What is compensation?

Compensation is the sum of the rewards for

the job-related efforts of the employees and
also for their commitment to and involvement
in the job.
 Compensation – Introduction
• The term compensation represents the exchange
between employees and organization, both gives
something in return for something else.
• In the past, the compensation issues were often
confidential and govern by individual employer’s
preferences and choices.
 Compensation – Introduction
• However, in today’s competitive world the
compensation policies are more transparent,
and the employees take their own choices
based on the compensation package.
• Thus, balancing the cost of compensation and
retaining the employees have become the
most important priority for the organization
 Compensation – Introduction
• Cash and non-cash rewards employees receive in
exchange for their work
• Effective compensation management.
– Employees more likely to be satisfied and motivated.
• Compensation perceived to be inappropriate
– Performance, motivation and satisfaction may decline
dramatically.
– Employee turnover may occur
– Dissatisfaction with absolute or relative pay
 Total Reward

Total
Remuneration
Components of A Compensation Program

Figure 12–1
12–6
 Direct Compensation
Compensation Type
Base Pay The basic monetary compensation that an
employee receives, usually as a wage or
salary.

Wages Payments calculated on the amount of time

worked.

Salary Consistent payments made each period

regardless of the number of hours worked in
the period.

Variable Pay Compensation linked to individual, team, or

organizational performance.

Benefit An indirect reward given to an employee or

group of employees as a part of
organizational membership.

12–7
 Compensation - Meaning
• The compensation is a substitute word of
wages and salaries, and it has recently
originated.
• The literature of wages and salaries are
enormous, but it considers the issues from a
legal viewpoint.
• However, wages have now become very
significant as a cost factor
 Compensation - Meaning
• Compensation is the remuneration received by an employee in returns
of their contribution to the organization.
• The compensation management is an organized practice which is
important for balancing the work and employee relationship by
providing monetary and non-monetary compensation to employees.
• Compensation includes all form of pay given to the employees which
arise from the employment.
• The one of the strapping feature of the organizations is compensation
management and they used it to attract and retain the most important
and worthy assets.
 Compensation - Meaning
• The compensation management is a complex process which requires
accuracy and precision and if not carried out properly may lead to
employees’ dissatisfaction.
• An ideal compensation policy motivates the employees to work harder
and with more determination. It also helps the organizations to set the
standards for job that it is related, realistic and measurable.
• Compensation policies should have a sound integration with practices
of HRM. One of the key functions of compensation management of any
company is to create a hearty competition among the employees in
order to attain more efficiently and provide growth opportunities to its
employees
 Compensation - Definition
• According to Cascio (1995) the “Compensation includes direct cash
payments and indirect payments in form of employees benefits and
incentives to motivate employees to strive for higher levels of
productivity”.
• According to Milkovitch and Newman (2005) the “Compensation is all
forms of financial returns, tangible services and benefits employees
receive as part of an employment relationship.”
• The phrase “financial returns” refers to an individual's base salary, as
well as short- and long-term incentives. “Tangible services and
benefits” are such things as insurance, paid vacation and sick days,
pension plans, and employee discounts.
Importance of Compensation
Compensation plan and business
strategy

There are following principles of Compensation :

•i. The organization should have a unambiguous plan to determine differential pay
levels in terms of different job requirements involving varied skills, exertion,
responsibility and working conditions.
•ii. An attempt should be made to keep the common level of wages and salaries of
the organization in line with that obtained in the labor market.
•iii. Adequate attention should be taken to distinguish people from the jobs.
Although people are paid in terms of rate embodied in specific jobs, some
exceptions should be allowed in the cases of professional and executive personnel
by paying them in terms of their abilities and contributions.
There are following principles of Compensation :
•iv. The care should be taken irrespective of individual considerations to
ensure that equal pay for equal work.
•v. There should be a plan to adapt an unbiased measure for identifying
individual differences in capacity and contribution in the form of rate
ranges within the grade increments, wages incentive schemes and a
system of job promotion.
•vi. There should be proper procedure for handling the wage grievances in
organization.
•vii. Adequate care should be taken to inform the employees and the
union, if any, about the procedure followed in determining wage rates.
There were no confidential wages, and the employees should have a clear
understanding of their wage or salary structure. This will enhance
employee satisfaction with wages. There are certain guiding principles
which provide the foundation for effective reward management.
 Types of compensation

• Direct compensation
Direct compensation normally includes
the amount payable to the employees as
direct cash rewards for the work
extracted from them.
Types of compensation (contd.)

Examples
• Basic pay
• Variable pay
• Profit-sharing

• Gain-sharing

• Equity plans
 Types of compensation (contd.)

• Indirect Compensation
Indirect compensation includes the benefits
enjoyed by the employees but paid by the
organization. It is available to all the
employees irrespective of their performance
in the job.
 Types of compensation (contd.)

Examples
• Mediclaim
• Insurance schemes
• Leave travel concessions
• Retirement benefits
 Theories of compensation

• Equity theory
• Expectancy theory
• Contingency theory
• Agency theory
 Equity theory

• According to this theory, ensuring a fair

balance between an employee’s
contributions to the job and his rewards is
critical for developing a cordial relationship
between the employer and the employees.
• When the rewards are greater than the
employees’ job efforts, they will be
satisfied.
 Equity theory (contd.)

• In contrast, when the employees believe that

their efforts are greater than their rewards,
they will be de-motivated.
 Expectancy theory

• According to this theory, employees work hard

in the job whey they are sure of a positive
outcome in the form of attractive rewards
from the job.
• Positive expectations about the eventual job
outcome creates high employee motivation in
the firm and vice-versa.
 Contingency theory
• According to this theory, different compensation
strategies act equally well in different
circumstances. As such, there is no one best
compensation strategy available for all conditions.
• The effectiveness of compensation strategy certainly
depends on the congruence among the firm, the
environment and the compensation strategies.
* (Congruence (symbol: ≅) is the state achieved by coming together,
the state of agreement.)
 Agency theory

• Agency theory views the employer as the

principal and the managers as the agents.
• According to this theory, it is necessary for
the firm to use compensation as an
effective means for creating ownership
interest among the managers.
 Agency theory (contd.)

• This theory insists that the firms develop

labour market–oriented and performance-
linked contractual relationship with the
managers to motivate them.
 Types of wages

• Real wages- When the income earned by

the employees as a reward for their job
efforts is expressed in real purchasing
power, it is called real wages.
• Minimum wages- This refers to the
legally permissible minimum
compensation payable to the employees
for their job efforts.
 Concept of wages (contd.)

• Fair wages- Fair wages are the wages which

are usually positioned above the minimum
wages but below the living wages.
 Concept of wages (contd.)

• Living Wages- Highest level of wages that should enable

the earner to provide for himself and his family not only
the bare essentials of food, clothing and shelter but a
measure of frugal comfort, including education for his
children, protection against ill-health, requirements of
essential social needs and a measure of insurance against
the more important misfortunes, including old age.
- Committee on fair wages.
 Importance of an ideal compensation plan

• Aligning with the business objectives and

workers needs.
• Promote Internal equity.
• Enhance External equity.
• Rewarding desired performance and behaviour.
• Ensure Legal compliance.
• Bring Consistency between individual and
organizational interest.
Challenges affecting /Factors influencing
compensation (wages and salary)
administration
Internal factors and external factors
 External factors

• Labour market conditions

• Labour legislations
• Comparative pay scales
• Cost of living
• Geographical location
• Collective bargaining
• Technology
• Globalization
 External factors (contd.)

• Capacity of the organization to pay.

• Corporate policies and philosophy.
• Human resource policies and strategies.
• Performance evaluation report.
 Devising a compensation Plan

• Analysis of the job.

• Evaluation of the job.
• Developing the pay structure.
• Survey of wages and salary.
• Pricing of the job.
• Compensation revision and control.
Devising a compensation plan
 Challenges affecting
compensation
• Emergence of innovative job designs.
• Relevance of money as a prime motivator.
• Lack of objectivity in the fixation of pay
structure.
• Political and legal challenges in compensation
administration.
 Challenges affecting
compensation
• Difficulties in fixing compensation for distinct
and critical skills.
• Balancing organizational and individual needs.
• Ethical issues in pay fixation.
Module 3 :Executive compensation

Executive compensation refers to the

compensation package offered to the
managerial personnel of an organization.
 Objectives of executive compensation
packages
• Aligning managerial interest with ownership
interest.
• Bringing in the best executives.
• Enhancing employee motivation, involvement
and commitment.
• Promoting managerial efficiency.
• Ensuring complete financial security.
• Encouraging progressive learning.
Elements of executive
compensation
Criticisms of executive compensation

• Complaints of over-payments.
• Undue influence on compensation
determination.
• Disregard for the financial health of the
organization.
• Secrecy shrouding executive
compensation.
• Inequality of income in the organization.
 Golden parachutes scheme

It is a unique executive compensation plan in

which a top executive is eligible for severance
pay in the event of his present company being
taken over by some other company as part of
a merger plan.
• Broad branding : Broad banding is when businesses set a wider-than-normal salary band, or pay range, for a
job level.
• When broad banding, businesses usually create fewer salary bands that each cover a much broader pay
range.