An Introduction to Compensation Management Chapter 1 An Introduction to Compensation Management References: Human Resource Management (13th Edition), Mondy, Noe, Pearson Education. Strategic Compensation: A Human Resource Management Approach (6th Edition), Joseph J., Martocchio Joe, Pearson Education. http://books.google.com.pk/books?id=pgn3WBPAXAkC&printsec=frontcover#v=onepage&q&f=false Strategic Compensation in Canada (4th Edition), Richard J. Long, Nelson Education Ltd. Resource Person: Furqan-ul-haq Siddiqui

Staffing Employee & Labor Human Relations Resource Development HUMAN RESOURCE MANAGEMENT FUNCTIONS Safety & Health Compensation

Why Work?

To get Compensated

Is that money only…..?

Compensation Total of all rewards given to employees in return for their services. Direct financial compensation - Pay received in the form of wages, salaries, bonuses, and commissions Salary- A form of periodic payment from an employer to an employee, which may be specified in an employment contract or Fixed income of white collar or executives over a period of time. (usually for exempt employees) Wage- A payment usually of money for labor or services usually according to contract and on an hourly, daily, or piecework basis —often used in plural. Wage earners often have to give up pay for leaving early, coming in late, missing a day, or taking a vacation or Fixed wages of blue collar or manual worker over a period of time. (usually for non-exempt employees) Commission- Variable pay on sales. Bonuses- reward for performance (one-time), not added in base pay. Increment- Additions in base pay (merit, seniority, performance, knowledge, incentive etc.) Indirect financial compensation - All financial rewards not included in direct compensation (Fringe Benefits). Nonfinancial compensation - Satisfaction a person receives from job itself or from work environment

Components of a Total Compensation Program External Environment Internal Environment Financial Non-Financial Direct Wages Salaries Commissions Bonuses Indirect (Benefits) Legally Required Benefits Social Security Unemployment Compensation Workers’ Compensation Family & Medical Leave Voluntary Benefits Payment for Time Not Worked Health Care Life Insurance Retirement Plans Employee Stock Option Plans Supplemental Unemployment Benefits Employee Services Premium Pay Unique Benefits Job Environment Sound Policies Competent Employees Congenial Coworkers Suitable Status Symbols Working Conditions Workplace Flexibility Flextime Compressed Work Week Job Sharing Flexible Compensation Telecommuting Part-time Work Modified Retirement The Job Skill Variety Task Identify Task Significance Autonomy Feedback

Another approach of classifying Compensation Intrinsic rewards satisfaction derived from the job itself. Satisfy higher level needs for self esteem, achievement, growth and development They drive from factors inherent in the job itself – the job content – such as: amount of challenge or the interest the job provides The degree of variety in the job The extent to which it provides feedback and autonomy The meaning or significance of the job

The Influence of Core Job Characteristics of Intrinsic Compensation Critical Psychological States Benefits to Employees Skill Variety Task Identity Task Significance Lower Turnover Lower Absenteeism Experienced meaningfulness of the work Experienced responsibility for work outcomes Enhanced job performance Autonomy Gained knowledge of results from work activities Greater Job satisfaction Feedback

Extrinsic reward Benefits provided by the employer Extrinsic reward Benefits provided by the employer. Non-monetary and monetary incentives for obtaining certain job performance levels and acquiring new skills and knowledge.

Equity and Its Impact on Pay Rates Description Pay should be based upon contributions made by the Employees. Higher effort should be rewarded with higher pay. Application to Compensation Pay should be tied to the performance level of individual Employee The Equity Theory of Motivation States that if a person perceives an inequity, the person will be motivated to reduce or eliminate the tension and perceived inequity. Equality-Compensation of employees on a unified way, regardless of their performance

Equity in Financial Compensation Equity - Fair pay treatment for employees External equity - Involves employee perceptions of the fairness of their compensation relative to those outside performing similar jobs in other firms. Internal equity - Involves the perceived fairness of pay differentials among different jobs (Grades) within an organization Individual Equity - How fair an individual’s pay as compared with what his/her co-workers are earning for the same/very similar jobs within the company. Procedural equity- The perceived fairness of the procedures to make decisions regarding the allocation of pay.

Equity Perceptions Other Self

< = > Person A Person B Equity Under-reward Over-reward Outputs Inputs < Outputs Inputs Outputs Inputs = Outputs Inputs Equity Outputs Inputs > Outputs Inputs Over-reward

Methods to Address Equity Issues Salary surveys To monitor and maintain external equity. Job analysis and job evaluation To maintain internal equity, Performance appraisal and incentive pay To maintain individual equity. Communications, grievance mechanisms, and employees’ participation To help ensure that employees view the pay process as transparent and fair.

Compensation System: Asset or Liability? Firms typically spend 40 to 70 percent of their operating budgets to compensate their employees. For most firms, compensation is the single largest operating expenditure. Some firms spend too much on compensation and some too little.

The key issue is: What is the organization receiving for its investment in wages, salaries, and benefits? Are the compensation system and the money devoted to it contributing to the achievement of organizational objectives in the fullest possible way? Does the firm have in place the compensation system that adds the greatest possible value to the company after taking costs into account?

Optimal Compensation System The reward system that adds value to the organization, after considering all its cost. A compensation system is one of the most powerful tools available to an employer for: shaping employee behavior Influencing company’s performance Copyright (c) 2010 by Nelson Education Ltd

Optimal Compensation System This does not mean that optimal compensation system is the cheapest one For some firms a high wage compensation strategy may be the one that maximizes overall effectiveness Resource constraints may prevent a company from adopting what would otherwise be the optimal reward strategy In general, an effective reward system maximizes the value added relative to the resources devoted to the reward system

Counterproductive consequences of poorly designed compensation system: Low employee motivation High employee turnover Poor job performance Irresponsible behavior and employee dishonesty

Is it realistic to expect that a reward system will achieve all eight of the effectiveness criteria? Probably not. But these criteria still serve as goals and measures of progress.

Role &Purpose of the Compensation System The basic purpose of a compensation system is to help create a willingness among qualified persons to join the organization and to perform the task needed by the organization This means that employees must perceive that accepting a job with a given employer will help them satisfy some of their own important needs These needs include: Economic needs for the basic necessities of life Needs for security Social interaction Status Achievement Recognition , and growth and development