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Human Resource Management
MBA & BBA
Compensation & Benefits Management
Lectures 25,26,27
Course Lecturer: Farhan Mir
Compensation
• Deals with every type of reward individuals receive in exchange for performing organizational tasks– Major cost of doing business– Chief reason why most individuals seek
employment– An exchange relationship
Financial Compensation
Direct Financial Compensation• Consists of the pay an employee
receives in the form of:– wages– salaries– bonuses– commissions
Indirect Financial Compensation
• Consists of all financial rewards not included in direct financial compensation – i.e., benefits:– pensions– insurance– employee services
Total CompensationTotal CompensationTotal CompensationTotal Compensation
DirectDirectDirectDirect IndirectIndirectIndirectIndirect
BonusesBonusesBonusesBonuses
GainsharingGainsharingGainsharingGainsharingSecurity Plans• Pensions
Security Plans• Pensions
Employee Services• Educational assistance• Recreational programs
Employee Services• Educational assistance• Recreational programs
CommissionsCommissionsCommissionsCommissions
Wages / SalariesWages / SalariesWages / SalariesWages / Salaries
Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife
Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife
Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays
Time Not WorkedTime Not Worked• VacationsVacations• BreaksBreaks• HolidaysHolidays
Presentation Slide 9–1
Objective of Compensation
• To create a system of rewards that is equitable to the employer and employee alike
• The desired outcome is an employee who is:– Attracted to the work– Motivated to do a good job for the employer
A Compensation system should
be:
AdequateEquitable
Balanced
Cost-effective
Secure
Incentive-providing
Acceptable to the employee
Labor Market Economy
Government Unions
External Influences on Compensation
Equal Pay Act of 1963
• Established the concept of equal pay for equal work
• Prohibits wage differentials based on gender between men and women performing essentially the same work in organizations– skill– effort– responsibility– working conditions
Pay and Motivation
• Motivation – set of attitudes and values that predisposes a person to act in a specific, goal-directed manner:– the direction of behavior (working to reach a
goal)
– the strength of behavior (how hard or strongly the individual will work)
Pay and Employees’ Satisfaction
• Pay Satisfaction – refers to an employee’s liking for or dislike of the employer’s compensation package (including pay and benefits)
• Lawler’s Model – the distinction between the amount employees receive and the amount they think others are receiving is the immediate cause of pay satisfaction or dissatisfaction
Pay and Employees’ Productivity
• Studies indicate that if pay is tied to performance, the employee produces a higher quality and quantity of work
• The key to making compensation systems more effective is to be sure that they are directly connected to expected behaviors
Traditional Approach to Compensation
Job AnalysisJob Analysis
Job DocumentationJob Documentation
Job RatingJob Rating
Create JobWorth Hierarchy
Create JobWorth Hierarchy
Prepareto SurveyPrepare
to Survey
Conduct SurveyConduct Survey
AnalyzeMarket Data
AnalyzeMarket Data
Reconcile Internal &External Considerations
Reconcile Internal &External Considerations
DevelopPay Structure
DevelopPay Structure
• To discover nature of duties performed• To clarify authority and responsibility• To determine KASOCs
• To record job information• Typical content: Job summary Specific duties KASOCs
• Identify benchmark positions• Select information sources
• Choose comparators• What information is needed?• Document survey
• Select methods for analysis
• Apply job evaluattion instrument
• Sore-thumbing• Check for evidence of bias
Internal External
Source: Reprinted from Elements of Sound Base Salary Administration, 2nd edition, copyright 1988, with permission from the American Compensation Association and American Society for Personnel Administration, 14040 N. Northsight Blvd., Scottsdale, AZ U.S.A. 85260; telephone (602) 951-9191; fax (602) 483-8352 © ACA
Compensation Decisions
• Pay-Level Decision– Examines pay relative to employees working
on similar jobs in other organizations– Objective is to keep the organization
competitive in the labor market– Pay survey is the major tool used in this
decision
Compensation Decisions
• Pay-Structure Decision– Examines pay relative to employees working
on different jobs within the organization– Involves setting a value on each job within the
organization relative to all other jobs– Job evaluation is the approach used
Compensation Decisions
• Individual Pay Determination– Examines pay relative to employees working
on the same job within the organization
Pay Surveys
• Techniques and instruments used to collect data about compensation paid to employees in:– a geographic area– an industry– an occupational group
• Obtaining valid, reliable information about pay is critical to creating a compensation system that supports corporate goals
GovernmentSources
Professional andTrade
Organizations
Surveys Conductedby Other
Organizations
Surveys byJournals
Sources of Pay Surveys
Compensation Conclusion
• Determining the worth of a job is difficult because it involves measurement and subjective decisions
• Using systematic job evaluation procedures is one way to determine net worth
How to Develop the Compensation Mechanism
Methods & Techniques
To the individual
employee, the most
important
compensation decision
is how much he or she
will earn.
Determination of Individual Pay
Three questions need to be addressed:
1. How should one employee be paid relative to another when they both hold the same job in the organization?
2. Should we pay all employees doing the same work at the same level the same?
3. If not, on what basis should we make the distinction?
Pay differentials are based on:
1. Individual differences in experience, skills, and performance
2. Expectations that seniority, higher performance (or both) deserve higher pay
Methods of Payment
Flat Rates
Payment for Time Worked
Variable Pay: Incentive Compensation
Payment for Time Worked
• General, across-the-board increase for all employees
• Merit increases paid to some employees– based on some indicator of job performance
• Seniority
Variable Pay
• Percentage of an employee’s paycheck is put at risk
• If business goals are not met, the pay rate will not rise above the lower base salary
• Annual raises are not guaranteed
• Helps manage labor costs
• Does not guarantee equitable treatment of employees
Types of Variable Pay
Individual Incentives
Group Incentives
Organization Incentives
Individual Incentives
• Possible only in situations where performance can be specified in terms of output– e.g., sales dollars generated– e.g., number of items completed
• Employees must work independently of each other so that individual incentives can be applied equitably
Reasons to Use Team Incentives
• When it is difficult to measure individual output
• When cooperation is needed to complete a task or project
• When management feels this is a more appropriate measure on which to base incentives
Organization-wide Incentives
• Usually based on one of two performance concepts:– A sharing of profits generated by all
employees altogether– A sharing of money saved as a result of
employees’ efforts to reduce costs
Employee Benefits• Five general categories of employee benefits.
– government-mandated programs
– employee welfare plans, including all forms of health care plans, survivor benefits, and disability programs
– pension plans and other long-term capital accumulation programs, including profit-sharing plans, and other savings plans
– time-off programs (whether paid or unpaid), such as vacation and sick pay
– employee services, which include reimbursement plans, child/family care, housing and relocation services, employee assistance programs, and employee recognition programs
How Benefit Dollars Were Spent in 2001
(as Percentages of Total Payroll)
Cash Payroll62.7%
Time Not Worked9.4%
Miscellaneous Benefits
1.3%
Medical10.5%
Retirement and Savings
7.3%
Legally Required8.7%
Life Insurance and Death 0.3%
Source: Adapted from the U.S. Chamber of Commerce. The 2001 Employee Benefits Study, prepared and published by the U.S. Chamber of Commerce. To order call 1-800-638-6582.
Government-Mandated Programs
• Benefits programs mandated by federal law.– Social Security Act of 1935—requires companies to
cover employees under a comprehensive program of retirement, survivor, disability, and health benefits (OASDHI) and, additionally, requires that employers pay taxes to cover benefits payable to workers who are out of work "through no fault of their own"
– Workers' Compensation Laws—requires that employers finance variety of benefits for employees with work-related illnesses or injuries on "no-fault" basis
Government-Mandated Programs
• Benefits programs mandated by federal law.– Omnibus Budget Reconciliation Act of 1985 (COBRA)—requires
employers to provide access to health care coverage in particular instances when coverage would otherwise terminated
• cost of coverage may be completely passed on to worker• administrative record-keeping fee also may be charged
– Family Medical Leave Act of 1993 (FMLA)—requires employers to continue providing health care coverage to employees who are on FMLA leave (up to 12 weeks per year for specified family emergencies) on same basis as it was provided before the leave
Pension Plans• Pension—payment to a retired employee based on
the extent and level of employment with the organization.– defined benefit plan—plan which guarantees a specific retirement
payment based on a percentage of pre-retirement income; typically, the amount is based on years of service, average earnings during a specified time period, and age at time of retirement
– defined contribution plan—plan whereby the employer provides a specific amount of money (typically a percent of the base salary) deposited into an individual's account each period; the employee chooses among investment options and, typically, may take the vested portion of the account with them if they leave employment (vesting refers to the point in time when pension moneys set aside by a company for an individual become the actual property of that individual)
Components of International Compensation
• Four major components.– base salary—the amount of cash compensation that will be
provided to an individual each pay period– foreign service inducements—monetary payments above and
beyond base salary that companies offer in order to encourage employees to accept expatriate assignments
– allowances—additional money given to expatriates for housing expenses, educational expenses, relocation expenses, spouse assistance, etc.
– benefits—indirect forms of compensation that are intended to maintain or improve quality of life for employees
AwardsAwardsAwardsAwards
Other Employee Benefits and Services
Recreational and Recreational and SocialSocial
Recreational and Recreational and SocialSocial
Credit UnionsCredit UnionsCredit UnionsCredit Unions
Food ServicesFood ServicesFood ServicesFood Services
Purchasing Purchasing AssistanceAssistance
Purchasing Purchasing AssistanceAssistance
Transportation Transportation PoolingPooling
Transportation Transportation PoolingPooling
On-Site Health On-Site Health ServicesServices
On-Site Health On-Site Health ServicesServices
Legal ServicesLegal ServicesLegal ServicesLegal Services
Financial Financial PlanningPlanning
Financial Financial PlanningPlanning
Housing and Housing and MovingMoving
Housing and Housing and MovingMoving