Compensation

AGBS,Mohali

Compensation

"If you pick the right people and give them the opportunity to spread their wings - and put compensation and rewards as a carrier behind it - you almost don't have to manage them." -Jack Welch

Compensation

Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction.

Compensation management

Compensation is what employees receive in exchange for their contribution to the organisation.

Total compensation = Direct + Indirect Compensation

Base Pay

Incentives

Benefits

How is compensation used?

Compensation can be used for :1. 2. 3. 4. 5. Recruit and retain qualified employees. Increase or maintain morale/satisfaction. Reward and encourage peak performance. Achieve internal and external equity. Reduce turnover and encourage company loyalty. 6. Modify (through negotiations) practices of unions.

What are the components of a compensation system?

Job Descriptions A critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. Job Analysis The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation.

What are the components of a compensation system?

Job Evaluation A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. There are four main techniques: Ranking, Classification, Factor Comparison, and Point Method. Pay Structures Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is pre-determined through collective bargaining. Salary Surveys Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages.

What are different types of compensation?

Different types of compensation include: Base Pay Commissions Overtime Pay Bonuses, Profit Sharing, Merit Pay Stock Options Travel/Meal/Housing Allowance Benefits including: dental, insurance, medical, vacation, leaves, retirement, taxes...

Components of a Total Compensation

Financial Direct
wages, salaries, commissions, bonuses

Indirect
insurance plans

life, health, dental, disability retirement plans, social security, workers comp vacations, holidays, sick leave

social assistance benefits

paid absences

Components of a Total Compensation Program

Non-Financial The Job interesting, challenging, responsible opportunity for recognition, advancement feeling of achievement Job Environment policies, supervision, co-workers, status symbols, working conditions, flextime, compressed work week, job sharing, telecommuting, flexible benefits programs

Equity

The equity theory of motivation holds that workers assess their perceived inputs to their work and their outcomes to those of others

Equity Theory

Internal equity
Comparison of my input / reward ratio with that of similar others. Employees may seek to address imbalance by changing their inputs. Fairness of pay differentials between different jobs in the organization can be established by job ranking, job classification, point systems and factor comparisons. External equity Fairness of organizational compensation levels relative to similar jobs in other organizations.

A recent study shows brown capuchin monkeys refused to play along when they saw another monkey get a better payoff for performing the same work. The monkeys were trained to trade a granite token for a piece of cumber. When the reward was the same for both monkeys, they took the cucumber 95 percent of the time. But it was a different story when one monkey was given something better -- namely, a grape. Then, the other monkey often pitched a fit -- either throwing the token, refusing to eat the cucumber or giving it to the other monkey. Associated Press 2003

Monkeys Demand Equal Pay

Individual Equity
Fairness about pay differentials among individuals who hold the same job can be established by using: Seniority-based pay systems that reward longevity. Merit-based pay systems that reward employee performance. Incentive plans that allow employees to receive part of their compensation based on their job performance. Skills-based pay systems. Team-based pay plans that encourage cooperation and flexibility in employees.

Types of Base Pay Systems

Job-based Pay the job (not the person) Market-based (external equity focus) Point factor-based (internal equity focus) Skills / knowledge-based Pay the person (not the job) 62% of F1000 firms used some type of skill based pay in 1999

Job Based Pay

Attraction Motivation Depends on market pricing No performance impact

Skill Learn job-related and Development upward mobility skills Culture Structure Cost Bureaucratic, hierarchical Hierarchical, individual jobs and differentiation Good control of individual pay

Individual Skill/Knowledge Based Pay

Attraction Motivation Attracts learningoriented individuals, high skills individuals Little performance impact Motivates needed skill development Learning, self-managing

Skill Development Culture Structure

Cost

Flat or team-based
Higher individual pay

Individual Merit
Attraction Motivation Good for high performers Good line of sight

Skill Development Culture

Structure Cost

Learn skills that lead to rewarded performance Performance oriented, job focused Individual and independent jobs Depends on the size of the awards

Team Incentives
Attraction Motivation Good if team performs well Moderate line of sight

Skill Development Culture Structure

Cost

Encourages team skills

Team focused

Team-based and integrated

High if significant awards given

Organizational Plans
Attraction Motivation Good if organization performs well Weak line of sight

Skill Development Culture

Structure Cost

Encourages broad understanding of business Business involvement

Organization wide integration Possible self-funding if based on performance improvement

EMPLOYEE COMPENSATION

Compensation of employees (CE) is measured by the value of the remuneration in cash or in kind which an employee becomes entitled to receive from an employer in respect of work done, during the relevant accounting period - whether paid in advance, simultaneously, or in arrears of the work itself.

EXECUTIVE COMPENSATION

Executive Compensation is how top executives of business corporations are paid. This includes a basic salary, bonuses, shares, options and other company benefits.
It has become integral part of management.

The Importance of Compensation

Impacts an employers ability to attract and retain employees.

Ensure optimal levels of employee performance in meeting the organizations strategic objectives.

When to Use a Job-based Pay Policy

A job-based pay work best in situations where: Job duties are stable. Skills are generic. Employees move up through the ranks over time. Jobs are fairly standardized within the industry. Drawbacks of a job-based pay system Discounts individual ability. Discourages lateral movement. Tends to be bureaucratic, mechanistic, and inflexible. Employees perceptions of equity are more important than market or point data.

Individual-based Compensation

Individual-based compensation works when: The firm has a relatively educated workforce. Employees often do different jobs Technology changes frequently. Employee participation and teamwork are encouraged. Opportunities for upward mobility are limited. Opportunities to learn new skills are present. The costs of employee turnover and absenteeism in terms of lost production are high.

Key Strategic Issues in Compensation

Determining compensation relative to the market. Striking a balance between fixed and variable compensation. Deciding whether or not to utilize team-based versus individual pay. Creating the appropriate mix of financial and non-financial compensation. Developing a cost-effective compensation program that results in high performance.

New Thinking for the New Millennium

Strategic approaches to may compensation (pay) systems more responsive: Pay the person for individual worth (knowledge, skills and competencies) rather than for the value of a job they perform. Reward excellence through a pay for performance compensation that establishes a clear relationship between a significant amount of pay and attainment of organizational objectives. Individualize the pay system to give employees choices in how they are rewarded and what reward they receive.