Compensation

– The sum total of all forms of payments or rewards provided to employees for perf
orming tasks to achieve organizational objectives
Rs
Compensation- Nature and scope
• The complex process includes decisions regarding variable pay and benefits • It su
ggests an exchange relationship between the employee and the organization • It inv
olves design, development, implementation, communication and the evaluation of r
eward strategy and process of the organization
Compensation Objectives
1. 2. 3.
4.
To reward employees’ past performance fairly, in line with efforts, skills and com
petencies To attract and retain competitive high performing employees To motivat
e the high performing employees and reinforce desirable employee behaviour
To remain competitive in the labor market
5. 6.
7.
To align employees’ future performance with organizational goals To communicate th
e employees their worth to the organization
To provide employee social status
• Strategic compensation
– Using the compensation plan to support the company’s strategic aims. – Focuses emplo
yees’ attention on the values of winning, execution, and speed, and on being bette
r, faster, and more competitive..
• IBM
Strategic Compensation Planning
• Strategic Compensation Planning
– Links the compensation of employees to the mission, objectives, philosophies, an
d culture of the organization. – Serves to identify the net monetary payments made
to employees with specific functions of the HR program in establishing a pay-fo
rperformance standard. – Seeks to motivate employees through compensation.
Compensation Policy Issues
• • • • • • • • Pay for performance Pay for seniority Salary increases and promotions Overt
nd shift pay Probationary pay Paid and unpaid leaves Paid holidays Salary compre
ssion (A salary inequity problem, generally caused by
inflation, resulting in longer-term employees in a position earning less than wo
rkers entering the firm today)
• Geographic costs of living differences
Pay Structure

Pay grades Pay ranges

Compensation Administration Process
Total compensation Financial (extrinsic rewards) Non -Financial (intrinsic rewar
ds)
Direct
Indirect
Satisfaction derived from job
Praise and rewards
Classification of rewards
Components of Financial Compensation
Direct Variable Pay Incentives -Individual -Group/team -organizational Mandatory
Indirect Benefits voluntary
•Vacations • Breaks • Holidays Security Plans • Pensions
Base pay
• Wages • Salaries
Provident Fund Gratuity Maternity Leave Health plans Medical leave
Educational assistance • Recreational programs
Base pay
• The direct financial compensation an individual receives based on the time worke
d • Two bases of calculation - Hourly/wage: payment for the number of hours worked
- Salaried : receive consistent payments at the end of specific period regardle
ss of number of hours worked
• Nature – generally market driven ( D>S=increase in pay) - Job Evaluation
– The formal systematic means used to identify the relative worth of jobs within a
n organization.
Variable pay/ pay for performance : Incentives
• Variable Pay - any plan that ties pay to productivity or profitability. (i.e)The
standard by which managers tie compensation to employee effort and performance.
- it is linked to individual, group, or organizational performance and not to t
ime worked Incentive Pay Programs
– Establish a performance “threshold” to qualify for incentive payments. – Emphasize a s
hared focus on organizational objectives. – Create shared commitment in that every
individual contributes to organizational performance and success.
•
•
Frederick Taylor
– Popularized scientific management and the use of financial incentives in the lat
e 1800s.
• Systematic soldiering: the tendency of employees to work at the slowest pace pos
sible and to produce at the minimum acceptable level.
Types of incentives
• Individual Incentives • Group/team Incentives • Organizational Incentives
Individual Incentive Plans
• Piecework Plans
– The worker is paid a sum (called a piece rate) for each unit he or she produces.
• Straight piecework: A fixed sum is paid for each unit the worker produces under
an established piece rate standard. An incentive may be paid for exceeding the p
iece rate standard.
• Standard hour plan:
– An incentive plan that sets pay rates based on the completion of a job in a pred
etermined “standard time.” – If employees finish the work in less than the expected ti
me, their pay is still based on the standard time for the job multiplied by thei
r hourly rate.
Individual Incentive Plans (cont’d)
• Pro and cons of piecework
– Easily understandable, equitable, and powerful incentives – Employee resistance to
changes in standards or work processes affecting output – Quality problems caused
by an overriding output focus – Possibility of violating minimum wage standards – E
mployee dissatisfaction when incentives either cannot be earned due to external
factors or are withdrawn due to a lack of need for output
Individual Incentive Plans (cont’d)
• Merit pay
– A permanent cumulative salary increase the firm awards to an individual employee
based on his or her individual performance.
Bonuses
• Bonus
– Incentive payment that is supplemental to the base wage for cost reduction, qual
ity improvement, or other performance criteria.
• Spot bonus
– Unplanned bonus given for employee effort unrelated to an established performanc
e measure.
Group Incentive Plans
• Team Incentive Plans
– Compensation plans where all team members receive an incentive bonus payment whe
n production or service standards are met or exceeded.
• Establishing Team Incentive Payments
– Set performance measures upon which incentive payments are based – Determine the s
ize of the incentive bonus. – Create a payout formula and fully explain to employe
es how payouts will be distributed.
Group Incentive Plans (cont’d)
• Gainsharing Plans
– Programs under which both employees and the organization share the financial gai
ns according to a predetermined formula that reflects improved productivity and
profitability.
• Scanlon • Rucker • Improshare
Employee Bonus and Gainsharing Plans
Scanlon Plan
Rewards come from employee participation in improving productivity and reducing
costs.
Rucker Plan (SOP)
Shared rewards come from the difference between labor costs and sales value of p
roduction.
Improshare
Gainsharing based on increases in productivity of the standard hour output of wo
rk teams.
The Pros and Cons of Team Incentive Plans
PROS • Team incentives support group planning and problem solving, thereby buildin
g a team culture. • The contributions of individual employees depend on group coop
eration. • Unlike incentive plans based solely on output, team incentives can broa
den the scope of the contribution that employees are motivated to make. • Team bon
uses tend to reduce employee jealousies and complaints over “tight” or “loose” individua
l standards. • Team incentives encourage cross-training and the acquiring of new i
nterpersonal competencies.
The Pros and Cons of Team Incentive Plans (cont’d)
CONS • Individual team members may perceive that “their” efforts contribute little to
team success or to the attainment of the incentive bonus. • Intergroup social prob
lems—pressure to limit performance (for example, team members are afraid one indiv
idual may make the others look bad) and the “free-ride” effect (one individual puts
in less effort than others but shares equally in team rewards)—may arise. • Complex
payout formulas can be difficult for team members to understand.
Organizational Incentive Plans
• Profit Sharing – Any procedure by which an employer pays, or makes available to al
l regular employees, in addition to their base pay, current or deferred sums bas
ed upon the profits of the enterprise. – Paid once in a year or deferred sums unti
l retiremement Challenges:
• Agreement over division of profits between company and employees. • Possibility of
no payout due to financial condition of company.
Organizational Incentive Plans
• Stock Options
– Granting employees the right to purchase a specific number of shares of the comp
any’s stock at a guaranteed price (the option price) during a designated time peri
od. – The value of an option is subject to stock market conditions at the time tha
t option is exercised. – Apple , yahoo, coca cola, nike
Organizational Incentive Plans
• Employee Stock Ownership Plans (ESOPs)
– Stock plans in which an organization contributes shares of its stock to an estab
lished trust for the purpose of stock purchases by its employees.( UK,USA and se
veral other industrialized countries). This provide tax concessions to corporate
orgns. And to trusts established for employee stock options. (i.e (difference b
etween acceptance price and market value)
• The employer establishes an ESOP trust that qualifies as a taxexempt employee tr
ust under Section 401(a) of the Internal Revenue Code
Why Incentive Plans Fail
• Performance pay can’t replace good management.
• You get what you pay for.
• “Pay is not a motivator.”
• Rewards punish. • Rewards rupture relationships.
• Rewards can have unintended consequences.
• Rewards may undermine responsiveness.
• Rewards undermine intrinsic motivation.
Implementing Effective Incentive Plans
• • • • • • • • • • Ask: Is effort clearly instrumental in obtaining the reward? Link the i
with your strategy. Make sure effort and rewards are directly related. Make the
plan easy for employees to understand. Set effective standards. View the standar
d as a contract with your employees. Get employees’ support for the plan. Use good
measurement systems. Emphasize long-term as well as short-term success. Adopt a
comprehensive, commitment-oriented approach.
Indirect Financial CompensationBenefits
• MANDATORY BENEFITS - legally binding
• VOLUNTARY BENEFITS - provided at the discretion of the employer
VOLUNTARY BENEFITS-EXAMPLES
• Educational benefits
Employee’s spouse education assistance( Motorola on international assignments ). O
NGC,NIIT ,ADITYA BIRLA GROUP, HLL sabbaticals (paid/ non-paid) are provided to e
mployees who wish to study. Meritorious Children of employees are provided oppor
tunity of higher education with loan benefits in BPCL, CPCL etc
• Family
Paternity leave in HLL, HCL Tech, Yes Bank, Genpact etc., Wedding anniversary al
lowance in NIIT, SPIC etc., “Joyful Working Team” and “ Happy Moments Board”- LG Electro
nics Family day at office- Bharti telecom.
-
-
-
• Fringe benefits tax - Amended finance act 2005
Non financial compensation : components
– Are most effective as motivators when the award is combined with a meaningful em
ployee recognition program.
• Intrinsic motivators are worthwhile as financial package • Organization reward hig
h performing employees • Psychological rewards that employees receive in recogniti
on of their skills and contributions
Types
• Awards
– Often used to recognize productivity gains, special contributions or achievement
s, and service to the organization. – Employees feel appreciated when employers ti
e awards to performance and deliver awards in a timely, sincere and specific way
. – Rooms of offices are named after the employees in NIIT
•
Recognition awards
– Recognition has a positive impact on performance, either alone or in conjunction
with financial rewards.
• Combining financial rewards with nonfinancial ones produced performance improvem
ent in service firms almost twice the effect of using each reward alone.
– Day-to-day recognition from supervisors, peers, and team members is important. – B
est performer of the month awards in Blue Dart, ALACTEL,XANSA etc.,
•
-
Service awards
Award for the length of service and exactly not on performance
-
IBM: thanks award IDEA: appreciation card
Needs and Motivation
• Abraham Maslow’s Hierarchy of Needs
– Five increasingly higher-level needs:
• physiological (food, water, sex) • security (a safe environment) • social (relations
hips with others) • self-esteem (a sense of personal worth) • self-actualization (be
coming the desired self)
– Lower level needs must be satisfied before higher level needs can be addressed o
r become of interest to the individual.
Needs and Motivation (cont’d)
• Herzberg’s Hygiene–Motivator theory
– Hygienes (extrinsic job factors)
• Inadequate working conditions, salary, and incentive pay can cause dissatisfacti
on and prevent satisfaction.
– Motivators (intrinsic job factors)
• Job enrichment (challenging job, feedback and recognition) addresses higher-leve
l (achievement, self-actualization) needs.
– The best way to motivate someone is to organize the job so that doing it helps s
atisfy the person’s higherlevel needs.
Equity and motivation of employees
• Pay Equity (also Distributive Fairness)
– An employee’s perception that compensation received is equal to the value of the w
ork performed. – A motivation theory that explains how people respond to situation
s in which they feel they have received less (or more) than they deserve.
• Individuals form a ratio of their inputs to outcomes in their job and then compa
re the value of that ratio with the value of the ratio for other individuals in
similar jobs.
Relationship between Pay Equity and Motivation
Doing More and Receiving Less
Doing the Same and Receiving the Same
Doing Less and Receiving More
The greater the perceived disparity between my input/output ratio and the compar
ison person’s input/output ratio, the greater the motivation to reduce the inequit
y.
Instrumentality and Rewards
• Vroom’s Expectancy Theory
– A person’s motivation to exert some level of effort is a function of three things:
• Expectancy: that effort will lead to performance. • Instrumentality: the connectio
n between performance and the appropriate reward. • Valence: the value the person
places on the reward.
– Motivation = E x I x V
• If any factor (E, I, or V) is zero, then there is no motivation to work toward t
he reward. • Employee confidence building and training, accurate appraisals, and k
nowledge of workers’ desired rewards can increase employee motivation.
Determinants of compensation
Pay levels
Internal determinants
• Employer’s Compensation Strategy
– Setting organization compensation policy to lead, lag, or match competitors’ pay.
• Worth of a Job
– Establishing the internal wage relationship among jobs and skill levels.
• Employee’s Relative Worth
– Rewarding individual employee performance
• Employer’s Ability-to-Pay
– Having the resources and profits to pay employees.
External Determinants
• Labor Market Conditions
– Availability and quality of potential employees is affected by economic conditio
ns, government regulations and policies, and the presence of unions.
• Area Wage Rates
– A firm’s formal wage structure of rates is influenced by those being paid by other
area employers for comparable jobs.
External Determinants
• Cost of Living
– Local housing and environmental conditions can cause wide variations in the cost
of living for employees. – Inflation can require that compensation rates be adjus
ted upward periodically to help employees maintain their purchasing power.
External Determinants
• Collective Bargaining The term extends to all negotiations that take place betwe
en an employer, group of employers or one or more employers’ organizations on the
one hand, and one or more workers’ organizations on the other to (a) Determine the
working conditions and terms of employment and / or (b) Regulate relations betw
een employer and employee/workers and / or (c) regulate relations between employ
er organization or employee/workers organization
New developments
• Competency based pay and reward programmes (also skill-based pay or knowledge-ba
sed pay) - Competency based pay using Broad banding
What Is Competency-based Pay?
• Competency-based pay
– Where the company pays for the employee’s range, depth, and types of skills and kn
owledge, rather than for the job title he or she holds.
• Competencies
– Demonstrable characteristics of a person, including knowledge, skills, and behav
iors, that enable performance.
Why Use Competency-Based Pay?
• pay plans that aim for high-performance work system. • Paying for skills, knowledg
e, and competencies is more strategic.
• Measurable skills, knowledge, and competencies are the heart of any company’s perf
ormance management process.
Competency-Based Pay in Practice
• Main components of skill/competency/ knowledge–based pay programs: – A system that d
efines specific skills, and a process for tying the person’s pay to his or her ski
ll – A training system that lets employees seek and acquire skills – A formal compet
ency testing system – A work design that lets employees move among jobs to permit
work assignment flexibility.
Competency-Based Pay: Pros and Cons
• Pros
– Higher quality – Lower absenteeism and fewer accidents
• Cons
– implementation problems – Cost implications of paying for unused knowledge, skills
and behaviors – Complexity of program – Uncertainty that the program improves produ
ctivity
• Broadbanding
– Consolidating salary grades and ranges into just a few wide levels or “bands,” each
of which contains a relatively wide range of jobs and salary levels.
• Wide bands provide for more flexibility in assigning workers to different job gr
ades. • Lack of permanence in job responsibilities can be unsettling to new employ
ees.
Trends in Executive Compensation
• The Executive Pay Package
– Base salary – Short-term incentives or bonuses – Long-term incentives or stock plans
– Perquisites (perks)
Why are they made more?
• Supply is short • Most important to organization in terms of their competencies • Mo
tivation and retention
Executive Compensation: Ethics and Accountability
• Incentive payments are excessive compared with return to stockholders. • Time peri
ods for judging and rewarding performance are too short. • Subjective in nature • Em
phasis is placed upon equaling or exceeding executive salary survey averages.
• Benefits do not relate closely to individual performance.
The “Sweetness” of Executive Perks
• Company car • Company plane • Executive eating facilities • Financial consulting • Compa
ny-paid parking • Personal liability insurance • Estate planning • First-class air tra
vel • Home computers • Chauffeur service • Children’s education • Spouse travel • Physical
xams • Mobile phones • Large insurance policies • Income tax preparation • Country club
membership • Luncheon club membership • Personal home repairs • Loans • Legal counseling
• Vacation cabins
Remedial
• Conscious efforts must be made by organization to increase the supply • Participat
ive management must be encouraged • Income beyond a limit must be subject to highe
r taxation • Remuneration committees must be constituted
Negotiation
Collective Bargaining • The term extends to all negotiations that take place betwe
en an employer, group of employers or one or more employers’ organizations on the
one hand, and one or more workers’ organizations on the other to • Determine the wor
king conditions and terms of employment and / or • Regulate relations between empl
oyer and employee/workers and / or • regulate relations between employer organizat
ion or employee/workers organization
Collective bargaining and stakeholders
• Concerned parties during the process of negotiation are The government The emplo
yers/ management The workers/trade unions The consumers/ community
Negotiation techniques and skills
• Negotiation is the process in which two or more parties who have common and conf
licting interested come together and talk with a view to reaching an agreement • I
t involves 5 key activities - Obtaining substantial results - Influencing the ba
lance of power between parties - Influencing the atmosphere - Influencing the co
nsistency - Influencing the procedures
Negotiation results
• • • • Win-win Lose-win Lose-lose Win-win
Legal framework for payment of salary in INDIA
• • • • Payment of wages Act, 1936 The minimum wages Act, 1948 The payment of Bonus Act,
1965 Equal remuneration Act, 1976
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