Compensation

The sum total of all forms of payments or

rewards provided to employees for
performing tasks to achieve organizational
objectives
Rs
Compensation-Nature and scope

The complex process includes decisions

regarding variable pay and benefits
It suggests an exchange relationship
between the employee and the
organization
It involves design, development,
implementation, communication and the
evaluation of reward strategy and process
of the organization
Compensation Objectives
1.
To reward employees past performance fairly, in line
with efforts, skills and competencies
2.
To attract and retain competitive high performing
employees
3.
To motivate the high performing employees and
reinforce desirable employee behaviour
4.
To remain competitive in the labor market
5.
To align employees future performance with
organizational goals
6.
To communicate the employees their worth to the
organization
7.
To provide employee social status
 Strategic compensation
Using the compensation plan to support the
company s strategic aims.
Focuses employees attention on the values
of winning, execution, and speed, and on
being better, faster, and more competitive..
IBM
Strategic Compensation
Planning

Strategic Compensation Planning

Links the compensation of employees to the
mission, objectives, philosophies, and 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-forperformance
standard.
Seeks to motivate employees through
compensation.
Compensation Policy Issues

Pay for performance

Pay for seniority
Salary increases and promotions
Overtime and shift pay
Probationary pay
Paid and unpaid leaves
Paid holidays
Salary compression (A salary inequity problem, generally caused by
inflation, resulting in longer-term employees in a position earning less than
workers entering the firm today)
Geographic costs of living differences
Compensation
Administration
Process

Pay Structure
.Pay grades
.Pay ranges
Total compensation
Financial
(extrinsic rewards)
Non -Financial
(intrinsic rewards)
Total compensation
Financial
(extrinsic rewards)
Non -Financial
(intrinsic rewards)
Direct
Indirect Satisfaction
derived from job
Praise and
rewards
Classification of rewards
Components of Financial
Compensation
Direct
Security Plans
Pensions
Educational assistance
Recreational programs
Variable Pay
Incentives
-Individual
-Group/team
-organizational
Base pay
Wages
Salaries
Provident Fund
Gratuity
Maternity Leave
Health plans
Medical leave
Vacations
Breaks
Holidays
Indirect
Benefits
voluntary Mandatory
Components of Financial
Compensation
Direct
Security Plans
Pensions
Educational assistance
Recreational programs
Variable Pay
Incentives
-Individual
-Group/team
-organizational
Base pay
Wages
Salaries
Provident Fund
Gratuity
Maternity Leave
Health plans
Medical leave
Vacations
Breaks
Holidays
Indirect
Benefits
voluntary Mandatory
Base pay

The direct financial compensation an

individual receives based on the time
worked
Two bases of calculation
-Hourly/wage: payment for the number of
hours worked
-Salaried : receive consistent payments at
the end of specific period regardless 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 an
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
time worked

Incentive Pay Programs

Establish a performance threshold to qualify for incentive payments.
Emphasize a shared 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 piece rate standard.
Standard hour plan:
An incentive plan that sets pay rates based on the completion of a
job in a predetermined standard time.
If employees finish the work in less than the expected time, their
pay is still based on the standard time for the job multiplied by their
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
Employee 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, quality
improvement, or other performance
criteria.
Spot bonus
Unplanned bonus given for employee
effort unrelated to an established
performance measure.
Group Incentive Plans

Team Incentive Plans

Compensation plans where all team members receive
an incentive bonus payment when production or
service standards are met or exceeded.
Establishing Team Incentive Payments
Set performance measures upon which incentive
payments are based
Determine the size of the incentive bonus.
Create a payout formula and fully explain to
employees how payouts will be distributed.
Group Incentive Plans (cont d)

Gainsharing Plans
Programs under which both employees and
the organization share the financial gains
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 production.
Improshare
Gainsharing based on increases in productivity of
the standard hour output of work teams.
The Pros and Cons of Team Incentive Plans The Pros and Cons of Team Incentive Pl
ans
PROS

Team incentives support group planning and problem

solving, thereby building a team culture.
The contributions of individual employees depend on group
cooperation.
Unlike incentive plans based solely on output, team
incentives can broaden the scope of the contribution that
employees are motivated to make.
Team bonuses tend to reduce employee jealousies and
complaints over tight or loose individual standards.

Team incentives encourage cross-training and the acquiring

of new interpersonal competencies.
The Pros and Cons of Team Incentive Plans (cont d) The Pros and Cons of Team Incen
tive 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 problems pressure to limit performance

(for example, team members are afraid one individual 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 all regular employees, in addition to their
base pay, current or deferred sums based upon the
profits of the enterprise.
Paid once in a year or deferred sums until
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 company s
stock at a guaranteed price (the option price)
during a designated time period.
The value of an option is subject to stock
market conditions at the time that 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 established trust for the purpose of stock purchases
by its employees.( UK,USA and several other industrialized
countries). This provide tax concessions to corporate orgns. And
to trusts established for employee stock options. (i.e (difference
between acceptance price and market value)
The employer establishes an ESOP trust that qualifies as a tax-
exempt employee trust 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 incentive with your strategy.
Make sure effort and rewards are directly related.
Make the plan easy for employees to understand.
Set effective standards.
View the standard 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 Compensation-
Benefits

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 ).
-ONGC,NIIT ,ADITYA BIRLA
GROUP, HLL sabbaticals (paid/
non-paid) are provided to
employees who wish to study.
-Meritorious Children of employees
are provided opportunity of higher
education with loan benefits in
BPCL, CPCL etc
Family
-Paternity leave in HLL, HCL Tech,
Yes Bank, Genpact etc.,
-Wedding anniversary allowance in
NIIT, SPIC etc.,
- Joyful Working Team and
Happy Moments Board -LG
Electronics
-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 employee recognition
program.
Intrinsic motivators are worthwhile as financial
package
Organization reward high performing employees
Psychological rewards that employees receive in
recognition of their skills and contributions
Types

Awards
Often used to recognize productivity gains, special contributions or
achievements, and service to the organization.
Employees feel appreciated when employers tie 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.
Combiningfinancial rewards with nonfinancial ones produced performance
improvement in service firms almost twice the effect of using each reward alone.

Day-to-day recognition from supervisors, peers, and team members is important.

Best 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 (relationships with others)
self-esteem (a sense of personal worth)
self-actualization (becoming the desired self)
Lower level needs must be satisfied before higher
level needs can be addressed or 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 dissatisfaction and prevent satisfaction.
Motivators (intrinsic job factors)
Job enrichment (challenging job, feedback and recognition)
addresses higher-level (achievement, self-actualization)
needs.
The best way to motivate someone is to organize the
job so that doing it helps satisfy the person s higher-
level 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 work performed.
A motivation theory that explains how people respond
to situations 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 compare the value of that ratio with the value of the
ratio for other individuals in similar jobs.
Relationship between Pay Equity and Motivation Relationship between Pay Equity a
nd Motivation
Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less a
nd Receiving More
The greater the perceived disparity between my input/output ratio and
the comparison person s input/output ratio, the greater the motivation
to reduce the inequity.
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 connection 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 the reward.
Employee confidence building and training, accurate appraisals,
and knowledge 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 conditions,
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 adjusted upward periodically to help
employees maintain their purchasing power.
External Determinants

Collective Bargaining
The term extends to all negotiations that take place
between 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 between employer and
employee/workers and / or
(c)
regulate relations between employer organization or
employee/workers organization
New developments

Competency based pay and reward

programmes (also skill-based pay or
knowledge-based pay)
-Competency based pay using Broad
banding
What Is Competency-based
Pay?

Competency-based pay
Wherethe company pays for the employee s
range, depth, and types of skills and
knowledge, rather than for the job title he or
she holds.
Competencies
Demonstrable characteristics of a person,
including knowledge, skills, and behaviors,
that enable performance.
Why Use Competency-Based
Pay?

pay plans that aim for high-performance

work system.
Paying for skills, knowledge, and
competencies is more strategic.
Measurable skills, knowledge, and
competencies are the heart of any
company s performance management

process.
Competency-Based Pay in Practice

Main components of skill/competency/ knowledge based pay

programs:
A system that defines specific skills, and a process for tying the
person s pay to his or her skill
A training system that lets employees seek and acquire skills
A formal competency 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 productivity
 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 grades.
Lack of permanence in job responsibilities can be
unsettling to new employees.
Trends in Executive Compensation

The Executive Pay Package

Base salary
Short-term incentives or bonuses

Perquisites (perks)
Long-term incentives or stock plans
Why are they made more?

Supply is short
Most important to organization in terms of
their competencies
Motivation and retention
Executive Compensation: Ethics and
Accountability

Incentive payments are excessive compared with return to

stockholders.
Time periods for judging and rewarding performance are too
short.
Subjective in nature
Emphasis 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
Company-paid parking
Personal liability insurance
Estate planning
First-class air travel
Home computers
Chauffeur service
Children s education
Spouse travel
Physical exams
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
Participative management must be
encouraged
Income beyond a limit must be subject to
higher taxation
Remuneration committees must be
constituted
Negotiation

Collective Bargaining
The term extends to all negotiations that take place
between 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 working conditions and terms of

employment and / or
Regulate relations between employer and
employee/workers and / or
regulate relations between employer organization or
employee/workers organization
Collective bargaining and
stakeholders

Concerned parties during the process of

negotiation are
The government
The employers/ 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 conflicting
interested come together and talk with a view to
reaching an agreement
It involves 5 key activities
-Obtaining substantial results
-Influencing the balance of power between
parties
-Influencing the atmosphere
-Influencing the consistency
-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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