Compensation Management

Gary Dessler in his book Human Resource Management defines compensation in these
words “Employee compensation refers to all forms of pay going to employees and arising
from their employment.” The phrase ‘all forms of pay’ in the definition does not include
non-financial benefits, but all the direct and indirect financial compensations.

The Concept of Compensation

Compensation refers to a wide range of financial and non financial rewards to employees
for their services rendered to the organization. It is paid in the form of wages, salaries and
employee benefits such as paid vacations, insurance maternity leave, free travel facility,
retirement benefits etc., Monetary payments are a direct form of compensating the
employees and have a great impact in motivating employees.
The system of compensation should be so designed that it achieves the following
objectives.
➢ The capable employees are attracted towards the organization ➢ The employees are
motivated for better performance ➢ The employees do not leave the employer
frequently
Non-Monetary Benefits
These benefits give psychological satisfaction to employees even when financial
benefit is not available. Such benefits are:
(a) Recognition of merit through certificate, etc. (b) Offering challenging job
responsibilities, (c) Promoting growth prospects, (d) Comfortable working
conditions, (e) Competent supervision, and (f) Job sharing and flexi-time.

Commissions
Commission to managers and employees may be based on the sales revenue or
profits of the company. It is always a fixed percentage on the target achieved. For
taxation purposes, commission is again a taxable component of compensation.
Components of Compensation

• Basic Wages/Salaries
• Dearness Allowance
• Incentives

There are:
(a) Individual incentive schemes, and (b) Group incentive programmes.

• Bonus

The bonus can be paid in different ways. It can be fixed percentage on

the basic wage paid annually or in proportion to the profitability. The
Government also prescribes a minimum statutory bonus for all
employees and workers.
Mixed Plans
Companies may also pay employees and others a combination of pay
as well as commissions. This plan is called combination or mixed plan.
Apart from the salaries paid, the employees may be eligible for a fixed
percentage of commission upon achievement of fixed target of sales
or profits or Performance objectives. Nowadays, most of the
corporate sector is following this practice. This is also termed as
variable component of compensation.

Piece Rate Wages

Piece rate wages are prevalent in the manufacturing wages. The
laborers are paid wages for each of the Quantity produced by them.
The gross earnings of the labour would be equivalent to number of
goods produced by them. Piece rate wages improves productivity and
is an absolute measurement of productivity to wage structure. The
fairness of compensation is totally based on the productivity and not
by other qualitative factors.
Fringe Benefits

Fringe benefits may be defined as wide range of benefits and services that employees
receive as an integral part of their total compensation package. They are based on
critical job factors and performance. Fringe benefits constitute indirect compensation
as they are usually extended as a condition of employment and not directly related to
performance of concerned employee. Fringe benefits are supplements to regular
wages received by the workers at a cost of employers. They include benefits such as
paid vacation, pension, health and insurance plans, etc. Such benefits are
computable in terms of money and the amount of benefit is generally not
predetermined. The purpose of fringe benefits is to retain efficient and capable
people in the organization over a long period. They foster loyalty and acts as a
security base for the employees.

Profit Sharing

Profit-sharing is regarded as a stepping stone to industrial democracy. Profit-sharing is

an agreement by which employees receive a share, fixed in advance of the profits.
Profitsharing usually involves the determination of an organization’s profit at the end
of the fiscal year and the distribution of a percentage of the profits to the workers
qualified to share in the earnings.
Types of Compensation / Base and Supplementary Compensation

Total compensation returns are more transactional. They include pay received directly as cash
(like base, merit, incentives, cost of living adjustments) and indirectly as benefits (like
pensions, medical insurance, programs to help balance work and life demands, brightly
coloured uniforms). Programme to pay to people can be designed in a wide variety of ways,
and a single employer typically uses more than one.

Direct /Base Compensation

Direct compensation refers to monetary benefits offered and provided to employees in return
of the services they provide to the organization. The monetary benefits include basic salary,
house rent allowance, conveyance, leave travel allowance, medical reimbursements, special
allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.
Basic Salary

Salary is the amount received by the employee in lieu of the work done by him/her for a
certain period say a day, a week, a month, etc. It is the money an employee receives from
his/her employer by rendering his/her services

House Rent Allowance

Organizations either provide accommodations to its employees who are from different state
or country or they provide house rent allowances to its employees. This is done to provide
them social security and motivate them to work.

Conveyance

Organizations provide for cab facilities tto their employees. Few organizations also provide
vehicles and petrol allowances to their employees to motivate them

Leave Travel Allowance

These allowances are provided to retain the best talent in the organization. The employees are
given allowances to visit any place they wish with their families. The allowances are scaled as
per the position of employee in the organization.
Medical Reimbursement

Organizations also look after the health conditions of their employees. The employees are
provided with medi-claims for them and their family members. These medi-claims include
health-insurances and treatment bills reimbursements.

Bonus
Bonus is paid to the employees during festive seasons to motivate them and provide them the
social security. The bonus amount usually amounts to one month’s salary of the employee.

Special Allowance

Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses,
reduced interest loans; insurance, club memberships, etc are provided to employees to
provide them social security and motivate them which improve the organizational productivity

• Basic Salary
• House Rent Allowances
• Conveyance
• Leave Travel Allowances
• Bonus
• Special Bonus
• Medical Reimburesement
Indirect /Supplementary Compensation

Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services
provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization,
Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.

Leave Policy
It is the right of employee to get adequate number of leave while working with the organization. The
organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves,
statutory pay, etc.

Overtime Policy
Employees should be provided with the adequate allowances and facilities during their overtime, if they
happened to do so, such as transport facilities, overtime pay, etc.

Hospitalization
The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even
their dependents should be eligible for the medi-claims that provide them emotional and social security.

Insurance
Organizations also provide for accidental insurance and life insurance for employees. This gives them the
emotional security and they feel themselves valued in the organization.

Leave Travel
The employees are provided with leaves and travel allowances to go for holiday with their families. Some
organizations arrange for a tour for the employees of the organization. This is usually done to make the
employees stress free.
Retirement Benefits

Organizations provide for pension plans and other benefits for their employees which benefits them after they
retire from the organization at the prescribed age.

Holiday Homes

Organizations provide for holiday homes and guest house for their employees at different locations. These
holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make
sure that the employees do not face any kind of difficulties during their stay in the guest house.

Flexible Timings

Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due
to their personal problems and valid reasons.

Indirect Compensation

• Leave Policy
• Flexible Timings
• Holiday Homes
• Retirement Benefits
• Leave Travel
• Insurance
• Hospitalization
• Overtime Policy
 Factors Considered in Deciding the
Compensation
External Factors

• Compliance with the law of the land

• Demand and supply of the labour
• Cost of Living
• Government
• Prevailing wage rates
• Labour union and collective bargaining

Internal Factors

• Capacity to pay
• Top Management Philosophy
• Job Requirements
• Organizational plocies
• Employee Related factors
• Productivity of workers
• Job requirements
 DOWNSIZING
Downsizing as a positive and purposive strategy, a set of organizational activities
undertaken on the part of management of an organization and designed to improve
organizational efficiency, productivity, and/or competitiveness. Downsizing thus defined
falls into the category of management tools for achieving desired change, much like
“rightsizing” and “reengineering”. Clearly, the definition is overly expansive. Downsizing
may and very likely will impact or impinge on systemic change efforts such as the
introduction of “total quality management, “reengineering,” or “reinventing” initiative.
They are not one and the same. Downsizing does not necessarily imply a reduction in the
assets of the organization; for example, an organization may contract out a function that
was previously done by permanent employees. The elimination of the jobs of the
employees constitutes downsizing.
 PLANNING COMPENSATION FOR
MANAGERIAL AND PROFESSIONAL JOBS

Basic Compensation Elements There are five elements in a manager’s compensation package: salary,
benefits, short-term incentives, long-term incentives, and perquisites. The amount of salary
managers are paid usually depends on the value of the person’s work to the organization and how
well the person is discharging his/her responsibilities. As with other jobs, the value of the person’s
work is usual determined through job analysis and salary surveys and the resulting fine tuning of
salary levels. Salary is the cornerstone of executive compensation: It is on this element that the
others are layered, with benefits, incentives, and perquisites normally awarded in some proportion
to the manager’s base pay. Benefits (including time off with pay, health care, employee services,
survivor’s protection, and retirement coverage) Short-term incentive are designed to reward
managers for attaining short-term (normally yearly) goals. Long-term incentives are aimed at
rewarding the person for long-term performance (in terms of increased market share and the like).
Perquisites (perks for short) begin where benefits leave off and are usually given to only a select few
executives based on organizational level and (possibly) past performance. Perks include use of
company cars, yachts, and executive dining rooms.
Who is an Executive?

A person or group having administrative or managerial authority in an organization. The chief officer
of a government, state, or political division.

Who are knowledge workers?

It may be more appropriate to first define and understand what “knowledge-work” is all about in
order to understand those who do it, and the implications for managing them. There are three key
features, which differentiate knowledge-work from other forms of conventional work. Firstly, while
all jobs entail a mix of physical, social and mental work, the basic task in knowledge-work is thinking
- it is mental work, which adds value to work. Unlike the salesman who interacts, negotiates and
persuades to achieve his targets, or the shop floor operator who performs physical operations (does
things), the knowledge worker adds value to work through mental activities. Knowledge-work
involves activities such as analyzing and solving problems, deriving conclusions, and applying these
conclusions to other situations. Naturally, the effectiveness of the knowledge worker would depend
on the mental skills and mastery of certain intellectual discipline and expertise (e.g., knowledge of
theoretical frameworks, model-building, problem-solving techniques, etc.).
Wage Access
What it is?

The WageAccess Compensation Survey is an Internet-based multi-industry salary survey that

provides employers with the current and accurate compensation information needed to attract and
retain quality employees. WageAccess provides employers with the current and accurate
compensation information needed to make critical wage-related decisions. • Comprehensive •
Current • Accurate • Convenient • Confidential ...the way surveys should be done
PAY RESTRUCTURING IN MERGERS AND ACQUISITIONS
Restructuring a means of implementing strategic change aimed at improving performance by
reducing the level of differentiation and integration and downsizing the number of employees to
decrease operating costs

Mergers and Acquisitions

The implications of a merger or acquisition on pay and conditions of employment do not seem to be
considered seriously enough in most take-over battles. Executives and employees are too often
pawns in a game of chess played by remote grandmasters. However, acquisitions or mergers do not
always live up to expectations and one of the principal reasons for failure is the demotivation of
managers and staff. This is inevitable if insufficient attention is paid to their needs and fears as well
as any existing imbalances between the reward strategies and remuneration levels of the
organizations set to merge. This issue has assumed increasing significance as globalization leads to
mega-mergers between organizations starting from very different places in the reward philosophy
spectrum.
Merging Salary Structures?

The advantages seem obvious. A common basis is established throughout the group which facilitates
movement and a consistent approach to salary administration. The disadvantage is the disturbance
and potential cost of merging, bearing in mind the regarding and salary increases that might be
necessary as well as the expense of job evaluation. Why go to all this trouble if the operations in the
respective companies are dissimilar and they are located in entirely different parts of the country? It
could even be damaging. 4. If salary structures have to be merged, how should this be done? The
choice is between:

(a) A full job evaluation exercise involving re benchmarking which may be disturbing, time
consuming and expensive but may now have to be looked at in the light of recent equal values
cases; or

(b)The arbitrary slotting of jobs into the new structure using existing job descriptions (if any):- This
could result in gross inequities unless full job descriptions are available or there is already a good fit
between the two salary structures; or

(c) A compromise between (a) and (b), slotting in jobs without a full evaluation if the fit is obvious,
but evaluating doubtful or marginal cases. Note that if pay is negotiated with a trade union or staff
association they would have to be involved and they will obviously fight against any detrimental
changes.

(d)Using this as an opportunity to adopt a new structure based on job family models/generics and
broader pay bands.
NATURE AND OBJECTIVES OF JOB EVALUATION

What is job evaluation?

Job evaluation is the process of methodically establishing a structure of jobs within an organization
based on a systematic consideration of job content and requirements. The purpose of the job
structure or hierarchy is to provide a basis for the pay structure. The job structure, as seen in
previous lessons, is only one of the determinants of the wage structure. But it is an important one
often used.

Definition of Job Evaluation Below are given some important definitions of job evaluation: The I.L.O.
defines job evaluation as “an attempt to determine and compare demands which the normal
performance of a particular job makes on normal workers without taking into account the individual
abilities or performance of the workers concerned.”

“job evaluation is a process of determining the worth of the various jobs within the
organisation, so that differential wages may to jobs of different worth.”
Why to do Job Evaluation?

Organizations usually begin the process of designing a wave structure by determining their job
structure. Two often-cited principles of compensation are

(1) equal pay for equal work and

(2) more pay for more important work. Both imply that organizations pay employees for
contributions required by jobs.

Objectives of Job Evaluation

1. To provide a basis for a simpler, more rational wage structure;

2. To provide an agreed-upon means of classifying new or changed jobs;
3. To provide a base for individual performance measurements;
4. To reduce pay grievances by reducing their scope and providing an agreed-upon means of
resolving disputes;
5. To provide incentives for employees to strive for higher-level jobs;
6. To provide information for wage negotiations;
7. To provide data on job relationships for use in internal and external selection, personnel planning,
career management, and other personnel functions.
The primary purpose of job evaluation

(a) Equity and objective of salary administration, i.e., paying the people whose work is alike the
same wages, and establishing appropriate wage differentials between jobs calling for different
skills and responsibilities;
(b) Effective wage and salary control;
(c) Union-management negotiations on wages; and
(d) Comparison of wage and vary rates with those of other employees. Besides setting wages, job
evaluation also helps in:
(e) Providing standardization of, and improvement in, working conditions;
(f) Clarifying the functions, authority and responsibility of employees; \
(g) Establishing references for the settlement of grievances arising out of individual rates and for
negotiations with a trade union on internal wage structure and differentials;
(h) Developing machinery for a systematic reviewing of job rates as job contents change; and
(i) Developing personnel statistics.
Various bodies involved with the responsibility of Job evaluation
(a) The Committee Approach This committee is given an explanation of job evaluation, the
purposes it is expected to accomplish, a rough time schedule, and perhaps an estimate of the
cost of the program. The committee makes the decision to install job evaluation, decides on the
scope of the project, and assigns responsibility for the work.

(b) Consultants Consultants are sometimes employed to install job evaluation plans. Successful
consultants are careful to ensure that organization members are deeply involved in installing the
plan and are able to operate the plan on their own.

(c) Compensation Department Involvement It is quite possible for the organization to assign
installation and operation of a job evaluation plan to the compensation department. Sometimes
the compensation professional heading the unit and a number of job analysts carry out the task.

(d) Union Involvement in Job Evaluation Union involvement has the same rationale as that offered
in our discussion of job evaluation committees. Acceptance and understanding are the expected
results of involvement
Unions have criticized job evaluation on several grounds

(1) that it restricts collective bargaining on wages,

(2) that wages shouldn’t be based solely on job content,

(3) that supervisors do not or cannot explain the plan to employees,

(4) that management doesn’t administer the plan the way it explained it, and

(5) that it is subjective.

Relationship between Job Evaluation and Job Analysis

Job evaluation is the output provided by job analysis. As seen earlier, Job analysis describes the
duties of a job, authority relationships, skills required, conditions of work, and additional relevant
information. Job evaluation on the other hand, uses the information in job analysis to evaluate
each job valuing its components and ascertaining relative job worth. It involves, in other words, a
formal and systematic comparison of jobs in order to determine the worth of one job relative to
another, so that a wage or salary hierarchy results. So it is a process by which jobs in an
organization are evaluated.
International Compensation
• Objective of international compensation
• Components of an international compensation
• Approaches to international compensation
• Factors influencing compensation

• Principles of compensation
• 1.) Be legal
• 2.) Be adequate
• 3.) Be motivating
• 4.) Be equitable
• 5.) Cost benefit effective
• 6.) Provide Security
Compensation approach in different countries

In USA – Compensation packages includes : Basic, Bonus,

Long term incentives and other benefits and perks. The
base salary is the small part of the total package

In Europe: - Paid less compensation comparison to the

American executives but benefits and employee perks
are much better in Europe than in America

In Japan – The compensation level of CEOs of large

companies are just one third of those of American CEOs.
Japanese compensation is based on seniority of
employees
Compensation – Two Issues

• Pay executives in different countries according to the

standard in each country ?

• What should be the method of payment

National Differences in Compensation

Countries CEO HR Finance

Argentina 860000 326000 64000
Canada 742000 188000 45000
Germany 421000 189000 61000
UK 719000 268000 108000
US 1403000 306000 66000
Compensation Issues
Type of Company Payment
Ethnocentric How much home countries
expatriates should be paid

Polycentric Pay can and should be country

specific
Geocentric May have to pay its
international cadre of managers
the same
Complexities of Global Compensation

• Exchange rate
• Varying tax rates
• Varying inflation rate
• Varying local condition
• Consistency and equity
• Employee expectations
• Varying cost of living
• Varying requirements for facilities
Some facts about Compensation

• A Chinese manager with 15 years of experience cost

less than USD 70000 p.a. A US expatriate manager with
corresponding expertise would cost his or her
organization USD 300000 per year

• Average wage of Chinese worker is only 3-5% of that of

the US worker

• Vacation time is not important in Japan

Objectives of Global Compensation

• Recruit and retain competent employee

• Consistency and equity in pay
• Employee mobility in a cost effective
• Financial protection to employees
• Organization ability to pay
• Benefit management
What are the factors that affect
Global Compensation ?

• Internal Environment
• External Environment
 Components of Global Compensation Package

Base Salary and Allowances Taxes Retirement Benefits

incentive pay

Pay/Base Salary Cost of living Exchange rate Gratuity

protection

Bonus Housing allowance Tax Equalization Pension

Stock Option Educational Tax Protection Social Security

allowance Measures

Medical allowance

Insurance allowance

Relocation allowance