Compensation management

Compensation Management Copyright © 2008 - 2012
managementstudyguide.c

Contents
Introduction to Compensation Management
Economic Theories and Compensation Management
Compensation Management and Job Design
Performance-Related Compensation
Negotiation in Compensation
Attrition and Compensation Management
Executive Compensation
Sales Compensation Plans
Strategic Compensation Management
Quantitative Tools and Innovation in Compensation
International Compensation Management
Copyright © 2008 - 2012

Introduction
Recently, a global pharma major noticed that
its executives were leaving to join relatively
lesser-known competitors. The company had
always believed in stability and long-term
incentives, focusing on secure post-retirement
lives for all employees.
According to the company the majority of the
executives leaving their jobs were in their
mid-thirties. The average age of employees
is 55, so the executives in their mid-thirties
were future torchbearers.
Why did these people leave that company?
Let us see what happened in the next slide
Copyright © 2008 - 2012

Introduction
An investigative study
indicated that most of the
employees left because of
compensation issues. It was
recommended that the
compensation package be
redesigned and the take-home
pay increased, while
discounting the deferred
benefit for their age group.
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Introduction
The term “compensation”, as
a substitute word for wages
and salaries, is of recent
origin.
Pay or compensation represents an exchange
between the employee and the organization
Compensation should be viewed as the
strategic management of wages and salaries
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Objectives of compensation
Equity
Compensation
management strives for
internal and external
equity. Internal equity
requires that pay be
related to the relative
worth of a job so that
similar jobs get similar
pay. External equity
means paying workers
what other firms in the
labor market pay
comparable workers.
Inefficiency
The objective of
efficiency are
reflected in attempts
to link a part of
wages to productivity
or profit, group or
individual
performance,
acquisition and
application of skills
and so on.
Macro-economic
stability
It can be
achieved
through high
employment
levels and low
inflation.
Efficient allocation
of labor
It implies that
employees will
move to
wherever they
receive a net
gain.
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Principles of compensation formulation
External relativities
Market rates as affected by
supply, demand, and general
movements in pay levels
Salary
Salary relativities between jobs
within the organization
depending on the values attached
to different jobs
Individual worth
The value of the individual’s
performance to the organization
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Significance of employee compensation
To an employee, pay is a primary reason for working. For
some individuals, it may be the only reason. For most of us, it
is the means by which we provide for our own and our family’s
needs.
Compensation is also important to organization. It represents a
large proportion of expenditure. Compensation is also
significant in the operation of the economy.
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Compensation decision
There are 3 core decisions, those involving
pay level, pay structure, and pay system.
Supporting there are 3 other decisions,
concerning pay form, pay treatment for
special groups, and pay administration.
All the decisions are influenced by a number
of environmental and organizational
variable.
Examples of their variables are the
economic, social/cultural, and legal
environments; as well as the organization’s
structure and workforce.
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Determinants of compensation decision
Compensation decisions are also affected by the
dynamics of the particular organization. Employee pay
must be consistent within the organization structure.
Finally, compensation decisions are affected by the
worldwide information highway
The social environment is changing dramatically,
following the entry of women into the workforce.
Valuing diversity while taking compensation decisions is
very important
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VIE theory and compensation
Victor Vroom formulated Valence
Instrumentality Expectancy (VIE) theory.
Valence stands for value, Instrumentality is
the belief that if we do one thing it will lead
to another, and expectancy is the
probability that action or effort will lead to
an outcome
An incentive or bonus scheme works only if
the link between effort and reward is clear,
and the value of the reward is worth the
effort
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Compensation benchmarking
Xerox Corporation in U.S adopted a compensation benchmarking process with 4 phases
1 2 3 4
Planning phase
Analysis phase
Integration phase
Action phase
In each of these phases, there were action items that needed to be accomplished.
Let us look at each phase in the next slides
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Planning phase
Issues that were to be addressed
• • •
What will be
benchmarked?
Who will be the
benchmark
companies?
How will the
data be
collected?
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Analysis phase
• • •
Are the
benchmarked
companies
better?
If so, by how
much?
Why are they
better?
•
How can we apply
what we have
learned to our
business?
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Integration phase
Have the results
been accepted by
management?
Do goals have to be
changed or modified
based on the
results?
Have these new
goals been
communicated
to all affected
parties?
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Action phase
Have the steps required to achieve the desired goals
1 been identified?
Is progress being tracked? 2
Is there a plan for recalibration of the benchmarking? 3
However, the Xerox experience showed that if the first two phases – the most
important in the benchmarking process – are carried out effectively, then
benchmarking will have a greater chance of success in the next 2
implementation phases.
Copyright © 2008 - 2012

Compensation plan
A compensation plan is defined as the
components of organizational compensation
A well-designed compensation plan helps
ensure equity within the organization..
A suitably designed compensation plan, mixing both strategic and statutory perspectives,
optimizes the cost of compensation and simultaneously helps the organization achieve its
strategic intent
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Mistakes in compensation designing
1 2 3
• • •
First, an
organizations often
find it difficult to
distinguish between
a bonus and an
incentive
The second mistake is
the compensation
design is the
propensity of
organizations to solve
compensation claims
on an ad hoc basis
And the third
mistake occurs when
organizations devise
equity participation
plans that are too
complicated.
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Classical school
Pioneered by Smith and Ricardo, it
focuses on the concept of subsistence
level of wages in the long run.
Commonly termed as the natural price
for labor, subsistence level is not limited
to the expenses incurred for food alone
Both the pioneers agreed that in the
short-run, even though there may be a
temporary variation in the wage rate,
in the long-run, it reduces to the
subsistence level
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Marxian school
This school considers labor as the basic
source of all value. Labor produces more than
that needed for subsistence
The excess is what in Marxian terminology is
known as “surplus value”, which contributes to
capital accumulation
Depriving workers from above
subsistence level wages in their exploitation
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Neo-classical school of thought
It considers wages as a price like any other factor of production which is
determined by the market forces. Labor supply depends on the disutility; hence it
needs to be overcome by wages as an incentive.
On the contrary, demand for labor depends on the marginal productivity of labor,
which declines with the application of every unit of additional labor.
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Marginalist school
It is an extension of neo-classical
thought, which advocates the law of
diminishing marginal productivity. At
the equilibrium wage rate, aggregate
supply of labor get fully absorbed,
i.e., the stage of full employment.
Hence wage rage gets adjusted
implicitly to the full employment
level.
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Keynesian school
This school, based on Say’s Law, subscribes to the view that supply creates
its own demand. Hence, contrary to the belief that whatever is saved is
automatically invested, the Keynesian school suggests that level of
employment is dependent upon aggregate demand. At full employment, the
level of income and consumptions gets adjusted with the investment.
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Philips Curve
Wage rate
Philips, based on the empirical study of British economy,
concluded that wage rate starts rising once the level of
employment is increased. He observed a inverse
relationship between the level of unemployment and the
rate of increase of the wage level
Level of employment
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Valuation of employee compensation
Value can be determined by answering the following questions:
Does the cost to the employer equal the value to the employee?
What if the employee had to purchase the same benefit in the market?
What if the employer wants to compare the cost of the benefits
package of its employees to another employee, or an industry norm?
How does the value of benefits compute into total compensation?
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Equity in employment benefits
Economic theories on employee compensation and benefits frequently conflict.
Neo-classical economists argue that market competition is the best premise on
which to base employee compensation.
On the other hand, institutional, game theory, or Marxist approaches argue that
markets may not always be competitive. To reduce the problem of inequity, there
is a need to ensure fair rules of pricing with government intervention.
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Productivity-linked employee benefits
Productivity – From an economic point of view, production refers to yield from
Each factor of
production
Each input
Overall yield of the
joint factors and
resources
enumerated above
in combination
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Factors to improve productivity
Nature and quality of
raw material
Basic nature of
process employed
Plants and
equipment
employed
Efficiency of plant and
equipment
Volume continuity and
uniformity of production
Utilization of
manpower
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Productivity measurement
Linking wages to productivity, based on these two models, yields better results as
organizations can objectively price labor, and labor can also get its legitimate share
of productivity gain.
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McDonald
McDonald’s recruitment process is continuous. All
candidates need to fill an online application form
which contains some essay type questions. After initial
screening the company contacts promising applicants
within 2 days and the candidates have to complete
online personality questionnaire.
If the candidate is selected, they call the applicant
to go through the Assessment center, which
McDonald’s refers to as “On Job Experience”. It is
an ideal opportunity for candidates to assess
whether McDonald’s is the right place for them to
work.
CWohmatp ahraipsopnens next and how is it possible for McDonald’s
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McDonald
The candidate is finally invited to a
final interview with an operations
manager. It is more of a chat than a
formal interview.
McDonald’s can do this effectively
because of its well-documented job
design, perfect alignment of jobs to their
core values, and a standard level of
services and quality worldwide.
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Job Design and Compensation
For compensation design and
management, effective job
design, information and
documentation of job
analysis, job descriptions, and
job evaluations are important
pre-requisites.
All these process help in
identifying job requirement
and describing the job, job-facilities,
skill-sets, and skill
mapping as well as
developing skill inventories in
the organization.
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Job Design
The main purpose of job design is to
increase both employee motivation and
productivity. Increased productivity can
manifest itself in various forms. While
designing a job management must also
be concerned with the practical
considerations of quantity and quality
of available personnel. Personal
conflicts, frictions, boredom, and
obsessive thinking also need to be
taken care of
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Characteristics of Job Design
1
4
2
5
3
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Strategies and techniques of job design
Robertson and Smith have recommended some strategies for analyzing jobs.
Review literature and other existing data such as prevailing job description, training manuals,
assessing job designs from manuals of technology providers.
Interview immediate managers to understand the responsibilities and tasks required to perform
the job well.
Interview current employees, who are presently doing the job in the same line, and assess job
requirements.
Observe employees while they do the job.
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Components of job design
Job information: Job information is
one essential input for effective job
analysis. It not only facilitates job
evaluations for compensation
designing, but also helps in
disseminating information to
employees about their duties and
responsibilities.
The main objective of job
information is to communicate
duties and responsibilities attached
to a job to employees for their clear
understanding. This also helps the
employees to understand
organizational expectations.
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Job analysis
Job analysis is the process of gathering information about the job and evaluating
such information in terms of what is necessary and relevant. Essentially, job
analysis involves 3 questions.
• • •
What is a job? What should be
analyzed?
What methods of analysis
should be used?
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Methods of job analysis
Job information can be obtained in various ways either by a staff analyst or by the
individual line manager. Direct observation of work performed is another important
method of job analysis. Valuable job information can also be obtained from
organization manuals, time-study reports, former job descriptions, and method
studies.
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Assessment centers
CIPD carried out a survey in 2006 and indicated that almost 50% of
employers are now using the assessment center approach in selection
prospective candidates for the job. An effective recruitment process is an
organization follows the sequence as shown below.
Attract Impress Select Recruit
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Design of assessment centers
The design should reflect
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Job description
The compiled job information is translated into job
descriptions. There are written records of job duties and
responsibilities, which provide a factual basis for job
evaluation. Job descriptions are recorded on a standard
form in a uniform manner.
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Job specifications
Job specifications include the
education or experience required to
do the job and the special knowledge
and skills necessary to carry out the
job.
In addition, specifications also identify
soft skills, such as inter-personal
skills, analytical ability, problem-solving
skills, or decision-making
skills, etc.
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Job evaluation
Job evaluation systematically differentiates the relative worth of a job
and established pay differentials. In fact, job evaluation reflects the job
values, which organizations assigns to a job accordingly decide the
wage rates.
A properly devised job evaluation scheme provides the management
with definite systematic and reliable data for determining wage and
salary scales.
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Job evaluation schemes
• • •
Ranking: This is a
simple system to
judge each job as a
whole and understand
its relatively worth by
ranking one whole job
against another job.
Classification: In this
case, the grade and wage
level are pre-determined
before jobs are ranked and
descriptions are written
defining the type of job
which should fall into each
group.
Points rating: under this
system, to achieve a
higher level of accuracy,
each job is broken down
into its component factors
or characteristics and
then evaluated separately
rather than evaluating the
job as a whole. Copyright © 2008 - 2012

Job assessment
At this stage, information about each job
is made available to the assessors. Every
job, whether manual or not, is closely
observed and inspected in actual
operation by the assessors. If required the
assessors can question the operators and
their supervisors to collect further details
about the job to clear any doubt
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Performance Management System (PMS)
From compensation management point of view, PMS helps in achieving the
It helps in recognizing the efforts and
contribution of employees objectively
and thereby facilitates effective job
pricing, both through cost optimization
and rewarding of talented performers
It facilitates suitable
compensation design,
rewarding employees based
on the performance metrics
It facilitates employees to develop
their core competencies and
achieve their goals
It attracts good performers
from competition
following critical goals
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Performance-related pay
Performance-related pay schemes
are designed and administered
from a company’s point of view
It often fails because it is not
aligned closely to business strategy
Further performance-driven compensation can support
constant change and performance improvement, but can
not deliver these by itself, contrary to popular belief
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Selection of performance objective
The performance objective must be
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Developing performance standards
• • • •
For effective
compensation
design,
developing
performance
standards is
another
important task
The approach
an organization
should adopt
should be a top-down
or a
bottom-up
collaborative
approach
As Simply
benchmarking
performance
standard with
competing
organizations
may not always
be the right
approach
Exceeding
expectations in setting
performance standards
and thereby requiring
employees to
overstretch is a
common
organizational
syndrome, particularly
for new start-ups,
which aim to grow
disproportionately
Developing
performance
The approach Benchmarking Expectations
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Guidelines
Reporting systems
should be adequate to
measure and, therefore
should have more
quantitative data
Quantifiable measures may not
apply to all functions. Describe in
clear and specific terms the
characteristic of performance
quality that are verifiable and that
would meet or exceed
expectations.
Performance
standard should be
related to the
employee’s
assigned work and
job requirements
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Checklist
Are the standards realistic?
Are the standards specific?
Are the standards based on measurable data?
Are the standards consistent with organizational goals?
Are the standards challenging?
Are the standards clean and understandable?
Are the standards dynamic?
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Effective performance modeling
If an employee performs well, such
performance is directly linked to
process performance and to
department/division performance as
well as the ultimate goals of the
company.
For a performance model
to work, employee
performance appraisal
criteria must be aligned
with the performance
metrics.
An effective performance
modeling enables the
management to be
specific that the end
results are not arbitrary,
but a summation of all
different activities and
processes, given an
attainable standard of
performance.
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Features of Performance Management System (PMS)
Objective
stating
Review of
objectives
Personal
improvement
plans
Alignment
with training
and
development
Formal
appraisal
with
feedback
Pay review
Competence-based
organizational
capability
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Various dimensions of performance
Output/result dimension
Input dimensions
Time dimensions
Focus dimensions
Quality dimensions
Cost dimensions
Results and output
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Compensation broad banding using PMS result
• Compensation broad banding is
a type of salary program that
replaces multiple grades and
ranges with a limited number of
wide ranges
• Employee move through salary
ranges without traditional
promotions or job delineation,
based on individual skill
attainment and expansion of
duties, rather than on any
prescribed time pattern.
• Broad banding reduces trade
levels and job titles, combining
multiple jobs levels into a single
range
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Compensation design through skill-based programme
It rewards employees for attainment of
additional skills and knowledge. A skill-based
pay system enables employees to
enjoy addition payment of compensation for
new learning, which correspondingly
enhances their level of performance. To
introduce skill-based compensation
programme, organizations at the outset
break the jobs or group of jobs into different
components. Organization then encourage
such employees to acquire additional skills.
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Problems
Major obstacles to introduce the skill-based pay can be listed as follows
Defining of skill set
Pricing skill sets
Validation of skills
Skill obsolescence
Skill recertification
test
High cost of training
Increased payroll
costs
Regulatory
bottlenecks
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Competency-based pay
Competency is more holistic, as it aggregates
knowledge, skill, and abilities of employees,
integrated with the behavioral requirements.
Instead of compensating for the position and the
job-title, competency-based pay emphasizes on
the job accomplishments, much wider than job
efficiency.
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Obstacles
It is important to remember that performance-linked pay or compensation is not the absolute
criterion for compensation design, and is one among the various criteria.
Relating compensation directly to performance is not so easy. In fact, in some type of
organizations, it may not be even desirable. Both the management and the employees need to
agree to relate compensation to performance.
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Negotiation
To talk about compensation
management without referring to
the process of negotiation and
bargaining that is an integral part of
compensation management is
impossible
As anybody who has worked in the
formal or even the informal sector
knows, the process of negotiating
one’s salary and perks is
fundamental to the process of
hiring and selection.
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Plan in place
Employer
The first element of negotiation is to plan for the process by deciding on how
much more you want and how much you think the employer is willing to give
The fine art of knowing how much you should ask for and at what point should
you strike the deal is something that experienced professionals know and
rookies should learn
Without having a clear idea of the target level of compensation that you are
aiming for, the negotiation process would turn out to be an exercise in futility
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Communicating your needs
HR Manager
• Once you have arrived at a figure that you think
you deserve, the next step is to communicate the
same to the prospective employer without delay.
• The important point to note here is that the way in
which you articulate your needs is as important
as the need to drive a bargain.
• For instance, without expressing yourself clearly
to the HR manager of the prospective employer,
there is little chance that he or she would
understand your needs and respond
appropriately.
• Hence, once you have sorted out the target
compensation that you want, you should also
have a strategy to communicate it to the
employer.
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Time is everything
You need to remember that there is something called being too
early when you negotiate and too late as well. Hence, the timing of
your articulation forms the basis for a successful negotiation.
For instance, if you start your demands early on in the hiring
process, the prospective employer might stall the process or even
put a stop to your hiring.
On the other hand, if you put forward your demands as you are
about to join the firm, there is precious little anyone can do about
your demands.
Hence, you should have a keen eye for when you should
communicate your demands.
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Time is everything
The three aspects of having a plan, communicating the need and
then timing it in such a way as to derive maximum advantage are
essential to the negotiation process
Of course, there are many firms that do not entertain any sort of
negotiation and there are firms that put up pretence of negotiation
when in reality, they do not budge at all
In these cases, it is better to adopt a wait and watch policy and
make your move once they get into the details of your
compensation
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Time is everything
In conclusion, a successful negotiation hinges on the willingness of
both the parties to hear each other and an ability to arrive at a
common denominator in a spirit of accommodation
Hence, do not be overtly rigid and at the same time do not give in
to the employer totally
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Low compensation and attrition
The exit interviews
conducted by the HR
professionals to
ascertain the reasons
behind an employee’s
exit usually reveal that
low compensation is a
major factor behind the
employee’s decision to
quit the company
Research into the phenomenon of attrition has
found that many employees (particularly at the
entry and the middle management levels) leave
companies because they have been offered better
compensation at another company. On the other
hand, the senior management personnel quit to
take up challenging roles that pay well as well as
provide self actualizing drives to them.
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Compensation as hygiene factor
• Hertzberg’s theory of motivation lists hygiene
factors as those conditions when absent
cause an employee to be dissatisfied.
• The point about this theory is that factors like
adequate compensation, a congenial working
environment and additional benefits are
necessary to motivate the employee and they
ought to be present to keep the employee
happy.
• The absence of such factors makes the
employee lose focus and drive and hence the
lack of “hygiene” makes it difficult for the
employee to continue
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Managing compensation expectation
The appraisal time or the time of the year
when employees are graded on their
performance is usually the time when
employees put forth their aspirations and
expectations regarding the compensation
and other aspects of their job
Compensation in recent years has ceased
to be the “be all” of employee satisfaction
with the nature of work and the
responsibilities that an employee has
becoming more important in determining
job satisfaction, it still is one of the most
important factors behind an employee’s
decision to quit a company
The line managers and the HR managers
must make it a point to “manage” the
expectations of the employees during this
period. The attrition is usually the highest
when employees are handed their raise
letters that specify how much their
compensation is increased. This is because
the employees might expect more than what
they have been awarded which leads to
dissatisfaction
It is incumbent upon HR professionals and
the senior management that they devise
compensation plans keeping in mind the
various factors that drive an employee’s
psyche. Only when an employee is
satisfied with his or her condition in a
company can they perform at the desired
levels
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Components of executive compensation
Base salary
Annual incentives
Long-term capital
accumulation
Deferred compensation
arrangement
Supplemental benefit
and perquisites
Special severance and
retirement arrangement
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Emerging trends in executive compensation
Increase in the number of corporate collapses is now dragging executive pay and
corporate governance into the public domain
Business condition are putting pressures on existing pay levels and structure
Corporate restraint and accountability in tough economic times make executive
compensation a major issue to control
Executive compensation movements at the median of the market are getting
subdued over the years
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Executive compensation design
Executive compensation design process
links compensation criteria, such as
organizational performance or size, to
compensation consequences, such as pay
at risk. Such process is categorized into 2
forms – the process that centers on
contract and the process that involves
direct monitoring of the executive.
Organizations that follow the contract
process make it a time-bound
employment offer, which becomes a legal
arrangement. Direct monitoring is a
behavioral approach to monitor the
performance of the executive. It is a
subjective evaluation.
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Performance measurement in executive
incentive programmes
There are certain criteria that incentive performance measures should ideally
meet. They should be:
Capable of
being aligned
with shareholders
interest
Definable
Easily
communicated
and understood
FFlelexxibibiliitliyty
Controllable Measurable
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Different criteria of executive compensation
1 Strategy criterion
2 Role/position criterion
3 Individual characteristics criterion
4 Performance criterion
5 Behavior criterion
6 Size criterion
7 Market criterion
88 Peer compensation criterion
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Understanding the sales function
Before designing a sales compensation plan, managers
need to understand the sales function.
The financial performance of an organization
depends on the sales executive’s performance;
hence sales compensation also needs to be different,
as it is largely incentive based.
For managers, an understanding of the sales
function involves the study of the various
activities involved in sales, from the
beginning.
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Sales compensation issues
Sales are lifeline of the organization.
Sales directly help in achieving the
organizational goals and objectives.
Hence when organization need to
achieve an accelerated pace of
growth, a strategic design of sales
compensation, without altering the
overall compensation structure, can
help achieve the objective
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Sales compensation plan
Sales compensation plan varies from one
organization to another, depending on
their practices
Salary is considered as right option. A
commission of sale is also considered as
the other alternative model of sales
compensation
A straight salary plan is simple to
administer and it also provides security
to the sales executives, as their pay is
not at risk
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Sales compensation design and administration
Although no model on sales compensation programme, which applies uniformly across the
organizations, exists, some common steps are adopted for a sales compensation design.
Such steps are:
Identification of
realistic and
challenging sales
goals
Translating sales goals
into measurable
objectives
Finally, designing
sales compensation,
which is competitive
and motivational for
the employees
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Designing an effective Sales compensation plan
7 6 5 4 3 2 1
Basic understanding of the sales job
description:
This is very important as the nature of
the sales job cannot be uniform for all
types of products and services.
Effectively describing the role of a
sales executive and then developing a
suitable compensation structure
requires organizations to first decide
about the job description for sales
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Understanding the objective:
For the sales function, the overall objectives of
the organization based on MBO approach may
cascade to key result areas (KRA), key
performance areas (KPA) and key sales
objectives (KSO). These could be identified for
individual sales executive or for a sales team.
7 6 5 4 3 2 1
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7 6 5 4 3 2
Understanding of controllable
and measurable elements of
the sales function:
Sales compensation plans are
largely linked to performance. To
understand the performance and
its possible bottleneck, and
degree of performance
achievement, emphasis should
be placed on the controllable and
measurable elements of the sales
function.
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Determine the level of compensation:
At this stage, the organization designs a compensation matrix with
respect to the job role on one axis and salary, incentives, and total
compensation on the other axis. Along with this the organization also
needs to understand industry’s average compensation, fixed-variable
mix for the salary, salary-incentive mix, and other determinants of
compensation level.
7 6 5 4 3
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7 6 5 4
Understanding the compensation method:
Straight salary, straight commission, and the
combination of both are considered while
designing sales compensation. Absolute
straight salary or absolute straight
commissions are not suitable models of sales
compensation. The organization is required to
adopt a combination approach, identifying a
suitable mix of salary, incentives, benefits and
expenses.
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Pilot testing of designed method:
A newly designed sales compensation method should be tested for
administrative feasibility, sales compensation expense optimization
and enhancement of motivation of the sales force. A better
understanding of all these factors would be possible by fitting the
organization’s immediate past year’s sales performance data into
new model and studying its impact.
7 6 5
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7 6
Rollout of the plan:
Finally, the newly designed plan is rolled out in the
organization. Organization, as an ongoing process,
should study the motivation level of sales force,
keep a track on the performance changes, and
incorporate possible changes, if needed.
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Components of sales compensation
Base salary
Long-term incentives
linked with annual target
Short-term incentives
linked with short-term
goals
Perquisites to support sales
initiatives
Incentives in the form of
sales commission
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Contribution-based sales compensation
A contribution-based sales compensation benefits the organization in following ways:
It ensures long-term
profitability, as it enhances
the performance of the
organization and make it
financially stable
It gives an opportunity to the
sales personal to earn with no
limit or a payment ceiling,
without straining the
organizational compensation
budget
It makes recruitment of sales executives
more flexible, as organizations can avoid
payment to those who fail to perform
1
2
3
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Strategy
Strategy is a pattern of decisions concerning
policies and practices associated with an
organizational system. Understanding
organizational system helps in formulating
strategies. Strategies need to be formulated
in each functional area of an organization and
also at each level of an organization.
Mintzberg et al. identifies 10 schools of
strategy – broadly classified under
Prescriptive schools and Descriptive schools.
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Schools
Prescriptive school
• Design school
• Planning school
• Positioning school
Descriptive school
• Entrepreneurial
school
• Cognitive school
• Learning school
• Power school
• Cultural school
• Environmental school
• Configuration school
School
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Design school
When it comes to making major mistakes, it's not your weaknesses that will get you
in trouble, it's your strengths. Most successful people are aware of their weaknesses.
Any strengths which is overextended becomes weakness. For example, listening is a
strength for some people. But if a person listens a lot but does not speak enough, it
becomes his/her weakness.
Copyright © 2008 - 2012

Planning school
Restructuring the strategy formation into some distinctive and identifiable steps,
this school makes strategy formation more a formal process, rather a cerebral one.
This school, therefore, emphasizes on making managerial decisions more formal
and documented by norms such as a standard operating procedure to ensure
consistency in a series of actions.
Copyright © 2008 - 2012

Positioning school
It views strategy formation as an analytical process placing the business
within the context of the industry that the organization is in, and
evaluating how the organization can improve its competitive positioning
within the industry.
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Descriptive school – Entrepreneurial school
Like the design school, the entrepreneurial school
centers around the strategy formation process at the
chief executive level, relying on intuition and gut feeling
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Cognitive school
It considers strategy formation as a mental process and analyses
how people perceive patterns and process of information. The
cognitive school looks inwards into the minds of strategists. This
school subscribes to the view that strategies are developed in
people’s mind as frames, models, or maps.
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Learning school
It regards strategy formation as an emergent process, where the
management of an organization pays close attention to what works and
does not work over time, and incorporate these “lessons learned” into
their overall plan of action
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Power school
It is a process of negotiation between
power holders within the company, and/or
between the company, and the external
stakeholders. The power school views
strategy as emerging out of power games
within the organization and outside it.
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Cultural school
The cultural school views strategy formulation as a process rooted in the
social force of culture. As opposite to the power school that focuses on
self-interest and fragmentation, the cultural school focuses on common
interest and integration. Strategy formulation is viewed as a social process
rooted in organizational school
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Environmental school
The environmental school believes that an organization’s strategy
depends on events in the environment and the organization’s reaction to
them. The environmental school deserves attention for the light it throws
on the demands of the environment. It sees strategy formation as a
reactive process – a response to the challenges imposed by the external
environment.
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Configuration school
It finally mandates
strategy formation as a
process of transforming
the organization from one
type of decision-making
structure into another.
The configuration school,
which views strategy as a
process of transforming the
organization, describes the
relative stability of strategy,
interrupted by occasional and
dramatic leaps to new ones.
This school enjoys the most
extensive and integrative
literature and practice at
present.
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Compensation design and strategy
Organizational practices in strategically designing
the compensation structure vary widely. In fact,
compensation is designed with the influence of
more than one school of thought
While framing compensation strategies, the
organization should align its policies and practices
with its strategy. This will ensure fulfillment of role
expectations for employees within the
organization
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Strategy across levels
Strategies framed at middle level deal with
• Strategies for meeting and
satisfying customer needs.
• Market competition
strategies
• Product/service
development strategies
matching with market
requirements
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Strategy compensation design
Organization design compensation in a flexible, competitive, and performance-oriented way, by
adopting the following processes
Looking into the
history of the
organizations to
understand the
principles and
norms
Using various
workgroups to
understand the
issues
Focusing on
performance
management,
structure setting
and adjustment
Implementing the
new strategically
Matching with
the legislative
regulatory norm
designed
compensation plan
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Strategy compensation policies
To achieve and maintain consistency, equity,
and fairness in evaluating and compensating
employees
To reward employees based on their experience
and performance
To reward employees based on their support of
organization-specific mission, strategies, and
operating plan
To allow attraction and retention of high-quality
professional employee
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Variable compensation
Variable pay is employee
compensation that changes
as compared to salary which
is paid in equal proportions
throughout the year. Variable
pay is used generally to
recognize and reward
employee contribution
toward company
productivity, profitability,
team work, safety, quality, or
some other metric deemed
important.
The employee who is
awarded variable
compensation has gone
above and beyond his or her
job description to contribute
to organization success.
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Incentives
Incentives are the additional
payment to employees besides the
payment of wages and salaries.
Often these are linked with
productivity, either in terms of
higher production or cost saving or
both. These incentives may be
given on individual basis or group
basis.
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Fringe benefits
Fringe benefits include such benefits
which are provided to the employees
either having long-term impact like
provident fund, gratuity, pension; or
occurrence of certain events like medical
benefits, accident relief, health and life
insurance; or facilitation in performance
of job like uniforms, canteens,
recreation, etc
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Perquisites
These are normally provided to managerial personnel either to
facilitate their job performance or to retain them in the
organization. Such perquisites include company car, club
membership, free residential accommodation, paid holiday trips,
stock options, etc.
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Need for rationale wage policy
Formulation of rational wage policy continues to be one of the most important and significant
social demands.
Earlier, it formed the basic responsibility of the employer but with the industrial progress, wage
bargain has become a matter of concern for the employer, employee, and the state.
Any rational wage policy has hence to be woven into the socio-economic texture reflecting the
objectives and aspirations of the people of a particular country.
It cannot be dealt with, on purely economic considerations in isolation from the social policy
and political culture of that particular community.
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Economic objectives of wage policy
An important objective of any society is the achievement of maximum economic welfare.
This requires the national income to be maximized. The national income should be divided
equally among all the members of the economy and finally, there should be a fair amount of
stability in the national income.
Economic welfare gets maximized if the highest and most stable standard of living possible for
each section of the community is attained. In order to secure this, it is necessary to achieve:
Copyright © 2008 - 2012

Economic objectives of wage policy
Full employment and
optimum allocation of
all resources.
The highest degree of
economic stability
consistent with an
optimum rate of economic
progress.
Maximum income
security- for all
sections of the
community.
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Remuneration administration
1. It should be developed keeping in view the interests of the employer, the
employees, the consumers and the community.
2. Wage policy should be stated clearly in writing to ensure uniform and
consistent application.
3. Remuneration plans should be consistent with the overall plans of
the company. Compensation planning should be an integral part of
financial planning.
4. Remuneration plans should be sufficiently flexible or responsive to
changes in internal and external conditions of the organization.
5. Management should ensure that employees know and understand the wage
policy of the company.
6. All remuneration decisions should be checked against the
standards set in advance in the wage policy.
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Appraisals/new joiners/pay increases
Creating a pay structure is not the final step in the creation of a compensation plan.
An organization must also decide how to administer this compensation plan.
This means deciding how to pay new employees, how and when to give employees increases,
including how to move existing employees from the minimum to the maximum of their assigned
pay grades, how to determine the pay increase for an employee being promoted from one job
to another and what influence, if any, cost of labor increases will have on the determination of
pay increases for employees.
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Fixed vs. variable pay
• Should performance be measured and rewarded based on
individual, group or organizational performance?
• Should the length of time for measuring performance be short
term or long term?
Variable pay programs are widely followed
throughout many organizations and for all
levels of employees.
Widespread use of various incentive plans,
team bonuses, profit-sharing programs
have been implemented with a view to link
growth in compensation to results.
Of course, while using variable pay systems,
management must look into two issues
carefully;
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Payroll Management
Payroll is a compensation record of each employee, which shows gross pay,
deductions, and net pay. It also provides the details of cost to the company,
associated with employment.
Payroll management involves accounting and administration of payroll.
Payroll accounting, using payroll software, can be automated and payroll
reports can be prepared with speed and accuracy.
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Quantitative analysis
In compensation designing and management, intuition is often used
rather than mathematical systems. Certain norms are following in
mathematical system. For example, the observation must be
dependent, i.e., one measurement should not bias the other. The
measurement must be from a normally distributed population, the
traditional “bell-shaped” curve.
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International Compensation
• Globalization is now a reality for organizations.
• Globalization has enhanced the level of awareness of free flow
of information across nations, influencing the market and the
people.
• As a natural consequence, it has bearings on compensation
management.
• International compensation management is a complex area
because of cross-cultural issues, difference in organizational
practices, labor, costs etc.
• For an multinational organization, it is now important to
understand international compensation practices.
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Components of International Compensation
Some of the common
international compensation
components are base
salary, indirect monetary
compensation, equalization
benefits, and incentives.
In international
compensation,
design of
incentives for
expatriates is also
a crucial issue.
Various cash
bonuses, stock
options, and
performance-related
payments
are used as
incentives.
Equalization in
benefits is practiced
in international
compensation as a
transitional support to
expatriates, as a part
of social adjustment
assistance.
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International compensation design
•
This requires a
global mindset.
•
With a global
mindset,
organizations can
become flexible in
designing
compensation for the
expatriates.
•
For example, in
China local labor
costs for the
state-owned
enterprises and
for the private and
foreign organiza-tions
are different.
To successfully compete in
a global market, it is
essential for organizations
to design their inter-national
compensation
with a global mindset, to
understand the economic,
social, and political
changes in the countries
they operate.
• • •
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Approaches to international compensation
Going-rate approach
The basic characteristics of this approach are linking the compensation of
the expatriates as per the compensation structure in the host country. For
this purpose, organizations need to first decide the basis of benchmarking
their compensation structure. Some of the advantages of the going-rate
approach are equality, simple administration, and simple for the expatriates
to understand, and the overall sense of identity to the expatriates, as they
can relate them with the host country.
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Approaches to international compensation
Balance sheet approach
This type of approach provides for extra financial benefits to adjust the home
country’s living standard. Thus home-country pay and benefits are the basis
of their approach. Financial benefits are provided in alignment with the living
standard. An Italian expatriate, working for an Italian company in India, will
certainly not feel comfortable with the India level of compensation. His/her
base salary would be of Italian standard. The basic purpose of this approach
is to equalize the purchasing power of expatriates in the home country.
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Critical thinking questions
A particular organization, engaged in the
business of pharma drugs, offers the best
salaries in the industry to its employees. Due to
the increase in inter-industry job mobility, the
company has started losing talented employees.
Initially, the company did not pay any attention
to this issue, as it gets skilled manpower from
its relatively small competitors, because of its
competitive compensation package.
However, its talent flight has now become so
acute that the company has decided to opt for
an industry benchmark of their compensation
packages.
As a team leader of this project, chalk out your
action plans, detailing the types of industries
that you may like to benchmark.
Prepare a wage policy for payment of wages to
industrial workers
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Rupee appreciating in recent times has made Indian IT
and ITES organizations prune compensation. While one
way for the company is to attribute such reduction in
variables to performance, the other way is to consider
this as economic phenomenon. Examine the effect on
the compensation design of manufacturing
organizations in the era of rupee depreciation.
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A company engaged in the manufacturer of life
style drugs and cosmetics gives 80% weightage
to the competencies of marketing managers.
You have been entrusted to help the company
design a competency-based job description for
marketing managers. Prepare the report and
explain your reasons.
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Case Study – Salary inequities
Tony was trying to figure out what to do
about a problem salary situation he had
in his plant. Tony recently took over as
president of Best Group Manufacturing.
The founder and former president,
Robert, had been president for 35 years.
The company was family owned and
located in a small eastern Arkansas town.
It had approximately 250 employees and
was the largest employer in the
community. Tony was the member of the
family that owned Best Group, but he had
never worked for the company prior to
becoming the president. He had an MBA
and a law degree, plus five years of
management experience with a large
manufacturing organization, where he
was senior vice president for human
resources before making his move to
Best Group.
TONY, MBA and Law Graduate
Copyright © 2008 - 2012

Salary inequities
A short time after joining Best Group,
Tony started to notice that there was
considerable inequity in the pay
structure for salaried employees. A
discussion with the human resources
director led him to believe that salaried
employees pay was very much a matter
of individual bargaining with the past
president. Hourly paid factory
employees were not part of this problem
because they were unionized and their
wages were set by collective bargaining.
An examination of the salaried payroll
showed that there were 25 employees,
ranging in pay from that of the president
to that of the receptionist. A closer
examination showed that 14 of the
salaried employees were female. Three
of these were front-line factory
supervisors and one was the human
resources director. The other 10 were
non management.
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Salary inequities
This examination also showed that the human resources director appeared to
be underpaid, and that the three female supervisors were paid somewhat less
than any of the male supervisors. However, there were no similar supervisory
jobs in which there were both male and female job incumbents. When asked,
the HR director said she thought the female supervisors may have been paid
at a lower rate mainly because they were women, and perhaps Robert, the
former President, did not think that women needed as much money because
they had working husbands. However, she added she personally thought that
they were paid less because they supervised less-skilled employees than did
the male supervisors. Tony was not sure that this was true.
Copyright © 2008 - 2012

Salary inequities
TONY, MBA and Law Graduate Compensation consultant
The company from which Tony had moved had a good job evaluation system.
Although he was thoroughly familiar with and capable in this compensation tool,
Tony did not have time to make a job evaluation study at Best Group. Therefore,
he decided to hire a compensation consultant from a nearby university to help
him. Together, they decided that all 25 salaried jobs should be in the same job
evaluation cluster, that a modified ranking method of job evaluation should be
used, and that the job descriptions recently completed by the HR director were
current, accurate, and usable in the study.
Copyright © 2008 - 2012

Salary inequities
The job evaluation showed
that the HR director and the
three female supervisors
were being underpaid
relative to comparable male
salaried employees.
Tony was not sure what to
do. He knew that if the
underpaid female
supervisors took the case to
the local EEOC office, the
company could be found
guilty of sex discrimination
and then have to pay
considerable back wages.
He was afraid that if he
gave these women an
immediate salary
increase large enough to
bring them up to where
they should be, the male
supervisors would be
upset and the female
supervisors might
comprehend the total
situation and want back
pay. The HR director told
Tony that the female
supervisors had never
complained about pay
differences.
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Salary inequities
The HR director agreed to take a sizable
salary increase with no back pay, so this
part of the problem was solved. Tony
believed he had for choices relative to
the female supervisors:
1. To do nothing.
2. To gradually increase the female
supervisors salaries.
3. To increase their salaries
immediately.
4. To call the three supervisors into his
office, discuss the situation with them,
and jointly decide what to do.
Copyright © 2008 - 2012

Questions
1. What would you do if you were Tony?
2. How do you think the company got into a situation like this in the first place?
3. Why would you suggest Tony pursue the alternative you suggested?
Copyright © 2008 - 2012

Compensation management

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