INTRODUCTION TO COMPENSATION & BENEFITS SYSTEM

Divya Goyal

Contrasting Perspectives of Compensation

Societys Views

Stockholders Views

Employees Views

Managers Views

Compensation: defined
Society
Pay

as a measure of justice Benefits as a reflection of justice in society Job losses (or gains) attributed to differences in compensation Belief that pay increases lead to price increases

Compensation: defined (cont.)

Stockholders
Using

stock to pay employees creates a sense of ownership Linking executive pay to company performance supposedly increases stockholders returns

Managers
A

major expense Used to influence employee behaviours and to improve the organisations performance

Compensation: defined (cont.)

Employees
Major source of financial security Return in an exchange between employer and themselves Entitlement for being an employee of the company Reward for a job well done

Global Views Vive la difference

China: Traditional meaning of compensation providing the necessities of life replaced with dai yu Japan: Traditional word kyuyo replaced with hou-syu; very recently the phrase used is teate

What is Compensation?
Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship.

Forms of Pay
Direct Pay Forms Cash Compensation: Base Cash Compensation: Merit Pay / Cost-ofLiving Adjustments Cash Compensation: Incentives Long-Term Incentives Indirect Pay Forms Benefits: Income Protection Benefits: Work/Life Focus Benefits: Allowances

Forms of Pay
1) Relational returns
Psychological

in nature

2) Total compensation
Cash
 


compensation/transactional
Difference between wage and salary Merit increases given in recognition of past work behaviour cost of living adjustments same increases to everyone, regardless of performance

Base wages Merit pay/cost of living adjustments

 

Forms of Pay (cont.)

3) Cash compensation/transactional (cont.)


Incentives/variable pay the pay increases directly to performance

Does not increase base wage, must be re-earned each pay period Potential size generally known beforehand Long term (stock options) and short term

Benefits
Income protection Work/life balance Allowances

Forms of Pay (cont.)

4) Total earnings opportunities: Present value of a stream of earnings


Shifts comparison of todays initial offers to consideration of future bonuses, merit increases, and promotions

5) Relational returns from work



Non-financial returns

6) Organisation as a network of returns



Created by different forms of pay, including total compensation and relational returns

Relational Returns from Work

Recognition & Status Employment Security

Challenging Work

Learning Opportunities

Pay Model
Three basic building blocks
Compensation

objectives Policies that form the foundation of the compensation system Techniques that make up the compensation system

The Pay Model

POLICIES

TECHNIQUES

OBJECTIVES

ALIGNMENT

Work Descriptions Evaluation/ INTERNAL analysis certification STRUCTURE

COMPETITIVENESS

Market Surveys definitions

Policy lines

PAY STRUCTURE

EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS

CONTRIBUTORS

Seniority based

Performance based

Merit guidelines

INCENTIVE PROGRAMS

COMPLIANCE
MANAGEMENT
Costs Communication Change EVALUATION

Pay System Policies

1) Internal alignment

Focus comparisons among jobs or skill levels inside a single organisation Pay relationships within an organisation affect an employees decision to:
  

Stay with the organisation Become more flexible by investing in additional training Seek greater responsibility

2) External competitiveness
Focus compensation relationships external to the organisation: comparison with competitors Pay is market driven

Pay System Policies (cont.)

External competitiveness (cont.)

Effects of decisions regarding how much and what forms:

 

To ensure that pay is sufficient to attract and retain employees To control labour costs in ensuring competitive pricing of products/services

3) Employee contributions

Focus relation emphasis placed on employee performance Performance based affect fairness

4) Management

Focus policies ensuring the right people get the right pay for achieving the right objectives in the right way

Pay System Techniques

Include methods used to operationalize policy decisions and link decisions to overall compensation objectives Examples of techniques Internal consistency  Job analysis  Job evaluation External competitiveness  Pay surveys Employee contributions  Incentive plans  Performance-based pay increases

Compensation Objectives
Efficiency

Fairness

Compliance

Compensation objectives (cont.)

1) Efficiency
 

Improving performance, increasing quality, delighting customers and stockholders Controlling labour costs Fundamental objective of pay systems Fair treatment by recognising both employee contributions and employee need

2) Fairness
 

3) Procedural fairness

Compensation objectives (cont.)

4) Compliance
Conformance

to National compensation laws and

regulations

5) Ethics
Organizations

care about how its results are achieved

What Is the Strategic Perspective of Compensation?

The strategic perspective involves thinking about how pay can assist in achieving organization success, while not being fixated on pay techniques.

Strategic Alignment
VISION/MISSION CORE BELIEFS OBJECTIVES BUSINESS STRATEGY COMPENSATION SYSTEM

PERFORMANCE

Strategic Compensation Process.

Strategy
Innovator: Increase Product Complexity and Shorten Product Life Cycle

Business Response
Product Leadership
Shift to Mass

HR Program Alignment
Committed to Agile, Risk Taking, Innovative People

Compensation System
Reward Innovation in Products and Processes
Market-Based Pay Flexible Generic

Customization and Innovation

Cycle Time

Job Descriptions

Cost Cutter: Focus on Efficiency

Operational Excellence
Pursue Cost-

Do More With Less

effective Solutions

Focus on Competitors Labor Costs Increase Variable Pay Emphasize Productivity Focus on System Control and Work Specifications

Customer Focused: Increase Customer Expectations

Customer Intimacy
Deliver Solutions to

Customers Speed to Market

Delight Customer, Exceed Expectations

Customer Satisfaction Incentives

Value of Job and

Skills Based on Customer Contact

Key Steps to Formulate a Compensation Strategy

1. Assess Total Compensation Implications
Competitive Dynamics Core Culture / Values Social and Political Context Employee / Union Needs Other HR Systems

4. Reassess the Fit

Realign as Conditions Change Realign as Strategy Changes

2. Fit Policy Decisions to Strategy

Objectives Alignment Competitiveness Contributions Administration

3. Implement Strategy
Design System to Translate Strategy into Action Choose Techniques to Fit Strategy

POLICIES

TECHNIQUES

OBJECTIVES

ALIGNMENT

Work Descriptions analysis

Evaluation/ certification

INTERNAL STRUCTURE

COMPETITIVENESS

EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS

CONTRIBUTORS

MANAGEMENT

COMPLIANCE

What Is Internal Alignment?

Often called internal equity, refers to the relationships between the jobs/skills/competencies within a single organization. The relationships form a pay structure that should support the organization strategy, support the workflow, be fair to employees, and motivate behavior toward organization objectives.

What Is Pay Structure?

Refers to the array of pay rates for different work or skills within a single organization. The number of levels, differentials in pay between the levels, and the criteria used to determine those differences create the structure.

Compensation Strategy: Internal Alignment

Support organization strategy Support work flow

Compensation strategy should ...

Support fairness

Motivate behavior

What Shapes Internal Structures?

EXTERNAL FACTORS: Economic pressures Government policies, laws, regulations Stakeholders Cultures and customs

ORGANIZATION FACTORS: Strategy Technology Human capital HR policy Employee acceptance Cost implications

INTERNAL STRUCTURE: Levels Differentials Criteria

Consequences of Structures Efficiency: Competitive Advantage

Importance of Internal Structure

Fairness

Compliance

POLICIES

TECHNIQUES

OBJECTIVES

ALIGNMENT

COMPETITIVENESS

Market Surveys definitions

Policy lines

PAY STRUCTURE

EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS

CONTRIBUTORS

MANAGEMENT

COMPLIANCE

What Is External Competitiveness?

External competitiveness refers to pay relationships among organizations - an organizations pay relative to its competitors.

How Is External Competitiveness Expressed?

Setting a pay level

Above, Below, or Equal to competitors, and

Determining mix of pay forms relative to those of competitors

What Is Pay Level? Pay Forms?

Pay level refers to the average of the array of rates paid by an employer
7 Base + Bonuses + Benefits + Options / 7 Employees

Pay forms refer to the mix of the various types of payments that make up total compensation.

What Shapes External Competitiveness?

LABOR MARKET FACTORS Nature of Demand Nature of Supply

PRODUCT MARKET FACTORS Degree of Competition Level of Product Demand

EXTERNAL COMPETITIVENESS

ORGANIZATION FACTORS Industry, Strategy, Size Individual Manager

Some Consequences of Pay Levels

Contain operating expenses (labor costs) Increase pool of qualified applicants

Increase quality and experience

Competitiveness of total compensation

Reduce voluntary turnover

Reduce pay-related work stoppages

Increase probability of union-free status

POLICIES

TECHNIQUES

OBJECTIVES

ALIGNMENT

COMPETITIVENESS

EFFICIENCY Performance Quality Customers Stockholders Costs

Seniority based Performance based Merit guidelines INCENTIVE PROGRAMS

CONTRIBUTORS

FAIRNESS

COMPLIANCE
MANAGEMENT

Components of a Total Reward System

1. Compensation 2.. Benefits 3. Social interaction 4. Security 5. Status / recognition 6. Work variety 7. Workload 8. Work importance 9. Authority / control / autonomy 10. Advancement 11. Feedback 12. Work conditions 13. Development opportunity Wages, commissions and bonuses Vacations, health insurance Friendly workplace Stable, consistent position and rewards Respect, prominence due to work Opportunity to experience different things Right amount of work (not too much, not too little) Is work valued by society Ability to influence others; control own destiny Chance to get ahead Receive information helping to improve performance Hazard free Training to learn new knowledge / skills / abilities

Base Pay

Across the Board Increase

Cost of Living Increase

Merit Pay

Lump Sum Bonus

Wage Components
Individual Incentive Plans Success Sharing Plans

Gain Sharing

Profit Sharing

Risk Sharing Plans

What Is Pay-for-Performance?
Pay for performance plans signal a movement away from entitlements. Pay will vary with some measure of individual, team, or organizational performance.

Pay-for-Performance Plans: Short Term

Merit Pay
Lump-Sum Bonuses Individual Spot Awards Individual Incentive Plans

Types of Variable Pay Plans

Cash Profit Sharing

Stock Ownership or Options

Balanced Scorecard

Team / Group Incentives

Productivity / GainSharing

Issues that increase the likelihood of success for gainsharing programs

Long-Term Incentive Plans

Employee Stock Ownership Plan (ESOP)

Performance Plan

Broad Based Options Plans (BBOP)

POLICIES

TECHNIQUES

OBJECTIVES

ALIGNMENT

COMPETITIVENESS

EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS

CONTRIBUTORS

COMPLIANCE
MANAGEMENT
Planning Budgeting Communication EVALUATION

What Are Employee Benefits?

That part of the total compensation package, other than pay for time worked, provided to employees in whole or in part by employer, e.g. life insurance, pension, workers compensation, vacation, holidays . ..

Key Issues in Benefit Planning, Design and Administration

Establishing Specific Objectives Allowing for Employee Input Providing Flexibility

Modifying Employee Benefits

Communicating Benefits Information

Key Issues: Benefit Planning and Design

-How much total compensation, including benefits, should be provided? -What is the relative role of benefits in a total compensation package? -What is expected from benefits? -What is an appropriate mix of benefits? -Which employees should be given/offered which benefits? -How do benefits aid in minimizing turnover or maximizing recruitment and retention of employees? -What strategies can be used to ensure external competitiveness of benefits? -Can benefits be cost justified?

Factors Influencing Choice of Benefit Package Employer Factors

1. Relationship to total compensation costs 2. Costs relative to benefits 3. Competitor offerings 4. Role of benefits in: Attraction Retention Motivation 5. Legal Requirements

Benefits Package

Employee Factors
1. Equity: fairness historically and in relationship to what others receive 2. Personal needs as linked to: Age Sex Marital status Number of dependents

Benefit Options

Categorization of Employee Benefits 1 2 3 4 5 6 7

Legally required payments Retirement and savings plan payments Life insurance and death benefits Medical and medical-related benefit payments Paid rest periods, coffee breaks, lunch periods, . . . Payments for time not worked Miscellaneous benefit payments

Legally Required Benefits

Workers Compensation

Social Security

Unemployment Insurance

Family and Medical Leave Act C.O.B.R.A.

Health and Medical Benefits

General Health Care
Health Care: Cost Control Strategies

Short- & LongTerm Disability

Dental Insurance Vision Care

Miscellaneous Benefits
Paid Time Off During Working Hours Payment for Time Not Worked

Child Care

Elder Care

Domestic Partner Benefits Legal Insurance

Paid Time Off During Working Hours

Rest periods Lunch periods Travel Work prep time

Pay for Time Not Worked

Vacation Holidays Sick pay Personal holiday Funeral leave Military leave Jury duty

Other Miscellaneous Services

Awards Recreational and Social Services Food Services On-Site Health Services

Credit Unions

Legal Services

Purchasing Assistance Transportation Pooling Housing and Moving

Financial Planning

Compensation of Special Groups

Who Are Special Groups?

Supervisors Corporate directors Top management executives Professional employees Sales staff Contingent workers

Popular Perquisites Offered to Executives

Physical exam Company car Financial counseling Company plane Income tax preparation First-class air travel Country club membership Luncheon club membership Estate planning Personal liability insurance Spouse travel Chauffeur service Reserved parking Executive dining room Home security system Car phone Financial seminars Loans at low or no interest Legal counseling

Key Factors: Designing a Sales Compensation Plan

1 2 3 4 5 6 7 Nature of people who enter sales profession Organizational strategy Market maturity Competitor practices Size of company Economic environment Product sold

International Pay Systems

Understandinginternational compensation begins with recognizing variations (differences and similarities) and figuring out how best to manage them.

Guide to: International Compensation

Hofstedes Cultural Dimensions

Power Distance Uncertainty Avoidance Individualism Collectivism Masculinity Femininity Long-term Short-term

Government and Legal Issues in Compensation

Legislation establishes a minimum wage, governs overtime pay, protects employees from discrimination, regulates benefits, and determines how compensation is taxed.

Three Major Provisions

# Minimum wage # Hours of work
- Overtime pay - Employee status
1. Exempt 2. Nonexempt

# Child labor

Discriminatory Compensation Practices

Types of compensation practices which may be discriminatory - Extra pay plans - Leave policies - Maternity leave - Pension policies

What Is Discrimination ?

A plaintiff would have a prima facie case if he/she received a lower wage than members of opposite sex for performing work that requires substantially the same skills, effort, and responsibilities under similar working conditions - all performed at the same location.

Possible Determinants of Pay Differences

Differences in firms Differences in employees

Differences in employee work behaviors

Differences in Pay

Differences in unions

Differences in work

Discrimination

Differences in labor market conditions

What Is Comparable Worth?

If jobs require comparable skill, effort, and responsibility, the pay must be comparable, no matter how dissimilar the job content may be.

The Compensation Communication Cycle

Defining the Objectives What are the goals?

Evaluating the Program Was the program successful?

Obtaining the Information What is the current situation?

Conducting the Sessions How should the sessions be implemented? Determining the Media What tools are most appropriate?

Developing the Strategy What is the best overall approach?

What Is an Implicit Employment Contract?

An unwritten understanding between employers and employees over their reciprocal obligations and returns; employees contribute toward achieving the goals of the employer in exchange for returns given by the employer and valued by the employee.

Summary
Pay systems are tools, and like any tools, they need to be evaluated in terms of usefulness in achieving an organizations objectives.

Key Objectives of Reward Systems : Attracting, Retaining & Motivating

On a lighter note