103209 - HUMAN RESOURCE MANAGEMENT

Dr. Karthik Mohandoss

CHAPTER – IV

Compensation Methods & Planning

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LEARNING OUTCOMES
At the end of this chapter you will be able to understand and
have knowledge about

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 The definition of compensation
 Components of compensation
 Factors influencing compensation
 Designing a compensation system
 Determining individual pay
 Types of payment system
 Solution to problems in compensation
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COMPENSATION

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Cash, Bonuses, Insurance,
Vacation, Holidays
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Perks, Recognition
What does compensation mean to you?

All forms of

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Financial return,
Tangible services &
Benefits
that employees receive as part of their employment
relationship

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COMPONENTS OF A TOTAL COMPENSATION PROGRAM

Financial
Direct

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 wages, salaries, commissions, bonuses
Indirect
 Insurance plans
 life, health, dental, disability
 Social assistance benefits
 retirement plans, social security, workers’ comp
 Paid absences
 vacations, holidays, sick leave
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Non-Financial
The Job

 Interesting, Challenging, Responsible

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 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

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FACTORS THAT INFLUENCE WAGE LEVELS
Conditions of
Labor Market Compensation
Policy of
Organization
Area Wage

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Rates Worth of
Job
Cost of WAGE
Living
MIX Employee’s
Relative Worth
Collective
Bargaining
Employer’s
Legal Ability to Pay
Requirements 7
DESIGNING A COMPENSATION SYSTEM

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Steps in the Decision Process

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STEP-1
ESTABLISH GENERAL WAGE LEVEL FOR ORGANIZATION

Factors to consider:

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 Other firm’s rates
 Union demands
 Cost-of-living changes
 Firm’s ability to pay

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STEP-2
ESTABLISH WAGE STRUCTURE (THE PAY FOR EACH JOB)

Employ a job evaluation system

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 Ranking

 Job Classification

 Point System

 Factor Comparison

Results:

 Pay grades

 Rate ranges
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STEP-3
ESTABLISH PAY FOR EACH INDIVIDUAL ON EACH JOB

Inputs:

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 Performance appraisal information
 Seniority system

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 MARKET WAGE AND SALARY SURVEYS

o Select key jobs.

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o Determine relevant labor market.
o Select organizations.
o Decide on information to collect:wages/benefits/pay policies.
o Compile data received.
o Determine wages and benefits to pay.

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MARKET WAGE LEVELS

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•Which company is leading the market?
•Which company is lagging the market?
• What would the wage level line look like for a company that was
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meeting/matching the market?
DETERMINATION OF INDIVIDUAL PAY

Three questions need to be addressed

1. How should one employee be paid relative to another

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when they both hold the same job in the organization?
2. Should we pay all employees doing the same work at the
same level the same?
3. If not, on what basis should we make the distinction?

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PAY DIFFERENTIALS ARE BASED ON:

1. Individual differences in experience, skills, and

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performance
2. Expectations that seniority, higher performance (or both)
deserve higher pay

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 Dr. Karthik Mohandoss
REASONS FOR CHOOSING
TO PAY EMPLOYEES AT
DIFFERENT RATES FOR THE SAME JOB

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 Pay differentials allow firms to recognize that different employees
performing the same job make substantially different contributions
to meeting organizational goals
 Differentials allow employers to communicate a changed emphasis

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on important job roles, skills, knowledge, etc.
 Differentials provide organizations with an important tool for
emphasizing norms of enterprise without having employees change
jobs (i.e., promotion)
 Pay differentials allow firms to recognize market changes between
jobs in the same grade without requiring a major overhaul of the
whole compensation system 17
Without differentials
 The pay system violates the internal equity norms of most

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employees,

 Reducing satisfaction with pay, and

 Making attraction and retention of employees more difficult

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METHODS OF PAYMENT

Flat Rates

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Payment for Time
Worked

Variable Pay:
Incentive
Compensation
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SOLUTIONS TO THE PROBLEM OF COMPENSATION

1. Re-examining how many entry-level people are needed

2. Reassessing recruitment itself

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3. Focusing on the job evaluation process, emphasizing
performance instead of salary-grade assignment
4. Basing all salaries on longevity
5. Giving first-line supervisors and other managers the authority
to recommend equity adjustments for incumbents who have
been unfairly victimized by pay compression
6. Limiting the hiring of new employees seeking excessive
salaries
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SUMMARY

 There is a growing realization that traditional pay systems do not

effectively link pay to performance

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 The trend is toward a total compensation approach made up of
base pay, variable pay, and benefits
 Flexibility is an essential ingredient in any compensation plan and
can be built using a variable pay approach

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Dr. Karthik Mohandoss
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Thank you