compensation management

2. UNIT I
•COMPENSATION MANAGEMENT AN INTRODUCTION TO
COMPENSATION MANAGEMENT, THEORIES OF COMPENSATION
MANAGEMENT, 3–P CONCEPT IN COMPENSATION
MANAGEMENT, STRATEGIC COMPENSATION MANAGEMENT,
STRATEGIC AND TACTICAL COMPENSATION ISSUES.

3. INTRODUCTION
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

4. COMPENSATION
●Reward refers to a wide range of financial and non financial
rewards to the employees for the services rendered to the
organisation .
a) Transactional rewards
b) Relational rewards
All forms of financial returns and tangible services & benefits
employees receive as part of an employment relationship

5. COMPENSATION
It is a system of rewards
● that motivates employees to perform
●An organisational tool to foster the values,culture & the
behaviour they require
●An instrument that enables organisations to achieve their
objectives

6. OBJECTIVESOF COMPENSATIONMANAGEMENT
● To attract competent personnel
● To retain the present employees
● To improve productivity
● To improve efficiency
● To control Costs

7. OBJECTIVES OF COMPENSATION MANAGEMENT
● To ensure fairness
● To improve union-management relations
● To improve the public image of the company
● Comply with legal regulations

8. A
Compensation
system should
be:
ADEQUATE* Equitable*
Balanced
Cost-effective
Secure
Incentive-
providing*
Acceptable to
the employee

9. GENERALANDINDIVIDUAL FACTORSAFFECTINGWAGES
● GENERAL FACTORS
● Demand for and supply of labor
● Ability to pay of the
organization
● Labor unions
● Cost of living
● Prevailing wage rates
● Job requirements
● Productivity
● State regulation
● Individual Factors
● Employee’s Age and work
Experience
● Educational Qualification
● Promotion possibilities
● Hazards involved in the job
● Stabilityof Employment
● Demand for the product
● Industry’s role in the
economy
● Potentials of an employee

10. Labor Market Economy
Government Unions

11. COMPENSATION AND AN INTERNATIONALLABORFORCE
●Issues that affect the compensation strategies of
organizations competing in a global market:
● Global wage differentialsverging on the extreme
● Moving employees to foreign locations
● Employing local (foreign) managers and workers
●Moving foreign workers for training or work
assignments

12. Essentials of soundCompensationManagement
● Internal Equity
● External Competitiveness
● Built in incentive
● Link with productivity
● Individual worth
● Increments

13. COMPENSATION-DEFINITION
●Compensation means all remuneration capable of
being expressed in terms of money, which, if the terms of
contract of employment, express or implied, were
fulfilled, be payable to a person employed in respect of
his employment
11

14. ■Types of Compensation

15. ■Types of Compensation
Direct compensation
It refers to monetary benefits offered and provided to
employees in return of the services they provide to the
organization. The monetary benefits include basic salary,
house rent allowance, conveyance, leave travel allowance,
medical reimbursements, special allowances, bonus,
PF/Gratuity, etc. They are given at a regular interval at a
definite time.

16. ■Types of Compensation
Indirect compensation
It refers to non-monetary benefits offered and provided to
employees in lieu of the services provided by them to the
organization. They include Paid Leave, Car / transportation,
Medical Aids and assistance, Insurance (for self and family),
Leave travel Assistance, Retirement Benefits, Holiday Homes.

17. WAGE ANDSALARY
BASECOMPENSATION
●Wage : Remuneration paid by the employer for the
services of hourly ,weekly & fortnightly workers doing
manual or physical work.
● Usually given to unskilled workers
●It may also be defined as the compensation paid to blue
collaremployees.
●Salary:It refers to the remuneration paid to the office
employees,foremen,managers,professional and technical
staff on a monthly basis.

18. SUPPLEMENTARYCOMPENSATION
●Compensation over and above the base compensation
to retain the employees on a long term basis . The
basic purpose behind this is to attract and retain the
employees and motivate them
● Also known as
● Employee benefits
● Non wage payments

19. EXAMPLES
● Fringe benefits
● Payment for time not worked
● Housing
● Insurance
● Careercounseling
● crèche
● Paid memberships in professional organizations
● Perquisites or “perks”
● take home vehicles /chauffeur driven vehicles
● Paid vacations
● Club membership
● Entertainmentallowance
● Paternity leave
● free refreshments
● leisure activities on work time (golf, etc.),

20. BASECOMPENSATION VSSUPPLEMENTARY COMPENSATION
● Payment to the workers for
theirwork
● Payment is in cash
● Wage & salaries are paid to
compensate for their
services.
● Determined by job
evaluation,demand &
Supply of labour
,organizations capacity to
pay ,bargaining power of
trade unions
,productivity ,govt
regulations .
● It denotes benefits over
&above their wages /salary
● They are paid to increase their
efficiency & retain them
● Determined by the history of
the organisation,capacity of
the organisation to pay ,need
to retain the talented
employees ,desire to enhance
the public image ,philosophy
of the management

21. WAGE CONCEPTS
21
●The minimum wage Concept states that one must
provide not only for the bare sustenance of life but for
the preservation of the efficiency of the worker.
●For this purpose, Minimum wage should also provide
for some measure of education, medical requirements
and amenities

22. WAGE CONCEPTS
22
●Living Wage is defined as “one which should
enable the earner to provide for himself and his
family not only the bare essentials of food, clothing
and shelter but a measure of frugal comfort,
including education for his children, protection
against ill-health, requirements of essential social
needs and a measure of insurance against the more
important misfortunes, including old age.”

23. LIVING WAGE CONCEPT
23
●The Living wage is fixed considering the general
economicconditions of the country.
●In more advanced countries,Living wage itself forms
the basis for Minimum Wage.

24. WAGE CONCEPT
24
●Fairwage concept is a wage that is someway
above the minimum wage but below the Living
wage.
●The lower limit for fair wage is the Minimum
wage & the upper limit is set by the ability of the
industry to.

25. FAIR WAGE CONCEPT
●A wage is fair if it is equal to the rate prevailing in the
same trade & in the neighbourhood for similar work
●In a wider sense, a wage is fair if it is equal to the
predominant rate for similar work throughout the
country & for trades in general

26. FAIR WAGE CONCEPT
While fixing Fair wage, the following are to be taken into
consideration:
● The productivity of labour
●The prevailing rates of wages in the same or
neighbouring localities
● The level of the national income and its distribution
● The place of industry in the economy of the country.
● Capacity of the industry to pay
24

27. PURPOSES OF WAGE ADMINISTRATION
● To recruit persons to a firm
● To control payroll costs
● To satisfy people
● To motivate people

28. PURPOSES OF WAGE ADMINISTRATION
●The goals of compensation administration are to
design a cost-effective pay structure that will attract,
motivate and retain competent employees

29. TYPES OF WAGES
29
●Nominal Wages : Wages expressed in terms of
money are called nominal wages
●It is an evaluation of the wage without considering
its current purchasing value
●Nominal wages are written down in contracts
between the employee and the organization

30. TYPES OF WAGES
30
●Real Wages - The amount of goods and services that
the money will buy.
●The term real wages refers to wages that have been
adjusted for inflation

31. THEORIES OF WAGES
●THEORY OF WAGES IS A BRANCH OF STUDY WHICH ANALYSES
THE SUPPLY & DEMAND CONDITIONS OF LABOUR.
•TWO DIMENSIONS OF WAGE THEORY:
•INTERNAL:
● CAPACITY TO PAY
● WORK CONTENT & CONTEXT
●WAGE SUFFICIENT TO MEET BASIC NEEDS OF FOOD, SHELTER,
SECURITY, SOCIAL COMMITMENT & LIKE

32. CON..
EXTERNAL:
● Supply & demand in labour market
●Level of payment prevailing in similar jobs in other
establishments

33. SUBSISTENCE THEORY
●
● Proposed by David Ricardo (1772-1823)
“the labourers are paid to enable them to subsist &
perpetuate the race without increase or diminution”
The theory Pre-supposes
Low wages decrease of labour force due to death,
malnutrition, family problems etc.
High wages increase their number due to better health,
long life, procreations.
● This theory is despised by many and known as “iron law
of wages” payment is limited to subsistence level.

34. WAGE FUND THEORY
Propounded by Adam Smith (1723-90)
Wage level is a function of surplus fund available with
the employer.
Higher the fund more is the level of pay.
Lower the fund lower is the level of pay
Which may touch even the subsistence level
Focus of the theory: the employer and his capacity to
pay.

35. SURPLUS VALUE THEORY
Developed by Karl mark (1849-83)
Here the labour is a commodity for trade
And the wage subsistence price for commodity
Employer account– “cost of labour” put up for
producing an item as part of price fixed for it.
Basis labour adds value to the product.
Only a part what is collected from the customer is paid
to the labour.

36. RESIDUAL CLAIMANT THEORY
Proposed by Francis. A. Walker (1840-97)
According to this theory, 4 factors add value to the
product, viz.,
● Land
● Capital
● Entrepreneurship
the revenue earned by selling
product is distributed among
these 3
●Labour remaining is paid to labour as against his
value addition to the product.
Hence, labour is considered the
‘residual claimanant’

37. MARGINAL PRODUCTIVITY THEORY
Developed by Philips henry Wicksteed (UK) and John Bates
Clark (USA)
Wages are determined by the “Supply and Demand of
labour” in the labour market.
Basis of wage payment by employer:
● Assessment of their economical worth
● Value addition by the marginal labour is more than the
cost -continue
●discontinue hiring & resort to technology or product mix
Overall result better returns to the employer & lesser
wages to employees

38. BARGAINING THOERY
Proposed by John Davidson.
●Wage levels are determined by the bargaining power
of employees & their unions V/s employers & their
associations.
●Relative strengths of these forces determine all
aspects of wages, viz.,
Wage level
Wage structure
Individual fixation
Wage differentials & perks

39. BEHAVIOURAL THEORY
Proposed by social scientists like Simon, Dubin, Jacques &
others.
Basis for the theory behavioural aspects
a. Wage level: based on the influence/ power exercised by
forces on the mgt. Viz, size, prestige, power of union,
contribution by employees.
b. Wage structure: influenced by factors such as norms,
tradition, customs, good will, social pressure & specialist
skill
c. Motivation: need satisfier, recognition through merit
rating & increment through wages increase motivation.

40. CRITERIA OF WAGE FIXATION
40
● The organizations ability to pay;
● Supply and demand of labour;
● The prevailing market rate;
● The cost of living;
● Living wage;

41. CONT
..
41
• Productivity;
• Trade unions bargaining power;
• Job requirements;
• Managerial attitudes; and
• Psychological and sociological factors.
• Levels of skills available in the market.

42. (1) The organizations ability to pay:
Wage increases should be given by those organizations
which can afford them. Companies that have good
sales and, therefore, high profits tend to pay higher
those which running at a loss or earning low profits
because of higher cost of production or low sales.
42

43. (2) Supply and demand of labour:
●The labour market conditions or supply and demand
forces operate at the national, regional and local
levels, and determine organizational wage structure
and level.
If the demand for certain skills is high and supply is
low, the result is a rise in the price to be paid to these
skills. When prolonged and acuter, these labour
market pressures probably force most organizations
to reclassify hard to fill jobs at a higher level”
43

44. (3) Prevailing market rate: This is known as the ‘comparable
wage’ or ‘going wage rate’, and is the widely used criterion.
An organization compensation policy generally tends to
conform to the wage rate payable by the industry and the
community.This is done for several reasons
1. Competition demand that competitors adhere to the same
relative wage level.
2. Various government laws and judicial decisions
3. Trade union practice.
4.Functionally related firms in the same industry requires
essentially the same quality of employees.
44

45. (4) The cost of living:
●The cost of living pay criterion is usually regarded as an automatic
minimum equity pay criterion.
●This criterion calls for pay adjustments based on increases or decreases
in an acceptable cost of living index. In recognition of the influence of
the cost of living.” escalator clauses” are written into labour contracts.
●When the cost of living increases, workers and trade unions demand
adjusted wages to offset the erosion of real wages.
●However, when living costs are stable or decline, the management does
not resort to this argument as a reason for wage reductions.
45

46. (5) The living wage:
●Criterion means that wages paid should be adequate to enable an
employee to maintain himself and his family at a reasonable level of
existence.
●However, employers do not generally favor using the concepts of a living
wage as a guide to wage determination because they prefer to base the
wages of an employee on his contribution rather than on his need.
●Also, they feel that the level of living prescribed in a workers budge is
open to argument since it is based on subjective opinion.
46

47. ● (6) Psychological and Social Factors:
●These determine in a significant measure how hard a person will
work for the compensation received or what pressures he will
exert to get his compensation increased.
●Psychologically, persons perceive the level of wages as a measure
of success in life; people may feel secure; have an inferiority
complex, seem inadequate or feel the reverse of all these. They
may not take pride in their work, or in the wages they get.
47

48. ●Sociologically and ethically, people feel that “equal
work should carry equal wages”that“wages should be
commensurate with their efforts,”that“they are not
exploited, and that no distinction is made on the basis
of caste, colour, sex or religion.” To satisfy the
conditions of equity, fairness and justice, a
management should take these factors into
consideration.
48

49. (7) Skill Levels Available in the Market:
▪ With the rapid growth of industries business trade,
there is shortage of skilled resources.
▪ The technological development, automation has been
affecting the skill levels at faster rates.
▪ Thus the wage levels of skilled employees are
constantly changing and an organization has to keep
its level up to suit the market needs.
49

51. PAY FOR POSITION
⚫Pay forposition, Position based payor Job-based
pay, pays employees for the job to which they are
assigned, regardless of the skills they possess.
⚫In otherwords, pay is centered on the jobor position
and noton the person.
⚫Pay for Position is a more traditional pay structure in
which each position is assigned a pay range based on the
jobdutiesand pay is based on education and seniority.

52. PAY FOR POSITION (CONTD.)
⚫Employeecompensation isset in broadband basedon qualifications,
education, training & experience
⚫Through broad banding, narrowly structured paygrades determined through
job evaluation, are replaced by fewerand wider bands
⚫Employees progress up through broad band if their performanceratingsare
good, ratherthanthroughsteps basedon timein thegrade
⚫Itreducesdifferentcompensationcategories to broad compensation bands,
grouping jobs together by commoncharacteristic

53. PAY FOR POSITION (CONTD.)
⚫Develop an equitable
grading structure
⚫Createa reference
salary structure
⚫Leveragecompensation
costs with market survey
information

54. PAY FOR PERSON
⚫Pay for Personor Person focused payor Skill-based payor
Knowledge-based payor Competency-based pay structures
link pay to the depth or breadth of the skills, abilities,
competencyand knowledgea person acquiresand applies to the
work.
⚫Structures based on skill, pay individuals forall the skills for
which they have been certified regardlessof whetherthework
theyaredoing requiresall or justa few of those particular
skills.
⚫The wage is attached tothe person.

55. PAY FOR PERSON (CONTD.)
⚫The pay increases are usuallytied to three typesof skills:
- horizontal skills, which involvea broadening of skills in termsof
the rangeof tasks
- vertical skills, which involveacquiring skillsof a higher level
- depth skills, which involvea high level of skills in specialised
areas relating to thesame job.
⚫Because skill-based pay encourages and rewards a broad range of
skills, the employee becomes multi-skilled and more flexible and
valuable;
⚫A job rotation is used to fill in temporarygaps in the workforce.

56. PAY FOR PERSON (CONTD.)
⚫Pay for person takes into account the demonstrable
characteristics of a person, including knowledge, skills,
competency and behaviors, thatenable performance
⚫Take intoconsideration the person’s capabilities & experience
in setting a pay level that is both equitableand competitive
⚫It considers the marketdemand of a person’s uniqueskills and
experience
⚫Italso incorporates market based payapproach

57. PAY FOR PERSON (CONTD.)
⚫Determine competency/skill
requirementsand employee
capabilities
⚫Pay individuals based on their
competency/skill match with
position
⚫Identify and pay market
premium for competencies/skill
in short supply in the market.

58. PAY FOR PERFORMANCE
⚫Pay for Performance, Performance related pay,
Performance-based pay is a financial reward system
for employees where some or all of their monetary
compensation is related to how their performance is
assessed relative tostated criteria.
⚫The criteria for performance-related pay scheme may
be based on individual, group or organizational
performance, oron a mixtureof them.

59. PAY FOR PERFORMANCE (CONTD.)
⚫Individual-based criteria would require –
- individual goal-setting,
- an appropriate performance appraisal system
- individual training to increase job knowledge & skillsand
- the individual should havea large measureof control over
his/herown performance.
⚫Team-based criteriaareappropriatewhere individual
performance is difficult to measure,
⚫orwhere there is a need fora corporateculture to
promote teamvaluesand cooperation.

60. PAY FOR PERFORMANCE (CONTD.)
⚫Design annual bonus
and incentives plans that
motivatestaff
⚫Shift from merit salary
increases to variablepay
⚫Create long-term reward
plans - stock optionsand
deferred compensation

62. WHAT IS COMPENSATION?
• Compensation can be defined as all forms of
financial returns and tangible service and
benefits employees receive as part of an
employment relationship.
• Which includes:
• Direct financial compensation
• Indirect financial compensation
• Non-financial compensation

63. VIEWS OF COMPENSATION
MANAGERS’ VIEW
• Major expense
• Means to influence
employee’s behavior
• To improve the
organization performance
• EMPLOYEESVIEW
• RETURN IN AN EXCHANGE WITH
THEIR EMPLOYER AN ENTITLEMENT
OR A REWARD.
• MAJOR SOURCE OF FINANCIAL
SECURITY
• ENTITLEMENT FOR BEING AN
EMPLOYEE OF THE COMPANY
• REWARD FOR A JOB WELL DONE.

64. WHAT IS A STRATEGY?
• The company’s long-term
plan for how it will
balance its internal
strengths and weaknesses
with its external
opportunity and threats to
maintain a competitive
advantage.

65. WHAT IS STRATEGIC
COMPENSATION PLANNING?
• Determines how much an organization
want to pay employees and what type
of employees they want to attract.
• Pay scales,
• Reward programs,
• Benefits packages
• Company perks.

66. WHAT IS STRATEGIC HUMAN RESOURCES
MANAGEMENT?
• Strategic HRM is an
approach that defines
how the organization's
goals will be achieved
through people by
means of HR strategies
and integrated HR
polices and practices.

67. THE MAIN PURPOSE OF STRATEGIC
COMPENSATION PLANNING IS TO :
• Retain
• Attract
• Motivate
• Develop

68. SHRM AND THE STRATEGIC DIRECTION OF
AN ORGANIZATION.
• Strategic HRM is the key to improved business performance.
• Strategic direction is a course of action that leads to the
achievement of the goals of an organization's strategy.
• An organization’s strategic direction is a combination of its
vision, mission, strategies and its core values.

69. A ROAD MAP TO EFFECTIVE COMPENSATION

70. GOALS OF A STRATEGIC COMPENSATION POLICY
• To reward employees’ past performance.
• To retain competitive in the labour market.
• To maintain salary equity among employees.
• To mesh employees’ future performance with
organizational goals.
• To control the compensation budget.
• To attract new employees.
• To reduce unnecessary turnover.

71. WHAT IS A COMPENSATION SYSTEM?
• A compensation system is a system that is designed to
determine the amount of pay, given the many individual
in an organization.

72. TYPES OF COMPENSATION
SYSTEMS

73. IMPORTANCE OF COMPENSATION
SYSTEMS WITHIN AN ORGANIZATION
• A well-designed compensation plan becomes one of many
tools a firm can use to help reach its strategic goals.
• Make the compensation system to attract the best for the
organization.
• Reward the peak performers with systems that match
achievement to compensation.

74. IMPORTANCE OF AN IDEAL
COMPENSATION PLAN
• An ideal compensation system will have:
• Positive impact on the efficiency and results produced by
employees.
• Better performance and achievement of standard
• Enhance the process of job evaluation..

75. IMPORTANCE OF AN IDEAL
COMPENSATION PLAN
• Sound Compensation/Reward System brings peace in the relationship
of employer and employees.
• Adequate compensation retains valuable employees
• Creates a healthy competition among them
• Encourages employees to work hard and efficiently.
• The perfect compensation system provides platform for happy and
satisfied workforce. This minimizes the labour turnover. The
organization enjoys the stability.

76. IMPORTANCE OF
COMPENSATION SYSTEMS
WITHIN AN ORGANIZATION
• Compensation systems that maintain its competitiveness and
ensure sustainability in the future include:
• Good balance of wages
• Benefits
• Rewards and recognition.

77. IMPORTANCE OF AN IDEAL
COMPENSATION PLAN
• Increase morale, efficiency and cooperation.
• Being just and fair would provide satisfaction to the workers
• Solve disputes between the employee, union and management.
• The system should follow the management principle of equal pay. It
should motivate and encouragement those who perform better and should
provide opportunities for those who wish to excel.

78. HOW DO WE DEVELOP A TOTAL
COMPENSATION STRATEGY

79. HOW DO WE DEVELOP A TOTAL
COMPENSATION STRATEGY
• Define your compensation philosophy.
• Link compensation to your overall business strategy.
• Change the culture and reinforce it with
compensation.
• Reward the behaviours that drive the results.
• Think total compensation.
• Measure your return on invested payroll £s.

80. TOTAL COMPENSATION STRATEGY
• Strong total compensation strategy must
align with your business strategy.

81. WHAT IS OUR COMPETITION FOR
THE PEOPLE WE WANT TO HIRE?
• Will we focus on salary,
bonus plans tied to
performance, equity in the
business, our benefit
package?

82. HOW WILL WE POSITION
OURSELVES IN OUR PAY MARKET –
MIDDLE OF THE MARKET, ABOVE
AVERAGE?

83. HOW CAN WE BE SURE THAT OUR
PAY PROGRAMS SUPPORT OUR
BUSINESS PLANS AND OUR
CULTURE?

84. HOW DO WE MAKE SURE PAY
PROGRAMS WORK FOR EMPLOYEES,
MANAGEMENT AND OUR
SHAREHOLDERS?

85. COMPENSATION STRATEGY
• Understanding how a compensation
strategy may be seen as a source of
sustained competitive advantage for the
organization

86. • Developing the right compensation
strategies is critical to attracting, retaining,
motivating and developing the right
employees for the right positions.

87. COMPETITIVE ADVANTAGE
• Competitive advantage is achieved when a
business produces surplus profits - greater than
it's competitors

88. COMPENSATION STRATEGIES
• For a business to achieve the results associated
with a competitive advantage it needs the right
people consistently doing the right things in the
right way and for the right reasons.

89. COMPETITIVE ADVANTAGE
• In order to capture and maintain competitive
advantages the company must develop and
implement strategies to differentiate
themselves from the competition.
• Read more: http://www.ehow.com/how_7787980_build-sustainable-competitive-advantage.html#ixzz2mHKEn41v

90. MICHAEL PORTER IDENTIFIED TWO BASIC TYPES
OF COMPETITIVE ADVANTAGE:
• “A competitive advantage exists when the firm is
able to deliver the same benefits as competitors
• but at a lower cost (cost advantage),
or deliver benefits that exceed those of competing
products
(differentiation advantage)…

91. THE “TOTAL REWARDS” VALUE
PROPOSITION
• COMPENSATION IS ONLY ONE OF FOUR ISSUES THAT HAVE
•TO BE ENGINEERED AND MANAGED IN SUCH A WAY THAT WILL
SUSTAIN THE COMPANY’S COMPETITIVE ADVANTAGE.
•THE OTHERS ARE A COMPELLING FUTURE; PERSONAL AND
PROFESSIONAL DEVELOPMENT OPPORTUNITIES AND A
POSITIVE WORK ENVIRONMENT.

92. THE “TOTAL REWARDS” VALUE PROPOSITION
•A compelling compensation plan becomes a cohesive link within
the total rewards strategy that makes up a company’s value
proposition for its key talent.

93. THE KEY
• In sustaining a competitive advantage, creating a compensation strategy
that would envision, create and sustain
a rewards system that will draw a compelling link are
• company vision (where),
• business strategy (how),
• roles and expectations (who and what),
• rewards (how much)
• and employee vision(relevance).
• This is called creating “line of sight”—and any company that
expects to have a competitive advantage must achieve it.

94. “If you pick the right
people and give them the
opportunity to spread
their wings- and put
compensation as a carrier
behind it-you almost
don’t have to manage
them”. Jack Welch