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 Compensation Management - Rewarding the
employees - measure of competent organization.
 Reputation, position in the market, attraction of
workers and retention of employees.
 Reward management is not just about money but
is concerned with intrinsic and extrinsic
motivation.
 Salary administration in the organizations is the
very complicated work and requires strategic
compensation management.
 Compensation Management helps in
understanding the reward strategy of the
organization which should also considered
employees demand and strategy of the
management
 The need of effective compensation
management system in the organization is the
need of the hour.
Course Objectives :
The objective of this course is to familiarize the
students with the effective compensation management
and make them able to design the compensation
system for the organization.
The inherent objectives can be given as below-
 To make conceptual foundation about reward
management and compensation management.
 To benchmark the jobs for the compensation purpose.
 To study internal and external equity about
compensation management.
 To design compensation package
 To study the compensation of Executives, R&D
employees, and salesman
Course Outcomes :
 The students will know about the remuneration basics
used by the organization.
 Students will also understand the things about the
design of the compensation package and its
components.
 The effect of different components on employees and
the organization and comparison with the competitors
so that the organization can perform effectively to
survive in the market.
 The students will know the importance of justifiable,
balanced, lucrative and affordable combination of
different components in compensation system which
may help and make satisfied to employees in every
level in the organization.
SECTION-A
Unit I : Compensation Management: Concept, Components
and Theories, Compensation Package, Reward
Management.
Unit II : Diagnosis of compensation problem, Meaning and
necessity of Benchmarking, commitments, internal &
external equity in compensation system.
Unit III : Compensation Packages: Tools in Designing,
improving & implementing. Designing Compensations
Packages for specific type of human resources
Unit IV : Components of compensation: Fringe Benefits,
Incentives, and Retirement Benefits.
Unit V : Strategic Compensation System, compensation
practices of public limited, institutional, corporate &
public sector companies.
Sr. No. Title Author Publication
R-1 Reward Management: A
Handbook of Salary
Administration,
Armstrong, Michel
and Murlis, Helen.
London, Kogan Page,
2012.
R-2 Compensation And
Reward Management
B.D. Sing Excel Books
R-3 Wage and Salary
Administration
Bergess, Lenard R. London,
Charles E-Merril, 1984
R-4 Employee Share
Ownership.
Capeman, George, New York, Kogan
Page, 1991
R-5 Economics of Non Wage
Labour Costs.
Hart, Robert A. London,
George aller and Unwin,
1984
R-6 Compensation
Management: Rewarding
Performance. 6th Edition,
Henderson Richard
I.
Englewood Cliffs, Prentice
Hall Inc. 1994
R-7 Handbook of Wage and
Salary Administration.
Micton, Rock, McGraw-Hill Inc.,US
(August 23, 1983)
Sr.
No.
Title Periodicity
1. Journal of Compensation and Benefits
http://legalsolutions.thomsonreuters.com/law-
products/Treatises/Journal-of-Compensation-and-
Benefits/p/100000474
Yearly
2.
Journal of Economics & Management Strategy
http://onlinelibrary.wiley.com/doi/10.1111/jems.12014/
Yearly
3.
Journal of Management
http://jom.sagepub.com/cgi/collection/ceo_compensatio
n
Yearly
IOSR journals on Business Management
http://iosrjournals.org/iosr-jbm.html
6 issues per
Year
Related Links -
 www.successfactors.com/compensation
 www.ramco.com/HCM
 www.payscale.com/hr/webinars
What are your views about
Compensation?
Thanks
UNIT-I:
CONCEPT, COMPENSATION AND THEORIES
What is compensation?
What comes in your mind?
 Labor cost issues affect the efficiency and even
the survival of public and private sector
organizations
 Compensation management provides step by
step approach for designing a remuneration
system that recognizes the job requirements ,
employee related knowledge and skills and
performance related incentives that link
individual , team work-unit and organization
performance.
 Introduction
 Objectives
 Components
 Importance
 Factor affecting
 conclusion
 Compensation is a systematic approach to
providing monetary & non monetary value to
employees in exchange for work performed.
 Compensation may be defined as money
received in performance of work and many
kinds of benefits that an organization provides
to their employees.
 To recruit & retain qualified employees.
 To increase or maintain morale.
 To determine basic wage & salary.
 To reward for job performance.
compensation
monetary
direct indirect
Non monetary
 Base Pay
 Bonus
 Long term incentives
 Perks or perquisites
• Direct
Compensation
 Insurance (health, eye).
 Leaves (sick, holiday/personal)
 Clothes
 Company parties
 Phones/laptop
 Retirement programs
• Indirect compensation
 Enhance dignity & satisfaction from
work performed.
 Promote social relationship with co-
workers.
 Allocate sufficient resources to perform
work assignments.
 Offer supportive leadership &
management.
 Enhance physiological health,
intellectual growth.
 Job description
 Job analysis
 Job evaluation
 Pay structure
 Salary surveys
 Demand &
supply of labor
 Cost of living
 Society
 Labor unions
 The economy
 Compensation
policy
 The org. ability
to pay
 Job analysis &
description
 Employee
External Internal
 We can say that good compensation can
increase the productivity of an organization
because its provides various rewards, bonus,
schemes etc. and its compulsory for every
organization.
Components of
Compensation system
 If based on systematic components
• Compensation will be perceived by
employees as fair
• Compensation systems have developed
to determine the value of positions.
Why Components are
important?
 Job Description
 Job Analysis
 Pay Structure
 Salary Survey
 Policies and Regulations
 Job analysis is a systematic approach to
defining the job role, description, requirements,
responsibilities, evaluation, etc.
 It helps in finding out required level of
education, skills, knowledge, training, etc for
the job position. It also depicts the job worth i.e.
measurable effectiveness of the job and
contribution of job to the organization. Thus, it
effectively contributes to setting up the
compensation package for the job position.

Job analysis helps in analyzing the resources
and establishing the strategies to accomplish
the business goals and strategic objectives. It
forms the basis for demand-supply analysis,
recruitments, compensation management, and
training need assessment and performance
appraisal.

Job analysis is a systematic procedure to
analyze the requirements for the job role and
job profile. Job analysis can be further
categorized into following sub components.

Job position refers to the designation of the job
and employee in the organization. Job position
forms an important part of the compensation
strategy as it determines the level of the job in
the organization. For example management
level employees receive greater pay scale than
non-managerial employees. The non-monetary
benefits offered to two different levels in the
organization also vary.

Job description refers the requirements an
organization looks for a particular job position.
It states the key skill requirements, the level of
experience needed, level of education required,
etc. It also describes the roles and
responsibilities attached with the job position.
The roles and responsibilities are key
determinant factor in estimating the level of
experience, education, skill, etc required for the
job. It also helps in benchmarking the
performance standards.

Job Worth refers to estimating the job
worthiness i.e. how much the job contributes to
the organization. It is also known as job
evaluation. Job description is used to analyze
the job worthiness. It is also known as job
evaluation. Roles and responsibilities helps in
determining the outcome from the job profile.
Once it is determined that how much the job is
worth, it becomes easy to define the
compensation strategy for the position.

 Therefore, job analysis forms an integral part in
the formulation of compensation strategy of an
organization. Organizations should conduct
the job analysis in a systematic at regular
intervals. Job analysis can be used for setting
up the compensation packages, for reviewing
employees’ performance with the standard
level of performance, determining the training
needs for employees who are lacking certain
skills.
•Pay Structures Useful for standardizing
compensation practices. Most pay structures include
several grades with each grade containing a
minimum salary/wage and either step increments
or grade range. Step increments are common with
union positions where the pay for each job is pre-
determined through collective bargaining.
Pay Structure
•Salary Surveys Collections of salary and market
data. May include average salaries, inflation
indicators, cost of living indicators, salary budget
averages.
Companies may purchase results of surveys
conducted by survey vendors or may conduct their
own salary surveys.
When purchasing the results of salary surveys
conducted by other vendors, note that surveys may
be conducted within a specific industry or across
industries as well as within one geographical region
or across different geographical regions.
Know which industry or geographic location the
salary results pertain to before comparing the results
to your company.
•Policies and Regulations
•Government norms
•Company own policies
•Policies to satisfy employees
A. Social Wage Theories
B. Wage Control Theories
C. Justification Theories
D. Behavioral Economics Theories and
E. Organizational Economic Theories
1. Subsistence Theory
2. Just Price Theory
3. Just Wage Theory
4. Wage Fund Theory
5. Residual claimant theory and
6. Marxian Theory
By David Ricardo ( 1817 )
 “Labors are paid to enable them to subsist
(manage to survive) and perpetuate (be
responsible for) the race without increase or
diminution.”
 The theory is based on the assumptions that if
workers were paid more than subsistence
wage, their numbers would increase; resulting
in spurt in supply of labour and this would bring
down the rate of wages.
 If the wages fall below subsistence level the
number of workers would decrease – as many
would die of hunger, malnutrition, disease, cold
etc .
 This theory deals with population rather than
labor.
By Plato and Aristotal
 This theory suggest that each person born into
the world is foreordained to occupy exactly the
same status and to enjoy the same creature
comforts as did his or her parents.
 So, the society should pay these individuals
sufficient compensation to maintain exactly the
same lifestyle into which they were born.
 This theory has not mentioned about the lower
classes that provided the knowledge and skills
to make society function.
By St. Thomas Aquinas
 The Just Price theory evolved into Just Wage
theory.
 The construction of churches and government
buildings and the continued expansion of the
commercial activities provided more and more
job opportunities to artists, artisans, and
traders.
 Hence artists, artisans, and traders are paid
better wages than the unskilled lower class
who provided physical work and require
minimum intellectual efforts.
 It is suggested that the price of any article
should be adequate but no more than
adequate to cover the cost of production.
 This theory has no provision for entrepreneurial
profit and made no recognition of the difference
of productive efficiency of two workers.
By John Stuart Mill
 Wages are paid out of a pre–determined fund
of wealth which lay surplus with wealthy
persons – as a results of organization saving.
This fund could be utilized for employing labors
for work.
 If funds are large, wages would be high; if it
was small, wages would be reduced to
subsistence level.
 Demand of labour and wages could be paid by
size of funds.
 It is argued that wages are paid out of product
of labour & not from accumulated capital. It is
production that furnishes the true measures.
By Francis A. Walker
 Four factors are land, labor, capital &
entrepreneurship.
 Wages represent amount payments of value
created in the production, which remains after
payments has been made for all these factors
of production. Labor is residual claimant .
 This theory does not explain that Trade Unions
are able to increase the wages, not consider
role of labour in productivity.
By Karl Marx (1818 – 1883 )
 According to this theory, Labor is an article of
commerce, which could be purchased on
payment of “subsistence price”.
 But, labor is the sole source of economic value,
therefore the labor should exercise the prime
claim on revenue.

 Price of any product is determined by the labor
time needed for producing it.
 The labor is not paid in proportion to the time
spent on work, but much less. Maximum went
over to be utilized for paying other expenses
which creates unacceptable exploitation of the
labor.
B. Wage Control Theories:
1. National Income Theory
2. Neo Keynesian Distribution Theory
3. Consumption Theory
 These theories suggest somewhat between the
pure dictatorship and a pure democracy.
 Government has somewhat indirect control
over wage level.
John Maynard Keynes ---- 1930
 He recognize that thriving middle class
economy required Full employment which is
the function of National Income
 National Income, in turn, is equal to the total of
consumption plus private and public
investment.
 If the national income falls below a level that
commands full employment --- Govt. should
manipulate the said 3 variables.
 The problem with this theory : How to manage
full employment was not suggested this theory
does not recognize the fluctuating labor force .
Refinement or extension of National Income Theory
 This theory attempt to explain how Full
employment can be achieved
 It suggest the “General wage level in the long and
short terms”.
 Entrepreneurial decisions can determine the
general level of wages in the short run
 Wages are determined by bargaining between
capitalist and the employees. (Politicians, Leaders
of business and society)
By Henry Ford
 It is also referred as Purchasing power theory
 In 1913- Ford unilaterally declared $5 per day
wages for workers in his Automobile plant
which was double than the competitors.
 Principle:
More wages - more consumption- more
demand-more employment
 It is also called as New Wage Theory
 The control is private rather than government
c. Justification Theories
1. Investment Theory
2. Institutional Wage Theory
3. Supply and Demand Theory
4. Marginal Productivity Theory
5. Productive Efficiency Theory
6. Bargaining Theory of Wages
Authors attempt to explain or justify individual
workers compensation level
By H.M. Gitelman
 Employees compensation is determined by the
rate of return on that employee’s investment.
 Here investment means education, training and
experience.
 Gitelman hypothesized that an individual
workers compensation is determined by the rate
of return on that worker’s investment.
 This Theory attempts to place the “Level of
Compensation” on a “system” or establish an
“empirical & quantitative” basis
 It suggest that a wage level depends on a variety
of choices of decision makers and that weight can
be assigned to those choices.
 It also suggest that one must analyze
compensation from a dynamic, continually
changing basis rather than assuming that we can
hold constant all factors affecting compensation
while varying only one factor.
 Perfect Competition is the main consideration
 Wages are determined based on demand and
supply of labor
 Employers seeks maximum profit and workers
seeks maximize utility
 Workers and employers have perfect information
about wages and job opportunities in the market
 Workers skill are identical and job conditions are
also identical
 Market consists of many workers on supply side
and many individual employers on demand side
 All jobs in the market are open to competition and
no barriers to mobility of workers.
 If jobs are plenty Demand of Labor increases
hence Wages will high.
i.e.
If Jobs are few Demand will less Wages will
fall.
 Converse: Jobs are plentiful there is shortage of
workers, wages will rise.
 In Long term it achieves a BEP
W
U
W1
WL
L
Quantity of
Wag
e
SL
DL
By Johann Heinrich Von Thuren which was
developed further by Philip Henry and John
Bates Clark
 Wages based upon the revenue the employer
can realized from the workers productivity.
 The latest worker hired is called the “marginal
employee” and the increased production
attributed to the worker is called “marginal
productivity”
 The wage paid to the latest marginal employee
determines the wage of all workers who are
doing similar work.
This theory is the refinement of the Marginal
Productivity Theory
 Each worker is provided with the opportunity to
increase his or her wages by increasing his or
her productive efficiency.
 Motivational tools like incentive system, bonuses
and profit sharing plans are used to design the
wages.
By John Davidson
The foundation of this theory is found in the writings of Adam
Smith’s.
 This is the first theory where Wages are determined by the
relative bargaining power of workers or trade union and of
employers.
 Bargaining theory is based on the assumption that there is no
single fixed wage rate for a particular kind of work. Rather
there is a range of wage rates.
 When a trade union is involved, basic wages, fringe benefits,
jobs differentials and individuals differences tend to be
determined by the relative strength of the organization and the
trade union.
 The highest wage limit the employer can afford and lower
wage limit the employees can accept is determined. Hence,
the minimum wage law come into existence.
 If an employee choose to designate a union as a
bargaining agent then this theory is called as
“Collective Bargaining Theory”. However the
basis of the theory remains unchanged.
 Union member must relinquish the right to
bargain on their own behalf for any better
benefits than those enjoyed by their fellow
union members
D. Behavioral Economics Theories:
1. X-Efficiency Theory
2. Sub optimization Theory
Many of the previous theories considered the
Organization as the “Black Box”
The total Focus was on Transformation process
i.e. Input  Output
The attention of Behavioral Economics Theories is
Functions, Structure and Management of the
Organization
By H. Leibenstein
X-efficiency is the effectiveness with which a given set of
inputs are used to produce outputs.
If a firm is producing the maximum output it can, given
the resources it employs, such as men and machinery,
and the best technology available, it is said to be
technical-efficient (X-Efficient)
X-inefficiency occurs when technical-efficiency is not
achieved.
 Firms operating under competitive market conditions
could produce additional level of output by changing
internal work processes without changing the scale of
operations or technology.
By Herbert Simon
 This theory recognized that managers do not
make optimal decision; rather they sub
optimize.
 Managers works under conditions of bounded
rationality and they satisfies.
 Economic behavior is linked directly to
individual decision makers and situational
related constraints.
1. Transaction cost Economic Theory
2. Agency Theory
 A transaction cost is a cost incurred in making an
economic exchange.
A number of different kinds of transaction costs exist.
 The total cost incurred by a firm can be grouped
largely into two components—transaction costs and
production costs.
 Transaction costs, often known as coordination costs,
and is defined as the costs of "all the information
processing necessary to coordinate the work of people
and machines that perform the primary processes“.
 A theory explaining the relationship between
principals, such as a shareholders, and agents,
such as a company's executives. In this
relationship the principal delegates or hires an
agent to perform work.
 The theory attempts to deal with two specific
problems: first, that the goals of the principal
and agent are not in conflict (agency problem),
and second, that the principal and agent
reconcile different tolerances for risk.
 Economic theories assumes that wages and prices are
either full rates fixed or fully flexible.
 Most wages theories are based on assumptions of full
employment. In most developing countries this is not
really the case.
 Labour is not as mobile as capital and products. Wages
rates could be influenced by changes in demand &
supply other than labor.
 Labour cost is critical. Fluctuation in interest rates,
technology, capital influences on demand. Cost of
labour influences on total cost. Wages and benefits
reflects industry & personal characteristics as well as
societal preference.
 Interference by government and trade unions
could minimize the influence of the market
forces organization demand & supply of labor.
 Technology & productivity are major
determinants. Low wages may not mean low
wage costs. High wages may not mean high
wage cost.
 With the growing pressure for linking labour
standard with international trade, increasingly it
will become difficult to compete on the basis of
comparative advantage of cheap labor.
Fig- Model of Economic Theories ON NEXT SLIDE
Subsistence
Theory
Just Price
Theory
Residual
Claimant
Theory
Marxian
Theory
Marginal
Productivity
Theory
Consumption
Theory
Supply &
Demand
Theory
Productive
Efficiency Theory
X-
Efficiency
Theory
Transaction
Cost Economic
Theory
Agency
Theory
Suboptimizatio
n Theory
Macro
Theorie
s
Micro
Theories
Micro-
Micro
Theori
es
Social
Wage
Theories
(classical)
Justificatio
n Theories
Behavioral Economic
Theories
Just Wage
Theory
Wage Fund
Theory
Neo-Kenesian
Distribution
Theory
National
Income
Theory
Institutional
wage Theory
Investment
Theory
Wage
Control
Theorie
s
Organizational
Economic Theories
Bargaining Theory of
Wages
C O M P E N S A T I O N
End of Lecture 6
Reward Management
89
Reward Management
 Reward management, is about the development ,
implementation, maintenance , communication &
evaluation of reward processes.
 It deals with job value ,design , paying for
performance , competence of skill , employee benefit
etc.
 Reward management is of both financial & non
financial reward.
Old fashioned Reward Management has
an image of dullness and inflexibility
Reward systems, like business strategy
itself, may not flow rationally from the
top down, but rather emerge from
events, and through negotiation with
stakeholders such as Trade Unions
91
 Pay systems (e.g. team based rewards) are
often introduced as aspects of HR policy
But
NEW THINKING means Reward
Management has become a tool of change.
 A NEW CHALLENGE to aim for is to align
employee behaviours with business strategy
through strategic reward management.
92
 “Reward Management is concerned with the
formulation and implementation of strategies
and policies that aim to reward people fairly,
equitably and consistently in accordance with
their value to the organization”
 (Armstrong and Murlis 2004)
 Support the organization’s strategy
 Recruit & retain
 Motivate employees
 Internal & external equity
 Strengthen psychological contract
 Financially sustainable
 Comply with legislation
 Efficiently administered
 Extrinsic rewards
 satisfy basic needs: survival, security
 Pay, conditions, treatment
 Intrinsic rewards
 satisfy higher needs: esteem,development
 Base pay--fixed or minimum wage/salary
 Plussage--capability, qualification
 Premia/Overtime
 Performance related pay
 Indirect pay--benefits, non-cash, shares
 Non-monetary: recognition, advancement
 “Total Reward” Pay, non-pay, flexible hours,
cafeteria benefits
 Individual: base pay, incentives,
benefits
 rewards attendance, performance,
competence
 Team
 team bonus, rewards group cooperation
 Organization
 profit-sharing, shares, gain-sharing
98
Business Strategy
e.g. higher co. income, lower costs, better quality
Required Employee Behaviours
e.g. flexibility & customer care
Reward Strategy
Co. Core Reward Values
Reward Structure
Reward System
Process
99
Performance
Management
System
Culture
Business Strategy
Required Employee Behaviours
Reward Strategy
Co. Core Reward Values
Reward
Structure
Reward
Process
Job
Design
Training
system
Org
Structure
HRM Systems
Reward System
Core Reward Values
 Five key values that should be honoured (on next
slide)
Reward Structure
 How the system is administered; structures that
put reward management values into effect
Reward System Process
 How the system is communicated
 Whether, and how, employees are involved in
designing it
100
Typical Reward Management values
are:
 Paying for performance
 individual performance related pay
 team based rewards
 Equity
 sometimes a trade-off between
external equity (alignment with
external market price of the labour)
and internal comparisons)
 also procedural justice issues
101
More Typical Reward Management values are:
 Employees sharing in the organisations’ success
 profit sharing, gain-sharing, etc
 Employee involvement in designing the system
 a relatively new idea
 Combining financial/non-financial rewards
(on next slide)
 achievement & recognition (we all need
this)
 responsibility, influence, personal growth
102
 No one quite understands the link between
money and motivation.
 Money may motivate people to behave in
particular ways some of the time, in some
circumstances
 Herzberg reminds us that it may not be possible
to motivate through money, but it is easy to
demotivate, by getting the pay system wrong
103
1. To relate pay to performance
Many orgs are adopting this kind of
structure:
 Base pay reflecting the market rate for the
job
 Plus a variable element related to one or
more of:
individual, team & org performance, and
skill acquisition
104
2. More importance to External equity
This means a move to as much
emphasis on external equity (the
market value of the employee’s
labour power) as on internal equity
(e.g. how he/she compares with
similar colleagues)
105
 Reconciling team based pay with
internal equity is difficult, so
combine it with individual
performance related pay.
106
Typical imperatives in relation to equity
(and building a sense of community)
include:
 To be careful that the directors are not
seen to award themselves unfairly large
pay increases
 Equal pay for work of equal value by
men & women
107
 Wider pay bands: room to reward
‘good citizens’
 lateral movement across the
organisation without promotion
 reward for multi-skilling & teamwork
 continual rewards for continual
improvement in performance
108
In order that, companies may adopt
 Profit related bonus
 Employee share ownership options
 Gainsharing (employees get a share of cost
savings required by company strategy and
arising from productivity +/or quality
improvements)
109
 Publish people’s successes in the in-house magazine
 Give ‘thank you prizes’ e.g. a weekend trip overseas
 Train line managers in appraisal, goal setting,
feedback skills
 Apply job design theory to make jobs more
meaningful & responsible, and where people can see
the successful outcomes of their work
110
 Where is your organization going ?
 How reward can help to sustain?
 What sort of behavior you want ?
 How can reward processes promote & provide
recognition ?
112
1. Feasibility study: establishes the aims of the scheme
2. Task force managers, supervisors
& employees develops a detailed proposal to top mgt
3. Pilot implementation of the scheme: why not pilot
on the employees . This pilot scheme is monitored,
is it achieving its aims?
4. Communication to those effected; plus training
for supervisors and line managers
5. Implement, and ongoing monitoring
& evaluation by task force
 Some companies won’t allow their members to talk
about pay
 The reward system may lack transparency
 This may give management the flexibility they like,
but may lead to rumours and lack of trust
 Transparency versus secrecy about pay is an
important reflection of organisational (culture)
 If the company wishes to create greater openness in
communication a good way to start is to be more
open and transparent about the reward
management system.
113
Thank you
114
 Que.1: “Establishment and implementation of sound policies and
practices of employee compensation makes an organization
sustainable in the market.” Discuss.
 Que.2: Discuss the important components must be considered
during developing the Compensation system for the
organization.
 Que.3: Discuss the Dimensions of compensation System.
 Que.4: Discuss the Dimensions of Non-compensation System.
 Que.5: Discuss the following wage economic theories-
 Demand and supply theory
 Bargaining theory of wages
 Que.6: Discuss the limitations of Economics theories.
 Que.7: What is reward management? What are the key elements of
reward system?
 Que.8: What are the common elements of reward management
structure? Discuss each in short.
 Que.9: Discuss different steps in reward management process.
Q1. A What is compensation? What are the
objectives of compensation Management? 10M
OR
Q1.B Discuss the dimensions of Compensation
system.
Q2. A What is reward Management? Discuss
key elements of Reward System. 10M
OR
Q2.BDiscuss different steps in Reward Management
Process.

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Cm u1-lect1-to-lect9

  • 1.  Compensation Management - Rewarding the employees - measure of competent organization.  Reputation, position in the market, attraction of workers and retention of employees.  Reward management is not just about money but is concerned with intrinsic and extrinsic motivation.  Salary administration in the organizations is the very complicated work and requires strategic compensation management.
  • 2.  Compensation Management helps in understanding the reward strategy of the organization which should also considered employees demand and strategy of the management  The need of effective compensation management system in the organization is the need of the hour.
  • 3. Course Objectives : The objective of this course is to familiarize the students with the effective compensation management and make them able to design the compensation system for the organization. The inherent objectives can be given as below-  To make conceptual foundation about reward management and compensation management.  To benchmark the jobs for the compensation purpose.  To study internal and external equity about compensation management.  To design compensation package  To study the compensation of Executives, R&D employees, and salesman
  • 4. Course Outcomes :  The students will know about the remuneration basics used by the organization.  Students will also understand the things about the design of the compensation package and its components.  The effect of different components on employees and the organization and comparison with the competitors so that the organization can perform effectively to survive in the market.  The students will know the importance of justifiable, balanced, lucrative and affordable combination of different components in compensation system which may help and make satisfied to employees in every level in the organization.
  • 5. SECTION-A Unit I : Compensation Management: Concept, Components and Theories, Compensation Package, Reward Management. Unit II : Diagnosis of compensation problem, Meaning and necessity of Benchmarking, commitments, internal & external equity in compensation system. Unit III : Compensation Packages: Tools in Designing, improving & implementing. Designing Compensations Packages for specific type of human resources Unit IV : Components of compensation: Fringe Benefits, Incentives, and Retirement Benefits. Unit V : Strategic Compensation System, compensation practices of public limited, institutional, corporate & public sector companies.
  • 6. Sr. No. Title Author Publication R-1 Reward Management: A Handbook of Salary Administration, Armstrong, Michel and Murlis, Helen. London, Kogan Page, 2012. R-2 Compensation And Reward Management B.D. Sing Excel Books R-3 Wage and Salary Administration Bergess, Lenard R. London, Charles E-Merril, 1984 R-4 Employee Share Ownership. Capeman, George, New York, Kogan Page, 1991 R-5 Economics of Non Wage Labour Costs. Hart, Robert A. London, George aller and Unwin, 1984 R-6 Compensation Management: Rewarding Performance. 6th Edition, Henderson Richard I. Englewood Cliffs, Prentice Hall Inc. 1994 R-7 Handbook of Wage and Salary Administration. Micton, Rock, McGraw-Hill Inc.,US (August 23, 1983)
  • 7. Sr. No. Title Periodicity 1. Journal of Compensation and Benefits http://legalsolutions.thomsonreuters.com/law- products/Treatises/Journal-of-Compensation-and- Benefits/p/100000474 Yearly 2. Journal of Economics & Management Strategy http://onlinelibrary.wiley.com/doi/10.1111/jems.12014/ Yearly 3. Journal of Management http://jom.sagepub.com/cgi/collection/ceo_compensatio n Yearly IOSR journals on Business Management http://iosrjournals.org/iosr-jbm.html 6 issues per Year
  • 8. Related Links -  www.successfactors.com/compensation  www.ramco.com/HCM  www.payscale.com/hr/webinars
  • 9. What are your views about Compensation?
  • 12. What is compensation? What comes in your mind?
  • 13.  Labor cost issues affect the efficiency and even the survival of public and private sector organizations
  • 14.  Compensation management provides step by step approach for designing a remuneration system that recognizes the job requirements , employee related knowledge and skills and performance related incentives that link individual , team work-unit and organization performance.
  • 15.  Introduction  Objectives  Components  Importance  Factor affecting  conclusion
  • 16.  Compensation is a systematic approach to providing monetary & non monetary value to employees in exchange for work performed.  Compensation may be defined as money received in performance of work and many kinds of benefits that an organization provides to their employees.
  • 17.  To recruit & retain qualified employees.  To increase or maintain morale.  To determine basic wage & salary.  To reward for job performance.
  • 19.  Base Pay  Bonus  Long term incentives  Perks or perquisites • Direct Compensation
  • 20.  Insurance (health, eye).  Leaves (sick, holiday/personal)  Clothes  Company parties  Phones/laptop  Retirement programs • Indirect compensation
  • 21.  Enhance dignity & satisfaction from work performed.  Promote social relationship with co- workers.  Allocate sufficient resources to perform work assignments.  Offer supportive leadership & management.  Enhance physiological health, intellectual growth.
  • 22.  Job description  Job analysis  Job evaluation  Pay structure  Salary surveys
  • 23.  Demand & supply of labor  Cost of living  Society  Labor unions  The economy  Compensation policy  The org. ability to pay  Job analysis & description  Employee External Internal
  • 24.  We can say that good compensation can increase the productivity of an organization because its provides various rewards, bonus, schemes etc. and its compulsory for every organization.
  • 25.
  • 27.  If based on systematic components • Compensation will be perceived by employees as fair • Compensation systems have developed to determine the value of positions. Why Components are important?
  • 28.  Job Description  Job Analysis  Pay Structure  Salary Survey  Policies and Regulations
  • 29.  Job analysis is a systematic approach to defining the job role, description, requirements, responsibilities, evaluation, etc.  It helps in finding out required level of education, skills, knowledge, training, etc for the job position. It also depicts the job worth i.e. measurable effectiveness of the job and contribution of job to the organization. Thus, it effectively contributes to setting up the compensation package for the job position.
  • 30.  Job analysis helps in analyzing the resources and establishing the strategies to accomplish the business goals and strategic objectives. It forms the basis for demand-supply analysis, recruitments, compensation management, and training need assessment and performance appraisal.
  • 31.  Job analysis is a systematic procedure to analyze the requirements for the job role and job profile. Job analysis can be further categorized into following sub components.
  • 32.
  • 33.  Job position refers to the designation of the job and employee in the organization. Job position forms an important part of the compensation strategy as it determines the level of the job in the organization. For example management level employees receive greater pay scale than non-managerial employees. The non-monetary benefits offered to two different levels in the organization also vary.
  • 34.  Job description refers the requirements an organization looks for a particular job position. It states the key skill requirements, the level of experience needed, level of education required, etc. It also describes the roles and responsibilities attached with the job position. The roles and responsibilities are key determinant factor in estimating the level of experience, education, skill, etc required for the job. It also helps in benchmarking the performance standards.
  • 35.  Job Worth refers to estimating the job worthiness i.e. how much the job contributes to the organization. It is also known as job evaluation. Job description is used to analyze the job worthiness. It is also known as job evaluation. Roles and responsibilities helps in determining the outcome from the job profile. Once it is determined that how much the job is worth, it becomes easy to define the compensation strategy for the position. 
  • 36.  Therefore, job analysis forms an integral part in the formulation of compensation strategy of an organization. Organizations should conduct the job analysis in a systematic at regular intervals. Job analysis can be used for setting up the compensation packages, for reviewing employees’ performance with the standard level of performance, determining the training needs for employees who are lacking certain skills.
  • 37. •Pay Structures Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is pre- determined through collective bargaining. Pay Structure
  • 38. •Salary Surveys Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries as well as within one geographical region or across different geographical regions. Know which industry or geographic location the salary results pertain to before comparing the results to your company.
  • 39. •Policies and Regulations •Government norms •Company own policies •Policies to satisfy employees
  • 40.
  • 41.
  • 42. A. Social Wage Theories B. Wage Control Theories C. Justification Theories D. Behavioral Economics Theories and E. Organizational Economic Theories
  • 43. 1. Subsistence Theory 2. Just Price Theory 3. Just Wage Theory 4. Wage Fund Theory 5. Residual claimant theory and 6. Marxian Theory
  • 44. By David Ricardo ( 1817 )  “Labors are paid to enable them to subsist (manage to survive) and perpetuate (be responsible for) the race without increase or diminution.”
  • 45.  The theory is based on the assumptions that if workers were paid more than subsistence wage, their numbers would increase; resulting in spurt in supply of labour and this would bring down the rate of wages.  If the wages fall below subsistence level the number of workers would decrease – as many would die of hunger, malnutrition, disease, cold etc .  This theory deals with population rather than labor.
  • 46. By Plato and Aristotal  This theory suggest that each person born into the world is foreordained to occupy exactly the same status and to enjoy the same creature comforts as did his or her parents.
  • 47.  So, the society should pay these individuals sufficient compensation to maintain exactly the same lifestyle into which they were born.  This theory has not mentioned about the lower classes that provided the knowledge and skills to make society function.
  • 48. By St. Thomas Aquinas  The Just Price theory evolved into Just Wage theory.  The construction of churches and government buildings and the continued expansion of the commercial activities provided more and more job opportunities to artists, artisans, and traders.
  • 49.  Hence artists, artisans, and traders are paid better wages than the unskilled lower class who provided physical work and require minimum intellectual efforts.  It is suggested that the price of any article should be adequate but no more than adequate to cover the cost of production.  This theory has no provision for entrepreneurial profit and made no recognition of the difference of productive efficiency of two workers.
  • 50. By John Stuart Mill  Wages are paid out of a pre–determined fund of wealth which lay surplus with wealthy persons – as a results of organization saving. This fund could be utilized for employing labors for work.
  • 51.  If funds are large, wages would be high; if it was small, wages would be reduced to subsistence level.  Demand of labour and wages could be paid by size of funds.  It is argued that wages are paid out of product of labour & not from accumulated capital. It is production that furnishes the true measures.
  • 52. By Francis A. Walker  Four factors are land, labor, capital & entrepreneurship.  Wages represent amount payments of value created in the production, which remains after payments has been made for all these factors of production. Labor is residual claimant .
  • 53.  This theory does not explain that Trade Unions are able to increase the wages, not consider role of labour in productivity.
  • 54. By Karl Marx (1818 – 1883 )  According to this theory, Labor is an article of commerce, which could be purchased on payment of “subsistence price”.  But, labor is the sole source of economic value, therefore the labor should exercise the prime claim on revenue. 
  • 55.  Price of any product is determined by the labor time needed for producing it.  The labor is not paid in proportion to the time spent on work, but much less. Maximum went over to be utilized for paying other expenses which creates unacceptable exploitation of the labor.
  • 56. B. Wage Control Theories: 1. National Income Theory 2. Neo Keynesian Distribution Theory 3. Consumption Theory
  • 57.  These theories suggest somewhat between the pure dictatorship and a pure democracy.  Government has somewhat indirect control over wage level.
  • 58. John Maynard Keynes ---- 1930  He recognize that thriving middle class economy required Full employment which is the function of National Income  National Income, in turn, is equal to the total of consumption plus private and public investment.  If the national income falls below a level that commands full employment --- Govt. should manipulate the said 3 variables.
  • 59.  The problem with this theory : How to manage full employment was not suggested this theory does not recognize the fluctuating labor force .
  • 60. Refinement or extension of National Income Theory  This theory attempt to explain how Full employment can be achieved  It suggest the “General wage level in the long and short terms”.  Entrepreneurial decisions can determine the general level of wages in the short run  Wages are determined by bargaining between capitalist and the employees. (Politicians, Leaders of business and society)
  • 61. By Henry Ford  It is also referred as Purchasing power theory  In 1913- Ford unilaterally declared $5 per day wages for workers in his Automobile plant which was double than the competitors.
  • 62.  Principle: More wages - more consumption- more demand-more employment  It is also called as New Wage Theory  The control is private rather than government
  • 63.
  • 65. 1. Investment Theory 2. Institutional Wage Theory 3. Supply and Demand Theory 4. Marginal Productivity Theory 5. Productive Efficiency Theory 6. Bargaining Theory of Wages Authors attempt to explain or justify individual workers compensation level
  • 66. By H.M. Gitelman  Employees compensation is determined by the rate of return on that employee’s investment.  Here investment means education, training and experience.  Gitelman hypothesized that an individual workers compensation is determined by the rate of return on that worker’s investment.
  • 67.  This Theory attempts to place the “Level of Compensation” on a “system” or establish an “empirical & quantitative” basis  It suggest that a wage level depends on a variety of choices of decision makers and that weight can be assigned to those choices.  It also suggest that one must analyze compensation from a dynamic, continually changing basis rather than assuming that we can hold constant all factors affecting compensation while varying only one factor.
  • 68.  Perfect Competition is the main consideration  Wages are determined based on demand and supply of labor
  • 69.  Employers seeks maximum profit and workers seeks maximize utility  Workers and employers have perfect information about wages and job opportunities in the market  Workers skill are identical and job conditions are also identical  Market consists of many workers on supply side and many individual employers on demand side  All jobs in the market are open to competition and no barriers to mobility of workers.
  • 70.  If jobs are plenty Demand of Labor increases hence Wages will high. i.e. If Jobs are few Demand will less Wages will fall.  Converse: Jobs are plentiful there is shortage of workers, wages will rise.  In Long term it achieves a BEP
  • 72. By Johann Heinrich Von Thuren which was developed further by Philip Henry and John Bates Clark  Wages based upon the revenue the employer can realized from the workers productivity.  The latest worker hired is called the “marginal employee” and the increased production attributed to the worker is called “marginal productivity”  The wage paid to the latest marginal employee determines the wage of all workers who are doing similar work.
  • 73. This theory is the refinement of the Marginal Productivity Theory  Each worker is provided with the opportunity to increase his or her wages by increasing his or her productive efficiency.  Motivational tools like incentive system, bonuses and profit sharing plans are used to design the wages.
  • 74. By John Davidson The foundation of this theory is found in the writings of Adam Smith’s.  This is the first theory where Wages are determined by the relative bargaining power of workers or trade union and of employers.  Bargaining theory is based on the assumption that there is no single fixed wage rate for a particular kind of work. Rather there is a range of wage rates.  When a trade union is involved, basic wages, fringe benefits, jobs differentials and individuals differences tend to be determined by the relative strength of the organization and the trade union.  The highest wage limit the employer can afford and lower wage limit the employees can accept is determined. Hence, the minimum wage law come into existence.
  • 75.  If an employee choose to designate a union as a bargaining agent then this theory is called as “Collective Bargaining Theory”. However the basis of the theory remains unchanged.  Union member must relinquish the right to bargain on their own behalf for any better benefits than those enjoyed by their fellow union members
  • 76.
  • 78. 1. X-Efficiency Theory 2. Sub optimization Theory Many of the previous theories considered the Organization as the “Black Box” The total Focus was on Transformation process i.e. Input  Output The attention of Behavioral Economics Theories is Functions, Structure and Management of the Organization
  • 79. By H. Leibenstein X-efficiency is the effectiveness with which a given set of inputs are used to produce outputs. If a firm is producing the maximum output it can, given the resources it employs, such as men and machinery, and the best technology available, it is said to be technical-efficient (X-Efficient) X-inefficiency occurs when technical-efficiency is not achieved.  Firms operating under competitive market conditions could produce additional level of output by changing internal work processes without changing the scale of operations or technology.
  • 80. By Herbert Simon  This theory recognized that managers do not make optimal decision; rather they sub optimize.  Managers works under conditions of bounded rationality and they satisfies.  Economic behavior is linked directly to individual decision makers and situational related constraints.
  • 81. 1. Transaction cost Economic Theory 2. Agency Theory
  • 82.  A transaction cost is a cost incurred in making an economic exchange. A number of different kinds of transaction costs exist.  The total cost incurred by a firm can be grouped largely into two components—transaction costs and production costs.  Transaction costs, often known as coordination costs, and is defined as the costs of "all the information processing necessary to coordinate the work of people and machines that perform the primary processes“.
  • 83.  A theory explaining the relationship between principals, such as a shareholders, and agents, such as a company's executives. In this relationship the principal delegates or hires an agent to perform work.  The theory attempts to deal with two specific problems: first, that the goals of the principal and agent are not in conflict (agency problem), and second, that the principal and agent reconcile different tolerances for risk.
  • 84.  Economic theories assumes that wages and prices are either full rates fixed or fully flexible.  Most wages theories are based on assumptions of full employment. In most developing countries this is not really the case.  Labour is not as mobile as capital and products. Wages rates could be influenced by changes in demand & supply other than labor.  Labour cost is critical. Fluctuation in interest rates, technology, capital influences on demand. Cost of labour influences on total cost. Wages and benefits reflects industry & personal characteristics as well as societal preference.
  • 85.  Interference by government and trade unions could minimize the influence of the market forces organization demand & supply of labor.  Technology & productivity are major determinants. Low wages may not mean low wage costs. High wages may not mean high wage cost.  With the growing pressure for linking labour standard with international trade, increasingly it will become difficult to compete on the basis of comparative advantage of cheap labor. Fig- Model of Economic Theories ON NEXT SLIDE
  • 86. Subsistence Theory Just Price Theory Residual Claimant Theory Marxian Theory Marginal Productivity Theory Consumption Theory Supply & Demand Theory Productive Efficiency Theory X- Efficiency Theory Transaction Cost Economic Theory Agency Theory Suboptimizatio n Theory Macro Theorie s Micro Theories Micro- Micro Theori es Social Wage Theories (classical) Justificatio n Theories Behavioral Economic Theories Just Wage Theory Wage Fund Theory Neo-Kenesian Distribution Theory National Income Theory Institutional wage Theory Investment Theory Wage Control Theorie s Organizational Economic Theories Bargaining Theory of Wages C O M P E N S A T I O N
  • 90.  Reward management, is about the development , implementation, maintenance , communication & evaluation of reward processes.  It deals with job value ,design , paying for performance , competence of skill , employee benefit etc.  Reward management is of both financial & non financial reward.
  • 91. Old fashioned Reward Management has an image of dullness and inflexibility Reward systems, like business strategy itself, may not flow rationally from the top down, but rather emerge from events, and through negotiation with stakeholders such as Trade Unions 91
  • 92.  Pay systems (e.g. team based rewards) are often introduced as aspects of HR policy But NEW THINKING means Reward Management has become a tool of change.  A NEW CHALLENGE to aim for is to align employee behaviours with business strategy through strategic reward management. 92
  • 93.  “Reward Management is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organization”  (Armstrong and Murlis 2004)
  • 94.  Support the organization’s strategy  Recruit & retain  Motivate employees  Internal & external equity  Strengthen psychological contract  Financially sustainable  Comply with legislation  Efficiently administered
  • 95.  Extrinsic rewards  satisfy basic needs: survival, security  Pay, conditions, treatment  Intrinsic rewards  satisfy higher needs: esteem,development
  • 96.  Base pay--fixed or minimum wage/salary  Plussage--capability, qualification  Premia/Overtime  Performance related pay  Indirect pay--benefits, non-cash, shares  Non-monetary: recognition, advancement  “Total Reward” Pay, non-pay, flexible hours, cafeteria benefits
  • 97.  Individual: base pay, incentives, benefits  rewards attendance, performance, competence  Team  team bonus, rewards group cooperation  Organization  profit-sharing, shares, gain-sharing
  • 98. 98 Business Strategy e.g. higher co. income, lower costs, better quality Required Employee Behaviours e.g. flexibility & customer care Reward Strategy Co. Core Reward Values Reward Structure Reward System Process
  • 99. 99 Performance Management System Culture Business Strategy Required Employee Behaviours Reward Strategy Co. Core Reward Values Reward Structure Reward Process Job Design Training system Org Structure HRM Systems Reward System
  • 100. Core Reward Values  Five key values that should be honoured (on next slide) Reward Structure  How the system is administered; structures that put reward management values into effect Reward System Process  How the system is communicated  Whether, and how, employees are involved in designing it 100
  • 101. Typical Reward Management values are:  Paying for performance  individual performance related pay  team based rewards  Equity  sometimes a trade-off between external equity (alignment with external market price of the labour) and internal comparisons)  also procedural justice issues 101
  • 102. More Typical Reward Management values are:  Employees sharing in the organisations’ success  profit sharing, gain-sharing, etc  Employee involvement in designing the system  a relatively new idea  Combining financial/non-financial rewards (on next slide)  achievement & recognition (we all need this)  responsibility, influence, personal growth 102
  • 103.  No one quite understands the link between money and motivation.  Money may motivate people to behave in particular ways some of the time, in some circumstances  Herzberg reminds us that it may not be possible to motivate through money, but it is easy to demotivate, by getting the pay system wrong 103
  • 104. 1. To relate pay to performance Many orgs are adopting this kind of structure:  Base pay reflecting the market rate for the job  Plus a variable element related to one or more of: individual, team & org performance, and skill acquisition 104
  • 105. 2. More importance to External equity This means a move to as much emphasis on external equity (the market value of the employee’s labour power) as on internal equity (e.g. how he/she compares with similar colleagues) 105
  • 106.  Reconciling team based pay with internal equity is difficult, so combine it with individual performance related pay. 106
  • 107. Typical imperatives in relation to equity (and building a sense of community) include:  To be careful that the directors are not seen to award themselves unfairly large pay increases  Equal pay for work of equal value by men & women 107
  • 108.  Wider pay bands: room to reward ‘good citizens’  lateral movement across the organisation without promotion  reward for multi-skilling & teamwork  continual rewards for continual improvement in performance 108
  • 109. In order that, companies may adopt  Profit related bonus  Employee share ownership options  Gainsharing (employees get a share of cost savings required by company strategy and arising from productivity +/or quality improvements) 109
  • 110.  Publish people’s successes in the in-house magazine  Give ‘thank you prizes’ e.g. a weekend trip overseas  Train line managers in appraisal, goal setting, feedback skills  Apply job design theory to make jobs more meaningful & responsible, and where people can see the successful outcomes of their work 110
  • 111.  Where is your organization going ?  How reward can help to sustain?  What sort of behavior you want ?  How can reward processes promote & provide recognition ?
  • 112. 112 1. Feasibility study: establishes the aims of the scheme 2. Task force managers, supervisors & employees develops a detailed proposal to top mgt 3. Pilot implementation of the scheme: why not pilot on the employees . This pilot scheme is monitored, is it achieving its aims? 4. Communication to those effected; plus training for supervisors and line managers 5. Implement, and ongoing monitoring & evaluation by task force
  • 113.  Some companies won’t allow their members to talk about pay  The reward system may lack transparency  This may give management the flexibility they like, but may lead to rumours and lack of trust  Transparency versus secrecy about pay is an important reflection of organisational (culture)  If the company wishes to create greater openness in communication a good way to start is to be more open and transparent about the reward management system. 113
  • 115.  Que.1: “Establishment and implementation of sound policies and practices of employee compensation makes an organization sustainable in the market.” Discuss.  Que.2: Discuss the important components must be considered during developing the Compensation system for the organization.  Que.3: Discuss the Dimensions of compensation System.  Que.4: Discuss the Dimensions of Non-compensation System.  Que.5: Discuss the following wage economic theories-  Demand and supply theory  Bargaining theory of wages  Que.6: Discuss the limitations of Economics theories.  Que.7: What is reward management? What are the key elements of reward system?  Que.8: What are the common elements of reward management structure? Discuss each in short.  Que.9: Discuss different steps in reward management process.
  • 116. Q1. A What is compensation? What are the objectives of compensation Management? 10M OR Q1.B Discuss the dimensions of Compensation system. Q2. A What is reward Management? Discuss key elements of Reward System. 10M OR Q2.BDiscuss different steps in Reward Management Process.