Chapter 6

Compensation and Benefits

DeNisi  Griffin  Sarkar

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 What Is Compensation?

The set of rewards that organizations

provide to individuals in return for their
willingness to perform various jobs and
tasks within the organization.

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 What are Benefits?

Purposes
Purposes of
of Benefits
Benefits

Rewards
Rewards Incentives
Incentives Items
Items of
of Value
Value

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 Beyond the Book: Components of the
Compensation System

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 Understanding the Basic Purposes of
Compensation

Developing
Developing aa
Compensation
Compensation Strategy
Strategy

Internal
Internal External
External Pay
Pay Legal
Legal
Equity
Equity Equity
Equity Surveys
Surveys Standards
Standards

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 Components of Remuneration
• Wages and Salary- Employees get an annual
increment on wages and salaries, based on nature of
the job, type of industry, employees’ seniority, and
merit.
• Incentives- In addition to wages and salaries
employees get incentives, which are also known as
payment by results. Incentives are of two types:
individual incentives and group incentives.
• Fringe Benefits- Provident fund, gratuity, accidental
benefit, health and group insurance, uniform, canteen,
discounts on purchase of company’s products etc.
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 Components of Remuneration
• Perquisites- Whereas a fringe benefit is well
defined and would include all employees
within the organization, perquisites (or perk)
are less well defined and sometimes given to
employees as a special privilege.
• Non-monetary benefits- Job sharing,
flextime, recognition (e.g. employee of the
month), challenging job assignments are
example of non-monetary benefits.

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 Organizational Considerations:
Linking Compensation to Performance

Motivation
Motivation

Retention
Retention Productivity
Productivity

Controlling
Controlling Organizational
Organizational
costs
costs objectives
objectives

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 Fig 6.1 Example of a Pay Survey

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 Wages Versus Salaries
• Wages
Is hourly compensation paid to
operating employees; basis for
wages is time.
• Salary
is income paid to an
individual on the basis
of performance, not on
the basis of time.

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 Fig 6.2 Strategic Options for Compensation Levels

Which
Which pay
pay level
level is
is aa firm
firm on
on
the
the decline
decline likely
likely to
to choose?
choose?

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 Determinants
Determinants of
of an
an Organization’s
Organization’s
Compensation
Compensation Strategy
Strategy

Ability
Abilityto
to
Overall
Overall Overall
Overallability
ability Strength
Strengthof
of
attract
attractand
and
strategy
strategyof
ofthe
the of
oforganization
organization union
union
retain
retain
organization
organization to
topay
pay influence
influence
employees
employees

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 Determining What to Pay

Job
Job Evaluation
Evaluation
Methods
Methods

Factor-
Factor-
Classification
Classification Point
Point comparison
comparison
system
system system
system method
method

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 Establishing a Classification System
for Job Evaluation
• Group sets of jobs into grades
• Rank grades at level of importance to the
organization
• Determine how many categories or
classifications to use for grouping jobs

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Fig 6.3 Job-
Classification
System

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Using a Point System for Job Evaluation
• Compensable Factors
Job skills
Physical effort
Working conditions
Responsibility and authority
• Point Manual
Defines points assigned to the increasing
degrees of compensable factors for which
the organization willing to provide payment
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 Using the Factor-Comparison Method
for Job Evaluation
1. Define comparison factors to be used
2. Identify benchmark or key jobs in the organization
3. Rank benchmark jobs on each compensation factor
4. Allocate benchmark’s job wage to each job factor
based on the relative importance of the job factor
5. Prepare two sets of ratings based on ranking and
assigned wages to determine evaluator consistency
6. Develop a job-comparison chart to rate other jobs in
the organization as compared to the benchmark jobs
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Factors Affecting Internal Pay Levels
• Pay-for-Knowledge
Compensating employees for
learning specific information
• Skill-based Pay
Rewards employees for
acquiring new skills
• Seniority
A maturity curve specifies the amount of
annual increase a person will receive for
time on the job with the firm.
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 Wage and Salary Administration

The ongoing process of managing a wage and

salary structure; managers must be sensitive to
these costs and must be vigilant about managing
them properly.

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 Understanding Compensation

Wage
Wage and
and Salary
Salary
Administration
Administration Issues
Issues

Pay
Pay Pay
Pay Pay
Pay
Secrecy
Secrecy compression
compression Inversion
Inversion

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 Pay Compression
Pay-Compression
Occurs when individuals with substantially
different levels of experience or performance
are paid wages or salaries that are relatively
equal.
Pay Compression occurs when the market rate
for starting salaries increases at a rate faster
than an organization can raise pay for
individuals who are already on the payroll.

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 Pay Compression
Pay Inversion
New employees are paid more than
experienced employees

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 Incentives Payments in
Organizations
• Merit Pay
Is awarded individuals on the basis
of the relative value of their
individual contributions
to the organization.
• Merit Pay Plans
Base a portion of
compensation on
individual merit.
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 Individual Incentive Plans

Incentive
Incentive Plans
Plans

Sales
Sales Nonmonetary
Nonmonetary
Base
Base Salary
Salary commission
commission Awards
Awards

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 Team
Team and
and Group
Group
Incentive
Incentive Plans
Plans

Employee
Employee
Gainsharing
Gainsharing Profit
Profit Stock
Stock stock
stock
Plans
Plans sharing
sharing options
options ownership
ownership
(Scanlon)
(Scanlon) plans
plans plans
plans (ESOPS)
(ESOPS)

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 The Nature of Benefits Programs

Benefits
Benefits Issues
Issues

Rising
Rising Global
Global Employee
Employee
Costs
Costs Differences
Differences Preferences
Preferences

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 Types of Benefits
• Mandated Benefits • Other Benefits
 Unemployment insurance  Wellness programs
 Social Security  Life-cycle benefits
 Workers’ Compensation  Child-care

• Nonmandated Benefits programs

 Elder-care
 Private pension plans
 Defined  Employee assistance
benefit plans
 Defined contribution  Cafeteria-style
plans benefits
 Paid time off  Spousal equivalents

 Health insurance
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 Table 6.1 Minimum Annual Vacation by
Law in Different Countries

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 Executive Compensation
Components
• Base Salary
• Incentive Payments
Usually a bonus based on company
performance
• Perquisites

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Table 6.2 Cash Bonuses For Some CEOs

2010 2011

Lloyd Blankfein (Goldman Sachs) $12.60 million $ 7.00 million

James Gorman (JP Morgan) $13.00 million $10.50 million

Howard Schultz (Starbucks) $22.00 million $16.00 million

Robert Diamond (Barclays PLC) $ 3.25 million $ 1.70 million

Phillipe Dauman (Viacom) $12.00 million $20.00 million

– BUT his total compensation fell from $84.5 million to $43 million

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Evaluating Compensation Policies
• To attract and retain good employees,
organizations should provide reasonable
compensation and appropriate benefits to
its employees
• Organizations should keep employees
well-informed about the value, extent,
and costs of benefits that the organization
provides

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