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