INTRODUCTION TO COMPENSATION

Introduction to Compensation: Definition of

Compensation, Basic concepts of Compensation(wages,
salary, benefits, DA, consolidated pay, Equity based
programs, commission, reward, remuneration, bonus etc.,),
Types of Compensation Management - The Pay Model,
Strategic Pay Policies, Strategic Perspectives of Pay,
Strategic Pay Decisions, Best Practices vs. Best Fit
Options
INTRODUCTION

Compensation is an integral part of human resource management

which helps in motivating the employees and improving
organizational effectiveness
Compensation is a systematic approach to providing monetary &
non monetary value to employees in exchange for work
performed.
Process of compensation management is to establish & maintain
an equitable wage & salary structure & an equitable cost
structure .it involves job evaluation, wage & salary survey, profit
sharing &control of pay costs.
Two important functions of compensation
a) Equity function
b) Motivation function
Equity is based on past & current performance& motivation with
which the work has been performed in the past & current
performance.
 Direct financial compensation: consisting of pay received in
the form of wages, salaries, bonuses and commissions provided
at regular and consistent intervals
Indirect financial compensation including all financial
rewards that are not included in direct compensation and
understood to form part of the social contract between the
employer and employee such as benefits, leaves, retirement
plans, education, and employee services
Non-financial compensation referring to topics such as
career development and advancement opportunities,
opportunities for recognition, as well as work environment and
conditions
Enhance dignity & satisfaction from the work performed.
Promote social relationship with co-workers
Allocate sufficient resources to perform work assignments.
Offer supportive leadership & management.
Enhance physiological health, intellectual growth.
BASIC CONCEPTS OF COMPENSATION
Wages & Salary: Wage and salary are the most important
component of compensation and these are essential irrespective of the
type of organization. Wage is referred to as remuneration to workers
particularly, hourly-rated payment. Salary refers to as remuneration
paid to white-collar employees including managerial personnel.
Wages and salary are paid on the basis of fixed period of time and
normally not associated with productivity of an employee at a
particular time.
Incentives: Incentives are the additional payment to employees
besides the payment of wages and salaries. Often these are linked
with productivity, either in terms of higher production or cost saving
or both. These incentives may be given on individual basis or group
basis.
Fringe Benefits: Fringe benefits include such benefits which are
provided to the employees either having long- term impact like
provident fund, gratuity, pension; or on occurrence of certain events
like medical benefits, accident relief, health and life insurance; or
facilitation in performance of job like uniforms, Canteens, recreation,
etc.
 Perquisites: These are normally provided to managerial personnel either to
facilitate their job performance or to retain them in the organization. Such
perquisites include company car, club membership, free residential
accommodation, paid holiday trips, stock options, etc.
DA: The Dearness Allowance (DA) is a cost of living adjustment
allowance paid to Government employees, Public sector employees
(PSU)and pensioners in Pakistan, Bangladesh and India. Dearness
Allowance is calculated as a percentage of an Indian citizen's basic salary to
mitigate the impact of inflation on people.
Consolidated Pay: consolidated salary means the amount you get without
any perks or allowances it is the fixed salary irrespective of target achieved
or performance criteria etc.
Commission: The payment of commission as remuneration for services
rendered or products sold is a common way to reward sales people. Payments
often are calculated on the basis of a percentage of the goods sold, a way for
firms to solve the principalagent problem by attempting to realign
employees' interests with those of the firm.[ Sales personnel are thus paid, in
part of entirely, on the basis of products or services successfully sold rather
than being paid by the hour, by attempted sales, or by any other measure.
 Reward: Reward system exists in order to motivate employees to
work towards achieving strategic goals which are set by entities.
Reward management is not only concerned with pay and
employee benefits. It is equally concerned with non-financial
rewards such as recognition, training, development and increased
job responsibility.
Remuneration: Remuneration is essentially determining how
much you as an employee get paid the salary or wage you
receive in return for your time/skills/experience. Often HR
Professionals within this function will also monitor/develop and
deliver the benefit packages that employees receive, these can
include issuing of company shares, health and/or life insurance,
discounts on products which are sold or manufactured by your
employer.
Bonus: A bonus is an additional compensation given to an
employee above his/her normal wage. A bonus can be used as a
reward for achieving specific goals set by the company, or for
dedication to the company.
 Equity is a sense of fundamental fairness. In the context of
compensation, financial equity, or compensation equity, is
the perception by employees that they are being paid fairly. The
perception of being overpaid or underpaid can create a sense of
inequity in the workplace - a sense of unfairness. Compensation
equity has an external component and an internal component.
External equity is the perception that an employee is being paid the
same as others working in a similar job at other companies.
Pay equity means that employees believe that their pay is basically
equal to the value of their work. It also means that employees that
have equivalent responsibilities with about the same degree of
knowledge, skills, experience, productivity and seniority are paid
about the same.
PAY MODEL
 Every industry or corporations develop their compensation models based
on three components .The basic components of pay model are:
1. Compensation objectives
2. The strategic policies that form the foundation of compensation
system
3. The techniques of compensation

1. COMPENSATION OBJECTIVES
Compensation systems are designed and managed to attain certain
objectives in any company. The basic objectives include:-
Efficiency: Improved performance, Increasing quality, Delighting
customers, Controlling labor costs.
Equity: The equity objectives are:-
designing pay systems that recognize employees contribution.
designing pay systems that recognize employees need.
Compliance with laws and regulations: Conforming to the various
central and state wage legislations and regulations. But regarding these
objectives the laws and regulations tend to be changing so the
compensation system is adjusted according to it.
2. The strategic pay policies that form the foundation of compensation system:-

Every employer must address the policy decision shown on the left side of the pay:
Internal consistency: It refers to comparison amongst jobs or skill levels
inside a single organization. Jobs and skills are compared in terms of their
relative contributions to the organizations objectives. Internal consistency
becomes a factor in determining the pay rates both for employees doing equal
work and for those doing dissimilar work.
External competitiveness: It refers to how an employer positions its pay to what
competitors are paying. The policy regarding external competiveness has a
twofold effect on objectives :
to ensure that the pay is sufficient to attract and retain employees
To control labour costs so that the organization prices of products or
services can remain competitive.

Employee contribution : It refers to relative emphasis placed on performance.

This emphasis is important as it directly affects employees attitudes and work
behaviours.
Administration of the pay system: The policy regarding administration of
the pay system is the last building block in the compensation model. It is
possible to design a system which has all the above objectives but these
objectives cant be achieved unless it is managed properly. The managers must
plan the elements of pay which is included in the system, communication with
the employees and judge whether the system is achieving its objectives.
3. PAY TECHNIQUES

Pay decisions refer to the methods used by human resources and

payroll professionals to choose the pay scales of employees.
Techniques that assist payroll professionals in making their pay
decisions include:
External measures such as benchmarking (salary surveys) and
ongoing reporting that constitute a market survey approach.
Internal measures such as projections, simulations, and
predictive modeling or the use of pay grades use an organization's
needs to assess the relative value of tasks within it.
Variable systems like pay-for-performance create a policy line
that connects job pay and job evaluation points.
.
BEST PRACTICES VS. BEST FIT OPTIONS

The best fit approach focuses on the importance of making

sure that the HR strategies are suitable to the different
circumstances of the entire organization, together with
culture, operational processes as well as external
environment. Thus, it focus on the idea that different human
resource (HR) strategies have to focus on a given needs of both
the organization and its people. Due to the said reason, most
of critics and commentators believe that best fit approach is
more important and vital than the best practice.

The terms best fit and best practice are used in

strategic human resource management literature and are
applied to the specific policy area of reward systems. Each
approach attempts to explain the way that HR policies in
general and reward policies in particular can lead to greater
organisational effectiveness.