges:
Agreement over division of profits between company and
employees.
Possibility of no payout due to financial condition of company.

ORGANIZATIONAL INCENTIVE PLAN(CONTD)

Stock Options
Granting employees the right to purchase a specific number of
shares of the companys stock at a guaranteed price (the option
price) during a designated time period.
The value of an option is subject to stock market conditions at the
time that option is exercised.
Apple , yahoo, coca cola, nike
Employee Stock Ownership Plans (ESOPs)
Stock plans in which an organization contributes shares of its stock
to an established trust for the purpose of stock purchases by its
employees.( UK,USA and several other industrialized countries).
This provide tax concessions to corporate orgns. And to trusts
established for employee stock options.

WHY INCENTIVE PLAN FAIL

Performance pay cant replace good
management.
You get what you pay for.
Pay is not a motivator.
Rewards punish.
Rewards rupture relationships.
Rewards can have unintended
consequences.
Rewards may undermine responsiveness.
Rewards undermine intrinsic motivation.

IMPLEMENTING EFFECTIVE INCENTIVE PLAN

Ask: Is effort clearly instrumental in obtaining the reward?
Link the incentive with your strategy.
Make sure effort and rewards are directly related.
Make the plan easy for employees to understand.
Set effective standards.
View the standard as a contract with your employees.
Get employees support for the plan.
Use good measurement systems.
Emphasize long-term as well as short-term success.
Adopt a comprehensive, commitment-oriented approach.

INDIRECT FINANACIAL COMPENSATION - BENEFITS

Mandatory Benefits
legally binding
Voluntary Benefits
provided at the discretion of the employer

VOLUNTARY BENEFITS EXAMPLES

Educational benefits
Employees spouse education assistance( Motorola on international
assignments ).
ONGC,NIIT ,ADITYA BIRLA GROUP, HLL sabbaticals (paid/ non-paid)
are provided to employees who wish to study.
Meritorious Children of employees are provided opportunity of
higher
education with loan benefits in BPCL, CPCL etc
Family
Paternity leave in HLL, HCL Tech, Yes Bank, Genpact etc.,
Wedding anniversary allowance in NIIT, SPIC etc.,
Joyful Working Team and Happy Moments Board- LG
Electronics

NON FINANACIAL COMPENSATION : COMPONENTS

Are most effective as motivators when the

award is combined with a meaningful
employee recognition program.
Intrinsic motivators
financial package
Organization
employees

Psychological

are

reward
rewards

worthwhile

high
that

as

performing
employees

TYPES
Awards
Often used to recognize productivity gains, special contributions or
achievements, and service to the organization.
Employees feel appreciated when employers tie awards to performance
and deliver awards in a timely, sincere and specific way.
Recognition awards
Recognition has a positive impact on performance, either alone or in
conjunction
with financial rewards.
Combining financial rewards with nonfinancial ones produced performance
improvement in service firms almost twice the effect of using each reward
alone.
Day-to-day recognition from supervisors, peers, and team members is
important.
Best performer of the month awards in Blue Dart, ALACTEL,XANSA etc.,
Service awards

EQUITY AND MOTIVATION OF EMPLOYEES

Pay Equity (also Distributive Fairness)

An employees perception that compensation received is equal
to the value of the work performed.
A motivation theory that explains how people respond to
situations in which they feel they have received less (or more)
than they deserve.
Individuals form a ratio of their inputs to outcomes in their job
and then compare the value of that ratio with the value of the
ratio for other individuals in similar jobs.

RELATIONSHIP BETWEEN PAY EQUITY AND

MOTIVATION

INSTRUMENTALITY AND REWARDS

Vrooms Expectancy Theory
A persons motivation to exert some level of effort is a function of
three things:
Expectancy: that effort will lead to performance.
Instrumentality: the connection between performance and the
appropriate reward.
Valence: the value the person places on the reward.
Motivation = E x I x V
If any factor (E, I, or V) is zero, then there is no motivation to work
toward the reward.
Employee confidence building and training, accurate appraisals, and
knowledge of workers desired rewards can increase employee
motivation.

DETERMINANTS OF COMPENSATION

INTERNAL DETERMINANTS

Employers Compensation Strategy

Setting organization compensation policy
to lead, lag, or match competitors pay.
Worth of a Job
Establishing the internal wage
relationship among jobs and skill
levels.
Employees Relative Worth

EXTERNAL DETERMINANTS
Labor Market Conditions
Availability and quality of potential employees is affected by
economic conditions, government regulations and policies, and the
presence of unions.
Area Wage Rates
A firms formal wage structure of rates is influenced by those being
paid by other area employers for comparable jobs.
Cost of Living
Local housing and environmental conditions can cause wide
variations in the cost of living for employees.
Inflation can require that compensation rates be adjusted upward
periodically to help employees maintain their purchasing power.
Collective Bargaining
The term extends to all negotiations that take place between an
employer, group of employers or one or more employers organizations
on the one hand, and
one or more workers organizations on the other to
(a) Determine the working conditions and terms of employment and /

NEW DEVELOPMENTS
Competency based pay and reward
programmes (also skill-based pay or
knowledge-based pay)
Where the company pays for the
employees range, depth, and types of
skills and knowledge, rather than for
the job title he or she holds.
Competencies
Demonstrable characteristics of a
person, including knowledge, skills, and
behaviors, that enable performance.

WHY COMPETENCY BASED PAY ?

Pay plans that aim for highperformance work system.
Paying for skills, knowledge, and
competencies is more strategic.
Measurable skills, knowledge, and
competencies are the heart of any
companys performance
management process.

TRENDS OF EXECUTIVE COMPENSATION

The Executive Pay Package

Base salary
Short-term incentives or bonuses
Long-term incentives or stock plans
Perquisites (perks)

EXECUTIVE COMPENSATION-ETHICS &

ACCOUNTABILITY
Incentive payments are excessive compared with return
to stockholders.
Time periods for judging and rewarding performance are
too short.
Subjective in nature
Emphasis is placed upon equaling or exceeding executive
salary survey averages.
Benefits do not relate closely to individual performance.

SWEETNESS OF EXECUTIVE PERKS

Company car
Company plane
Executive eating facilities
Company-paid parking
Personal liability insurance
First-class air travel
Home computers
Chauffeur service
Childrens education
Spouse travel
Mobile phones
Large insurance policies
Country club membership
Luncheon club membership
Personal home repairs
Loans
Legal counseling
Vacation cabins

LEGAL FRAMEWORK FOR PAYMENT OF SALARYINDIA

Payment of wages Act, 1936

The minimum wages Act,
1948
The payment of Bonus Act,
1965

DIRECT COMPENSATION

Fixed
Pay
Variable Pay : depending on no of optional days
attended
Variable Pay : depending on last years
performance

Mandatory
( Indirect )

CLASSIFICATION OF REWARDS
TOTAL
Compensation
Financial

Dire
ct
Monthly Salary
Annual
Incentives
Bonus

Indirect
Provident Fund
Gratuity
Travel allowance
Mobile expense
Sales Promotional
Expense

Non - Financial

Job
Satisfaction

Praise /
Rewards

CLASSIFICATION OF REWARDS
TOTAL
Compensation
Financial

Dire
ct

Indirect

Non - Financial

Job
Satisfaction

Praise /
Rewards

Future Leadership Program (FLP): Executives earmarked and

declared future leader based on their competency
Development based Career Plan (DLCP): Competent executives
committing 5 years service to company in the form of bond will be given
minimum 2 elevation during the bond period.
Executive of the year Award
Company Jeep at individual level
Foreign Tour with family for the team achieving their yearly
target
Major medical claim for self and dependant