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Compensation ManagementCompensation Management

Asif JaleesAsif Jalees

Compensation ManagementCompensation Management• Human Resource is the most vital resource for Human Resource is the most vital resource for

any organization. It is responsible for each and any organization. It is responsible for each and every decision taken, each and every work done every decision taken, each and every work done and every result. Employees should be managed and every result. Employees should be managed properly and motivated by providing best properly and motivated by providing best remuneration and compensation as per the remuneration and compensation as per the industry standards or practice. industry standards or practice.

• The attractive compensation will also serve the The attractive compensation will also serve the need for attracting and retaining the best need for attracting and retaining the best employees for the organization.employees for the organization.

Compensation ManagementCompensation Management Q:Q: What is Compensation?What is Compensation?

Compensation is the remuneration received by an Compensation is the remuneration received by an employee in return for his / her contribution to employee in return for his / her contribution to the organization. It is an organized practice that the organization. It is an organized practice that involves balancing the work – employee relation involves balancing the work – employee relation by providing monetary and non-monetary by providing monetary and non-monetary benefits to employees.benefits to employees.

Compensation is an integral part of human Compensation is an integral part of human resource management which helps in motivating resource management which helps in motivating the employees and improving organizational the employees and improving organizational effectiveness. effectiveness.

Components of Compensation SystemComponents of Compensation System- Compensation systems are designed keeping in Compensation systems are designed keeping in

mind the strategic goals and business objectives. mind the strategic goals and business objectives. Compensation system is designed on the basis of Compensation system is designed on the basis of certain factors after analyzing the job work and certain factors after analyzing the job work and responsibilities. There are three major components responsibilities. There are three major components of a good compensation system:of a good compensation system:

1)1) Job AnalysisJob Analysis2)2) Pay Structures / Salary SlabsPay Structures / Salary Slabs3)3) Salary SurveysSalary Surveys

And outcome is CompensationAnd outcome is Compensation

Components of Compensation SystemComponents of Compensation System

Need of Compensation ManagementNeed of Compensation Management- A good compensation package is important to motivate A good compensation package is important to motivate

the employees to increase the organizational the employees to increase the organizational productivity.productivity.

- Unless compensation is provided no one will come and Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in work for the organization. Thus, compensation helps in running an organization effectively and accomplishing running an organization effectively and accomplishing its goals.its goals.

- Salary is just a part of the compensation system, the Salary is just a part of the compensation system, the employees have other psychological and self-employees have other psychological and self-actualization needs to fulfill. Thus, compensation serves actualization needs to fulfill. Thus, compensation serves the purpose.the purpose.

- The most competitive compensation will help the The most competitive compensation will help the organization to attract and sustain the best talent. The organization to attract and sustain the best talent. The compensation should be as per industry standards. compensation should be as per industry standards.

Types of Compensation Types of Compensation

- There are two types of compensations:There are two types of compensations:

1) Direct Compensation1) Direct Compensation

2) Indirect Compensation2) Indirect Compensation

1) Direct Compensation1) Direct Compensation• Direct compensation refers to monetary benefits or Direct compensation refers to monetary benefits or

direct cash offered and provided to employees in return direct cash offered and provided to employees in return of the services they provide to the organization. The of the services they provide to the organization. The monetary or cash benefits include:monetary or cash benefits include:

a) Basic Salarya) Basic Salary

b) House Rent Allowanceb) House Rent Allowance

c) Conveyance Allowancec) Conveyance Allowance

d) Leave Fare Allowanced) Leave Fare Allowance

e) Medical Allowancee) Medical Allowance

f) Bonus f) Bonus

g) Provident Fundg) Provident Fund

h) Gratuityh) Gratuity

i) Special Allowancei) Special Allowance

Components of Direct CompensationComponents of Direct Compensation

1) Direct Compensation1) Direct Compensation

a)a) Basic Salary:Basic Salary: Salary is the amount received by Salary is the amount received by an employee in lieu of the work done by him / an employee in lieu of the work done by him / her for a certain period say a day, a week, a her for a certain period say a day, a week, a month etc. month etc.

b)b) House Rent Allowance: House Rent Allowance: Some organizations Some organizations provide accommodations to its employees who provide accommodations to its employees who are from different areas of country or they give are from different areas of country or they give house rent allowance to its employees if they house rent allowance to its employees if they are not providing accommodation. This is done are not providing accommodation. This is done to provide them social security and motivate to provide them social security and motivate them to work for them. them to work for them.

1) Direct Compensation1) Direct Compensationc) c) Conveyance Allowance: Conveyance Allowance: Organizations Organizations

provide free transportation facility to their provide free transportation facility to their employees. To motivate them to come for work. employees. To motivate them to come for work.

d)d)Leave Fare Allowance: Leave Fare Allowance: These allowances are These allowances are provided when en employee claims his/her provided when en employee claims his/her annual leaves in order to entertain his travel annual leaves in order to entertain his travel visits they plan with their families.visits they plan with their families.

e)e)Medical Allowance: Medical Allowance: Organizations also look Organizations also look after the health conditions of their employees. after the health conditions of their employees. The employees are provided with medical claim The employees are provided with medical claim facility for them and their immediate families. facility for them and their immediate families.

1) Direct Compensation1) Direct Compensationf) f) Bonus:Bonus: Is provided to employees after the Is provided to employees after the

completion of company’s fiscal year. After completion of company’s fiscal year. After having approval from the board of directors. having approval from the board of directors. Bonus pay out time may vary from organization Bonus pay out time may vary from organization to organization and industry practice.to organization and industry practice.

g) g) Provident Fund:Provident Fund: Is the shared by an employee Is the shared by an employee and company with certain defined percentage of and company with certain defined percentage of the basic salary. Which is deducted from the basic salary. Which is deducted from employee’s account. And is accumulated on employee’s account. And is accumulated on monthly basis. And once an employee plans to monthly basis. And once an employee plans to leave. The accumulated amount is returned to leave. The accumulated amount is returned to him/her.him/her.

1) Direct Compensatio1) Direct Compensationn

h) h) Gratuity:Gratuity: Is provided to employees with subject Is provided to employees with subject to the number of years he has served in the to the number of years he has served in the organization. And is calculated from the basic organization. And is calculated from the basic salary. salary.

i) i) Special Allowance:Special Allowance: It includes mobile It includes mobile allowances, meals, commissions, travel expenses, allowances, meals, commissions, travel expenses, reduced interest loans, club memberships etc.reduced interest loans, club memberships etc.

2) Indirect Compensation 2) Indirect Compensation Indirect compensation refers to non-monetary benefits Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services offered and provided to employees in lieu of the services provided by them to the organization. They are:provided by them to the organization. They are:

a)a) LeavesLeaves

b)b) Overtime Overtime

c)c) Company Maintained CarCompany Maintained Car

d)d) HospitalizationHospitalization

e)e) Leave Travel AssistanceLeave Travel Assistance

f)f) InsuranceInsurance

g)g) Retirement BenefitsRetirement Benefits

h)h) Free TransportationFree Transportation

i)i) Flexible Working HoursFlexible Working Hours

Components of Indirect CompensationComponents of Indirect Compensation

Indirect CompensationIndirect Compensationa)a) Leaves:Leaves: Normally leaves are provided to employees to get Normally leaves are provided to employees to get

relaxation from the work. Leaves may be of different types relaxation from the work. Leaves may be of different types like: casual leaves, medical or sick leaves and maternity like: casual leaves, medical or sick leaves and maternity leaves.leaves.

b)b) Overtime Allowance:Overtime Allowance: This include providing cash benefits This include providing cash benefits to employees if they work other than their standard office to employees if they work other than their standard office work hours. This helps on motivating employees. work hours. This helps on motivating employees.

c)c) Company Maintained Car: Company Maintained Car: One of the major source to One of the major source to motivate employees is to give them company maintained motivate employees is to give them company maintained cars. However, this option is available with the positions in cars. However, this option is available with the positions in the hierarchy.the hierarchy.

Indirect CompensationIndirect Compensationd)d) Insurance:Insurance: Organizations provide accidental and life Organizations provide accidental and life

insurance to employees. This gives them emotional security.insurance to employees. This gives them emotional security.

e)e) Leave Travel: Leave Travel: One of the key motivating factor is to One of the key motivating factor is to provide cash assistance for tickets, hotel ling etc. and this provide cash assistance for tickets, hotel ling etc. and this covers not only employee but also his/her immediate family.covers not only employee but also his/her immediate family.

f) f) Retirement Benefits or Pension:Retirement Benefits or Pension: Some organizations Some organizations provide cash benefits even after employee is retired or has provide cash benefits even after employee is retired or has left organization after serving certain period of time. This left organization after serving certain period of time. This option remains open subject to employee’s or his wife’s life.option remains open subject to employee’s or his wife’s life.

Indirect CompensationIndirect Compensation

g) g) Hospitalization:Hospitalization: this benefit covers employee’s this benefit covers employee’s immediate family for emergency treatment, immediate family for emergency treatment, accidental coverage and maternity.accidental coverage and maternity.

h) h) Free Transportation:Free Transportation: Some times Some times organizations provide free pick and drop facility organizations provide free pick and drop facility to employees.to employees.

i) i) Flexible Working Hours:Flexible Working Hours: organizations organizations provide flexible timings to the employees who provide flexible timings to the employees who can not come to work during normal working can not come to work during normal working hours.hours.

Pay StructurePay Structure

Pay StructuresPay Structures

• Once job analysis has been done organizations Once job analysis has been done organizations need to decide upon the pay structures. Pay need to decide upon the pay structures. Pay structure refers to the process of setting up the structure refers to the process of setting up the pay for a job in an organization. The process pay for a job in an organization. The process deals with internal and external analysis to deals with internal and external analysis to estimate the compensation package for a job estimate the compensation package for a job profile.profile.

• Organizations decide their pay structures Organizations decide their pay structures through “External Equity and Internal Equity”.through “External Equity and Internal Equity”.


a)a) Internal Equity:Internal Equity: A systematic comparison in A systematic comparison in order to determine the worth of a job with the order to determine the worth of a job with the other similar job with in a organization. This other similar job with in a organization. This process identifies the importance of duties, process identifies the importance of duties, responsibilities and working conditions.responsibilities and working conditions.

- Internal equity is determined through Internal equity is determined through Job Evaluation.Job Evaluation.

Job EvaluationJob Evaluation- - Job Evaluation is a systematic procedure to Job Evaluation is a systematic procedure to

determine the relative worth of jobs. It determine the relative worth of jobs. It determines which jobs are worth more to the determines which jobs are worth more to the organization than others. Without job organization than others. Without job evaluations, the HR department would be evaluations, the HR department would be unable to develop a rational approach to pay. unable to develop a rational approach to pay. We have different methods of it:We have different methods of it:

• Job RankingJob Ranking• Job GradingJob Grading• Factor ComparisonFactor Comparison• Point System Point System

Job EvaluationJob Evaluation1)1) Job Ranking: The simplest and least precise Job Ranking: The simplest and least precise

method of job evaluation is job ranking. method of job evaluation is job ranking. Specialists review the job analysis information Specialists review the job analysis information and then rank each job subjectively according and then rank each job subjectively according to its relative importance in comparison with to its relative importance in comparison with other jobs in the organization.other jobs in the organization.

-- Raters may consider individual factors such as Raters may consider individual factors such as responsibilities, skill, effort, and working responsibilities, skill, effort, and working conditions in jobs. conditions in jobs.

Job EvaluationJob Evaluation

2) Job Grading: It works by having each job 2) Job Grading: It works by having each job assigned to a grade by matching standard assigned to a grade by matching standard descriptions with each job’s description. descriptions with each job’s description.

(Please, review figure 13-4, page number 385, (Please, review figure 13-4, page number 385, book Keith Davis) book Keith Davis)

The job that has more duties and responsibilities The job that has more duties and responsibilities will be assigned a higher grade.will be assigned a higher grade.


3) Factor Comparison: In this method job 3) Factor Comparison: In this method job evaluation committee compares critical or evaluation committee compares critical or compensable job factors. These compensable compensable job factors. These compensable factors are the job elements common to all jobs factors are the job elements common to all jobs being evaluated , such as responsibility, skill, being evaluated , such as responsibility, skill, mental & physical efforts and working mental & physical efforts and working conditions.conditions.


Steps in Factor ComparisonSteps in Factor Comparison

1)1) Determine the Critical Factors: In this approach Determine the Critical Factors: In this approach analysts first decide which factors are common analysts first decide which factors are common and important in a broad range of jobs. and important in a broad range of jobs.

2)2) Determine Key Jobs: Those jobs that are Determine Key Jobs: Those jobs that are commonly found throughout the organization commonly found throughout the organization and in the employer’s labor market.and in the employer’s labor market.

Job EvaluationJob Evaluation3) Apportion Current Wages for Key Jobs: The 3) Apportion Current Wages for Key Jobs: The

job evaluation committee then allocates a part of job evaluation committee then allocates a part of each key job’s current wage rate to each critical each key job’s current wage rate to each critical factor.factor.

- For example: A janitor receives $6.7 an hour. For example: A janitor receives $6.7 an hour. This amount is apportioned as follows:This amount is apportioned as follows:

- 80 cents for responsibility80 cents for responsibility- 80 cents for skill80 cents for skill- 50 cents for mental effort 50 cents for mental effort - $2.70 for physical effort$2.70 for physical effort- $1.90 for working conditions$1.90 for working conditions

Job EvaluationJob Evaluation4) Place key jobs on a Factor Comparison Chart: 4) Place key jobs on a Factor Comparison Chart:

Once the compensable factors of each key job Once the compensable factors of each key job have been assigned a proportion of the wage have been assigned a proportion of the wage rate, this information is transferred to a factor rate, this information is transferred to a factor comparison chart.comparison chart.

(Please, refer Figure 13-6, Page 387, Book (Please, refer Figure 13-6, Page 387, Book Keith Davis) Keith Davis)


5) Evaluate other jobs: Each job is evaluated on 5) Evaluate other jobs: Each job is evaluated on the basis of benchmark.the basis of benchmark.

6) Point System: It is the mostly used method. 6) Point System: It is the mostly used method. This system evaluates the compensable factors This system evaluates the compensable factors of each job. And rating is based on simple point of each job. And rating is based on simple point system.system.


b)b)External Equity:External Equity: Organizations formulate their Organizations formulate their compensation strategies by assessing the compensation strategies by assessing the competitor’s or industry standards. competitor’s or industry standards. Organizations set the compensation packages Organizations set the compensation packages for their employees aligned with the prevailing for their employees aligned with the prevailing compensation packages in the market. This compensation packages in the market. This entails for fair treatment to employees. At times entails for fair treatment to employees. At times organizations offer higher compensation organizations offer higher compensation packages to attract and retain the best talent in packages to attract and retain the best talent in their organizations.their organizations.

Salary and Benefits - Surveys Salary and Benefits - Surveys

• The purpose of Wage and Salary survey is to The purpose of Wage and Salary survey is to identify what other key players or employers are identify what other key players or employers are paying to their employees in the same market.paying to their employees in the same market.

• Organizations have to bridge the gap between Organizations have to bridge the gap between the industry standards and their salary packages. the industry standards and their salary packages. They can not provide compensation packages They can not provide compensation packages that are either less than the industry standards or that are either less than the industry standards or are very higher then the market rates.are very higher then the market rates.

Salary and Benefits - Surveys Salary and Benefits - Surveys

What is a Wage and Salary Survey? What is a Wage and Salary Survey? - The salary survey is the research done to analyze The salary survey is the research done to analyze

the industry standards to set up the the industry standards to set up the compensation strategy for the organization. We compensation strategy for the organization. We have two ways to have salary surveys:have two ways to have salary surveys:

a)a) Organizations can either conduct the survey Organizations can either conduct the survey themselves.themselves.

b)b)Or they can purchase the survey reports from Or they can purchase the survey reports from research organizations. The life of survey report research organizations. The life of survey report is 2 to 4 years. is 2 to 4 years.

Objectives of Salary and Benefits Objectives of Salary and Benefits SurveySurvey

1)1) To gather information regarding the industry To gather information regarding the industry pay standards.pay standards.

2)2) To know more about the market rate i.e. To know more about the market rate i.e. compensation offered by the competitors.compensation offered by the competitors.

3)3) To design a fair compensation system.To design a fair compensation system.

4)4) To design and implement most competitive To design and implement most competitive reward strategies.reward strategies.

5)5) To benchmark the compensation strategies.To benchmark the compensation strategies.

Types of Compensation SurveysTypes of Compensation Surveys

1) Standard Surveys: Standard surveys are 1) Standard Surveys: Standard surveys are undertaken by organizations on a regular basis. undertaken by organizations on a regular basis. These surveys are conducted annually based on These surveys are conducted annually based on the organizational objectives. These surveys the organizational objectives. These surveys attempt to cover the same companies every year attempt to cover the same companies every year and provide the same time of analysis.and provide the same time of analysis.

Types of Compensation SurveysTypes of Compensation Surveys2) Custom Surveys: At times, a few organizations 2) Custom Surveys: At times, a few organizations

need to know some specific information. The need to know some specific information. The surveys which cater this need are known as surveys which cater this need are known as custom surveys. The organizations either higher custom surveys. The organizations either higher research organizations to conduct these surveys research organizations to conduct these surveys for them or they themselves conduct the survey for them or they themselves conduct the survey by sampling few of the competitors on their by sampling few of the competitors on their own. These surveys don’t have any time interval. own. These surveys don’t have any time interval. They are undertaken as the need arises. They They are undertaken as the need arises. They focus on important issues usually one or two.focus on important issues usually one or two.

Survey ReportsSurvey Reports

• The survey report consist of the analysis and The survey report consist of the analysis and conclusion drawn from the evaluative data based conclusion drawn from the evaluative data based on the objectives of the study. The reports also on the objectives of the study. The reports also include the data, facts and figures to support the include the data, facts and figures to support the analysis and conclusion the supportive data and analysis and conclusion the supportive data and annexure provided in the report form the basis annexure provided in the report form the basis for the un-biased conclusion and validation of for the un-biased conclusion and validation of the analysis.the analysis.

Fair Compensation System BenefitsFair Compensation System Benefits

1)1) An ideal compensation system will have An ideal compensation system will have positive impact on the efficiency and results positive impact on the efficiency and results produced by employees.produced by employees.

2)2) Such system should also solve disputes between Such system should also solve disputes between the employee union and management.the employee union and management.

3)3) Sound compensation / reward system brings Sound compensation / reward system brings peace in the relationship of employer and peace in the relationship of employer and employeesemployees

4)4) It aims at creating a healthy competition among It aims at creating a healthy competition among them and encourages employees to work hard.them and encourages employees to work hard.

Fair Compensation System BenefitsFair Compensation System Benefits

5) The organization is able to retain the best talent 5) The organization is able to retain the best talent by providing them adequate compensation there by providing them adequate compensation there by stopping them from switching over to by stopping them from switching over to another job.another job.

6) The business organization can think of 6) The business organization can think of expansion and growth if it has the support of expansion and growth if it has the support of skillful, talented and happy workforce.skillful, talented and happy workforce.

7) The sound and healthy compensation system 7) The sound and healthy compensation system helps to attract best talent from the market.helps to attract best talent from the market.

8) The system provides growth and advancement 8) The system provides growth and advancement opportunities to the outstanding employees.opportunities to the outstanding employees.

Maslow’s Need HierarchyMaslow’s Need Hierarchy

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