New Compensation Management

7/31/2019 New Compensation Management

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The Importance of HR

Human resource is the most vital resource forany organization .

It is responsible for each and every decision

taken , each and every work done , and eachand every result .

Employees should be managed properly and

motivated by providing best remunerationand compensation as per the industrystandards .


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Compensation

Compensation is the remuneration received

by an employee in return for his contribution

to the organization .

It is an organized practice that involves

balancing the work employee relation by

providing monetary and non- monetary

benefits .


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Developing a Compensation Strategy

Compensation should not be a result of randomdecisions

Instead , the result of a careful and systematicstrategic process .

Embedded in the process is an understanding ofthe basic purposes of compensation

An assessment of strategic options for

compensation . Knowledge of the determinants of compensation

strategy , and the use of pay surveys .


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Basic Purposes and Objectives of

Compensation

The organization must provide appropriate

and equitable rewards to employees .

Individuals who work for organizations want

to feel valued and .

Want to be rewarded at a level commensurate

with their skills , abilities and contributions to

the organization .


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Basic Purposes and Objectives of

Compensation

Compensation serves a ( signaling ) function .

Organizations signal to employees what theyfeel is important or the employee to focus on..

(And what they feel is less important )bypaying for certain kinds of activities orbehaviors and not for others .

Compensation can serve as an incentive toemployees to increase their efforts alongdesired lines


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Issues of Fairness and Equity

Organizations must consider two different

kinds of equity :

Internal equity .

External equity .


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Internal Equity in Compensation Refers to comparisons made by employees to

other employees within the same organization

In making these comparisons , the employee

is concerned that he is equitably paid for his

contributions to the organization relative to

the way other employees are paid in the firm .

An example and the reaction .


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Problems With internal Equity

Can result in conflict among employees ,

feelings of mistrust , low morale , anger

And perhaps even legal actions if the basis of

inequity is perceived to result from illegal

discrimination .


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External Equity In compensation refers to comparisons made

by employees to others employed by different

organizations performing similar jobs .

Problems with external equity may result in

higher turnover ( because employees will

leave for better opportunities elsewhere ) ..

Dissatisfied and unhappy workers , and

difficulties in attracting new employees .


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Pay Surveys

Are critical sources of information concerning

external equity .

Pay surveys are surveys of compensation paid to

employees by other employers in a particulargeographic area, industry, or occupational group .

Some wage surveys especially for executive and

managerial jobs, are conducted by professionalassociations such as the Society for Human

Resource Management .


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The Importance of Internal and

External Equity

Both are important, however, there is one

additional consideration concerning internal

equity .

The Equal Pay Act of 1963 stipulates that men

and women who perform essentially the same

job must be paid the same .


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Problems Related to Internal Equity

Generally speaking, internal equity problemsoccur when employees on one job feel thatthey are being undercompensated relative to

employees on some other job or jobs withinthe organization .

However, it is illegal to pay a woman less thana man(or vice versa ) for performing the same

job when no objective bases for such adifference exists.


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Motivational purpose

It is important that compensation serve amotivational purpose.

Meaning that individuals should perceive that

their efforts and contributions to theorganization are recognized and rewarded.

Individuals who work hard and who perform

at a high level should be compensated at alevel higher than are individuals who do justenough to get by or at below average rate .


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Compensation Management

Is more than just the means to attract and retain

talented employees .

In todays competitive labor market ,

organizations need to fully leverage their humancapital to sustain a competitive position .

This requires integrating employee processes ,

information and programs with organizationalprocesses and strategies to achieve optimal

organizational results .


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Compensation Plans

Successful Organizations are committed to the

continued success of their Compensation Plan

Such a plan enhances the organizations ability

to staff core operations and new initiatives


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Compensation Plans

Support employee development , recruit and

retain highly qualified employees and

Reward them based on heir performance and

capabilities and support .

The achievement of organizational goals


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Compensation

Is an integral part of human resource

management which helps in

Motivating the employees and improving

organizational effectiveness .

If the compensation offered is effectively

managed , it contributes to high organizational

productivity .


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Need of Compensation Management

A good compensation package is important to

motivate the employees to increase the

organizational productivity .

The lucrative compensation will also serve the

need for attracting and retaining the best

employees .


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Unless compensation is provided no one will

come and work for the organization .

Thus , compensation helps in running an

organization effectively and accomplishing its

goals .


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Salary is just a part of the compensation

system .

The employees have other psychological and

self actualization needs to fulfill , thus ,

compensations serves the purpose .

The most competitive compensation will help

the organization to attract and sustain the

best talented employees


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Employee

retention

compensation

motivation

Need

satisfaction


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Designing The Compensation System

Compensation systems are designed keeping

in minds the strategic goals and business

objectives .

They are designed on the bases of certain

factors after analyzing the job work and

responsibilities .


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Components Of Compensation

Systems

Pay

structure

Job

analysis

Salary scales


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Types of Compensation

Compensation can be direct in the form of

monetary benefits and / or in th form of non

monetary benefits known as perks , time off ,

etc.

It does not include only salary ,but it is the

sum total of all rewards and allowances

provided to the employees in return for theirservices .


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Types of Compensation

There are two different types of compensationmanagement : direct and indirect .

Compensation is the combination of monetary

and other benefits provided to an employee inreturn for his time and skill .

The field of compensation management

provides management with the idealcombination of the different remunerationtypes .


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Direct Compensation

Is typically comprised of salary payments and

health benefits .

The creation of salary ranges and pay scales

for different positions within the company are

the central responsibility of compensation

management staff .


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Medical

reimbursement

Direct

compensation

Specialallowances

Bonus

Basic salary

House rentallowances

ConveyanceLeave travel

allowances


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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 .


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Overtime

policy

Indirect

Compensation

Leave

policy

Flexible

Timings

Holiday

Homes

Retirement

Benefits

Hospitalization

Insurance

Leave

travel


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Basic Salary:Direct Compensation

Is the amount received by the employeein lieu of the work done by him for a

certain period , say , a day , week ,month .


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Direct Compensation : House Rent

Allowance

Organizations either provide accommodation

to their employees or they provide house rent

allowances .

This is done by to provide them social security

and motivate them to work .


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Direct Compensation: Conveyance

Organizations provide for cab facilities to their

employees .

Few organizations also provide vehicles and

petrol allowances to their employees to

motivate them .


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Direct Compensation : Leave Travel

Allowances

Are provided to retain the best talented

employees 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 .


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Direct Compensation : Medical

Reimbursement

Organizations also look after the health

conditions of their employees


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Pay and performance

The development of performance related

pay schemes that are related to assessments

of performance through individual employee

appraisal .

This is widely thought, but hard to actually

achieve .


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Problems with pay for

performanceOne primary problem is definingperformance properly, so that the

organization pays for results and not foreffort .


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The basis of performance related pay

systems

It seems only fair that people should be paidaccording to their contribution .

Performance related pay schemes can benefitboth employers and employees by emphasizing

the importance of efficiency and effective jobperformance, employers can benefit from higherproductivity .

Higher pay can be targeted at the ( better )

performance encouraging them to stay with thecompany and continue to perform to a highstandard .


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Wages versus salaries

Fundamental to understanding compensationis the distinction between wages and salaries .

Wages generally refer to hourly compensation

paid to operating employees; the basis forwages is time .

That is, the organization pays individuals forspecific blocks of their time .

Most organizations calculate wages on anhourly basis .


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salary

Is income paid to an individual on the basis of

performance, not on the basis of time .

A salary is used to provide compensation not

for how much time people spend in the

organization but for their overall contribution

to the organizations performance .


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Strategic Options for Compensation

More recently, organizations have begun to

rely on skill-based pay and pay- for-

knowledge programs .

In this way, organizations signal to their

employees the relative importance of what

someone does on the job versus what they

bring to the job .


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A second decision in developing a compensation

strategy focuses on the bases for differential pay

within a specific job .

In some organizations, especially those with astrong union presence, differences in actual pay

rates are based on seniority, that is..

With each year of service in a particular job,wages go up by a specific amount, so the longer

one works on the job, the more the person makes


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Maturity Curve

Is a schedule specifying the amount of annual

increase a person will receive .

This curve is used when the annual increase

varies based on the actual number of service theperson has accumulated .

The assumption under a seniority based system is

that employees with more experience can make amore valuable contribution to the organization

and should be rewarded for that contribution .


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A third decision in developing a compensation

strategy deals with the organizations pay

rates relative to going rates in the market .

In addition to attracting high-quality

employees, market rates system tends to

minimize voluntary turnover among

employees .

f


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Determinants of Compensation

Strategy

One general set of factors has to do with Theoverall strategy of the organization itself.

Afirm in a high-growth mode is constantly

striving to attract new employees and may finditself in a position of having to pay above-marketrates to do so .

The organizations ability to pay is an important

consideration, those with healthy cash flow and /or substantial cash reserves are more likely to beable to pay above market wages and salaries .

f


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Strategy

In addition , the overall ability of theorganization to attract and retain employees isa critical factor .

If the organization is located in an attractivearea; has several non compensationamenities; and provides a comfortablepleasant and secure work environment, then

it might be able to pay somewhat lower wagesand vice versa.

i f i


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Strategy

Union influences comprise another important

determinant of an organizations

compensation strategy ..

If an organization competes in an environment

that is heavily unionized, then the strength

and bargaining capabilities of the union

influence what the union pays its employees


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Determining what to pay

Once a compensation strategy has been

chosen, it is necessary to determine exactly

what employees on a given job should be

paid.

The starting point in this effort has

traditionally been job evaluation.


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Job evaluation methods

Is a method for determining the relative value

or worth of a job to the organization so that

individuals who perform this can be

compensated adequately and appropriately.

Job evaluation is mostly concerned with

establishing internal pay equity.

Several job evaluation techniques andmethods have been established.


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Wage and Salary Administration

Much of this administration involves making

adjustments to wages and salaries as the

result of pay raises or changes in job

responsibilities .

In organizations where jobs are arranged in a

more hierarchical structure, it is important to

implement programs for progression to ahigher level job within a job class ..


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Wage and Salary Administration

In addition, there are certain issues that are

related to compensation that must also be

addressed as part of this administration

process

Two of the most important of these issues

involve pay secrecy and pay compression .


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Pay Secrecy

Refers to the extent to which the

compensation of any individual in an

organization is secret ..

Or the extent to which it is formally made

available to other individuals.

Each approach has some merit .


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Advocates of Pay Secrecy

Maintain that what an individual is paid is hisown business and is not for public knowledge .

They also argue that if pay levels are made

known to everybody else, then jealousy and/or resentment will result .

Most business practice pay secrecy,sometimes to the point of formally forbiddingmanagers from discussing their pay with otherpeople .


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Open Pay System

Some organizations adopt a more open pay

system where everyone knows what everyone

else makes .

The logic behind this strategy is that it

promotes equity and motivation .


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Open Pay System If high performers are known to make more

money than low performers.

It follows logically that people throughout the

organization will be motivated to work harder,

under the assumption that .

They too will be recognized and rewarded for

their contribution .


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Open Pay System

Many publicly funded organizations such as

state universities and public schools have

open pay systems whereby .

Any interested individual can look at budgets

or any other information to determine how

much any employee is being paid .


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Open Pay System

Pay secrecy is a long- standing practice in

many companies today .

But some companies seem to be willing to

consider open pay systems .

At the same time, however, organizations that

are interested in open pay systems should be

prepared for cries of favoritism, politics, andworse!


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Open Pay System

Workers who are paid less than they think

they deserve will likely find reasons

To criticize the pay of others, especially upper-

level managers whose salaries are likely to be

relatively high .


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Pay Compression

Is another problem that some organizations

must confront occasionally during wage and

salary administration .

It occurs when individuals with substantially

different levels of experience and/or

performance abilities are being paid wages or

salaries that are relatively equal .


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Pay Compression

Is most likely to develop when the market rate

for starting salaries increase at a rate ..

Faster than an organization can raise pay for

individuals who are already on the payroll .


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Pay Compression

It may be possible for a newcomer starting in

organization to be paid a higher salary than an

individual who has been working for the

organization for a year or two . If other employees are aware of this situation,

then again the possibility for resentment and

disappointment is likely to increase .


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Pay Compression

Organizations sometimes have little

remedy in the event of pay

compression , they have to respond

to market shifts .

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New Compensation Management