COMPENSATION MANAGEMENT

WHAT IS COMPENSATION???

JUST
THINK
FOR A
MINUTE!!!
!!!
A LABORER GETS RS. 200.00 FOR SWEATING FOR 9 HOURS AND
THE ENGINEER GETS FEW LAKHS!!!!!!!!!!

WORKER GETS PAID FOR WORKING WHILE THE MANAGER

GETS PAID FOR??????
SITTING!!!

CASE STUDY

A friend of ours writes that she is in one of the touring companies of the musical
Cats. In the company are two performers called swings who sit backstage during
each performance. Each swing must learn five different lead roles in the show.
During the performance, the swing sits next to a rack with five different costumes
and makeup for each of the five roles. Our friend, who has a lead in the show, once
hurt her shoulder during a dance number, She signaled to someone offstage, and by
the time she finished her number, the swing was dressed, in makeup, and out on stage
for the next scene. Our friend is paid $ 2000 per week for playing one of these cats in
the show, she is expected to do a certain number of performances and a certain
number of rehearsels per week.
SHE GETS PAID FOR HER JOB??

The swing gets paid $ 2900 per week, whether she performs 20 shows that week or
none.
NOW WHAT IS SHE PAID FOR???
She is paid for knowing the five roles, whether she plays them or not.
Think of other professionals you know Electricians, payroll supervisors, etc etc,

COMPENSATION
MANAGEMENT
REVEALS ALL
THESE SECRETS
TO US
AND ALSO
HOW WE CAN
USE IT TO OUR
BENEFIT!!!!!

COMPENSATION: DEFINITION PLEASE???

Compensation refers to all forms of financial returns and tangible services and
benefits employees receive as part of an employment relationship.
Compensation represents both the intrinsic and extrinsic rewards employees receive
for performing their jobs. INTRINSIC C reflects employees psychological mindsets
that result from performing their jobs. EXTRINSIC C includes monetary and nonmonetary rewards.
TYPES OF COMPENSATION

CASH
COMPENSATION

SHORT TERM INCENTIVES

BASE

MERIT\COST OF LIVING

INCOME
PROTECTION

BENEFITS

ALLOWANCES
WORK LIFE FOCUS

RELATIONAL
RETURNS

RECOGNITION AND
STATUS

CHALLENGING
WORK

EMLOYMENT
SECURITY

These are a few pay programs and a single employer uses more than one of these.
CASH COMPENSATION :
1. BASE WAGE: is the cash compensation that an employer pays for the work
performed.
2. It reflects the value of the work or skills and generally ignores differences
attributable to individual employees
1. MERIT PAY\COST OF LIVING ADJUSTMENSTS: Periodic adjustments to
base wages may be made on the basis of changes in what employers are
paying for the same work, changes in the overall cost of living, or changes in
experience or skill.
2. majority of Indian firms use merit pay increases, Outstanding performers
could get 8 to 10 % increase while COLA gives same % increase to all across
the board regardless of the performance

INCENTIVES: tie the pay increases directly to performance, However

Incentives differ form merit adjustments.
First incentives o not increase the base wage and so must be re earned
each pay period. Incentives try to influence future behavior whereas
merit recognizes (rewards) past behavior THE DIFFERENCIATION
IS A MATTER OF TIMING.

When Performance declines incentive pay automatically declines, too

they are referred to as VARIABLE PAY!!!!
I. 1 LONG TERM INCENTIVES: Usually in the form of ESOPs
(employee stock option plan). These focus on employee efforts
on multiyear results.
II. The idea behind stock option is that employee with a financial
stake in the Oz will focus on long term financial objective etc.
Bristol-Myers, Squibb grant stock to selected Key contributes
while Yahoo, PepsiCo, Wal Mart etc offer to all their employees.
1. BENEFITS: INCOME PROTECTION: Benefits, including
income protection, work life balance services, and allowances
are also part of total compensation. Medical insurance,
retirement programs, life insurance, and savings plans are
common benefits, They help protect employees from the
financial risks inherent in daily life. Healthcare benefits have
increasingly become an important form of pay.
2. WORK LIFE FOCUS: are programs that help employees
better integrate their work and life, include time away from
work ( Vacation) access to services to meet specific needs
(drug counseling, financial planning, referrals for child and
elder care) and flexible work arrangements. Aim is that the
employee is Fully present at work and less distracted by
conflicts between their work and non work responsibilities.
ALLOWANCES: often grow of whatever is in short supply. In
Vietnam and China, India etc, housing and transportation
allowances are frequently part of the pay package. Sixty years
after the end of World War II some Japanese companies still
continue to offer a Rice allowance based on the number of
family members.
SENIORITY PAY: system reward employees with periodic
additions to base pay according to employees length of service in
performing their jobs, These pay plans assume that employees
become more valuable to companies with time and that valued
employees will leave if they do not have a clear idea that their
wages will progress over times (Comes from HUMAN CAPITAL
THEROY which states that employees knowledge and skills
generate productive capital known as human capital and they
refine their skills over a period of time.
INTRINSIC VS EXTRINSIC
Why does bill gates still show up for work every morning??? Why
does Microsof millionaires continue to write codes???

INTRINSIC compensation represents employees

critical psychological states that result from
performing their jobs.

According to JOB CHARACTERSTICS THEORY

these critical psychological states, employee
experiences enhanced psychological states when their
jobs rate high on five core job dimensions.
i. Skill variety: is the degree to which the job requires
the person to peform different tasks and involves
different skills, abilities and talents.
ii. TASK IDENTITY: is the degree to which a job
enables a person to complete an entire job from
start to finish.
iii. TASK SIGNIFICANCE is the degree to which the
job has an impact on the lives or work of other
people.(Cancer research scientist)
iv. AUTONOMY: is the amount of freedom,
independence, and discretion the employee enjoys in
determining how to perform the job(Farmers).
v. FEEDBACK: is the degree to which the job or
employer provides the employee with clear and
direct information about job outcomes and
performance.

HOW ARE THESE

CHARACTERSTICS
TRANSLATED
INTO
PRACTICE?????

Recent study by
People, a HR
consulting firm
suggests that
enhanced intrinsic
compensation may
help reduce excessive
turnover

Problem of turnover if IT
employees!!!! Over time,
base salaries and bonuses
have risen dramatically
to promote the
recruitment the very best.
But turnover has not
slowed down!!!

EXAMPLES include new technologies,

learning and training opportunities and
challenging technical environments.

Extrinsic compensation include both monetary and non monetary rewards,

Compensation professionals establish monetary compensation programs to reward
employes according to their job performance level or for learning job related
knowledge or skills.

What do you mean by Strategic Analysis? Describe the factors that influence
companys compensation practices.
Strategy = plan, policy, approach, line of attack
Analysis = examination, investigation, breakdown.
Compensation strategy deals about what type of pay model the company should
follow which should be in alignment with its Ozal strategy.
We will let the market decide what we need to pay people!!!
Unfortunately, it cant be so easy! Companies compete very differently for
very similar talent.
Lets compare C strategies at Fire pond, Microsoft, and Bristol-Myers Squibb
(BMS), Each have different strategy, but it is tailor made for their business.
Fire pond is a small start up that offers Software solutions to traditional
firms trying to grow the e sales part of their business. All these companies
emphasize employee performance and commitment, but each company does it

very differently.

A STRATEGIC PERSPECTIVE FOCUSES ON THOSE COMPENSATION

CHOICES THA HELP THE OZ GAIN AND SUSTAIN COMPETITIVE
ADVNATAGE
Letz learn form the leader!!!!
STARBUCKS
The competitive advantage of Starbacks is apparent with the first sip of its specialty
drink, mocha Valencia. What started out as a Seattle seller of coffee beans has,
through strategic decisions, grown to a familiar chain of coffeehouses stretching
around the globe?
OBJECTIVE: How should compensation support the business strategy and be
adaptive to the cultural and regulatory pressures in a global environment?
STARBACKS: Grow by making employees feel valued. Recognize that every
dollar earned passes through employees hands. Use pay, benefits, and

opportunities for personal development to help gain employee loyalty and

become difficult to imitate.
ALIGNMENT: How differently should the different types and levels of skills
and work be paid within the Oz? STARBACKS: De emphasizes differences,
use egalitarian structures, cross train employees to handle many jobs, and call
employees Partners.
COMPETITIVENESS: How should total compensation be positioned against
competitors? STARBACKS: Pay just slightly above other fast food
businesses; give benefits, and stock options called bean stocks.
CONTRIBUTORS: How should the pay increase be based on??? On
individual performance or team performance or experience and or continuous
learning, or improved skills or changes in cost of living or personal needs or
whatSTARBACKS: emphasized on team performance and shareholder
returns.
MANAGEMENT: How open and transparent should the pay decisions be to all employees?
Who should be involved in designing and managing the system? STARBACKS: As members of
the Starbucks Family our employees realize what is best for them. Partners can and do get
involved.

WHEN ALL DOES A BUSINESS MAKE STRATEGIC CHOICES?????

DEVELOPING A TOTAL COMPENSATION STRATEGY:

THE SIMPLE FOUR STEPS!!!!

The first step includes an understanding of the industry in which the Oz

operates and how it plans to compete. Know what factors are important today
(Changing customers needs, labor market etc. What will be important in
future? What is your business strategy? How do you compete to win?
A pay system reflects the values that guide an employers behaviors and
underline its treatment of its employees. The pay system mirrors the
companys image and reputation. Microsoft gives it mission and values

statement as To enable people and businesses throughout the world to realize

their full potential
The simple fact that employees differ is too easily overlooked in formulating a
compensation strategy. Ex Older, highly paid workers may wish to defer taxes
by putting their pay into retirement t funds, while younger employees may
have high cash needs to buy house, support a family, or finance an education.
Step 3 is to implement the strategy through the design and execution of the
compensation system. How the compensation system translates strategy into
practice and into peoples bank accounts.
The last step is to reassess and realign, closes the loop.
EXCELLENT TEST OF COMPETITIVE ADVANTAGE:

ALIGN IN 3 TYPES:
ALIGN WITH BUSINESS
STRATEGY
ALIGN EXTERNALLY WITH
ECONOMIES
ALIGN INTERNALLY WITH
HR SYUSTEMS.

HOW IS OUR STRATEGY

DIFFERENT FROM
OTHERS!!! MICROSOFT
USES STOCK AWARDS
MORE THAN BASIC PAY,
DIFFICULT TO COPY!!!

ADD VALUE: ITS EASIRE TO

COUNT BOTTLES THAN TO
DESCRIBE THE WINE, HERE
THE CO TRIES TO MEASURE
THE ROI ON WHATS BEING
PAID.

ACCORDING to examination of eight years of data from 180 U.S. companies, ITS
NOT HOW MUCH YOU PAY, BUT HOW YOU PAY THAT MATTERS THE
MOST