5th Chapter

Tahmina Akter Arzin

Lecturer
Department of Business Administration
Prime University

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 Chapter
5th
5th

Strategic Compensation Planning

➢ Define Strategic Compensation Planning

➢ Understand the Process of Compensation Planning
➢ List different Methods of Compensation Planning
➢ Know Traditional Compensation Planning
➢ Understand Modern Compensation Planning

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 Define Strategic Compensation Planning
Once employees have done their jobs and been appraised, they expect to be paid.
Each employee’s pay should make sense in terms of the company’s overall pay
plan. Developing a pay plan is as important in a small firm as a large one.
 Paying wages rate that are too high may be unnecessarily expensive, and paying
less may guarantee interior help and high turnover. Furthermore, internally
inequitable wage rates will reduce morale and cause endless badgering by
employees demanding rises.
 The strategic compensation planning otherwise called the process of looking
ahead at what an organization needs to do about its reward policies and practices
in the future.
 The strategic compensation management deals with both ends and means. As an
end, it describes a vision of what reward policies will look like in a few years
time. As a means, it shows how the vision will be realized.
 Therefore, strategic compensation management is also called visionary
management. But it is also called empirical management which decides how, in
practice, it is going to get there.
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 Process of Determination of
Compensation
Today the compensation systems are designed aligned to the
business goals and strategies. The employees are expected to
work and take their own decisions. The wage determination
process consists of the following steps:

Modern
Change in Compensat
Traditional Compensation
Compensation ion
Systems Systems
Systems

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Evolution of Strategic Compensation
 Process of Determination of
Compensation
A. Traditional Compensation Systems
In the traditional organizational structures, employees were
expected to work hard and obey the bosses’ orders. In return
they were provided with job security, salary increments and
promotions annually. The salary was determined on the basis
of the job work and the years of experience the employee is
holding. Some of the organizations provided for retirement
benefits such as, pension plans, for the employees. It was
assumed that humans work for money, there was no space
for other psychological and social needs of workers

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 Process of Determination of
Compensation
B. Change in Compensation Systems
With the behavioral science theories and evolution of labour and
trade unions, employees started asking for their rights. Maslow
brought in the need hierarchy for the rights of the employees. He
stated that employees do not work only for money but there are other
needs too which they want to satisfy from there job, i.e. social needs,
psychological needs, safety needs, self-actualization, etc.
Now the employees were being treated as human resource. Their
performance was being measured and appraised based on the
organizational and individual performance. Competition among
employees existed. Employees were expected to work hard to have
the job security. The compensation system was designed on the basis
of job work and related proficiency of the employee.
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 Process of Determination of
Compensation
Change in Compensation Systems
1.Conducting Wage/ Salary survey
2.Determine the worth of each job
through job evaluation
3. Groups similar jobs into pay
grades
4. Price each pay grades by using
wave curves
5. Developing wage structure
6. Framing wage administrating
rules
7. Employee Appraisal

7 Steps in Determination of Compensation

 Process of Determination of
Compensation
C. Modern Compensation Systems
1. The Salary/Wage Survey: It is difficult to set pay rates if one don’t
know what others paying, so salary survey of what others are paying
will play a big role in pricing jobs. Virtually every employer
conducts at least an informal telephone, newspaper, or internet
salary survey.
2. Job Analysis: Job analysis is a systematic approach to defining the
job role, description, requirements, responsibilities, evaluation, etc.
It helps in finding out required level of education, skills, knowledge,
training, etc for the job position. It also depicts the job worth i.e.
measurable effectiveness of the job and contribution of job to the
organization.
Thus,
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it effectively contributes to setting up the compensation package
for the job position
 Skill,
Knowledge,
Job Position Attitude

Role and
Job Description Responsibiliti
es

Job Worth
Education,
Experience
 Job Analysis

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 Process of Determination of
Compensation
Job Description: Job description refers the requirements an
organization looks for a particular job position. It states the key skill
requirements, the level of experience needed, level of education
required, etc. It also describes the roles and responsibilities attached
with the job position. The roles and responsibilities are key
determinant factor in estimating the level of experience, education,
skill, etc required for the job. It also helps in benchmarking the
performance standards.
Job Position: Job position refers to the designation of the job and
employee in the organization. Job position forms an important part
of the compensation strategy as it determines the level of the job in
the organization. For example management level employees receive
greater pay scale than non-managerial employees. The non-monetary
10 benefits offered to two different levels in the organization also vary
 Process of Determination of
Compensation
Job Worth: Job Worth refers to estimating the job worthiness i.e.
how much the job contributes to the organization. It is also known
as job evaluation. Job description is used to analyze the job
worthiness. It is also known as job evaluation. Roles and
responsibilities helps in determining the outcome from the job
profile. Once it is determined that how much the job is worth, it
becomes easy to define the compensation strategy for the position.
Job Evaluation: The relative value of every job is determined
through job evaluation. The relative job value is then converted
into money value so s to fix. Wage Survey: Wage or salary surveys
are conducted to find out wage or salary levels prevailing in the
region or industry for similar jobs. Other organizational problems
such as recruitment policy, fringe benefits, etc., are also
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considered.
 Process of Determination of
Compensation
3. Groups Similar Jobs Into Pay Grades
Once the committee has used job evaluation to determine the relative
worth of each job, it can turn to the task of assigning pay rates to each
job; however, it will usually want to first group jobs into pay grades. It
could, of course, just assign pay rates to each individual job. But for a
larger employer, such a plan would be difficult to administer, since
there might be different pay rates for hundreds or even thousands of
jobs. And even in smaller orgnisation, there’s a tendency to try to
simplify wage and salary structures as much as possible. Therefore, the
committee will probably group similar jobs into grades of pay purposes.
4. Developing Wage Structure
On the basis of foregoing steps an equitable wage structure is prepared.
While determining such a structure several points need to be
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considered;
 Process of Determination of Compensation
a) Legislation elating to wages
b) Payments equal to, more or less than prevailing wage rates
c) Number and width of pay grades
d) Jobs to be placed in each pay grade
e) Provision for merit increases
f) Differentials between pay and plans and
g) Dealing with wages or salaries that are not line with the structure
5. Wage Administration Rules
Rules are required to determine the degree to which advance will be based on
length of service rather than merit, the frequency with which pay based on
length of service rather than merit, the frequency with which pay increments
will be awarded, the rules that will govern promotions from one pay grade to
another, and the way control over wage/salary costs can be maintained. Once
the rules are framed these should be communicated to the employees.
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 Process of Determination of Compensation
6. Employee Appraisal
In order to reward merit and performance, it is necessary to evaluate
the performance of individual employees. Some differentials in pay are
maintained on the basis of employee’s performance. This is necessary
to provide incentive for hard work and superior performance is
evaluated against predetermined standards of performance.
Therefore, job analysis forms an integral part in the formulation of
compensation strategy of an organization. Organizations should
conduct the job analysis in a systematic at regular intervals. Job
analysis can be used for setting up the compensation packages, for
reviewing employees’ performance with the standard level of
performance, determining the training needs for employees who are
lacking certain skills.

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