Compensation and Benefits Strategy

Design, Strategic options , Challenges and opportunities.

 Learning Objectives

• To understand how compensation strategy is a

source of competitive advantage
• To learn different compensation approaches and
strategies
• To discuss how pay dissatisfactions may be
reduced .
• To learn new compensation approaches for
motivation and retention of employees.

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 The Importance of Compensation

• Attract employees
• Retain employees
• Motivate employees
• Compliance with pay law
• Cost effectiveness

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 Think of Something that was unfair.

• Explore what it is and why it was unfair.

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 Critical Thinking Questions:

1. Why do most private firms choose to have a pay

secrecy policy? Do they work? Does pay
secrecy fit with a high commitment HR system
where employee participation is a strong element
of corporate culture?

2. Should a manager receive higher pay than the

subordinates that she/he supervises?

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 Critical Thinking Questions:

3. What are the strategic advantages of paying

below the market for pay? Can a firm sustain
this pay choice?

4. Why would a firm decide to pay above the market?

Is this choice open to all firms in an industry or
sector?

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 Why Pay Secrecy?

• The compensation employees get is privileged

information to both the parties
• Pay secrecy diminishes an opportunity for
comparison among employees and organization's
exposure to perceived inequality
• Though perfectly justifiable pay differences are
complicated and difficult to explain reasons,
especially if people doing similar jobs are lined at
different pay levels under different market
conditions

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 Why Pay Secrecy?

• Pay secrecy can prevent embarrassing situations by

shielding under-paid and under-performing
employees.
• Managers enjoy more freedom in administering
pay in a pay secrecy organization, as the difference
in the pay need not be explained to others.

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 Why NOT Pay Secrecy?

• Open communication and build trust

• An open pay system drives the point home to employees
that the management believes in fair and open policies.
• Open pay policies not only take power and control from the
managers but politics are also less likely to surface
resulting in merit getting rewarded.
• When pay information is kept as secret, employees make
inaccurate perceptions. Further more, those perceptions
work against increasing motivation.
– Hence, to maximise motivation employees need to know how
performance is defined and measured and finally rewarded.

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Job Evaluation: Point System Method

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Job Evaluation Methods

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 Key Strategic Issues in Compensation

• Determining compensation relative to the market.

• Striking a balance between fixed and variable
compensation.
• Deciding whether or not to utilize team-based
versus individual pay.
• Creating the appropriate mix of financial and non-
financial compensation.
• Developing a cost-effective compensation program
that results in high performance.

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 Compensating Teams

• Reasons for tailoring compensation to individuals:

– Motivation comes from within the individual as opposed to the
group.
– The development of skills and behaviors is an individual
undertaking.
– Fairness in dealing with teams does not mean equal pay for
all.
– Team compensation is not a payoff but a means of nurturing
behavior that benefits the team.

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 New Thinking for the New Millennium

• Strategic approaches to may compensation (pay)

systems more responsive:
– Pay the person for individual worth (knowledge, skills and
competencies) rather than for the value of a job they perform.
– Reward excellence through a pay for performance
compensation that establishes a clear relationship between a
significant amount of pay and attainment of organizational
objectives.
– Individualize the pay system to give employees choices in
how they are rewarded and what reward they receive.

Copyright © 2002 South-Western. All rights reserved. 11–15

Theory Behind Compensation
 Theory Behind Compensation
• Equity Theory
• Equity theory is based in the idea that individuals are motivated by fairness,
and if they identify inequities in the input or output ratios of themselves and
their referent group, they will seek to adjust their input to reach their
perceived equity
– Perceived inequity affects employee effort

• 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.
 Equity Theory

• Internal equity
– Comparison of my input / reward ratio with that of similar
others.
– Employees may seek to address imbalance by changing their
inputs.
– Fairness of pay differentials between different jobs in the
organization can be established by job ranking, job
classification, point systems and factor comparisons.
• External equity
– Fairness of organizational compensation levels relative to
similar jobs in other organizations.
 “Monkeys Demand Equal Pay”
A recent study shows brown capuchin monkeys refused to play along
when they saw another monkey get a better payoff for performing the
same work.

The monkeys were trained to trade a granite token for a piece of cumber.
When the reward was the same for both monkeys, they took the
cucumber 95 percent of the time.

But it was a different story when one monkey was given something better
-- namely, a grape. Then, the other monkey often pitched a fit -- either
throwing the token, refusing to eat the cucumber or giving it to the
other monkey.

Associated Press 2003

 Equity Theory

Fairness about pay differentials among individuals

who hold the same job can be established by using:
• Seniority-based pay systems that reward longevity.
• Merit-based pay systems that reward employee performance.
• Incentive plans that allow employees to receive part of their
compensation based on their job performance.
• Skills-based pay systems.
• Team-based pay plans that encourage cooperation and
flexibility in employees.
 Types of Base Pay Systems

• Job-based
– Pay the job (not the person)
– Market-based (external equity focus)
– Point factor-based (internal equity focus)
• Skills / knowledge-based
– Pay the person (not the job)
– 62% of F1000 firms used some type of skill based pay in
1999
 Job Based Pay
Attraction Depends on market pricing

Motivation No performance impact

Skill Development Learn job-related and upward mobility

skills

Culture Bureaucratic, hierarchical

Structure Hierarchical, individual jobs and
differentiation

Cost Good control of individual pay

 Individual Skill/Knowledge Based Pay

Attraction Attracts learning-oriented individuals,

high skills individuals
Motivation Little performance impact

Skill Development Motivates needed skill development

Culture Learning, self-managing

Structure Flat or team-based

Cost Higher individual pay

 Individual-based Compensation

• Individual-based compensation works when:

– The firm has a relatively educated workforce.
– Employees often do different jobs
– Technology changes frequently.
– Employee participation and teamwork are encouraged.
– Opportunities for upward mobility are limited.
– Opportunities to learn new skills are present.
– The costs of employee turnover and absenteeism in terms of lost
production are high.
 Variable Pay Incentives

• Linking performance to pay

– Individual – Bonuses, piece-rates, stock options
– Team – Bonuses and awards
– Plant / Unit / Business – Gainsharing, profit sharing
– Corporation – ESOP’s

• “Line of sight” is the perceived link between

individual behavior and the reward.
 Individual Merit

Attraction Good for high performers

Motivation Good line of sight

Skill Development Learn skills that lead to rewarded

performance
Culture Performance oriented, job focused

Structure Individual and independent jobs

Cost Depends on the size of the awards
 Team Incentives

Attraction Good if team performs well

Motivation Moderate line of sight

Skill Development Encourages team skills

Culture Team focused
Structure Team-based and integrated

Cost High if significant awards given

 Pay for Performance Requires

1. Definition of performance
– How are we going to measure and compare people?

2. Distribution of performance
– Can we distinguish high and low performers?

3. Decide the increase for each level of performance.

– How large a difference between high and low performers?
 Key Strategic Issues in Compensation

• Determining compensation relative to the market.

• Striking a balance between fixed and variable
compensation.
• Deciding whether or not to utilize team-based
versus individual pay.
• Creating the appropriate mix of financial and non-
financial compensation.
• Developing a cost-effective compensation program
that results in high performance.
New Thinking for the New Millennium
• Strategic approaches to may compensation (pay)
systems more responsive:
– Pay the person for individual worth (knowledge, skills and
competencies) rather than for the value of a job they perform.
– Reward excellence through a pay for performance
compensation that establishes a clear relationship between a
significant amount of pay and attainment of organizational
objectives.
– Individualize the pay system to give employees choices in
how they are rewarded and what reward they receive.
The Developing Reward System and its Key
Challenges
 What is reward system

Developing of reward system is concerned with

the formulation and implementation of strategies
and policies that aim to reward people fairly,
equitably and consistently in accordance with their
value to the organization.

5/30/2019 DR. Hameed Akhtar

 Key Challenges

 1. Rewards not understood by people: The employees in general are

not aware of the process that goes behind the plan, design and delivery
of the Reward Programs. The same are also not communicated
adequately/effectively to the people,
 2. Rewards not linked to company’s business: While planning and
designing the Employee Reward Programs, it is often found that HR
actually works in isolation or at best with a only few chosen stake
holders who they are ‘comfortable’ with, and not in overall alignment
with the company’s goals (vision/mission) or its business strategies.
 3. Rewards not linked to employee performance: More often than
not, it is the ‘perception’ around the intent and efforts of employees,
rather than the actual results or outcome delivered that drive
performance measures and the rewards associated with the same.
 Leading industry research reveals that more than 80% of highly
successful companies consistently display certain common attributes
like clear/common employee goals and performance based rewards.

5/30/2019 DR. Hameed Akhtar

 Key Challenges

 4. Rewards not linked to the job to be performed: The absence of a

proper Job Evaluation System or well designed Job Descriptions often fail
to differentiate between the real job at hand and its worth, as against loosely
crafted designations/positions.
 5. Rewards not linked to the labor market: Those companies which do
not track their competition or compare their salary levels with the industry
are always at a disadvantage of not paying their employees Market level
salaries, and hence losing out in talent attraction/talent retention. It is always
wise to get Market Salary Data periodically, and fresh custom surveys
providing real time data are the best options, as database study reports have
their own limitations.
 6. Rewards not linked to individual employee needs: Most of the time,
the Employee Reward Programs end up being flat and linear, in the name of
standardization and equality. The spectrum of rewards must be
flexible/adaptable, as the motivational factors are different for different
groups of employees and their respective needs/purposes must be met.

5/30/2019 DR. Hameed Akhtar

 Benefits of Proper Compensation

Compensation policy aims to attract talented employees

and motivate them to put their efforts and commitment to
work that increase job satisfaction work performance

Benefits of Proper Compensation Administration

1 2 3 4 5
Attracts talent Motivates Rewards Reduces Manages
Employees Performance Turnover Compensation
Budget
 Consequences of Pay Dissatisfaction

performance
Desire for
more pay strikes
absenteeism
grievances
turnover
Search for
new job
Psychologica
l withdrawal
Job
Pay Lower
dissatisfacti Poor health
dissatisfaction attractiveness
on
of job absenteeism
Visits to the
doctors
 Factors Influencing Remuneration

Internal Factors External Factors

Organization Strategy Economy

Employee Society

Job Evaluation Labour Market

Performance Appraisal Cost of Living

Labor Unions

Legislation

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 Factors Influencing Remuneration

Business Strategy Market Remuneration Blend of

Position Strategy Remuneration
Invest to grow Merging or Encourage High cash and
grow rapidly innovation and incentives for
entrepreneurship performance.
Modest benefits
Manage earning Normal growth Reward Average
Protect Markets to maturity management skills incentives with
average cash on
unit and
individual
performance.
Standard benefits
Harvest earnings Maturity or Focus on cost Below average
invest somewhere decline control cash with few
else incentives that too
tied with cost
5/30/2019
Source: Aswathappa. Human Resource Management, Text and Cases, 2008, p. 295 controlDR.
efforts.
Hameed Akhtar
 Remuneration Model

Job description

Job evaluation

Job hierarchy

Pay survey Pay levels

Pricing Jobs Pay grades

Source: Aswathappa. Human Resource Management, Text and Cases, 2008, p. 295
 Challenges of Remuneration

Skill based Monetary and Salary

pay non monetary Reviews
rewards

Employee Remuneration Pay Secrecy

participation

Below market Comparable Eliticism or

or above worth Egalitarianism
market pay

Source:5/30/2019
Aswathappa. Human Resource Management, Text and Cases, 2008, p. 300 DR. Hameed Akhtar
 Market Conditions

• Loose market: the supply of labor exceeds the

demand for labor

• Fixed market: the supply of labor is finite or fixed

regardless of the demand for it

• Tight market: the demand for labor exceeds the

available labor supply

5/30/2019 Dr.Hameed Akhtar

Market
Employer Response
Conditions
Loose Set high standards
Offer low wages
Market Hire all the people needed
Fixed
Pay what it takes for labor
Market Find substitutes for needed labor

Tight Create incentives for individuals

to enter the market or acquire
Market skills demanded by employers

5/30/2019 Dr.Hameed Akhtar

 Question Bank

1.Discuss the benefits of a effective management and

discuss key internal & external factors influencing
Reward system.
2.Why equity is necessary ? What are consequences of
pay dissatisfaction on employees behavior ?
3. Differentiate between Job- based pay, merit based
pay and Performance based pay .
4. Discuss key strategic issues and how these may
solved .

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