Compensation Management
Compensation
• Employee compensation
– refers to extrinsic and intangible rewards.
– refers to all forms of pay or rewards going to
employees and arising from their employment.
– includes monetary as well as nonmonetary pay or
rewards.
– could be
– Direct financial payments• Wages, Salaries, Incentives, Commission and Bonuses etc.
– Indirect financial payments• Financial benefits like insurance, vacations etc.
Components of compensation
Typical Compensation Responsibilities
Compensation Program
• It should have four objectives:
– Legal compliance with all appropriate laws and
regulations
– Cost effectiveness for the organization
– Internal, external, and individual equity for
employees
– Performance enhancement for the organization
Legal compliance
• Some the compensation related acts in India:
– Minimum Wages Act, 1948
– Payment of Wages Act, 1936
– Adjudication of Wage Disputes
– Pay Commissions
– Payment of Bonus Act, 1965
Strategic Compensation
• Attracting, motivating, and retaining the talent
required for a sustainable competitive
advantage
• Focusing the energy of employees on
implementing the organization’s particular
competitive strategy
• Improving productivity
Compensation Philosophies
Other considerations
• Alignment with organizational cultures
• Balancing the costs of attracting and retaining
employees with the competitive pressures in its
industry.
– where firm wishes to be positioned in the labor
market?
Labour Market Positioning
• Lead strategy
– the organization intends to pay somewhat above the market
rate in valuing employees as a competitive advantage.
• Match strategy
– sets the organization’s policy line at the middle of the
market.
• Lag strategy
– the organization intentionally pays below the market.
Competency-based Pay
• Pay for the competencies
• Also k/a Knowledge-based pay (KBP) or Skillbased pay (SBP)
• Employees start at a base level of pay and
receive increases as they learn to do other jobs
or gain other skills and therefore become more
valuable to the employer.
Outcomes of competency-based pay
Broadbanding
• It uses fewer pay
grades having broader
ranges.
• Prime reasons
– creating more flexible
organizations,
encouraging competency
development, and
emphasizing career
development.
Behavioral Aspects of Compensation
• Equity
– Perceptions based on comparisons between an
individual’s ratio of inputs and outcomes and the
ratios of others doing similar work.
• Inputs: What an employee gives to the job
• Outcomes: What people get out of doing the job
Outcomes
Outcomes

Inputs
Inputs
Self
Other
Equities
• Equity
– the perceived fairness of the relation between what a person does
(inputs) and what the person receives (outcomes).
• External Equity
– Employees are paid comparably to those who perform similar jobs in
other firms.
• Internal Equity
– Employees are paid according to relative value of their jobs within an
organization.
• Individual or Employee Equity
– Individuals performing similar jobs for the same firm are rewarded
according to factors unique to the employee, such as performance level
or seniority.
Behavioral Aspects of Compensation
• Pay Fairness
– What people believe they deserve to be paid in relation to what others
deserve to be paid.
• Pay Secrecy
– Employees may have inaccurate information or misperceptions about
pay.
– Secrecy is the norm—managers get fewer questions about inequitable
pay.
• Pay Communication
– Involving employees in pay system design increases pay satisfaction.
– Implementing pay systems fairly and providing due process reduces
misperceptions about pay.
Wage and Salary Administration
• It is described as
– the development, implementation, and ongoing
maintenance of a base pay system.
– Base pay
• The wage or salary an employee receives, exclusive of
any incentive pay or benefits.
• Is predictable and fixed.
– Pay Mix
• The way an organization distributes pay among all
elements of total compensation, including monetary
versus nonmonetary elements.
Wage and Salary Administration
• Pay Policies
– Market positioning
– Market pricing
• Market price is the typical wage paid for a job in the
immediate labour market.
• Unions and Compensation
Development of a Base Pay System
Pay Surveys
• A pay survey
– is a collection of data on compensation rates for
workers performing similar jobs in other
organizations.
– An employer may
• use surveys conducted by other organizations, or
• may decide to conduct its own survey.
Pay Surveys
• While using surveys from other sources, it is
important to address following questions:
– Participants
– Broad-based
– Timeliness
– Methodology
– Job matches
Job Evaluation
• Job Evaluation
– provides a systematic basis for determining the
relative worth of jobs within an organization.
– every job in an organization is examined and
ultimately priced according to the following
features:
• Relative importance of the job
• KSAs needed to perform the job
• Difficulty of the job
Job Evaluation Methods
• Job Ranking Method
– Places jobs into a rank order according to the perceived
overall value or importance of the job.
– Is convenient when only a few jobs need to be evaluated
and one person is familiar with them.
• Job Classification Method
– Groups jobs into a set of classifications based on the job
descriptions, and then ranks the jobs that are found within
each classification.
– Jobs classified as being similar are usually referred to as
being in the same job grade.
Job Evaluation Methods
• Point Factor Rating Method
– It breaks down jobs into various compensable factors and
places weights, or points, on them.
– Compensable factor
• is one used to identify a job value that is commonly present
throughout a group of jobs.
• The factors are determined from the job analysis.
Job Evaluation Methods
• Point Factor Rating Method
–STEP 1: Select Compensable Factors
–STEP 2: Assign Factor Weights
–STEP 3: Define Factor Degrees
–STEP 4: Establish the Degree of Each Factor
Present in Each Job
–STEP 5: Calculate Job Values
Job Evaluation Point Chart
Defining degrees
Establishing Pay Structures
Executive Salaries
Executive Benefits
Executive Perquisites
(Perks)
Annual Executive Incentives
and Bonuses
Performance Incentives:
Long Term vs. Short Term
Elements of
Executive
Compensation