New Trends in Compensation Management
By Dr. G C Mohanta, BE, MSc (Engg.), MBA, PhD (Mgt.), Professor, Al-Qurmoshi
Institute of Business Management, Hyderabad, India
What are Flexible Benefits?
Flexible benefits allow employees to pick benefits that meet their needs. The idea is to allow
each employee to choose a benefit package that is individually tailored to his or her own needs
and situation. It replaces the traditional “one-benefit-plan-fits-all” programs that dominated
organizations for more than 50 years.
The average organization provides fringe benefits worth approximately 40% of an employee’s
salary. Traditional benefit programs were designed for the typical employees of the 1950s - a
male with wife and two children at home. Less than 10% of employees now fit this stereotype.
While 25% of today’s employees are single, a third is part of two-income families with no
children. As such these traditional programs don’t tend to meet the needs of today’s more diverse
workforce. Flexible benefits, however, do meet these diverse needs. They can be uniquely
tailored to reflect differences in employee needs based on age, marital status, spouses’ benefit
status, number and age of dependents, and the like.
The three most popular type of benefit plans are modular plans, core-plus options, and flexible
spending accounts. Modular plans are pre-designed packages of benefits, with each module put
together to meet the needs of a specific group of employees. So a module designed for single
employees with no dependents might include only essential benefits. Another, designed for
single parents, might have additional life insurance, disability insurance, and expanded health
Core-plus plans consist of a core of essential benefits and a menu-like selection of other benefits
options from which employees can select and add to the core. Typically, each employee is given
“benefit credits,” which allow the “purchase” of additional benefits that uniquely meet his or her
Flexible spending plans allow employees to set aside up to the amount offered in the plan to pay
for particular services. It’s a convenient way, for example, for employees to pay for health-care
and dental premiums. Flexible spending accounts can increase employee take-home pay because
employees don’t have to pay taxes on the amount they spend out of these accounts.
Linking Flexible Benefits and Expectancy Theory:
Giving all employees the same benefits assumed that all employees have the same needs. Of
course we know that assumption is false. Thus, flexible benefits turn the benefit expenditure into
a motivator. Consistent with expectancy theory’s thesis those organizational rewards should be
linked to each individual employee’s goals, flexible benefits - individualized rewards by
allowing each employ to choose the compensation package that best satisfies his or her current
Flexible Benefits in Practice:
Today almost all major Corporations in the United States offer flexible benefits. And they are
becoming a norm in other countries too. For instances, a recent survey of 136 Canadian
Organizations found that 93% have adopted flexible benefits or will adopt in the near term. And
a similar survey of 307 firms in the United Kingdom found that while only 16% have flexible
benefits programs in place, another 60% are either in the process of implementing them or are
seriously considering them.
In India and most countries of Asia with the exception of Japan, flexible benefits are not offered
by employers for various reasons which may create personnel and trade union problems. In India
some flexible benefits are offered in a limited way to the top management personnel like
Executive Directors, President, Vice President, General Manager etc. It may take a few more
years to offer flexible benefits to employees in India and other Asian counties by the
3 P Compensation Concept
There are 3P approach of developing a compensation policy centred on the fundamentals
of paying for Position, Person and Performance. Drawing from external market information
and internal policies, this program helps establish guidelines for an equitable grading structure,
determine capability requirements and creation of short and long-term incentive plans.
The 3P approach to compensation management supports a company's strategy, mission and
objectives. It is highly proactive and fully integrated into a company's management practices
and business strategy. The 3P system ensures that human resources management plays a
central role in management decision making and the achievement of business goals.
The management of an organization considers 3P approach while deciding the salary as well as
Paying for Position
- Through broad banding the traditional narrowly structured pay grades determined through job
evaluation, are replaced by fewer and wider bands, and a grading structure is created.
- It is a compensation technique that reduces many different compensation categories to several
broad compensation bands. A banding procedure takes place when jobs are grouped together by
- On recruitment or promotion, employee compensation may be set at levels in the broadband
deemed to be appropriate to an employee’s qualifications, education, training and experience.
Employees typically progress up through the broad band if their performance ratings are good,
rather than progressing up through a grade by steps based on time in the grade.
Pay for Position
Develop an equitable grading structure
Create a reference salary structure
Leverage compensation costs with market survey information
Paying for Person
- Pay for person takes into account a person’s capabilities and experience in setting a pay
level that is both equitable and competitive. It also considers the market demand of a person’s
unique skills and experience.
- Pay for person is associated with competency based pay. It also incorporates market based pay
Pay for Person
Determine competency requirements and employee capabilities
Pay individuals based on their competency match with the position
Identify and pay market premium for competencies in short supply in the market.
Paying for Performance
- An individual’s performance is managed through a performance contract which comprises the
definition of the role, the setting up of objectives for the role and the review of performance.
- As an outcome a measure of performance at the corporate, unit and individual level becomes
the basis for setting the performance pay.
Pay for Performance
Design annual bonus and incentives plans that motivate staff
Shift from merit salary increases to variable pay
Create long-term reward plans - stock options, deferred compensation