1. 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.
Strategic Compensation in Canada (4th Edition), Richard J. Long, Nelson Education Ltd.
Resource Person: Furqan-ul-haq Siddiqui

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

3. Why Work?

4. To get Compensated

5. Is that money only…..?

6. 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

7. 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

8. 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

9. 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

10. 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.

12. 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

13. 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.

14. Equity Perceptions
Other
Self

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

16. 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.

17. 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.

18. 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?

19. 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

20. 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

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

24. 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.

25. 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