This document defines compensation and pay models. Compensation includes monetary and non-monetary pay provided to employees in exchange for work. It is based on market research, employee contributions, skills availability, and company profitability. Compensation includes base pay, bonuses, benefits, and other forms. The objectives of compensation are fairness, compliance, efficiency, competitiveness, and contributions. Policies and techniques are used to achieve these objectives and align pay internally and externally.

1. Compensation – Definition
and Pay Model

2. Definition
Compensation means that counterbalances or
makeup for something else.
It is the total amount of the monetary and non-
monetary pay provided to an employee by an
employer in return for work performed as
required.

3. 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.

4. 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 life
Base and long term allowances
living protection balance
incentives

5. Base Wage and Merit Pay/ Cost of Living
Adjustment
Base 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.

6. 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.

7. 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.,

8. 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

9. 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

10. 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

11. Total Earnings opportunities
• Retention strategy – staying 5 years - annual increment
of 4%
• Merit increases and promotions
Relational Returns from work:
• Recognition, status, employment security, challenging
work and opportunities to learn.
• Teaming with great co-workers, receiving new uniform

12. Pay Model
POLICIES TECHNIQUES OBJECTIVES
ALIGNMENT
Work Description Evaluation / INTERNAL EFFICIENCY
Analysis Certification STRUCTURE Performance
Quality
Customer and
COMPETITIVENESS Market Surveys Policy PAY Stockholder
Definitions Lines STRUCTURE
Cost
Seniority Performance Merit INCENTIVE FAIRNESS
CONTRIBUTIONS Based Based Guidelines PROGRAM
MANAGEMENT Cos t Communication Change EVALUATION COMPLIANCE

13. 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.

14. Four Policy Choices
Internal 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
organization's 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)

15. Four Policy Choices
Employee 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”