DefinitionCompensation means that counterbalances ormakeup for something else.It is the total amount of the monetary and non-monetary pay provided to an employee by anemployer in return for work performed asrequired.
Compensation is based on• Market research about the worth of similar jobs in the marketplace,• Employee contributions and accomplishments,• Availability of employees with like skills in the marketplace,• Desire of the employer to attract and retain a particular employee for the value they are perceived to add to the employment relationship, and• Profitability of the company or the funds available in a non-profit or public sector setting, and thus, the ability of an employer to pay market-rate compensation.• Compensation also includes payments such as bonuses, profit sharing, overtime pay, recognition rewards and checks, and sales commission. Compensation can also include non-monetary perks such as a company-paid car, stock options in certain instances, company-paid housing, and other non-monetary, but taxable, income items.
Forms of Pay Total Returns Total Relational Compensation Returns Cash Recognition Employment Challenging Learning Benefits Compensation and status security work opportunities Short term Merit / Cost of Income Work lifeBase and long term allowances living protection balance incentives
Base Wage and Merit Pay/ Cost of Living AdjustmentBase Pay:• Cash compensation that an employer pays for the work performed.• It reflects the value of work or skills and generally ignores differences attributable to individual employees.• Difference between salary and wages. (as per Fair Labor Standards Act – no OT for salaried employees)Merit Pay / Cost-of-living Adjustments:• Merit increases are given as increments to the base pay (depending upon experience and performance)• Cost of living adjustments are same regardless their performance.
Cash Compensation: Incentive• Incentive α Performance.• Not included with base pay• Potential size of incentive payment will generally be known before hand.• Merit pay (Past performance) Vs Incentive (future performance)• Incentive can be tied to individual employee / group/ total business unit or combination of all.
Long Term Incentive• Focus on employees multi year results.• In the form of stock ownership or options to buy stock at advantageous price.• Thus employees will focus on long term financial objectives: return on investment, market share.• Stock option is the largest component in executive pay package.• Eg: Google, Intel, Sun Microsoft, Starbucks etc.,
Benefits: Income Protection• Medical Insurance, retirement programs, life insurance and savings plan are common benefits.• They help protect employees from the financial risks inherent in daily life.• Eg: ESI
Benefits: Work/Life Balance• Time away from work – vacations• Flexible work arrangement• Responding to changing demographies to work force (2 income family)• Health and wellness, security, individual and family wellbeing, fulfilling work environment – total well being
Benefits: Allowances• Housing allowance, transportation allowance• Rice allowance (after world war II – Japanese firms)• In many European countries – car will be provided for manager – who decide the model
Total Earnings opportunities• Retention strategy – staying 5 years - annual increment of 4%• Merit increases and promotionsRelational Returns from work:• Recognition, status, employment security, challenging work and opportunities to learn.• Teaming with great co-workers, receiving new uniform
Pay Model POLICIES TECHNIQUES OBJECTIVES ALIGNMENT Work Description Evaluation / INTERNAL EFFICIENCY Analysis Certification STRUCTURE Performance Quality Customer andCOMPETITIVENESS Market Surveys Policy PAY Stockholder Definitions Lines STRUCTURE Cost Seniority Performance Merit INCENTIVE FAIRNESSCONTRIBUTIONS Based Based Guidelines PROGRAM MANAGEMENT Cos t Communication Change EVALUATION COMPLIANCE
Compensation Objectives• Fairness – fair treatment for all employees by recognizing both employees contribution (eg: higher pay for greater performance, experience, or training) and employee needs (fair wage as well as fair procedure).• Compliance - MNC (should obey laws of all countries)• Objectives guide the design of the pay system – eg: customer satisfaction - ?• Pay system should consider the external competitiveness and internal alignment• Policies and Techniques are means to reach objectives• Compensation should be according to ethics.
Four Policy ChoicesInternal Alignment• Comparison of jobs or skill levels inside a single organisation.• Jobs and people skills are compared in terms of their relative contributions to the organizations business objectives.• This is both for employees doing equal work and dissimilar work.• Internal Alignment affects all the three compensation objectives.External Competitiveness• Comparison with competitors includes pay mix (base, incentives, stock, benefits etc).• “Market Driven Pay” – both how much and what form. Have 2 fold effect on objective (to attract and retain and to control labour cost)
Four Policy ChoicesEmployee Contribution• Performance based / Seniority based• Eaton and Motorola – Team based pay and corporate profit sharing plans• Performance based pay – employee needs to understand the basis for judging the performance.Management• Ensuring that the “right people get the right pay for achieving the right objective in the right way”