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COMPENSATION
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History
 Unionization brought a measure of standardization to
wage labor, but neither the private sector nor the federal
government began to study systematic job evaluation
until after World War 1. The federal government
spearheaded the development of formal compensation
administration with the passage of the Federal
Classification Act of 1923, which ranked government
jobs and set salary levels accordingly.
 Milton L. Rock and Lance A. Berger, authors of The
Compensation Handbook, credited human resource
professional Edward N. Hay with providing a foundation
for 20th-century compensation management.
 Hay operated on the theory that "something that can be
measured has value while some
 thing that can't be measured has none.“
 . The first edition of the resulting Dictionary of
Occupational Titles (DOT), published in 1939.
 Mobilization of the domestic economy for World War II
significantly advanced the compensation discipline,
both directly and indirectly
• Compensation
• Compensation consists of every item of payment in cash
that you make to members of your workforce.
• Non-cash compensation is referred to as "Benefits"
which is not paid in monetary terms.
• Employees should be managed properly and motivated
by providing best remuneration and compensation as per
the industry standards. The lucrative compensation will
also serve the need for attracting and retaining the best
employees.
• Types of Compensation
Compensation provided to employees can direct in the
form of monetary benefits and/or indirect in the form of
non-monetary benefits known as perks, time off, etc.
Compensation does not include only salary but it is the
sum total of all rewards and allowances provided to the
employees in return for their services. If the
compensation offered is effectively managed, it
contributes to high organizational productivity.
Direct Compensation
Indirect Compensation
Components of Compensation System
Compensation systems are designed keeping in minds the strategic goals and
business objectives. Compensation system is designed on the basis of
certain factors after analyzing the job work and responsibilities.
Components of a compensation system are as follows
Salary
Survey
Pay
Structure
Job
Analysis
Motivation
Compensation
Package
Employee
Retention
Need
Satisfaction
Need of Compensation Management
• A good compensation package is important to motivate the
employees to increase the organizational productivity.
• Unless compensation is provided no one will come and work
for the organization. Thus, compensation helps in running an
organization effectively and accomplishing its goals.
• Salary is just a part of the compensation system, the
employees have other psychological and self-actualization
needs to fulfill. Thus, compensation serves the purpose.
• The most competitive compensation will help the organization
to attract and sustain the best talent. The compensation
package should be as per industry standards.
Total
Compensation
Financial
Extrinsic
Direct
Non Financial
Intrinsic
Indirect
Satisfaction by
doing job
Praise and
recognition
Components of
Financial
Compensation
Direct
Base pay
Indirect
Variable
Pay
Benefits
Mandatory
Voluntary
Indirect Financial Benefits
• Employee benefits and benefits in kind (also called
fringe benefits, or perks) are various non-wage
compensations provided to employees in addition to
their normal wages or salaries. Where an employee
exchanges (cash) wages for some other form of
benefit, this is generally referred to as a 'salary
sacrifice' or 'salary exchange' arrangement. In most
countries, most kinds of employee benefits are taxable
to at least some degree.
Some of these benefits are: housing (employerprovided or employer-paid), group insurance (health,
dental, life etc.), disability income protection,
retirement benefits, daycare, tuition reimbursement,
sick leave , vacation (paid and non-paid), social
security, profit sharing, funding of education, and other
specialized benefits.
• The purpose of the benefits is to increase the
economic security of employees.
• The term perks is often used colloquially to refer
to those benefits of a more discretionary nature.
Often, perks are given to employees who are
doing notably well and/or have seniority.
Common perks are take-home vehicles, hotel
stays, free refreshments, leisure activities on
work time (golf, etc.), stationery, allowances for
lunch, and—when multiple choices exist—first
choice of such things as job assignments and
vacation scheduling. They may also be given
first chance at job promotions when vacancies
exist.
Non Financial Compensation
-Are most effective as motivators when the award
is combined with a meaningful employee
recognition program.
• Intrinsic motivators are worthwhile as financial
package
•Organization reward high performing employees
•Psychological rewards that employees receive in
recognition of their skills and contributions
Needs and Motivation
•
Abraham Maslow’s Hierarchy of Needs
• –Five increasingly higher-level needs:
• •physiological (food, water, sex)
•security (a safe environment)
•social (relationships with others)
•self-esteem (a sense of personal worth)
•self-actualization (becoming the desired self)
• –Lower level needs must be satisfied before higher
• level needs can be addressed or become of interest to
the individuals.
Needs and Motivation (contd..)
• Herzberg’s Hygiene–Motivator theory
–Hygienes (extrinsic job factors)
•Inadequate working conditions, salary, and incentive pay
can
cause dissatisfaction and prevent satisfaction.
–Motivators (intrinsic job factors)
•Job enrichment (challenging job, feedback and
recognition)
addresses higher-level (achievement, self-actualization)
needs.
–The best way to motivate someone is to organize the
job so that doing it helps satisfy the person’s higher-
Non Financial Compensation
Non Financial
(Intrinsic Reward)
NON FINANCIAL
(Intrinsic Rewards)
SATISFACTION
DERIVED FROM
JOB
PRAISE AND
REWARDS
Types
• Awards
–Often used to recognize productivity gains, special contributions or
achievements, and service to the organization.
–Employees feel appreciated when employers tie awards to performance and
deliver awards in a timely, sincere and specific way.
–Rooms of offices are named after the employees in NIIT
•
Recognition awards
–Recognition has a positive impact on performance, either alone or in
conjunction with financial rewards.
•Combining financial rewards with nonfinancial ones produced performance
improvement in service firms almost twice the effect of using each reward
alone.
–Day-to-day recognition from supervisors, peers, and team members is
important.
–Best performer of the month awards in Blue Dart, ALACTEL,XANSA etc.,
•
Service awards
- Award for the length of service and exactly not on performance
- IBM: thanks award
- IDEA: appreciation card
Reward Preference
• Self powered Innovators
 Impassioned and Energized by their work
 Prefer to be given work that empowers them and enables
them to learn and grow
 Less motivated by traditional rewards like additional
compensation and vacation time
• Fair and Square Traditional ist
 Reliable and loyal family people who desired traditional
rewards
 Least interested in risky compensation packages
containing bonuses and stock options
 Less interested in soft benefits like stimulating work
,enjoyable work places, or flexible work arrangement
Reward Preference (cont’d)
• Accomplished contributors
 Take pride in what they do, are team players
 Value comfort and security and preferred an environment that is
cooperative, congenial and fun
• Maverick Morphers
 Young and restless, want flexible work schedules that allow them to
pursue their own interests
 Prefer bonuses and stock options
 Organizations have to make efforts to retain them
Determinants
of
Compensation
Quote
“
"Money is only a tool. It will take
you wherever you wish,
but it will not replace you as the
driver." -Ayn Rand
”
External Determinants
1.
2.
3.
4.
5.
6.
Labour Market
Economic Condition
Area
Government Control
Cost of Living
Union influence
Examples
• Globalization
• Cross-Sector Employee Movement
• Characteristics of Employees
Internal Determinants
1.
2.
3.
4.
Organisation Compensation Policy
Employers Ability to Pay
Worth of a Job
Employee’s Worth
Performance - Reward Linkage
PROS
CONS
$ May be counterproductive if
$ Each employee is reward on
appraisal are seen as unfair.
the basis of individual
perfoemance.
$ Increase in pay is not
meaningful after pay for non$ Individual performanceperformance factors such as
reward linkage is
seniority and cost of living is
motivational.
subtracted from theincrease.
$ Employee has some control
over total compensation.
$ Timing of reward is tied to
budget rather than to task
accomplishment , reducing
the motivational value of the
reward.
Approaches to
Compensation and Reward
Classification of Approaches
Job – based pay
Traditional
compensation
approach
Based on job
evaluation
Approaches to
Compensation
Contemporary
compensation
approach
Skill based or
competency
based pay
Rewards linked
to performance
Classification of Approaches
 Financial compensation
1. Direct – financial remuneration
2. Indirect(also known as wage
supplements/fringe benefits)
 Non-financial compensation
Financial compensation
1. Direct
i)Fixed pay
a) Base pay : Base pay is the fixed
compensation paid to an employee for performing
specific job responsibilities. It is typically paid as a
salary, hourly or piece rate.
b) Differential pay : Differential pay is nonperformance based pay usually given to accommodate a
specific working condition.
Financial compensation
ii) Variable pay: Variable pay is compensation that is
contingent on discretion, performance or results. It may
be referred to as "pay at risk."
 Enhanced compensation awards
 Incentive bonus
 Recognition awards
 Retention bonus
Financial compensation
2. Indirect (pay for time)




At work
Breaks
Training hours
Any other event conducted by the organization
Financial compensation






Not at work
Sick leave
Holiday
Admin leave
Vacation
Emergency leave
Non-financial compensation
Non-financial compensation is different incentives given to
employees that are not in the form of direct pay.
• Alternative Work Schedules - there are many
alternatives to a traditional 5 day, 8-hour work schedule.
• On-the-Job Training- showing workers how to perform
tasks by observing others.
• Work/Life Balance - when an employer understands the
needs employees have to juggle in their lives.
• Developmental Opportunities - training and other
opportunities for employees to expand their knowledge
and improve their skills.
• Casual Dress - allowing employees to relax their dress
code at work.
Reward system
• The theory of reward is located more in Behavioural
Sciences. It is a part of broader strategy of enhancing
loyalty, motivation and satisfaction.
Rewards are used to1. Motivate employees to perform effectively
2. Motivate employees to join the organisation
3. Motivate employees to continue to work
4. Motivate individuals by indicating their position in the
organisation structure
Types of Reward
1. Promotions
2. Fringe benefits
3. Status
4. Money
5. Plaques
6. Trophies
Types of Reward
7. Certificates or citations
8. Public recognition
9. Official perquisites
10. Special assignments
11. Parties or celebrations
COMPENSATION:
Based on Equity Theory
Why is compensation important?
• Society
• Firm
• Individual
What are the elements of compensation?
• Base pay
• Incentives
• Fringe benefits
What are different forms of payment?
• Cash
• Benefits
– Payment for time not worked
– Non-pecuniary benefits (gym
memberships, child care)
• Intrinsic
Exchange Theory
• Pay is an exchange for efforts
• Implicit Social Contract
– beliefs about mutual obligations
• Implicit Psychological Contract
• Temporal Quality
– amount of time in job & career
Equity Theory
Pay, benefits,
opportunities, etc.
OUTCOME
INPUTS
the same
more or less
<=>
?
OUTCOME
INPUTS
effort, ability,
experience etc.
A person evaluates fairness by comparing their ratio with others.
IRWIN
©a Times Mirror Higher Education Group, Inc., company, 1997
Equity Theory
Workers compare their compensation
with others
If unequal workers attempt to restore
equity
Workers Restore Equity by:
•
•
•
•
Reducing input
Attempting to get raise
Quitting
Psychological Adjustment
Compensation Model
Equity
Individual
(Pay for Perf.)
Internal
(Pay Structure)
External
(Pay Level)
Procedural
Justice
(Pay
Administration)
Compensation
Tool
Seniority,
Performance
Job Evaluation
Objective
Market Surveys
Attraction
Communication,
Appeals
Organization
Citizenship,
Commitment
Motivation
Retention
Internal Equity
• Comparison of Jobs
• Jobs worth to the Employer
– Similarities and differences in
work content
– Relative contribution to
organization objectives
• Accomplished through job
evaluation
External Equity
• Value of the job to
the labor market
• Assessed through
wage surveys
Individual Equity
• Relative pay between
individuals doing the
same job
• Influences motivation
Organizational Justice
• Perceived fairness of the pay system
– Outcomes
– Process Issues
– Interactions
• Influences Commitment, Organization
Citizenship
Strategic Perspectives
• The strategy balances 4 types of equity
• Best Practice
• Contingency:
– organizations will have pay systems that fit
with their business strategy
– organizations that have “fit” will outperform
those without “fit”
• Strategic Decisions include:
– pay level, pay structure, individual rewards,
team rewards, pay administration
Best Practice v. Strategy Debate
• Best practice - there are a set of
compensation practices that are good for all
firms.
• Strategy - the set of compensation practices
that are good for firms will vary based upon
the firm’s goals.
Best Practice Examples*
•
•
•
•
•
•
•
High wages
Guarantee of Employment Security
Use incentives; share gains
Employee Ownership
Participation & Empowerment
Teams
Smaller pay differences
*Source: Pfeffer, Competitive
Advantage Through People, 1994
Summary
• There are four key elements to equity
• The strategic contingency view is that some
firms may weight those elements differently
depending on firm objectives
• The best practice view is that there are good
practices that all firms should engage in no
matter what their strategy.
Summary (continued)
• Equity forms the basis for compensation
management
• Strategy guides the organization in the
balancing of equity components
• The test is whether the compensation
system reinforces sustained competitive
advantage
Legal Issues
Legal Issues in Compensation
The design of any compensation system that intentionally
or unintentionally discriminates against any protected class
can subject the organization to legal action. The Equal Pay Act
of 1963 and Civil Rights Act of 1964 regulates compensation
and must be considered when designing and administering
compensation programs.
Nowadays the concept of Comparable worth argues that
equal pay for equal work should be replaced with the doctrine
of equal pay for equal value. Comparable worth of two
different jobs remains very difficult to prove because of the
lack of objective, measurable data that would support an
assessment of the job value. Although the courts have been
sympathetic to arguments for comparable worth, they have
extremely reluctant to take action, because the doctrine falls
outside of existing federal law. Equal pay for equal work is still
the standard; the courts have refused to manufacture
standards and policy that have not been legislated.
One additional law that impacts compensation is the Fair
Labor Standards Act of 1938 (FLSA), which regulates the
federal minimum wage, overtime policies, and the use of child
labor. It exempts from minimum wage and overtime
requirements certain groups of employees who exercise
independent judgment in carrying out their job duties.
The Fair Labor Standards Act has caused numerous
problems for employers in recent years, because it was
written long before our economy became based on services,
knowledge, and information technology. Problems have come
up because of the ambiguity of law regarding specifically who
is covered under the act and therefore is eligible for overtime
pay.
While the U.S. Department of Labor offers employers a
comprehensive FLSA compliance assistance program, much
confusion still exists and lawsuits continue to be filed.
Executive Compensation
Executive Compensation
• Executive compensation - is financial
compensation received by an officer of a
firm, often as a mixture of salary, bonuses,
shares of and/or call options on the
company stock, etc.
EXECUTIVE COMPENSATION
• Managers especially senior level
managers have become very crucial to
organizational success. They are short in
supply , therefore , organizations are
competing with each other to attract ,
retain and motivate leaders mangers for
their strategic requirement . In India too,
the demands of such managers have
increased after the economy has been
opened up
Reasons mangers are paid more
• Managers have intensive worth and
organisation grow and success under
their stewardship
• managers are short in supply
• Retaining high caliber managers is very
difficult then attracting them
• having succeeded in retaining them , the
managers must be motivated for better
performances
Elements of compensation
There are six basic elements of
compensation or remuneration.
1. Salary
2. bonus or profit sharing bonus
3. long term incentives / stock option
4. perquisites /paid expenses
5. insurance (Golden parachute)
6. performance related pay
Salary
• Salary of a manger varies by type of job,
size of organization ,region of the country
and the type of industry. Generally salaries
make up about 40 to 60% of top managers
annual compensation total . Salaries are
subjected to deduction .in order to avoid
such deduction they are offered incentives
and attractive perks
Bonus
• Bonus or profit sharing bonus :profit sharing
bonus play’s an important role in today’s
competitive managerial programmes .this
type of incentives is generally shortened
(annual) is based on performance or profit
sharing
Long term incentives/Stock option:
• Stock option a benefit given by company
to managers in the form of an option to
buy stock in the company at discount or at
a fixed price
 the idea behind stock option is to align
incentives between the employees and the
share holders of a company
Paid expenses (perquisites)
• In addition to the normal allowed perks like
pf , gratuity , the managers enjoys special
perks like parking ,office, vacation travels ,
auto expenses, membership in clubs and
well furnished house ,telephone bills,
servants, electricity bills gas bills etc.
perks take care of all possible needs
• Managers are rarely required to spend
money from their own pocket
Insurance /Golden parachute
• A golden parachute is an agreement
between a company and an employee
(usually upper executive) specifying that
the employee will receive certain
significant benefits if employment is
terminated. Sometimes, certain conditions,
typically a change in company ownership,
must be met, but often the cause of
termination is unspecified.
• These benefits may include severance pay,
cash bonuses, stock options, or other
benefits. They are designed to reduce
perverse incentives — paradoxically (and
ironically) they may create them.
• Three Main Benefits Of Golden Parachutes :
1. It make it easier to hire and retain executives,
especially in industries more prone to mergers.
2. They help an executive to remain objective
about the company during the takeover process.
3. They dissuade takeover attempts by increasing
the cost of a takeover, often part of a Poison Pill
strategy,
Performance related pay
• Performance-related pay is money paid to
someone relating to how well he or she works at
the workplace. Car salesmen, production line
workers, for example, may be paid in this way, or
through commission.
• Business theorist Frederick Winslow Taylor was
a great supporter of this method of payment,
which is often referred to as PRP. He believed
money was the main incentive the widely used
concept of 'piece work
Business Strategy and
Compensation
Compensation
• Compensation and reward process determines the
mechanism and form for giving financial and non
financial rewards, fringe benefits etc, to the
employees with a view to motivate them for work.
• It may be positive or negative.
• It is a subset of an organization’s HR strategy, which
is aligned with business strategy.
• The pace of change in both business strategy
and compensation design are leading many
companies to consider and implement changes
to one side of the bridge without making
changes to align it with the other side of the
bridge. As a result, the bridge becomes weaker
and is more likely to undermine the overall
success of the business.
• Companies should first examine the alignment of the bridge
between business strategy and compensation strategy and
then make the necessary changes to address any
weaknesses in that alignment. This process encompasses
the following key steps:
1. Articulating the company's long- and short-term business
strategies and making sure they are aligned with current
compensation approaches.
2. Choosing the compensation approach that will best reward
and reinforce the company's articulated strategic goals.
3. Periodically evaluating the compensation approach against
the business strategy to see if goals have been met and
make necessary adjustments.
Compensation remains an important tool for
helping a company achieve its strategic objectives.
However, companies must recognize that
compensation does not operate in a vacuum. It is
merely one step in a very dynamic strategic
planning and implementation process. But by
ensuring that compensation is aligned with their
strategic objectives, companies stand a better
chance of achieving those objectives and
maintaining a competitive edge over their
competitors .
CASE STUDIES!!
Domino’s Pizza Inc. - parent company to more than 9,000
pizza delivery locations
 Patricia Wilmot, Chief People Officer – helped establish the
pay-for-performance model – “Pay-for-performance has been
the standard method of compensation at Domino’s for the past
decade because it works.”
 Base pay has to be practical — neither excessive nor
insignificant. It also needs to be competitive.
 Pay in the 50th percentile.
 Shareholders feel base salary is reasonable. Executives like
that.
 Short-term and long-term bonuses.
• Short-term bonuses are a percentage of corporate
earnings before income, taxes, depreciation, and
amortization (EBITDA). The percentage is higher
than the market rate.
• Concept of ‘stretch goals’ for executives which are
management or financial targets that are
achievable, but require hard work and effort to
reach. When they reach their goals, their pay can
reach into the 75th percentile.
Long-term incentives are all about corporate equity, but
even there an executive has to meet performance
targets each year for three years for that equity to vest.
“What the real carrot, the uniqueness about our pay-forperformance, is the more money you make the more
you share in the wealth. If you don’t perform, you don’t
get paid. It’s that simple. It’s that black and white.”
Wilmot said.
Goal setting and rewards are for everyone. For
example, employees can benefit through the Team
Achievement Dividends, or TAD, which are paid out
when the company meets certain objectives for the year.
“There is a lot of unity in that and a lot of communication
about where we are against the target and what role
everyone plays in hitting the target, whether they are a
secretary or accountant.”
“It’s not rocket science,” Wilmot said. “It’s not unique.
But it’s real and it works and it’s right for our culture.”
Google
• Presentation by the compensation team at Google
entitled “Using Statistical Research to Change
Compensation Strategy” at World@Work
conference in San Diego – Total Rewards 2011.
• 10 percent across-the-board increase and a bonus
for EVERY employee.
• Google put a lot of thought and a lot of research
into this investment before they made it.
• Not an “easy route”.
• Survey of all employees (with a 90% response rat
to find out the value that they place on the different
elements of compensation.
• Analysis to determine what elements of
compensation were most rewarding to their
employees.
• Understand the relative worth of one type of reward
versus another.
• Eg.: A Google employee values bonuses at $0.91
compared to $1.00 of base salary.
• Studied data about previous salaries of employees
to find out how much top technology companies
pay.
• Google’s salaries are over the 75th percentile
• Decision made carefully with good information
about the effect it would have on stock price, after
simulating stock prices for various proposals.
• With regard to low performers getting the same
increase as high performers, Google believes that
low performance is a management issue (not a
compensation issue)
• Google has strong commitment to managing
employees in a way that moves them out of roles
where they aren’t successful and making sure that
low performance isn’t tolerated.
• Preliminary results indicate success
• Retention rate has seen a sharp increase in the
first quarter of this year.
CONCLUSION
Organisations face a number of key strategic issues in
setting their compensation policies and programs.
While formulating these programs and policies, the
organizations have to consider:
the compensation in the market,
the balanced between fixed and variable compensation,
utilization of individual vs. team based pay,
the appropriate mix of financial and non financial
compensation, and
developing and overall cost effective program
that results in high performance.
Thank You