Compensation

– The sum total of all forms of payments or

rewards provided to employees for
performing tasks to achieve organizational
objectives

Rs
 Compensation- Nature and scope
• The complex process includes decisions
regarding variable pay and benefits
• It suggests an exchange relationship
between the employee and the
organization
• It involves design, development,
implementation, communication and the
evaluation of reward strategy and process
of the organization
 Compensation Objectives
1. To reward employees’ past performance fairly, in line
with efforts, skills and competencies
2. To attract and retain competitive high performing
employees
3. To motivate the high performing employees and
reinforce desirable employee behaviour
4. To remain competitive in the labor market
5. To align employees’ future performance with
organizational goals
6. To communicate the employees their worth to the
organization
7. To provide employee social status
• Strategic compensation
– Using the compensation plan to support the
company’s strategic aims.
– Focuses employees’ attention on the values
of winning, execution, and speed, and on
being better, faster, and more competitive..
• IBM
 Strategic Compensation
Planning
• Strategic Compensation Planning
– Links the compensation of employees to the
mission, objectives, philosophies, and culture
of the organization.
– Serves to identify the net monetary payments
made to employees with specific functions of
the HR program in establishing a pay-for-
performance standard.
– Seeks to motivate employees through
compensation.
 Compensation Policy Issues
• Pay for performance
• Pay for seniority
• Salary increases and promotions
• Overtime and shift pay
• Probationary pay
• Paid and unpaid leaves
• Paid holidays
• Salary compression (A salary inequity problem, generally caused by
inflation, resulting in longer-term employees in a position earning less than
workers entering the firm today)
• Geographic costs of living differences
 Pay Structure
 Pay grades
 Pay ranges

Compensation
Administration
Process
 Total compensation

Financial Non -Financial

(extrinsic rewards) (intrinsic rewards)

Direct Indirect Satisfaction Praise and

derived from job rewards

Classification of rewards
 Components of Financial
Compensation

Direct Indirect

Variable Pay Benefits

Base pay
Incentives
• Wages Mandatory voluntary
• Salaries -Individual Provident Fund •Vacations
Gratuity • Breaks
-Group/team • Holidays
Maternity Leave
-organizational Health plans Security Plans
Medical leave • Pensions

Educational assistance
• Recreational programs
 Base pay
• The direct financial compensation an
individual receives based on the time
worked
• Two bases of calculation
- Hourly/wage: payment for the number of
hours worked
- Salaried : receive consistent payments at
the end of specific period regardless of
number of hours worked
• Nature
– generally market driven ( D>S=increase in
pay)
- Job Evaluation
– The formal systematic means used to identify
the relative worth of jobs within an
organization.
 Variable pay/ pay for performance : Incentives

• Variable Pay
- any plan that ties pay to productivity or profitability.
(i.e)The standard by which managers tie compensation to employee effort
and performance.
- it is linked to individual, group, or organizational performance and not to
time worked

• Incentive Pay Programs

– Establish a performance “threshold” to qualify for incentive payments.
– Emphasize a shared focus on organizational objectives.
– Create shared commitment in that every individual contributes to organizational
performance and success.
• Frederick Taylor
– Popularized scientific management and the use of financial incentives in the late
1800s.
• Systematic soldiering: the tendency of employees to work at the slowest pace possible
and to produce at the minimum acceptable level.
 Types of incentives
• Individual Incentives

• Group/team Incentives

• Organizational Incentives
 Individual Incentive Plans
• Piecework Plans
– The worker is paid a sum (called a piece rate) for each unit he or
she produces.

• Straight piecework: A fixed sum is paid for each

unit the worker produces under an established piece
rate standard. An incentive may be paid for
exceeding the piece rate standard.
• Standard hour plan:
– An incentive plan that sets pay rates based on the completion of a
job in a predetermined “standard time.”
– If employees finish the work in less than the expected time, their
pay is still based on the standard time for the job multiplied by their
hourly rate.
 Individual Incentive Plans
(cont’d)
• Pro and cons of piecework
– Easily understandable, equitable, and powerful
incentives
– Employee resistance to changes in standards or
work processes affecting output
– Quality problems caused by an overriding output
focus
– Possibility of violating minimum wage standards
– Employee dissatisfaction when incentives either
cannot be earned due to external factors or are
withdrawn due to a lack of need for output
 Individual Incentive Plans
(cont’d)
• Merit pay
– A permanent cumulative salary increase the
firm awards to an individual employee based
on his or her individual performance.
 Bonuses
• Bonus
– Incentive payment that is supplemental to
the base wage for cost reduction, quality
improvement, or other performance
criteria.
• Spot bonus
– Unplanned bonus given for employee
effort unrelated to an established
performance measure.
 Group Incentive Plans
• Team Incentive Plans
– Compensation plans where all team members receive
an incentive bonus payment when production or
service standards are met or exceeded.
• Establishing Team Incentive Payments
– Set performance measures upon which incentive
payments are based
– Determine the size of the incentive bonus.
– Create a payout formula and fully explain to
employees how payouts will be distributed.
 Group Incentive Plans (cont’d)
• Gainsharing Plans
– Programs under which both employees and
the organization share the financial gains
according to a predetermined formula that
reflects improved productivity and profitability.
• Scanlon
• Rucker
• Improshare
Employee Bonus and Gainsharing Plans
Rewards come from employee participation in
Scanlon Plan improving productivity and reducing costs.

Rucker Plan Shared rewards come from the difference between

(SOP) labor costs and sales value of production.

Gainsharing based on increases in productivity of

Improshare the standard hour output of work teams.
 The Pros and Cons of Team Incentive Plans
PROS
• Team incentives support group planning and problem
solving, thereby building a team culture.
• The contributions of individual employees depend on group
cooperation.
• Unlike incentive plans based solely on output, team
incentives can broaden the scope of the contribution that
employees are motivated to make.
• Team bonuses tend to reduce employee jealousies and
complaints over “tight” or “loose” individual standards.
• Team incentives encourage cross-training and the acquiring
of new interpersonal competencies.
The Pros and Cons of Team Incentive Plans (cont’d)
CONS
• Individual team members may perceive that “their” efforts
contribute little to team success or to the attainment of the
incentive bonus.
• Intergroup social problems—pressure to limit performance
(for example, team members are afraid one individual may
make the others look bad) and the “free-ride” effect (one
individual puts in less effort than others but shares equally
in team rewards)—may arise.
• Complex payout formulas can be difficult for team members
to understand.
 Organizational Incentive Plans
• Profit Sharing
– Any procedure by which an employer pays, or makes
available to all regular employees, in addition to their
base pay, current or deferred sums based upon the
profits of the enterprise.
– Paid once in a year or deferred sums until
retiremement
Challenges:
• Agreement over division of profits between
company and employees.
• Possibility of no payout due to financial condition of
company.
 Organizational Incentive Plans
• Stock Options
– Granting employees the right to purchase a
specific number of shares of the company’s
stock at a guaranteed price (the option price)
during a designated time period.
– The value of an option is subject to stock
market conditions at the time that option is
exercised.
– Apple , yahoo, coca cola, nike
 Organizational Incentive Plans
• Employee Stock Ownership Plans (ESOPs)
– Stock plans in which an organization contributes shares of its
stock to an established trust for the purpose of stock purchases
by its employees.( UK,USA and several other industrialized
countries). This provide tax concessions to corporate orgns. And
to trusts established for employee stock options. (i.e (difference
between acceptance price and market value)
• The employer establishes an ESOP trust that qualifies as a tax-
exempt employee trust under Section 401(a) of the Internal Revenue
Code
 Why Incentive Plans Fail
• Performance pay can’t replace good management.
• You get what you pay for.
• “Pay is not a motivator.”
• Rewards punish.
• Rewards rupture relationships.
• Rewards can have unintended consequences.
• Rewards may undermine responsiveness.
• Rewards undermine intrinsic motivation.
 Implementing Effective
Incentive Plans
• Ask: Is effort clearly instrumental in obtaining the reward?
• Link the incentive with your strategy.
• Make sure effort and rewards are directly related.
• Make the plan easy for employees to understand.
• Set effective standards.
• View the standard as a contract with your employees.
• Get employees’ support for the plan.
• Use good measurement systems.
• Emphasize long-term as well as short-term success.
• Adopt a comprehensive, commitment-oriented approach.
 Indirect Financial Compensation-
Benefits
• MANDATORY BENEFITS
- legally binding

• VOLUNTARY BENEFITS
- provided at the discretion of the employer
 VOLUNTARY BENEFITS-EXAMPLES
• Educational benefits
- Employee’s spouse education
assistance( Motorola on
international assignments ).
- ONGC,NIIT ,ADITYA BIRLA
GROUP, HLL sabbaticals (paid/
non-paid) are provided to
employees who wish to study.
- Meritorious Children of employees
are provided opportunity of higher
education with loan benefits in
BPCL, CPCL etc
• Family
- Paternity leave in HLL, HCL Tech,
Yes Bank, Genpact etc.,
- Wedding anniversary allowance in
NIIT, SPIC etc.,
- “Joyful Working Team” and “
Happy Moments Board”- LG
Electronics
- Family day at office- Bharti
telecom.
• Fringe benefits tax
- Amended finance act 2005
 Non financial compensation : components

– Are most effective as motivators when the award is

combined with a meaningful employee recognition
program.
• Intrinsic motivators are worthwhile as financial
package
• Organization reward high performing employees
• Psychological rewards that employees receive in
recognition of their skills and contributions
 Types
• Awards
– Often used to recognize productivity gains, special contributions or
achievements, and service to the organization.
– Employees feel appreciated when employers tie awards to performance and
deliver awards in a timely, sincere and specific way.
– Rooms of offices are named after the employees in NIIT
• Recognition awards
– Recognition has a positive impact on performance, either alone or in conjunction
with financial rewards.
• Combining financial rewards with nonfinancial ones produced performance
improvement in service firms almost twice the effect of using each reward alone.
– Day-to-day recognition from supervisors, peers, and team members is important.
– Best performer of the month awards in Blue Dart, ALACTEL,XANSA etc.,
• Service awards
- Award for the length of service and exactly not on performance
- IBM: thanks award
- IDEA: appreciation card
 Needs and Motivation
• Abraham Maslow’s Hierarchy of Needs
– Five increasingly higher-level needs:
• physiological (food, water, sex)
• security (a safe environment)
• social (relationships with others)
• self-esteem (a sense of personal worth)
• self-actualization (becoming the desired self)
– Lower level needs must be satisfied before higher
level needs can be addressed or become of interest
to the individual.
 Needs and Motivation (cont’d)
• Herzberg’s Hygiene–Motivator theory
– Hygienes (extrinsic job factors)
• Inadequate working conditions, salary, and incentive pay can
cause dissatisfaction and prevent satisfaction.
– Motivators (intrinsic job factors)
• Job enrichment (challenging job, feedback and recognition)
addresses higher-level (achievement, self-actualization)
needs.
– The best way to motivate someone is to organize the
job so that doing it helps satisfy the person’s higher-
level needs.
Equity and motivation of employees
• Pay Equity (also Distributive Fairness)
– An employee’s perception that compensation
received is equal to the value of the work performed.
– A motivation theory that explains how people respond
to situations in which they feel they have received
less (or more) than they deserve.
• Individuals form a ratio of their inputs to outcomes in their job
and then compare the value of that ratio with the value of the
ratio for other individuals in similar jobs.
 Relationship between Pay Equity and Motivation

Doing More and Receiving Less Doing the Same and Receiving the Same Doing Less and Receiving More

The greater the perceived disparity between my input/output ratio and

the comparison person’s input/output ratio, the greater the motivation
to reduce the inequity.
 Instrumentality and Rewards
• Vroom’s Expectancy Theory
– A person’s motivation to exert some level of effort is a function of
three things:
• Expectancy: that effort will lead to performance.
• Instrumentality: the connection between performance and the
appropriate reward.
• Valence: the value the person places on the reward.
– Motivation = E x I x V
• If any factor (E, I, or V) is zero, then there is no motivation to work
toward the reward.
• Employee confidence building and training, accurate appraisals,
and knowledge of workers’ desired rewards can increase employee
motivation.
Determinants of compensation

Pay levels
 Internal determinants
• Employer’s Compensation Strategy
– Setting organization compensation policy to lead, lag,
or match competitors’ pay.
• Worth of a Job
– Establishing the internal wage relationship among
jobs and skill levels.
• Employee’s Relative Worth
– Rewarding individual employee performance
• Employer’s Ability-to-Pay
– Having the resources and profits to pay employees.
 External Determinants
• Labor Market Conditions
– Availability and quality of potential employees
is affected by economic conditions,
government regulations and policies, and the
presence of unions.
• Area Wage Rates
– A firm’s formal wage structure of rates is
influenced by those being paid by other area
employers for comparable jobs.
 External Determinants
• Cost of Living
– Local housing and environmental conditions
can cause wide variations in the cost of living
for employees.
– Inflation can require that compensation rates
be adjusted upward periodically to help
employees maintain their purchasing power.
 External Determinants
• Collective Bargaining
The term extends to all negotiations that take place
between an employer, group of employers or one or
more employers’ organizations on the one hand, and
one or more workers’ organizations on the other to
(a) Determine the working conditions and terms of
employment and / or
(b) Regulate relations between employer and
employee/workers and / or
(c) regulate relations between employer organization or
employee/workers organization
 New developments
• Competency based pay and reward
programmes (also skill-based pay or
knowledge-based pay)
- Competency based pay using Broad
banding
 What Is Competency-based
Pay?
• Competency-based pay
– Where the company pays for the employee’s
range, depth, and types of skills and
knowledge, rather than for the job title he or
she holds.
• Competencies
– Demonstrable characteristics of a person,
including knowledge, skills, and behaviors,
that enable performance.
 Why Use Competency-Based
Pay?
• pay plans that aim for high-performance
work system.
• Paying for skills, knowledge, and
competencies is more strategic.
• Measurable skills, knowledge, and
competencies are the heart of any
company’s performance management
process.
 Competency-Based Pay in Practice
• Main components of skill/competency/ knowledge–based pay
programs:
– A system that defines specific skills, and a process for tying the
person’s pay to his or her skill
– A training system that lets employees seek and acquire skills
– A formal competency testing system
– A work design that lets employees move among jobs to permit
work assignment flexibility.
 Competency-Based Pay: Pros and Cons

• Pros
– Higher quality
– Lower absenteeism and fewer accidents
• Cons
– implementation problems
– Cost implications of paying for unused knowledge,
skills and behaviors
– Complexity of program
– Uncertainty that the program improves productivity
• Broadbanding
– Consolidating salary grades and ranges into
just a few wide levels or “bands,” each of
which contains a relatively wide range of jobs
and salary levels.
• Wide bands provide for more flexibility in assigning
workers to different job grades.
• Lack of permanence in job responsibilities can be
unsettling to new employees.
Trends in Executive Compensation
• The Executive Pay Package
– Base salary
– Short-term incentives or bonuses
– Long-term incentives or stock plans
– Perquisites (perks)
 Why are they made more?
• Supply is short
• Most important to organization in terms of
their competencies
• Motivation and retention
 Executive Compensation: Ethics and
Accountability

• Incentive payments are excessive compared with return to

stockholders.
• Time periods for judging and rewarding performance are too
short.
• Subjective in nature
• 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
 Remedial
• Conscious efforts must be made by
organization to increase the supply
• Participative management must be
encouraged
• Income beyond a limit must be subject to
higher taxation
• Remuneration committees must be
constituted
 Negotiation
Collective Bargaining
• The term extends to all negotiations that take place
between an employer, group of employers or one or
more employers’ organizations on the one hand, and
one or more workers’ organizations on the other to
• Determine the working conditions and terms of
employment and / or
• Regulate relations between employer and
employee/workers and / or
• regulate relations between employer organization or
employee/workers organization
 Collective bargaining and
stakeholders
• Concerned parties during the process of
negotiation are
The government
The employers/ management
The workers/trade unions
The consumers/ community
 Negotiation techniques and skills
• Negotiation is the process in which two or more
parties who have common and conflicting
interested come together and talk with a view to
reaching an agreement
• It involves 5 key activities
- Obtaining substantial results
- Influencing the balance of power between
parties
- Influencing the atmosphere
- Influencing the consistency
- Influencing the procedures
 Negotiation results
• Win-win
• Lose-win
• Lose-lose
• Win-win
Legal framework for payment of salary
in INDIA
• Payment of wages Act, 1936
• The minimum wages Act, 1948
• The payment of Bonus Act, 1965
• Equal remuneration Act, 1976
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