The word compensation may be defined as • all forms of financial returns and tangible services and benefits, which an employee receive in his/her tenure of employment. • a system of rewards to motivate employees, so that organizations can achieve its intended goals and objectives. Considers both intrinsic (psychological) and extrinsic (tangible) components of compensation. Extrinsic compensation covers both the monetary and non-monetary rewards, intrinsic compensation reflects employees’ psychic satisfaction through job accomplishment.
Compensation refers to allforms of financial returnsand tangible services and benefits employees receive as part of anemployment relationship
• Acquire qualified personnel• Retain current employees• Reward desired behaviour• Control costs• Comply with legal regulations• Further administrative efficiency
Non-financial Compensation SystemEnhance Dignity and Satisfaction from Work PerformedEnhance Physiological Health, Intellectual Growth, and Emotional MaturityPromote Constructive Social Relationships with Co-workersDesign Jobs that Require Adequate Attention and EffortAllocate Sufficient Resources to Perform Work AssignmentsGrant Sufficient Control over the Jobs to Meet Personal DemandsOffer Supportive Leadership and Management
Three basic building blocks: • Compensation objectives • Policies that form the foundation of the compensation system • Techniques that make up the compensation system
Internal alignment, often called internal equity, refers to the pay relationshipsamong different jobs/skills/competencies within a single organization.
Pay structure refers to the array of payrates for different work or skills withina single organization.The number of levels, the differentials inpay between the levels, and the criteria used to determine those differences describe the structure.
An internal pay structure can be defined by • Number of levels of work • Pay differentials between the levels • Criteria or basis used to determine those levels and differentials
Pay structure is hierarchical in nature, based on: • Number of levels • Reporting relationships
The pay differences among levels Pay is determined by: • Knowledge/ skills involved • Working conditions • Valued addition to the company Intention of these differentials: • To motivate people to strive for promotion to a higher-paying level
Job-based structures relies on the work content – tasks, behaviors, responsibilities Person-based structure shifts the focus to the employee • Skills, knowledge, or competencies the employee possesses • Whether or not they are used in the particular job In reality, both job-and-person-based structures are included
The systematic process of collecting information that identifies similarities and differences in the work.
Job-based structures look at what people are doing and the expected outcomes Skill- and competency based structures look at the person
Job evaluation – process of systematically determining the relative worth of jobs to create a job structure for the organization The evaluation is based on a combination of: • Job content • Skills required • Value to the organization • Organizational culture • External market
Skill-based structures link pay to thedepth or breadth of the skills, abilities, and knowledge person acquires that are relevant to the work. In contrast, a job-based plan paysemployees for the job to which they are assigned, regardless of the skills they possess.
Skill plans can focus on • Depth based Specialist • Breadth based: Generalist/ multiskilled based
Systematic process of identifying and collectinginformation about skills required toperform work in an organization.
Several perspectives on what competencies are and what they are meant to accomplish • Skill that can be learned and developed or a trait that includes attitudes and motives? • Focus on the minimum requirements that the organization needs to stay in business or focus on outstanding performance? • Characteristics of the organization or of the employee?
Core competencies • Related to mission statements expressing organization’s philosophy, values, business strategies, and plans Competency sets • Translate each core competency into action Competency indicators • Observable behaviors that indicate the level of competency within each set
Organizations seem to be moving away from the vagueness of self-concepts, traits, and motives Greater emphasis on business-related descriptions of behaviors “that excellent performers exhibit much more consistently than average performers” Competencies are becoming “a collection of observable behaviors that require no inference, assumption or interpretation”
External competitiveness refers to pay relationships among organizations - anorganization’s pay relative to its competitors.
Pay level refers to the average of the array of rates paid by an employer: (base + bonuses + benefits + value of stocks) / number of employees.
Pay forms are the varioustypes of payments, or pay mix, that make up total compensation.
Control CostsAttract and Retain Employees
LABOR MARKET FACTORSNature of DemandNature of SupplyPRODUCT MARKET FACTORSDegree of Competition EXTERNAL COMPETITIVENESSLevel of Product DemandORGANIZATION FACTORSIndustry, Strategy, SizeIndividual Manager
Three conventional pay-level policies: • To lead • To meet • To follow competition Newer policies emphasize flexibility among: • Policies for different employee groups • Pay forms for individual employees • Elements of the employee relationship that company wishes to emphasize in its external competitiveness policy
Pay withCompetition (Match) Lead Policy Lag Policy Flexible Policies Employer ofShared Choice Choice
A survey is the systematic process of collecting and making judgments about the compensation paid by other employers Surveys provide the data for translating policy into pay levels, pay mix, and structures
An employer conducts or participates in a survey for a number of reasons: • Adjust the pay level in response to changing rates paid by competitors • Set the mix of pay forms relative to that paid by competitors • Establish or price a pay structure • Analyze pay-related problems • Estimate the labor costs of product/service market competitors
Who should be involved? How many employers? • Publicly Available Data • “Word-of-mouse” • Where are the standards? Which Jobs to include? • Benchmark-job approach • Low-High approach • Benchmark conversion approach What information to collect? • Organization data • Total compensation data
Employers want employees to perform in ways that lead to better organizational performance Organizational strategy is the guiding force that determines what kinds of employee behaviors are needed
Do people join a firm because of pay? Do people stay in a firm (or leave) because of pay? Do employees more readily agree to develop job skills because of pay? Do employees perform better on their jobs because of pay?
Uses a constellation of measures • Pinpoints areas of success • Indicates areas to improve Categories of measures • Financial results • Process improvements • Customer service • Innovation Forces discussions about priorities among different measures Outcome – Objectives with different weights in terms of importance
Used for several organizational decisions • To guide allocation of merit increases Performance ratings are influenced by: • Employee behaviors observed by raters • Organization values • Competition among departments • Differences in status between departments • Economic conditions
Employees often frustrated about the appraisal process • Appraisals are too subjective • Possibility of unfair treatment by a supervisor Experts argue that rather than throwing out the entire performance appraisal process, total-quality-management principles should be applied to improving it
Ranking - Rater compares employees against each other Rating - Rater evaluatesCategories employees on some absolute standard (measured on a continuum scale) Essay - Rater answers open- ended questions in essay form describing employee performance