COMPENSATION SYSTEM

IPMI-HRM-Krishnan Rajendran, 2010 What is Compensation? Employee compensation is the process of paying and rewarding people for the contributions they make to an organization. Compensation is a broad term which includes pay and benefits such as insurance, retirement savings, and paid time off from work. Compensation represents the total package of rewards—both monetary and nonmonetary.

Total Compensation DirectDirectIndirectIndirectBonusesBonuses Gain sharing, etc. Security Plans Pensions Security Plans Pensions Employee Services Educational assistance Recreational programs Employee Services Educational assistance Recreational programs CommissionsCommissions Wages / Salaries Insurance Plans Medical Medical Dental Dental Life Life Insurance Plans Medical Medical Dental Dental Life Life Time Not Worked Leave Leave Holidays Holidays Vacations Vacations Time Not Worked Leave Leave Holidays Holidays Vacations Vacations

IPMI-HRM-Krishnan Rajendran, 2010 Internal Equity Internal Equity External Equity External Equity Employee Contribution Employee Contribution Job Analysis Market Definition Market Survey Policy Decision Performance Appraisal Incentive Guidelines Incentive Scheme Policies Techniques Internal Alignment Competitiveness Contribution Internal Structure Job Evaluation Job Description Pay Structure Objectives Efficiency Fairness Compliance Pay Policy Model

IPMI-HRM-Krishnan Rajendran, 2010 Linking Compensation to Organizational Objectives Value-added Compensation ◦ Evaluating the individual components of the compensation program (pay and benefits) to see if they advance the needs of employees and the goals of the organization.  “How does this compensation practice benefit the organization?”  “Does the benefit offset the administrative cost?”

IPMI-HRM-Krishnan Rajendran, 2010 Common Strategic Compensation Goals 1. To reward employees’ past performance 2. To remain competitive in the labor market 3. To maintain salary equity among employees 4. To mesh employees’ future performance with organizational goals 5. To control the compensation budget 6. To attract new employees 7. To reduce unnecessary turnover

Comparison of Compensation Strategies

IPMI-HRM-Krishnan Rajendran, 2010 Strategic Framework for Employee Compensation

IPMI-HRM-Krishnan Rajendran, 2010 The Compensation Package The compensation package represents the blend of rewards employees receive from the organization. Money paid as wages or salary is the largest component of most compensation packages. Benefits and short and long term rewards make up the rest of the package.

IPMI-HRM-Krishnan Rajendran, 2010 Common Elements of Compensation Packages The main elements of the Compensation Package consist of: ◦ Base pay is a form of compensation that is not at risk and may consist of an hourly wage or an annual salary. ◦ Employee benefits, are rewards other than monetary salary and wages.

IPMI-HRM-Krishnan Rajendran, 2010 Elements of the Compensation Package Individual incentive is a reward that is based on the personal performance of the employee. Individual incentives are linked to performance behaviors and outcomes. A group incentive is a reward based on the collective performance of a team or organization.

IPMI-HRM-Krishnan Rajendran, 2010 Combining Compensation Package Elements.

IPMI-HRM-Krishnan Rajendran, 2010 HOW DO STRATEGIC DECISIONS INFLUENCE A COMPENSATION PACKAGE? The organization must decide how much compensation to allocate to base pay, benefits, individual incentives, and group incentives in order to align pay to the organization’s broad HR strategy.

IPMI-HRM-Krishnan Rajendran, 2010 Strategic Compensation Process.

IPMI-HRM-Krishnan Rajendran, 2010 Typical Compensation Elements

IPMI-HRM-Krishnan Rajendran, 2010 HOW IS COMPENSATION LEVEL DETERMINED? It all begins with the pay survey. The pay survey provides information about how much other organizations are paying employees. Pay surveys are conducted by consulting firms, which obtain confidential pay information from numerous organizations and create reports that describe average pay levels in other organization. This information is grouped by industry, number of employees, sales volume and/or operating budget. This makes it easier to determine if the companies pay practice gives it a competitive advantage.

IPMI-HRM-Krishnan Rajendran, 2010 Pay-Level Strategies There are three market strategies 1.meet-the-market which establishes pay that is in the middle of the pay range for the selected group of organizations. 2.lag-the-market where an organization establishes a pay level that is lower than the average in the comparison group. 3.lead-the-market where the average pay level is higher than the average in the comparison group.

IPMI-HRM-Krishnan Rajendran, 2010 HOW IS COMPENSATION STRUCTURE DETERMINED? The pay structure focuses on how compensation differs for people working in the same organization. Job-based pay—focuses on evaluating different tasks and duties associated with various jobs in the organization. Skill-based pay focuses on the difference in skill and ability required to perform the job.

IPMI-HRM-Krishnan Rajendran, 2010 Job-Based Pay

IPMI-HRM-Krishnan Rajendran, 2010 Skill-based Pay.

IPMI-HRM-Krishnan Rajendran, 2010 Executive Compensation: Ethics and Accountability Incentive payments are excessive compared with return to stockholders. Time periods for judging and rewarding performance are too short. Quarterly earnings growth is emphasized at the expense of research and development. Emphasis is placed upon equaling or exceeding executive salary survey averages. Benefits do not relate closely to individual performance.

The “Sweetness” of Executive Perks Company car Company plane Executive eating facilities Financial consulting Company-paid parking Personal liability insurance Estate planning First-class air travel Home computers Chauffeur service Children’s education Spouse travel Physical exams Mobile phones Large insurance policies Income tax preparation Country club membership Luncheon club membership Personal home repairs Loans Legal counseling Vacation cabins