Lesson 3.

Strategic Compensation Planning

 Learning Objectives
Understand the List different
Define Strategic
Process of Methods of
Compensation
Compensation Compensation
Planning
Planning Planning

Know Understand
Traditional Modern
Compensation Compensation
Planning Planning
 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.
 Strategic Compensation Planning
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
dispute by employees
demanding rises.
 Strategic Compensation Planning
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.
 Strategic Compensation Planning
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.
Process of Determination of Compensation
Traditional Modern
Compensat Compensat
ion ion
Systems Systems

Change in
Compensat
ion
Systems
 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.
Change in Compensation Systems

Self Actualization

Esteem

Social

Safety

Physiological
Steps in Determination of Compensation
Conducting Wage/Salary Survey
Determine the Worth of Each Job through Job Evaluation (Job
content)
Group Similar Jobs into Pay Grades
Price Each Pay Grade by Using Wave Curves
Developing Wage Structure
Framing Wage Administration Rules
Employee Appraisal
Modern Compensation Systems
 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.

Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 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.

Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 Job Analysis
JOB POSITION

Skills, Knowledge, JOB DESCRIPTION

Role & Responsibilities Education, Experience
Attitude

JOB WORTH

Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 Job Analysis
JOB DESCRIPTION
It refers the requirements an organization looks for a particular job
position. 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.

Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 Job Analysis
JOB POSITION
It 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.

JOB WORTH
It refers to estimating the job worthiness i.e. how much the job
contributes to the organization. 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.
Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 Job Analysis
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 considered.

Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 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 organization, 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.
Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 Developing Wage Structure
Legislation to wages
Payments equal to, more or less than prevailing wage rates
Number of pay grades
Jobs to be placed in each pay grade
Provision for merit increases
Differentials between pay and plans
Dealing with wages or salaries that are not line with the structure

Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 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.
Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 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.

Groups
Developing Wage
The Salary/Wage Similar Jobs Employee
Job Analysis Wage Administratio
Survey Into Pay Appraisal
Structure n Rules
Grades
 Concluding Thoughts
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.
 Homework

Assignment -1 (Marks-10)
Due: 9.8.20
 Case Study
The case discusses the compensation management practices at Tata Consultancy
Services Ltd. (TCS), one of the leading Indian IT companies. TCS’ compensation
management system was based on the EVA model. With the implementation of
Economic Value Added (EVA)-based compensation, the salary of employees
comprised of two parts – fixed and variable. The variable part of the salary was
arrived after considering business unit EVA, corporate EVA, and also individual
performance EVA. During the fourth quarter of the financial year (FY) 2007-2008,
TCS announced its plans to slash 1.5 percent of the variable component of employee
salaries since its EVA targets for the third quarter of FY 2007-2008 were not met The
announcement came as s jolt not only to TCS employees but also to the entire Indian
IT industry. The company came in for severe criticism and it was accused of not being
transparent with respect to EVA calculation. However, some analysts felt that the pay
cuts were a result of the macroeconomic challenges that the Indian IT companies were
facing — rapid appreciation of the rupee against the US dollar and the recession in the
 Questions
1. Analyze TCS’ HR practices with respect to its policy related to
compensation of its employees.
2. Discuss various concepts related to compensation management.
3. Discuss the importance of variable compensation in light of its ability to
motivate employees and enhance organizational productivity.
4. Discuss the pros and cons of the EVA-based compensation management
system and also analyze EVA as a performance measurement tool.
5. Understand the rationale behind the cut in the compensation of the
employees at TCS.
6. Understand how macroeconomic variables could affect a company’s HR
policies.
7. Appreciate the importance of HR goals and strategies in the success of an